t c memo united_states tax_court povolny group incorporated et al petitioners v commissioner of internal revenue respondent docket nos filed date mark a pridgeon for petitioners julie a schwoebel christina l cook john q walsh jr and john schmittdiel for respondent memorandum findings_of_fact and opinion holmes judge james povolny ran three real-estate businesses--one of which racked up a lot of liabilities trying to build a hospital in algeria to pay the other cases we consolidated with this one are povolny group incorporated docket number and james m povolny and deborah a povolny docket number some of those liabilities povolny used his other companies’ money he says these payments were loans and that he can deduct them as bad_debts the commissioner says they were really distributions and wages and that povolny owes taxes on them findings_of_fact povolny is an ambitious and accomplished real-estate entrepreneur with a strong inclination toward hard work he started building his career early--he went to a private junior rotc high school and then on to college where he studied electrical engineering for a year he left got married and joined the air force sergeant povolny finished his tour of duty and went on to serve in the minnesota air national guard for two-and-a-half years during that time he also worked in maintenance at a real-estate development company and attended night school he rose steadily through the ranks and went from maintenance to become a principal in the firm after eighteen years he left in to join his wife’s company archetone limited povolny’s wife had started archetone limited sometime in the 1980s archetone limited is an s corporation2 and povolny own sec_49 of it--his wife if a business meets the requirements of sec_1361 it may elect to be treated as an s_corporation and generally avoid corporate tax sec_1362 continued owns the other povolny considered it a small general-contracting firm and hoped to use it to build his own real-estate company this proved difficult so in povolny formed povolny group pg a real-estate brokerage firm povolny is pg’s president ceo and sole shareholder povolny didn’t focus much on pg and when the recession hit in pg’s book of business all but dried up archetone limited’s business--which had been mostly regional--dried up too by archetone limited had no book of business the phones just stopped ringing at that point povolny recalled a chat he’d had with an old air force buddy a few years back povolny’s friend had gone to work for the va and wanted him to take advantage of some of the opportunities it offered pg and archetone limited were doing well then and povolny didn’t have time to explore any new opportunities the recession however gave him the perfect chance to take his business in a different direction povolny discovered that the va gave preference on some construction contracts to disabled veterans who owned their own continued a an s corporation’s income and losses like a partnership’s flow through to its shareholders who then pay income_tax see sec_1363 all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated business povolny realized that he qualified so he got the required certifications and began working on federal projects things went well for a while then came algeria the algerian ministry of health decided to build a new hospital in tablat povolny submitted several bids and won a contract to build the hospital he formed archetone international llc archetone international --which he solely owns--and opened a bank account for it in algeria but construction in algeria is complicated and povolny testified that the government there required a bank guaranty povolny tried to get one from wells fargo in the united_states but they were able to give him only a line of credit which he converted into a bank guaranty with a correspondent bank in london that line of credit required cash collateralization so povolny and his entities each took out a series of small loans from other lenders but even with the right funding the project quickly started to head south povolny had to stop work three times because the algerian government wasn’t paying him povolny testified that he suspected that the underlying reason for the delay was that the project while for the algerian government was funded by an organization from a third country whose representative expected under-the-table consideration to keep things moving povolny did not go along and the progress payments stopped progressing these significant delays prompted the algerian government to shut the project down and this left archetone international with a lot of outstanding liabilities and not much money to pay them with povolny did not want archetone international to default but that company had little money so povolny decided to tap the assets of the other companies that he controlled and that’s where the problems that led to these cases began for he considered pg and archetone limited to be related entities and didn’t see the merit in creating any formal notes or other documentation when he began moving money in he had pg pay a bit more than dollar_figure of archetone limited’s and archetone international’s debts on its ledgers pg now lists these amounts as being owed to it but on it sec_2010 tax returns--it filed an initial return and two amended returns each as a c corporation3--pg claimed them as costs of goods sold cogs and because pg was apparently making money again--on each of its returns it listed more than dollar_figure in gross receipts--there was enough income c_corporation is tax jargon for a corporation not taxed under subchapter_s of the code a c corporation’s net_income is taxed twice--first at the corporate level and again at the individual level when the shareholders receive distributions of profits in the form of dividends to make these claimed cogs valuable for that year pg also issued povolny a w-2 that showed about dollar_figure in wages but later issued him a corrected w-2 that reduced the amount to only about dollar_figure in pg paid povolny over dollar_figure which he used to pay more of archetone international’s debts pg’s ledgers characterized these payments as distributions pg itself also directly paid another nearly dollar_figure of archetone limited’s and archetone international’s expenses which pg’s ledger simply calls archetone payments that year pg filed its tax_return as an s_corporation reporting over dollar_figure million in gross_receipts with dollar_figure in ordinary business income flowing through to the povolnys the povolnys on their joint_return claimed an over dollar_figure flowthrough loss from archetone limited--a loss that was principally derived from archetone limited’s claimed dollar_figure deduction for loss on archetone international expenses paid and its claimed dollar_figure deduction for loss on archetone international bad_debt povolny’ sec_2011 w-2 from pg meanwhile reported only about dollar_figure in wages during the years at issue povolny hired a cpa to prepare his and pg’s tax returns but povolny didn’t give this cpa receipts or other supporting even after including the dollar_figure in its cogs in pg reported around dollar_figure in gross_profit and over dollar_figure in taxable_income documentation beyond what his quickbooks reflected povolny also told this cpa that archetone international never received any revenue even though it had received at least some payments on the algerian hospital contract pg’ sec_2010 and sec_2011 tax returns were timely as were the personal returns that povolny and his wife jointly filed for those years the commissioner issued pg a notice_of_deficiency for and issued the povolnys a notice_of_deficiency for and the commissioner also issued pg a notice_of_determination of worker classification for finding that pg owed dollar_figure in fica_taxes on the dollar_figure it gave povolny and the dollar_figure it used to pay archetone limited’s and archetone international’s expenses pg was incorporated in and maintained its primary place of business in minnesota when it timely filed its petitions the povolnys were minnesota residents when they filed their petition we tried the case in st paul the the notice_of_deficiency the commissioner issued the povolnys includes changes for related to pg which was an s_corporation that year fica_taxes are those that the federal_insurance_contributions_act imposes on employers and employees see sec_3101 sec_3111 fica generally includes a social_security_tax and a medicare_tax but wages over a certain annual_limit are subject only to the medicare_tax sec_3101 sec_3111 sec_3121 employers and employees each pay half of the fica_taxes and employers are required to withhold the employee’s portion sec_3101 sec_3102 sec_3111 commissioner asserted that povolny and pg owed accuracy-related_penalties and povolny contested them in the petitions the commissioner however introduced no evidence at trial that he had complied with sec_6751 see graev v commissioner graev iii t c ___ ___ slip op pincite date citing 851_f3d_190 2d cir aff’g in part rev’g in part t c memo supplementing t c ___ date opinion povolny concedes several of the commissioner’s adjustments five issues remain for decision was pg’ sec_2010 payment of dollar_figure to creditors of archetone limited and archetone international a loan between pg and those companies or a capital_contribution that was also a constructive_dividend to povolny is archetone limited entitled