department of the treasury employer_identification_number contact person - 1d number contact telephone number uil internal_revenue_service p o box cincinnati oh number release date date date legend m program x dollars amount y dollars amount dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request your letter indicates that you will operate an educational grant program called m you will institute a small grants program in which funds will be awarded to selected individuals who propose ideas to address an urgent challenge and to improve conditions for those in need the purpose of m is to identify and encourage bold innovations inventions and discoveries you believe that it is important for the development of humanity to encourage unconventional thinking and creative solutions through m you will seek to support achievable and informed by relevant facts you acknowledge that a single idea will not solve poverty income inequality or hunger and complex problems require novel approaches that can be scaled to meet the needs of many thus the goal of m those with an innovative idea for real change to take the first step in implementing that is to help the ideas must be change and to foster the type of risk-taking and creative thinking necessary to address today’s most critical problems grantees will be chosen based on the innovativeness of the idea the feasibility of the idea the problem the idea seeks to address and the population the idea seeks to benefit the announcement regarding m and a copy of the application will be posted on your website you may also post a request for proposals for a specific problem that you find particularly compelling or underfunded eligible_candidates must be years of age or older while m will be focused in the united_states persons living outside of the united_states may apply no relative of any officer trustee or donor will be eligible to receive any grants in addition current or former employees advisory review members or agents of your foundation and their relatives will be ineligible to receive m you intend to award grants in amounts that range from x dollars to y dollars the amount of each grant will vary based on the applicant’s projected budgets and needs you will accept applications on a continuous basis and there will be no limit to the number of projects you will support in any given year information about m will be disseminated on your website through press releases issued by you on other websites that promote social innovation social impact innovation incubators and social venture networks and on your website your staff will evaluate each proposal to determine eligibility innovativeness clarity scalability and potential for impact potential proposals that require specific subject matter expertise will be reviewed by an advisory review member who will provide support and make recommendations proposals will be submitted to your board_of directors at each board meeting your board_of directors will vote on the best proposals to be awarded m grant as part of the review process you will evaluate how the amount requested will be used and how necessary it is for the project to succeed you will select grantees based on criteria reasonably related to the purposes of m the criteria will include demonstration of how the idea project or technology will create an impact on a significant probiem in need of a solution demonstration of a feasible and achievable path to implementation and the creativity and innovation behind the proposed idea you will require that the grantees agree the funds must be used only for charitable educational or scientific purposes you will require for the grantee to maintain the grant that the grantees abide by the terms of the grant agreement which includes submitting annual and final reports about the progress toward achieving the proposed ideas maintaining receipts and documentation on use of grant funds and using the grant for the purposes approved by you if a recipient fails to submit reports fails to use the grant funds for charitable educational or scientific purposes or otherwise fails to abide by the terms of the grant you will request return of the full amount of the grant or specific performance by the grantee in catalog number 58222y letter addition any portion of the grant that is not expended or committed for authorized purposes must be returned to you you represent that you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by the grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you represent that you will maintain all records related to the following individual grants including information to evaluate grantees grantees which are identified as a disqualified_person how the amount and purpose of each grant was established and how you established supervision and investigation of the grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or aprize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination_letter catalog number 58222y this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 e e e e e e you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary sincerely please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter we've sent a copy of this letter to your representative as indicated in your power_of_attorney stephen a martin director exempt_organizations rulings and agreements letter catalog number 58222y