to a bad-debt deduction for for dollar_figure in payments it made to archetone international’s creditors from to and dollar_figure in payments pg made in should pg’ sec_2011 payments of dollar_figure to povolny and dollar_figure directly to creditors of archetone limited and archetone international be taxed as wages to povolny does pg owe employment_taxes on those dollar_figure and dollar_figure payments are pg and the povolnys liable for accuracy-related_penalties under sec_6662 for the years at issue we will address each issue in turn i loans or constructive dividends in pg claimed a dollar_figure cogs adjustment for expenses of archetone limited and archetone international that it had paid pg now argues it was a loan the commissioner says that the payment was only disguised as a loan and was really a contribution of capital by pg to archetone limited and archetone international according to him this made the payment a constructive_dividend to povolny under sec_301 and 316--which would mean no deduction for pg and an increase in income for povolny a debt or capital_contribution a bona_fide debt arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money sec_1_166-1 income_tax regs see also 91_tc_575 the commissioner’s brief collapses the two parts of the argument saying that because the payments weren’t debt they were constructive dividends that’s understandable because the payments here went directly from pg to archetone limited’s and archetone international’s creditors but payments on behalf of a related_entity can still be capital contributions to that entity see herrera v commissioner tcmemo_2012_308 at payment for the benefit of sister corporation treated as capital_contribution aff’d 544_fedappx_592 5th cir whether a transfer creates a bona_fide debt or is instead an equity_investment is a question of fact see 532_f2d_1204 8th cir see also 74_tc_476 to answer this question we ask primarily whether there was a genuine intention to create a debt with a reasonable expectation of repayment and did that intention comport with the economic reality of creating a debtor-creditor relationship dixie dairies corp t c pincite quoting 61_tc_367 case law gives us a small forest of factors to consider the names given to the certificates evidencing the indebtedness the presence or absence of a fixed maturity_date the source of payments the right to enforce payments whether there was participation in management as a result of the advances the status of the advances in relation to regular corporate creditors the intent of the parties any identity of interest between creditor and stockholder any ‘thinness’ of capital structure in relation to debt the ability of the corporation to obtain credit from outside sources the use to which the advances were put any failure of the debtor to repay and the risk involved in making the advances id pincite see also uneco inc f 2d pincite we’re careful not to give any one factor undue weight see uneco inc f 2d pincite pg’s quickbooks entries show the dollar_figure in payments as due from related parties write off - archetone which makes it seem as though pg intended the payments to be loans but pg deducted the payments as purchases on all three versions of it sec_2010 tax returns belying the quickbooks label and when pg made the payments it didn’t execute a note set an interest rate ask for security or set a maturity_date the lack of these basic indicia of debt and pg’s inconsistent labeling weigh in favor of finding that pg intended the payments to be capital contributions not loans see shedd v commissioner tcmemo_2000_292 wl at so does the fact that archetone limited and archetone international were broke when pg made the payments povolny testified that archetone international had no funds or wasn’t capitalized and he’d already given up on its only contract--the algerian hospital--for which it hadn’t been paid anything since archetone limited’s situation was similar--by it had virtually no book of business its liabilities exceeded its assets and it was losing money so pg’s payments went to entities that were undercapitalized would only be able to repay if they suddenly had earnings and under those circumstances couldn’t have obtained loans from outside lenders--all factors suggesting that the payments were capital contributions not loans see eg am offshore inc v commissioner 97_tc_579 95_tc_257 a trial_court is supposed to look at all these factors together and the image that emerges is that povolny treated legally separate corporations as one big wallet taking money from one corporation and routing it to another will almost always trigger bad tax consequences unless done thoughtfully povolny though possessed of considerable practical intelligence in running his businesses did not approach archetone international’s problems with any indication that he thought through these consequences or sought the advice of someone who could help him do so one result is that we find that pg’s dollar_figure in payments were not loans to archetone international and archetone limited but were instead capital contributions to these corporations see shedd wl at the lack of relevant evidence in the record itself also suggests that pg and the archetone entities didn’t intend to form a debtor-creditor relationship b constructive_dividend we now turn to whether pg’s payments were constructive dividends to povolny a constructive_dividend occurs when a corporation confers an economic benefit on a shareholder without the expectation of repayment 73_tc_980 a transfer between related corporations can be a constructive_dividend to common shareholders even if those shareholders don’t personally receive the funds see eg benson v commissioner tcmemo_2004_272 wl at payments for purported royalties and nonexistent services between related entities were constructive_dividend supplemented by tcmemo_2006_55 aff’d 560_f3d_1133 9th cir shedd wl at advance between shareholder’s entities was constructive_dividend that type of transfer is a constructive_dividend if the common shareholder has direct or indirect control_over the transferred property and the transfer wasn’t made for a legitimate business_purpose but instead primarily benefited the shareholder shedd wl at see also 730_f2d_634 11th cir aff’g tcmemo_1982_314 povolny had complete control_over the transferred funds--he was and is the sole shareholder of pg and archetone international and he own sec_49 of archetone limited and there was no discernible business reason for pg to make the transfer--as we found above there was no hope of repayment or contemplation of interest the transfer was undeniably bad for pg but it was good for povolny because it reduced his other entities’ liabilities pg’s payment of dollar_figure of archetone international’s and archetone limited’s expenses was therefore a constructive_dividend to povolny ii bad-debt deductions on their tax_return the povolnys claimed an over dollar_figure flowthrough loss derived from a dollar_figure bad-debt deduction that archetone limited took for payments it made on archetone international’s behalf from to and a dollar_figure deduction that it took for loss on archetone international expenses paid the commissioner denied all of these deductions increasing the povolnys’ flowthrough income from archetone limited by around dollar_figure the disparity between the contested deductions’ total and the dollar_figure adjustment is not a failure of arithmetic instead the commissioner tells us it’s due to an at_risk_limitation calculation that is not part of the record because it favors the povolnys we’ll keep the commissioner’s lower number before there can be a bad-debt deduction there has to be a bona_fide debt sec_1_166-1 income_tax regs kean t c pincite even when there’s a bona_fide debt a bad-debt deduction is available only for the year that debt becomes worthless sec_166 a bona_fide debt we’ve already gone over what constitutes bona_fide debt see supra pp the same test applies here we note first that the purported loans had none of the standard indicia of debt no formal loan documentation no set maturity_date and no interest payments see eg 827_f2d_1409 9th cir formal loan documentation tends to show bona_fide debt 464_f2d_394 5th cir fixed maturity_date is characteristic of debt am offshore inc t c pincite lack of interest payments suggests equity we recognize that transactions between closely held corporations and their shareholders are often conducted in an informal manner epps v commissioner tcmemo_1995_297 wl at but because of the amount of the purported loans at issue here--over dollar_figure-- the lack of any loan documentation whatsoever weighs against a finding of debt see id lack of formality weighs against debt finding where payment was dollar_figure the only documents povolny produced about the purported loans were printouts of quickbooks entries at trial povolny discussed a two-page printout from archetone limited’s quickbooks labeled a r archetone international that lists the dollar_figure in payments that archetone limited deducted as bad_debt the dollar_figure that pg paid and that archetone limited deducted that same year as loss on archetone international expenses paid appears in two separate entries from pg’s quickbooks one entitled quarterly distributions and another called due from related parties write off - archetone but we don’t just look at the label a corporation sticks on a transaction we look for proof of its substance see eg shedd wl at and there’s none of that here--povolny this fact is also relevant to the pg-wage issue that we’ll discuss in the next section--ie whether pg’s dollar_figure in payments to archetone international’s and archetone limited’s creditors were loans to those entities or compensation to povolny but there was another adjustment for those payments archetone limited’s dollar_figure deduction--which flowed through to the povolnys--was also disallowed by the commissioner there was some confusion at trial and in the briefs about this deduction the povolnys argued on brief that the dollar_figure deduction was part of archetone limited’s bad-debt deduction for so we’ve focused on that argument here but even if it wasn’t part of archetone limited’s bad-debt deduction for 2011--for example if it was a current claimed business_expense by archetone limited--the commissioner says that that adjustment was still appropriate because povolny failed to provide documentation or explanation for archetone limited having a business_purpose for paying archetone international’s expenses povolny didn’t have anything to say about that at trial or on brief so we deem that issue conceded see rule b mcneil v commissioner tcmemo_2011_150 wl at n aff’d 451_fedappx_622 8th cir apparently didn’t even give his cpa anything beyond such quickbooks printouts this strongly suggests that povolny was simply trying to recast some of the investment in the failed algerian hospital project as loans to recoup some of the loss in other words it wasn’t bona_fide debt archetone international’s lack of capital also suggests that what the povolnys deducted weren’t bona_fide debts a transferee’s undercapitalization is strong evidence that the transfer is a capital_contribution am offshore inc t c pincite here archetone international had no capital at all--povolny testified that it had no funds or wasn’t capitalized so it basically was capitalized through the assets that archetone limited had this complete lack of capitalization weighs heavily in favor of finding that the payments at issue were capital contributions and not bona_fide debt along the same lines repayment dependent on earnings suggests that an advance is more likely to be equity estate of mixon f 2d pincite am offshore inc t c pincite calumet indus inc t c pincite provost v commissioner tcmemo_2000_177 wl at and because archetone international had no capital at the time of the purported loans the only potential source of repayment was earnings on its single contract--the algerian hospital this too weighs against finding that a bona_fide debt existed the evidence we have then shows no formal signs that a debt existed and the underlying economics of the situation strongly suggests that povolny was once again just using one of his companies’ funds to pay another of the companies’ debts we therefore find that archetone limited’s advances to archetone international did not create bona_fide debt b worthlessness even if archetone limited’s advances to archetone international did create bona_fide debt the povolnys would still need to show that that debt became worthless in when a debt becomes worthless is a question of fact 326_us_287 am offshore inc t c pincite this means that a taxpayer must show identifiable events that form the basis of reasonable grounds for abandoning any hope of recovery 109_tc_400 citing 77_tc_582 caselaw reveals many objective criteria that can indicate a debt is worthless they include a decline in the debtor’s business a decline in the value of the debtor’s assets overall business climate serious financial hardship suffered by the debtor the debtor’s earning capacity events of default insolvency of the debtor the debtor’s refusal to pay actions taken by the creditor to pursue collection and subsequent dealings between the creditor and the debtor am offshore inc t c pincite see also cooper v commissioner tcmemo_2015_191 at it was povolny’s burden to show he’s entitled to a deduction the commissioner has disallowed rule a 290_us_111 we have little but povolny’s uncorroborated testimony however he did testify that he didn’t think the algerian government would ever pay archetone international on its contract this isn’t enough--he didn’t say why he thought that and didn’t show that he’d ever tried to collect what the algerian government owed him he also had the burden to show that the debt became worthless specifically in yet he offered no proof at all of this key fact we find for the commissioner on this issue iii wages povolny argues that the dollar_figure he received from pg in 2011--a payment he immediately used to pay other corporate debts--was either a distribution or a loan he also claims that the dollar_figure pg used to pay archetone limited’s and archetone international’s creditors was a loan the commissioner says that both of these payments were wages to povolny and argues that pg just called them something else to avoid employment_taxes we’ve already determined that the dollar_figure payment--which was part of the purported bad_debt that archetone limited tried to deduct that year--wasn’t a loan as we pointed out that payment lacked formal loan documentation had no set interest rate or maturity_date was made to a company with no capital and could be repaid only if that company generated earnings see supra pp for the same reasons the dollar_figure payment couldn’t have been a loan either what remains is for us to determine whether the commissioner properly characterized these payments as wages to povolny or if they are instead distributionsdollar_figure on brief povolny refers to distributions in his headings but then only argues that these payments were loans we’ll nevertheless consider whether the commissioner properly characterized them wages are payments for services performed david e 668_f3d_1008 8th cir aff’g 757_fsupp2d_877 s d iowa see also 119_tc_121 aff’d 93_fedappx_473 3d cir sec_31_3121_d_-1 sec_31_3306_i_-1 sec_31_3401_c_-1 employment_tax regs whether payments to an employee-shareholder are wages paid for services performed or something else--such as dividends or loan repayment--is a question of fact see david e watson p c f 3d pincite we consider all the evidence and look to the substance of the situation not the name the parties give a payment see id pincite 117_tc_141 aff’d 54_fedappx_100 3d cir sec_31_3121_a_-1 sec_31_3306_b_-1 employment_tax regs a big part of this analysis is what reasonable_compensation for the employee’s services would be see david e watson p c f 3d pincite revrul_74_44 1974_1_cb_287 this is yet another question where caselaw has sprouted a profusion of possibly relevant facts the employee’s qualifications the nature extent and scope of the employee’s work the size and complexities of the business a comparison of salaries paid with the gross_income and the net_income the prevailing general economic conditions comparison of salaries with distributions to stockholders the prevailing rates of compensation_for comparable positions in comparable concerns the salary policy of the taxpayer as to all employees and in the case of small corporations with a limited number of officers the amount of compensation paid to the particular employee in the previous years 500_f2d_148 8th cir aff’g tcmemo_1973_130 david e watson p c f_supp 2d pincite in david e watson p c for example the eighth circuit accepted a district court’s application of those factors where the sole officer shareholder director and employee of an s_corporation paid himself dollar_figure in salary and around dollar_figure in distributions f 3d pincite there the court found that the trial_court didn’t err when it accepted an irs expert’s opinion that reasonable_compensation for the services of a highly qualified experienced full-time accountant such as the taxpayer was around dollar_figure id pincite dollar_figure povolny argues that the parties’ subjective intent alone determines whether payments were compensation the eighth circuit does not agree see continued the commissioner estimated at trial that reasonable_compensation for the ceo of a st paul construction company the size of pg is dollar_figure he points out that while povolny’ sec_2011 w-2 from pg reports only dollar_figure in salary combining that with the contested payments results in dollar_figure which is fairly close to the estimate there’s no reason for us to think that the commissioner’s estimate is unreasonable given povolny’s decades of real-estate development experience and the fact that he singlehandedly ran three companies one of which had hundreds of thousands of dollars in receipts and one of which had an international contract povolny didn’t contest this estimate at trial or in his opening brief he mentioned it only in his reply brief where he argued that the commissioner didn’t affirmatively show that the estimate was the result of comparisons to companies sufficiently similar to pg but it is povolny’s burden to show that the commissioner’s determination is wrong not the commissioner’s burden to show that it is right see rule a welch u s pincite povolny doesn’t bear his burden here continued david e watson p c f 3d pincite subjective intent controls only in the rare case where there is evidence that an otherwise reasonable_compensation payment contains a disguised_dividend id pincite quoting elliots inc v commissioner 716_f2d_1241 9th cir rev’g t c memo that’s not the situation here and povolny’s own testimony