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-126276-07 date august -------------------------------- -------------------------------------- legend legend sub llc --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ------------------------------------------------------------------ ----------------------------------------------------------- sub ----------------------------------------------------------------- ----------------------------------------------------------- sub --------------------------- ----------------------------------------------------------------- ----------------------------------------------------------- sub -------------------------------------------------------------------------- ----------------------------------------------------------- sub ----------------------------------------------------------------- ----------------------------------------------------------- sub ---------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------- newco ----------------------------------------------------------------- ------------------------------------ --------------------------- ------------------------------------------------------------- -------------------------------------------------- ------------- ----------------- ------------------- --------------------- ---------------------- ----------------------------------- plr-126276-07 ---------------------------------------------------------------- llc ------------------------------------------------------------------------------------ ----------------------------------------------------------- lp ----------------------------------------------------------------------------- ----------------------------------------------------------- state c date date date public company n o p q r s t u v w x y ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------ ----------------------------------- ----------------------------------- -------------------------------- ----------------- ---- ---- -- plr-126276-07 z aa bb cc dd ------------------------- ------------- ----------------- -------------------------------- ------------------------------ --------------------------------- this letter responds to your date request that we supplement our letter_ruling dated date plr-101871-07 the prior letter_ruling legend terms not defined in this ruling have the meanings assigned to them in the prior letter_ruling the information provided in that request and in later correspondence is summarized below the prior letter_ruling addressed certain federal_income_tax consequences of proposed transactions the proposed transactions under sec_332 sec_708 and certain other provisions of the internal_revenue_code the code supplemental facts apart from the additional steps described below the proposed transactions remain as described in the prior letter_ruling during the final stages of implementing restructuring - part i step sec_1 through of the proposed transactions parent became aware of two issues specific to state c that ultimately were resolved by additional transactions described below the additional transactions the issues identified by parent were i how best to address certain state c licensing requirements and ii how to eliminate certain intercompany debt obligations and modify the investment portfolio of certain entities that hold either directly or indirectly third-party obligations that would have resulted in state c classifying certain members of the parent group as financial corporations the additional transactions adopted to resolve these issues are in addition to and not in substitution for any of the proposed transactions the description of the parent corporate structure appearing in the prior letter_ruling as it existed before any of the proposed transactions or additional transactions were undertaken is elaborated as follows limited_liability_company disregarded as separate from its owner for federal tax purposes under sec_301_7701-3 of the procedure and administration regulations a disregarded_entity in addition to sub sub wholly owned sub and llc a single member in addition to the intercorporate debt described on page of the prior letter plr-126276-07 in addition to the entities described on page sec_4 and of the prior letter_ruling sub wholly owned sub and sub sub wholly owned sub and sub wholly owned sub prs and sub owned respectively a n-percent interest and a o-percent limited_partner interest in lp a limited_partnership prs’ n-percent interest in lp consisted of a p-percent limited_partner interest and a o-percent general_partner interest ruling on date i llc was indebted to sub in the amount of q dollars represented by an interest-bearing intercompany note the sub intercompany debt ii parent was indebted to sub in the amount of r dollars represented by an interest- bearing intercompany note the parent sub intercompany debt iii parent was indebted to sub in the amount of s dollars represented by an interest-bearing intercompany note the parent sub intercompany debt iv sub was indebted to parent in the amount of t dollars represented by an interest-bearing intercompany note the sub parent intercompany debt v sub was indebted to sub in the amount of u dollars represented by interest-bearing intercompany note the sub sub intercompany debt vi lp was indebted to sub in the amount of v dollars represented by a non-interest bearing intercompany account the lp sub intercompany debt vii sub was indebted to prs in the amount of w dollars represented by a non-interest bearing intercompany account the sub prs intercompany debt viii parent was indebted to lp the parent lp intercompany debt and ix prs was indebted to parent the prs parent intercompany debt proposed transactions the additional transactions described below were completed on date following step of the proposed transactions on date sub llc formed newco as a wholly owned state a corporation and effective date immediately following step of the proposed transactions sub llc