undermined his position when his attorney asked him whether the dollar_figure payment was a distribution or compensation povolny replied part of it was compensation but the majority of it was intended to pay off debts the only debt povolny specifically mentioned though was a personal debt--the mortgage on his home povolny also testified that the dollar_figure payment was a loan but we’ve already shown that it wasn’t and it went directly to the payment of the other companies’ debtsdollar_figure we find for the commissioner on this issue iv employment_taxes the next issue is whether pg owes employment_taxes on the dollar_figure and dollar_figure it paid povolny in a n officer who performs substantial services for a corporation and who receives remuneration in any form for those services is considered an employee whose wages are subject_to federal employment_taxes veterinary surgical consultants p c t c pincite see also sec_3121 sec_31_3121_d_-1 employment_tax regs an employer can avoid employment-tax liability by showing three things one of the payments was for dollar_figure in settlement of a collections action by wells fargo povolny pg archetone limited and archetone international were all parties to the settlement it didn’t treat the person as an employee essentially meaning it didn’t file a w-2 it filed its tax returns consistent with that treatment and it had a reasonable basis for not treating the person as an employee revenue act of pub_l_no sec_530 stat pincite otherwise the employer is liable the commissioner points out that povolny was an officer who performed substantial services for pg and received payment in return and in pg both issued povolny a w-2 and reported that compensation on its return so far so good for the commissioner povolny for his part doesn’t address the employment_taxes on brief--he argues that the compensation at issue wasn’t wages but we’ve held that it was the issue is therefore conceded see rule b mcneil v commissioner tcmemo_2011_150 wl at n aff’d 451_fedappx_622 8th cir v penalties the commissioner says that pg owes sec_6662 accuracy-related_penalties for and that the povolnys owe such penalties for and sec_6662 imposes a penalty when there is an underpayment attributable to negligence disregard for the rules or regulations or a ny substantial understatement of income_tax sec_6662 and b and povolny argues that these penalties shouldn’t apply because a cpa prepared each of the returns at issue which he says is enough to show reasonable_cause and good_faith see sec_6664 sec_1_6664-4 income_tax regs a penalties against the povolnys the commissioner has the initial burden of production regarding the penalties against the povolnys because they are individuals sec_7491 commissioner has burden of production with respect to the liability of any individual for any penalty first he must show that the tax understatement was substantial which means it exceeded the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 the commissioner bore this part of his burden each year’s understatement surpasses both dollar_figure and of the tax required to be shown on the return we recently noticed that sec_7491 also places on the commissioner the burden to show that accuracy-related_penalties were personally approved in writing by the immediate supervisor of the irs employee who made the initial determination to assert them in the notice_of_deficiency sec_6751 graev iii t c at slip op pincite this the commissioner failed to do accordingly he did not meet his burden of production and the povolnys are not liable for the penalty the commissioner determined against them for or see ford v commissioner tcmemo_2018_8 at b penalties against pg the commissioner has no burden of production regarding the penalties against pg because sec_7491 doesn’t apply to corporations see 126_tc_191 dollar_figure pg can avoid the penalties however if it shows that it had reasonable_cause to take its return positions and acted in good_faith sec_6664 sec_1_6664-4 income_tax regs povolny arguing against all of the penalties the commissioner determined in these cases including those against the povolnys as individuals which we’ve already held we can’t sustain says he made this showing because he hired a cpa to prepare both pg’s and the povolnys’ tax returns during the years at issue we’ve occasionally applied sec_7491 to c corporations see d r fin servs inc v commissioner tcmemo_2011_252 wl at mcgehee family clinic p a v commissioner tcmemo_2010_202 wl at aff’d 777_f3d_582 2d cir maint painting constr inc v commissioner tcmemo_2003_270 wl at but 126_tc_191 is a t c opinion so we must follow it we usually do see eg our country home enters inc v commissioner 145_tc_1 shah v commissioner tcmemo_2015_31 at n hie holdings inc v commissioner tcmemo_2009_130 wl at n aff’d 521_fedappx_602 9th cir reliance on an adviser can save a taxpayer from accuracy-related_penalties but only if the reliance was reasonable 115_tc_43 aff’d 299_f3d_221 3d cir reliance is reasonable if the adviser was a competent professional with sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied on the adviser’s judgment in good_faith id pincite the commissioner doesn’t dispute that the cpa was a competent professional but povolny didn’t give this cpa necessary and accurate information he provided only the quickbooks entries for the purported loans--he didn’t provide any supporting documentation because he never created any povolny also misled the cpa--specifically he said that archetone international didn’t need to file returns because it had no revenue even though it had received at least some payments for the algerian hospital contract povolny also didn’t actually rely on the cpa’s judgment he never asked for the cpa’s advice regarding how to report the contested transactions and it was povolny--not the cpa--who decided that the purported bad_debt became worthless in rather than provide complete information and follow the cpa’s advice he simply told the cpa how to report everything merely hiring a cpa--without giving him necessary information or relying on his advice-- doesn’t protect a taxpayer see eg bronson v commissioner tcmemo_2012_17 wl at aff’d 591_fedappx_625 9th cir kaplan v commissioner tcmemo_2006_16 wl at pg is therefore liable for the penalties determined against it there were settlements and concessions on other issues so decisions will be entered under rule


internal_revenue_service number release date index number ------------------------------ ------------------------------------------- ------------ ----------------------- -------------------------- department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc fip b03 plr-124631-07 date date legend trust ------------------------------------------------------------- ------------- company ------------------------------------------------------------- -------------------------------- ------------ state x properties property a date date date dear --------------------- -------------------------------------------------- --------------------------- --------------------- --------------------- -------------------------- this responds to a letter dated date submitted on behalf of trust and company requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to make an election under sec_301_7701-3 to classify company as an association_taxable_as_a_corporation for federal tax purposes plr-124631-07 and an election under sec_856 of the internal_revenue_code to treat company as a taxable_reit_subsidiary trs of trust facts trust is a publicly-traded state x corporation that elected to be treated as a real_estate_investment_trust reit beginning with the tax_year ending on date trust is in the business of acquiring developing redeveloping owning leasing and managing the properties company was formed on date to acquire property a company acquired property a on date trust and its tax advisor determined that company should be classified as a corporation and that a trs election should be made with respect to company because the default classification for company was a corporation a form_8832 was not required but a form_8875 needed to be prepared and timely filed because of an inadvertent error in communications trust employees however erroneously filed a form_8832 with respect to company timely electing disregarded_entity status effective date even though trust's intent was to file a form_8875 with company to jointly elect trs status for company effective date during the year-end closing of books trust discovered that the correct election had mistakenly not been made after trust discovered the failure_to_file the form_8875 trust and company submitted a private_letter_ruling request under sec_301_9100-1 of the regulations requesting an extension of time to file a form_8872 to elect to treat company as a corporation and an extension of time to file a form_8875 to elect to treat company as a taxable_reit_subsidiary of trust furthermore trust and company jointly make the following additional representations the request for relief was filed by trust and company before the failure to make the regulatory election was discovered by the service granting the relief will not result in trust and or company having a lower tax_liability in the aggregate for all years to which the regulatory election applies than that taxpayer would have had if the election had been timely made taking into account the time_value_of_money trust and company did not seek to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 of the code at the time trust and company requested relief and the new position requires or permits a regulatory election for which relief is requested plr-124631-07 being fully informed of the required regulatory election and related tax consequences trust and company did not choose to not file the election law and analysis sec_301_7701-3 provides that an eligible_entity may elect to be sec_301_7701-3 provides that except as provided in sec_301 sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 of the regulations provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_9100-1 provides that the commissioner may 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 or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register making certain elections not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 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 sec_301_9100-2 provides the rules governing automatic extensions of time for sec_301_9100-3 provides extensions of time for regulatory elections that do plr-124631-07 sec_856 of the code provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a taxable_reit_subsidiary sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition sec_856 specifically provides that the election and any revocation thereof may be made without the consent of the secretary in announcement i r b the service announced the availability of new form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for tax years beginning after for eligible entities to elect treatment as a trs the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the tax_year however the effective date of the election depends upon when the form_8875 is filed the instructions further provide that the effective date on the form cannot be more than months and days prior to the date of filing the election or months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 of the regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i sets forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money plr-124631-07 conclusions based on the information submitted and representations made we conclude that trust and company have satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations for granting a reasonable extension of time to elect under sec_301_7701-3 to classify company as a corporation for federal tax purposes and elect under sec_856 to treat company as a taxable_reit_subsidiary of trust accordingly company is granted an extension of time not to exceed calendar days from the date of this letter to file form_8832 with the appropriate service_center and elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective as of date a copy of this letter should be attached to the form_8832 furthermore trust and company are granted a period of time not to exceed calendar days from the date of this letter to file a form_8875 to treat company as a taxable_reit_subsidiary of trust effective as of date this ruling is limited to the timeliness of the filing of the form_8832 and form_8875 this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether trust otherwise qualifies as a reit under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of either trust or company is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect plr-124631-07 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives this ruling is directed only to the taxpayer who requested it sec_6110 sincerely alice m bennett chief branch office of associate chief_counsel financial institutions products 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 corp plr-116159-09 date date legend parent ---------------------------------------------------------------------------- --------------------------------------------------------------------- ------------------------------------------ regulator ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ ---------- other regulators -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------- merger sub ---------------------------------------------------------------------------- --------------------------------------------------------------------- ------------------------------------------- bank ------------------------------------------------------------------------------------- --------------------------------------------------------------------- ---------------------------------- target ---------------------------------------------------------------------------- --------------------------------------------------------------------- -------------------------------------------------- tsub ---------------------------------------------------------------------------- --------------------------------------------- plr-116159-09 --------------------------------------------------------------------- tsub --------------------------------- ---------------------------------- --------------------------------------------------------------------- busine sec_1 ---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- ------------------------- date date date date x y z ------------------- -------------------- ---------------------- ---------------- --------- ------ -------- dear ------------------ this is in reply to your authorized representative’s letter dated date requesting rulings regarding certain federal_income_tax consequences resulting from an ownership_change as defined in sec_382 of the internal_revenue_code additional information was received in letters dated date date and date the information submitted is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts parent is a bank_holding_company and the common parent of a affiliated_group_of_corporations that file a consolidated federal_income_tax return parent is supervised and plr-116159-09 regulated by regulator in addition parent’s banking and securities subsidiaries are supervised by various other regulators two of parent’s wholly owned subsidiaries are merger sub and bank a national banking association target is a diversified financial marketing and services holding_company target wholly owns tsub and tsub all of which are engaged in busine sec_1 target has experienced financial distress as a result of the collapse of the private secondary market for non-conforming securities on date the market collapse caused target to experience the following adverse consequences among others target was forced to hold assets originally intended to be short term assets for much longer periods of time and therefore target did not have the cash on hand to pay its liabilities when they became due target exhausted a line of credit it had with a banking consortium target was cited for possible bankruptcy by a financial management and advisory company target’s stock suffered a significant decline in value and target’s term debt credit ratings were downgraded on date bank entered into an investment agreement with target pursuant to which target issued and sold to bank x shares of y convertible preferred_stock the capital_contribution the investment in target stock was typical of investments bank had previously made at the time of issuance the preferred_stock constituted approximately z of the total value of target’s outstanding_stock the capital_contribution was made during the two-year period ending on date which is the consummation of the transaction defined below target used the capital_contribution to continue target’s basic business operations transaction on date target merged with and into merger sub with merger sub continuing as the surviving company the merger in the merger parent acquired all of target’s outstanding_stock in exchange for parent stock as a result of this transaction target underwent an ownership_change as defined in sec_382 representations the following representations have been submitted regarding the transaction and the capital_contribution a target is the parent of a loss group as defined in sec_1_1502-91 b prior to the transaction target had not undergone an ownership_change since date a date more than three years before date c the transaction constituted a reorganization under sec_368 of the code plr-116159-09 d the transaction caused an ownership_change as defined in sec_382 for target on the date the transaction was consummated e the capital_contribution was used solely to alleviate the financial distress of target and continue target's basic business operations ruling based solely on the information submitted and the representations set forth above we rule that the capital_contribution will not be excluded from the value of the old_loss_corporation under sec_382 for purposes of computing the value of the old_loss_corporation and the sec_382 limitation within the meaning of sec_382 caveats we express no opinion concerning the federal tax consequences of the transaction under any other provision of the code or regulations or concerning any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely ____________________ lisa a fuller senior counsel branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date ndex number washington dc person to contact telephone number refer reply to cc dom corp 1-plr-106667-01 date date distributing controlled bank subsidiary subsidiary subsidiary subsidiary state a business x business y n p this letter responds to your letter dated date in which you requested a ruling as to the federal_income_tax consequences of a proposed transaction additional information was provided in letters dated