contributed to newco the b-percent general_partner interest in sub received by sub llc from llc in the llc merger step of the proposed transactions the newco contribution as a result newco became sole general_partner of sub sub distributed to sub llc the q dollars sub intercompany debt net of the t dollars sub parent intercompany debt a net receivable totaling x dollars and immediately thereafter sub llc contributed the q dollars sub intercompany debt to llc collectively the first transfer the first transfer resulted in cancellation of the sub intercompany debt and the sub parent intercompany debt since sub llc is a disregarded_entity of parent parent transferred s dollars to sub in complete satisfaction of the parent sub intercompany debt the second transfer parent transferred v dollars to lp in partial satisfaction of the parent lp intercompany debt the third transfer plr-126276-07 lp transferred the v dollars received in the third transfer to sub in complete satisfaction of the lp sub intercompany debt the fourth transfer sub transferred w dollars to prs in complete satisfaction of the sub prs intercompany debt the fifth transfer prs transferred the w dollars received in the fifth transfer to parent in partial satisfaction of the prs parent intercompany debt the sixth transfer sub transferred y dollars to sub of this amount u dollars was paid in complete satisfaction of the sub sub intercompany debt the seventh transfer and z dollars was a distribution of current and accumulated_earnings_and_profits of sub parent transferred r dollars to sub in complete satisfaction of the parent sub intercompany debt the eighth transfer sub distributed aa dollars of cash through sub llc to parent as a dividend the ninth transfer on date parent contributed bb dollars through sub llc to sub the sub contribution sub retained cc dollars and contributed dd dollars to sub the sub contribution on date sub and sub purchased for cc dollars and dd dollars respectively of public company common_stock on date as the first step in the restructuring - part ii newco and parent through sub llc will adopt a formal plan of merger and pursuant to the applicable laws of state a newco will merge with and into sub llc the newco merger representation the adjusted_basis of each intercompany obligation as described in the first through eighth transfer equaled such obligation’s adjusted_issue_price and fair_market_value at the time of the additional transactions ruling based on the information and representation set forth above and submitted with the requests for the prior letter_ruling and this supplemental we rule that the additional transactions will have no adverse effect on the rulings contained in the prior letter_ruling and that all such rulings will remain in full force and effect caveats we express no opinion about the tax treatment of the proposed transactions or the additional transactions under other provisions of the code and regulations or on the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions or the additional transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding plr-126276-07 i whether any entity described as a disregarded_entity actually qualifies as a disregarded_entity under sec_301_7701-3 ii apart from their effect on the prior letter_ruling the federal_income_tax consequences of the of the various debt reductions and distributions occurring in the additional transactions iii whether newco should be respected as a separate_entity and iv if it should be respected whether the newco contribution should be treated under some analysis as a liquidation-reincorporation of sub procedural statements this ruling letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling 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 the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely ________________________________________ lewis k brickates branch chief branch associate chief_counsel corporate


t c memo united_states tax_court claudia f walker petitioner v commissioner of internal revenue respondent docket no filed date j scott moede and jan r pierce for petitioner shirley m francis for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’s federal income taxes for and respectively and penalties of dollar_figure and dollar_figure under sec_6662 or in the alternative sec_6662 for those years respectively the issues for decision are whether petitioner reported the correct amount of gain resulting from the sale of her interest in a parcel of property deeded to petitioner by her former now deceased husband bert walker mr walker on her and federal_income_tax returns and whether petitioner is liable for accuracy-related_penalties under sec_6662 for and unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts have been rounded to the nearest dollar findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference at the time the petition in this case was filed petitioner resided in clackamas oregon background petitioner and mr walker were married on date prior to their marriage petitioner had worked in several factories and had obtained a high school equivalent education during their marriage petitioner did not work outside the home mr walker worked as a realtor property developer and home builder petitioner and mr walker divorced effective date at the time of their divorce petitioner’s and mr walker’s marital estate was worth several million dollars included in the marital estate was a piece of real_property happy valley property located next to petitioner’s and mr walker’s home in clackamas county oregon in which petitioner and mr walker jointly owned a 50-percent interest the other 50-percent interest in the happy valley property had been conveyed to a_trust for the benefit of petitioner and mr walker’s children and grandchildren walker family irrevocable_trust the marital settlement agreement that was entered into by petitioner and mr walker severed their joint_ownership in the happy valley property and conveyed separate 25-percent interests to each of them in accordance with the terms of the marital settlement agreement and pursuant to a bargain and sale deed signed and dated by petitioner and notarized on date and signed and dated by mr walker and notarized on date petitioner and mr walker as grantors conveyed to petitioner as grantee one-half of their previously jointly owned 50-percent interest in the happy valley property the stated consideration for this conveyance was the stipulated judgment of dissolution of marriage divorce decree entered in clackamas county oregon circuit_court case no walker v walker neither the marital settlement agreement nor the divorce decree addressed the sale of the happy valley property in addition to providing to petitioner and mr walker separate 25-percent interests in the happy valley property the marital settlement agreement divided the rest of their real_property and their personal_property contained a provision for an equalizing money judgment that required mr walker to pay to petitioner dollar_figure and required mr walker to pay to petitioner spousal support in the amount of dollar_figure per month until he satisfied the equalizing money judgment the equalizing money judgment provided that no interest shall accrue on the dollar_figure judgment if paid within one year if the judgment is not paid when due the judgment shall accrue interest at the rate of percent per annum from the date the judgment is entered petitioner’s equalizing money judgment against mr walker was secured_by a note and a_trust deed on several pieces of real_property that were conveyed to mr walker pursuant to the marital settlement agreement including his 25-percent interest in the happy valley property the equalizing money judgment was entered against mr walker on date correspondence regarding the tax consequences of transactions involving the happy valley property on date petitioner’s divorce attorney raymond young young wrote a letter to gary leavitt leavitt an accountant in oregon city oregon requesting advice on a possible transaction involving petitioner mr walker and the happy valley property the pertinent parts of young’s letter to leavitt are as follows i am writing this letter on behalf of my client claudia walker who has a significant post-decree tax question in the divorce decree from clackamas county in date ms walker was awarded a dollar_figure judgment against mr walker the judgment is due one year from the date of the judgment as long as it is paid when due no interest will accrue on the judgment five months later mr walker is running into financial difficulties and two of the properties an apartment complex and some bare land are in the process of being sold in regards to the bare land mr walker holds a one-quarter interest in the property with mrs walker holding another one-quarter interest in the property after that sale is made mr walker’s one-quarter interest should net him about dollar_figure from the sale the big question is should mr walker quitclaim his one-quarter interest in the bare land to ms walker prior to the sale with a simple notation on the quitclaim_deed that the consideration is a credit against the judgment owed to her for whatever amount she receives from the sale who is responsible for the capital_gains on mr walker’s portion essentially it boils down to if mr walker transfers his interest in the real_property to mrs walker is it a taxable_event for him which requires him to declare the capital_gains or whether the capital_gains responsibility and the basis carries over to mrs walker so she has to pay capital_gains on the proceeds of the sale herself young sent a copy of this letter to petitioner and she reviewed it on date young faxed the letter that he had sent to leavitt to kelly coburn coburn petitioner’s accountant seeking coburn’s views on the tax consequences for the facts stated in the letter to leavitt petitioner and mr walker had been clients of coburn’s firm for many years and coburn continued to prepare their individual tax returns after their divorce on date coburn wrote a response to young the pertinent parts of coburn’s response are as follows i received your fax of a letter you sent to gary leavitt regarding a possible transfer of properties from bert to claudia prior to their sale if the transfers occur within one year of the divorce it is clear that sec_1041 would apply no gain_or_loss would be reported by bert walker and claudia walker would take his basis in the property as her own therefore she would be responsible for any income taxes due on a subsequent sale emphasis added there are a couple of alternatives that could be considered first since claudia will probably have little other income in she may be in a lower tax_bracket than bert and thus would pay less income_tax on the gains than bert would if claudia were to accept an assignment of the properties bert could perhaps agree to reimburse her for the income_tax due on the gains or since claudia holds trust deeds on these properties it should be possible for the escrow instructions to provide for a payment of some or all of the proceeds from the sales even though bert would be the seller in that case bert would remain responsible for the income taxes on any gain if this were done bert may wish to retain a portion of the proceeds in order to pay the income taxes