date date and date the information you submitted is summarized below distributing is a privately held corporation organized under the laws of state a distributing is a fiscal_year accrual_method taxpayer that has been indirectly engaged as the common parent of an affiliated_group_of_corporations that file a consolidated tax_return in business x specifically distributing has been engaged in business x through subsidiary subsidiary subsidiary and subsidiary all of which are directly engaged in business x currently distributing has n shares of voting and non- voting common_stock outstanding controlled is a wholly owned subsidiary of distributing that was organized under the laws of state a controlled is directly engaged in business y controlled has a single class of p shares of common_stock outstanding currently controlled is facing severe competition from competitors engaged in business y to offer its customers products and services commensurate with those offered by its competitors and to attain funds at a lower cost controlled seeks to merge with bank an unrelated state a corporation however a merger of controlled into bank is prohibited by applicable banking laws because of the non-bank related assets held by distributing therefore the following transactions have been proposed distributing will distribute pro_rata all of the stock of controlled to its shareholders the distribution the shareholders of distributing will immediately contribute the controlled shares they received in the distribution to a newly formed holding_company solely in exchange for the holding company’s stock the contribution the contribution is intended to qualify as tax free under sec_351 within twelve months from the date of the distribution controlled will be merged into bank with bank surviving the merger the merger is intended to qualify as a tax-free reorganization under sec_368 the contribution and merger the subsequent transactions will not either individually or collectively constitute an acquisition of a 50-percent_or_greater_interest within the meaning of sec_355 in controlled the following representations have been made in connection with the proposed transactions a no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other that of a shareholder of the corporation b the five years of financial information submitted on behalf of distributing subsidiary subsidiary subsidiary and subsidiary is representative of the corporations’ present operations and with regard to such corporations there have been no substantial operational changes since the date of the last financial statements submitted c the five years of financial information submitted on behalf of controlled is representative of the corporation’s present operations and with regard to such corporation there has been no substantial operational changes since the date of the last financial statements submitted d immediately after the distribution at least of the fair_market_value of the gross assets of distributing will consist of the stock and securities of controlled corporations that are engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 e following the transaction distributing subsidiary subsidiary subsidiary subsidiary and controlled will each continue the active_conduct of its business independently and with its separate employees f the distribution is carried out for the following corporate business_purpose to facilitate an acquisition of controlled by bank the distribution of controlled is motivated in whole or substantial part by this corporate business_purpose g except for the subsequent transactions there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in distributing or controlled after the transaction h there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirement of sec_4 b of revproc_96_30 i except for the subsequent transactions there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business j no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution k immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations furthermore distributing’s excess_loss_account with respect to the controlled stock if any will be included in income immediately before the distribution see sec_1_1502-19 l payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length m the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing or more of the total value of all classes of stock of either distributing or controlled n the contribution will satisfy the statutory and judicial requirements of sec_351 o the merger will satisfy the statutory and judicial requirements of sec_368 based solely on the facts submitted and the representations made above it is held as follows no gain_or_loss will be recognized by distributing on the distribution of all the stock of controlled to its shareholders sec_355 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing’s shareholders on their receipt of the controlled common_stock in the distribution sec_355 the basis of the distributing and controlled stock in the hands of distributing’s shareholders will be the same as the basis of distributing’s stock held immediately before the distribution allocated in proportion to the fair_market_value of each in accordance with section sec_1_358-2 sec_358 and b the holding_period of the controlled common_stock received by each distributing shareholder in the distribution will include the holding_period of the distributing stock held by such shareholder immediately before the distribution provided that such shareholder held the distributing stock as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 and sec_1_1502-33 no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not directly covered by the above rulings we specifically express no opinion on the qualification of the contribution as a sec_351 transaction or the qualification of the merger as a sec_368 reorganization this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated sincerely associate chief_counsel corporate by michael j wilder senior technician reviewer


t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n department of the treasury internal_revenue_service washington d c date number i nf o -0 release date t eo ra t4 sin no third party contact dear this is in response to your letter requesting inf orm ation concerning appropriate activities f or a hospital auxiliary described in sec_501 of the internal_revenue_code in your letter you indicate that the auxiliary previously supported a tax-exem pt hospital which was sold the hospital now operates as a f or-prof it enterprise you are seeking guidance as to whether the auxiliary can appropriately engage in any activities involving the f or-prof it hospital sec_501 of the code provides exemption f rom f ederal income_tax f or organizations organized and operated exclusively f or charitable purposes charitable purposes which are of ten undertaken by a hospital auxiliary include prom oting the health of the com m unity providing relief to the poor and distressed advancing education and promoting scientif ic research in accom plishing its exem pt purposes a hospital auxiliary can undertake activities that may incidentally benef it a f or-prof it hospital so long as no substantial part if its activities f urthers that nonexempt purpose see sec_1_501_c_3_-1 of the income_tax regulations the requirement is that the organization’s activities must serve a public interest and not unduly benef it the private interests of the f or-prof it hospital see sec_1_501_c_3_-1 of the regulations t he f ollowing exam ples illustrate how the service would use these principles in analyzing the ef f ect of various activities that might be undertaken by an exempt hospital auxiliary in the circum stances you described all of the exam ples assume that the f or-prof it hospital does not control the exempt auxiliary or otherwise exercise any signif icant control_over the auxiliary’s operations in each case whether the activities are com patible with the auxiliary’s exem pt status depends on whether the public benef it to the community as a whole outweighs any incidental benef its that might be conf erred on the f or-prof it hospital s o l i c i t a t i o n o f f u n d s some transactions between a f or-prof it hospital and an exempt auxiliary involve f und transf ers f rom the hospital to the auxiliary without consideration being a contributor to the auxiliary m ay enhance the f or-prof it hospital’s public im age however such intangible or conjectural benef its to the hospital are insignif icant in com parison to the public benef it the exem pt auxiliary can achieve with the contributed f unds thus the mere f act that the contributor is a proprietary hospital does not jeopardize the auxiliary’s exem pt status g r a n t s f o r c o m m u n i t y e d u c a ti o n fund transf ers f rom the auxiliary to the hospital m ay also f urther the auxiliary’s exem pt purposes however in such a case the auxiliary must retain control and discretion over the grant f unds to assure that they are used f or the exempt organization’s purposes see revrul_68_489 1968_2_cb_210 t hus an auxiliary could m ake grants to a f or-prof it hospital to enable the hospital to provide a f ree educational program such as lectures on health related topics to the community t he auxiliary should m aintain records to show that the activities f inanced by the grant f urthered exempt purposes even though the activities were conducted by the f or-prof it hospital g r a n t s t o s u p p o r t s c i e n t i f i c r e s e a r c h another exam ple of a perm issible grant f rom an auxiliary to a proprietary hospital is f unding a scientif ic research project on health related matters such as f inding a treatment or cure f or a disease qualif ied personnel associated with the f or-prof it hospital may conduct the research utilizing the f or-prof it hospital’s patient base to obtain research subjects the f act that both the researchers and the research subjects are associated with the f or-prof it hospital does not detract f rom the scientif ic nature of the research or conf er any signif icant private benef it on the f or-prof it hospital theref ore the grant would not jeopardize the auxiliary’s exem pt status ac tivi tie s be n e fitin g h os p ita l p a tie nts patients of a proprietary hospital m ay also be aided by an auxiliary directly in revrul_68_73 1968_1_cb_251 an organization provided volunteers to read and visit with patients write letters f or them and perf orm similar personal services w hile there may have been some benef it to the proprietary hospital in the f orm of increased patient satisf action this possible private benef it was inconsequential in comparison to the public benef it of prom oting the wellbeing of persons who were ill theref ore the organization was entitled to exemption under sec_501 similarly in revrul_79_358 1979_2_cb_225 an organization provided f unds to a hospital to pay f or the increased cost of a private room f or patients who could medically benef it f rom such a room but who could not otherwise af f ord the cost of such a room the hospital benef ited because it received the increased private room f ee but the benef it to the hospital was incidental to accomplishing the exempt_purpose of aiding the patient’s recovery p r o vi d i n g g o o d s a n d s e r vi c e s t o t h e_p u b l i c the wellbeing of hospital patients including those in a proprietary hospital may be promoted by operation of a hospital gif t shop see revrul_69_267 1969_1_cb_160 this is true because the presence of visitors and the receipt of gif ts f rom them has a positive emotional im pact on the patients even though some minor patronage of the gif t shop may be attributable to convenience purchases by hospital employees which do not benef it the patients the overriding public benef it to the patients outweighs the private benef it to the hospital and its employees at the other end of this spectrum are activities that predominantly benef it someone other than the hospital patients in this category are caf eterias and parking garages that are predominantly_used by visitors employees and physicians the patients have virtually no need f or these services since they are already receiving their meals and do not generally have their cars with them during a hospital stay theref ore the operation of a caf eteria or a parking garage serving nonpatients of a proprietary hospital would be problem atic even though the auxiliary might have other activities that were consistent with its exempt status sim ilarly purchasing goods services or f acilities f or a f or-prof it hospital would also be problematic because of the direct and substantial private benef it to the proprietary hospital re q u e s ti n g a p r i va te l e tte r rul i n g as the above exam ples illustrate these issues are analyzed in term s of all the relevant f acts and circumstances and situations of ten arise in gray areas not covered by revenue rulings or other precedent in such a case an organization may request a private_letter_ruling f rom the internal_revenue_service as to whether a particular proposed activity will jeopardize its tax-exem pt status t he procedures f or requesting a private_letter_ruling are explained in revrul_2002_4 i r b as updated annually in accordance with section dollar_figure of revrul_2002_4 the inf orm ation provided in this letter is advisory only if you have any questions about this letter please contact me at my sincerely marvin friedlander manager exempt_organizations technical group


id office uilc cca_2009090108291137 ---------- number release date from ------------------- sent tuesday september am to -------------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ subject re aar disallowance letter there is no problem with making a partial allowance of an aar sec_6227 provides that we may allow the credits or refunds arising from the requested adjustments emphasis supplied the phrase arising from means the refunds that the requesting partner s are entitled to out of what was requested the statute does not say that we must allow the refunds requested or none at all hence we have the discretion to allow only what we think are the proper adjustments we are also free to allow taxpayers to request appeals consideration instead of filing suit under section a the tmp can secure a statute extension using form_9248 to allow appeals time to consider settlement a partner-level aar can use form_9247 if a settlement is reached with appeals we would only issue refunds in the settlement amount and litigation would be unnecessary -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------


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 corp b04 plr-112869-05 date date ---------------------------------------------------- shareholder a ---------------------------------------------------------- corporation a -------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ---------------------------------------------------------- corporation b ------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------- corporation c -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------------ ---------------------------------------------------------------------------------- ---------------------------------------------------------- state c a b c water rights -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------ ------ ----- ------------------------------------------------------------------- -------------------------------------------------------------------------------- plr-112869-05 --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- minority shareholders ------------------------------------------------------------- case j ------------------------------------------------------------------------------------------------------------ dear --------------- this letter responds to your date letter requesting rulings on the federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process the rulings contained in this letter are based on facts and representations summary of facts corporation a corporation b and corporation c collectively the the corporations are subject_to state c’s statutory requirements for mutual ditch corporations use the cash_method_of_accounting have calendar tax years and qualify as tax-exempt entities under sec_501 of the internal_revenue_code shareholder a owns a of corporation a b of corporation b and approximately c of corporation c_corporation a and c have minority shareholders companies under the law of state c mutual ditch companies are not formed under general corporate statutes but rather under special legislation reserved for ditch and reservoir companies the corporations each hold a variety of assets collectively the water rights on behalf of their respective shareholders the supreme court of state c stated in case j that although legal_title of the water rights are held by mutual ditch companies in state c these assets are beneficially owned by the shareholders administered on behalf of the corporations by shareholder a for business reasons however shareholder a no longer wants to administer these water rights accordingly corporation a corporation b and corporation c intend to dissolve under the laws of state c and distribute the water rights to their shareholders the proposed transaction the water rights which are the only assets held by the corporations are plr-112869-05 rulings based on the information provided we rule as follows shareholder a and the minority shareholders for federal_income_tax purposes are the beneficial owners of the water rights accordingly the distribution of the water rights by the corporations in the proposed transaction will not be deemed to be a distribution_of_property to shareholder a and the minority shareholders with respect to their stock or loss to the corporations sec_311 under sec_501 the liquidating distributions in the proposed transaction will not result in gain the proposed transaction will not affect the corporations’ tax-exempt status caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings procedural statements this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent each taxpayer involved in the proposed transaction should attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the proposed transaction is completed letter is being sent to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this sincerely ________________________ richard k passales senior counsel branch corporate cc


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 psi b02 plr-123056-09 date september legend x ------------------------- -------------------------------- y ----------------------------------------- -------------------------------- country -------------------------------------- date -------------------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an entity classification election the information submitted states that x was formed under the laws of country on date x has been wholly owned by y since date x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity for federal tax purposes however x did not timely file a form_8832 entity classification election electing to be treated as a disregarded_entity sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an plr-123056-09 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301 b by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder plr-123056-09 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c o f f i c e o f t h e c h i e f c o u n s e l date number release date conex-124563-10 uil 36a ---------------------------- -------------------- -------------------------- dear ------------ i am responding to your letter to vice president joe biden dated date which was referred to this office by the white house and the commissioner of internal revenue you asked about changes in federal_income_tax withholding for your pension the american_recovery_and_reinvestment_act_of_2009 provides that taxpayers with earned_income in and may be eligible for the making_work_pay_credit sec_1001 of the act the credit is the lesser_of percent of earned_income or dollar_figure for individuals dollar_figure for married couples filing jointly the credit begins phasing out for taxpayers with modified adjusted gross incomes over dollar_figure per year for individuals dollar_figure for married couples filing jointly only individuals who include their social_security account number on their tax_return are eligible to receive the credit taxpayers claim the making_work_pay_credit on the form_1040 u s individual_income_tax_return the congress wanted taxpayers to receive the benefit of the credit as soon as possible so they instructed us to revise the income_tax_withholding schedules for the remaining months of see h_r rep in date we issued the revised withholding tables for wages paid in and told employers to begin using them as soon as possible but no later than date you can find information about these tables in news_release enclosed in date we released the enclosed publication making_work_pay_credit and form_w-4 employee’s withholding allowance certificate a one page flyer explaining that certain individuals including married couples might need to adjust their withholding before the tax_return filing season we have since provided new tables for use with wages paid in these tables are available in publication employer’s tax guide for conex-124563-10 for pension payors we made a new optional procedure for adjusting withholding available on date notice 1036-p enclosed this procedure reflected that pension income is not earned_income for purposes of the making_work_pay_credit the tables also include the optional adjustment procedure for pension payors pension payors have no requirement to use this new procedure and may use only the withholding tables we do not know whether your pension payor is using only the regular withholding tables or is also using the optional procedure for adjusting the withholding because the making_work_pay_credit also applies to taxpayers may want to consult the irs withholding calculator on www irs gov to see if their withholding will cover their expected tax_liability for the enclosed publication how do i adjust my tax withholding provides additional guidance pension recipients may submit a form w- 4p withholding_certificate for pension or annuity payments to their pension payor to adjust withholding if necessary i hope this information is helpful if you need further information please contact me or - --------------------at -------------------- in addition information about the making_work_pay_credit and the changes in withholding is available at www irs gov sincerely janine cook chief employment_tax branch division counsel associate chief_counsel tax exempt government entities enclosures


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date ffr og onns sim afls- ov contac tp erson identification_number telephone number t eb by dear sir or madam this is in reference to your letter of date requesting advance approval of your grant procedures under sec_4945 of the internal_revenue_code the information submitted indicates you are exempt from federal_income_tax under sec_501 of the code and have been classified as a private_foundation under sec_509 you propose to administer a scholarship program to benefit the eligible children of employees of b you will award renewable scholarships to deserving men and women to continue their post high school education at the college university or vocational-technical school of their choice any post high school dependent_child years of age or younger of a full-time active b employee who has a minimum of six months of service with b as of the appliéation deadline may be considered for the scholarship you will award nine scholarships of x each and one of y per year scholarships are renewable annually for a maximum of three years provided the student is making satisfactory academic progress the selection criteria for the scholarship will include but not be limited to the student's demonstrated past academic performance and future potential leadership and participation in school and community activities work experience statement of career and education aspirations and goals unusual personal or family circumstances and an outside appraisal you have hired c a program of d to review applications choose recipients maintain records and perform all necessary administrative tasks related to the program c chooses the e selection committee no selection committee members are employees officers or directors of you or b recipients are required to file periodic reports ifa recipient files no report or if reports indicate that the funds are not being used in furtherance of the scholarship purpose a member of c will investigate the scholarship while conducting this investigation you will withhold further payments to the scholarship recipient and will take reasonable steps to recover misused scholarship funds c will retain all records submitted by the scholarship recipients and their educational institutions you will obtain and maintain in your file evidence that no recipient is related to you or any members of c the scholarships will not be used as a means of inducement to recruit employees for b nor will a grant be terminated if the employee leaves b scholarships will only be awarded to students who plan to enroll in an institution that meets the requirements of sec_170 of the code the recipient will not be restricted in his or her course of study c will supply statistical information on applications received and grants made which will enable you to maintain the records required by revproc_76_47 1976_2_cb_670 you will ensure compliance with the percentage tests under section dollar_figure of revproc_76_47 in the aggregate with respect to your other scholarship programs available to the same individuals sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_institution described in sec_170 a ii revproc_76_47 1976_2_cb_670 sets forth guidelines for a private_foundation conducting an employer related grant program to obtain advance approval of its procedures for conducting such a program under sec_4945 of the code sections dollar_figure through dollar_figure set forth seven conditions which a private_foundation must meet in order to obtain advance approval of its procedures under sec_4945 of the code section dollar_figure provides that a private_foundation which makes scholarship awards to children of employees of a company or to the employees themselves will meet this test if it limits these grants to of all eligible applicants or of all those shown to be eligible in any given year renewals of grants awarded in prior years will not be considered in determining the number of grants awarded in a current_year based upon the information submitted and assuming your program will be conducted as - proposed with a view to providing objectivity and nondiscrimination in the awarding of scholarship grants we rule that grants awarded under your purposed scholarship program comply with the requirements of sec_4945 of the code expenditures made in accordance with these procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code and as such are eligible for the exclusion from income provided for in sec_117 of the code to the extent that such grants are actually used for qualified_tuition_and_related_expenses within the meaning of sec_117 of the code this ruling is conditioned on the understanding that there will be no material changes in the facts upon which it is based it is further conditioned on the understanding that no grants will be awarded to your organization's creators officers directors trustees or members of the selection committee or for a purpose inconsistent with the purposes described in sec_170 of the code the approval of your grant-making procedures is a one time approval of your system of standards and procedures for selecting recipients of grants that meet the requirements of sec_4945 of the code thus approval will apply to succeeding grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request we are informing the with your organization's permanent records te_ge office of this action please keep a copy of this ruling 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 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 gerald v sack manager exempt_organizations technical group