on the gains coburn sent copies of his response to young’s letter to both petitioner and mr walker and petitioner reviewed her copy of his response the transactions involving the happy valley property the happy valley property was listed for sale with a realtor sometime during mr walker served as the primary contact person for the realtor on the sale of the happy valley property on or about date a prospective purchaser cruz development inc cruz development offered to buy the happy valley property cruz development was not related to petitioner or to mr walker and neither petitioner nor mr walker had any legal obligations to cruz development cruz development’s offer to buy the happy valley property was based on obtaining approval for buildable lots on the property at a price of dollar_figure per lot the sale of the happy valley property to cruz development however was not completed on date petitioner signed a document entitled settlement agreement whereby she agreed to accept mr walker’s 25-percent interest in the happy valley property in consideration for a credit against the dollar_figure equalizing money judgment the settlement agreement used the following language i claudia f walker hereby agree to accept from bert walker hi sec_25 interest_in_real_property tl and tl - happy valley oregon this assignment will credit bert walker hi sec_1 interest being approximately dollar_figure less approximately dollar_figure capital_gains_tax leaving dollar_figure credit towards the divorce settlement this calculation is based on future building lots the settlement amount may be adjusted up or down by dollar_figure-per lot after subdivision approval claudia walker agrees to pay deferred property taxes on hers and bert’s share the settlement agreement was also signed by mr walker but it was not dated by him on date mr walker signed and had notarized the quitclaim_deed that conveyed his 25-percent interest in the happy valley property to petitioner the settlement agreement was attached to the quitclaim_deed and provided the consideration for the transfer of mr walker’s 25-percent interest in the happy valley property to petitioner on date petitioner signed an earnest money agreement with a new and unrelated prospective buyer parker development northwest inc parker development for the potential sale of the happy valley property the earnest money agreement acknowledged earnest money of dollar_figure and provided for release of that dollar_figure to the listed sellers petitioner and the walker family irrevocable_trust by date and closing on or before date on date the trustee for the walker family irrevocable_trust which as previously noted owned a 50-percent interest in the happy valley property signed the earnest money agreement mr walker did not sign the earnest money agreement and is not mentioned in this document the quitclaim_deed that conveyed mr walker’s interest in the happy valley property to petitioner was recorded on date the bargain and sale deed that conveyed the happy valley property to parker development was signed by petitioner on date this bargain and sale deed was recorded by parker development in date as shown on the seller final closing statement closing statement the closing date for parker development’s purchase of the happy valley property was date the closing statement listed only petitioner and the walker family irrevocable_trust as sellers of 50-percent interests in the happy valley property there was no reference in the closing statement to mr walker’s participating in the sale of the happy valley property petitioner’s and mr walker’s tax returns coburn prepared petitioner’s federal_income_tax returns for and and returns and used the installment_method to report the gain on the sale of a 25-percent interest in the happy valley property on those returns petitioner told coburn that mr walker agreed to pay the tax on percent of the gain resulting from the sale of the happy valley property to parker development petitioner did not provide to coburn the settlement agreement or quitclaim_deed that transferred mr walker’s interest in the happy valley property to her while coburn was preparing her and returns consequently coburn prepared petitioner’s and returns without regard to the 25-percent interest in the happy valley property formerly owned by mr walker coburn also prepared mr walker’s federal_income_tax return return which mr walker filed on or about date on his return mr walker reported a gain on the sale of a 25-percent interest in the happy valley property had coburn been provided with the settlement agreement and quitclaim_deed that transferred mr walker’s 25-percent interest in the happy valley property to petitioner he would not have reported any gain from the sale of the happy valley property to parker development on mr walker’s return in date mr walker gave to coburn a copy of the settlement agreement that petitioner had signed on date and which was attached to the quitclaim_deed of date and requested that coburn amend his return mr walker also supplied to coburn a copy of the quitclaim_deed accordingly in date mr walker filed an amended federal_income_tax return for to remove from his taxable_income the gain on the sale of the happy valley property when coburn told petitioner that mr walker had amended his return petitioner responded by telling him that the settlement agreement related to a transaction that had not occurred consequently petitioner did not amend her and returns mr walker died on date while his refund claim for was pending on date respondent disallowed the refund claim that was filed by mr walker for and sent to petitioner a notice_of_deficiency for and the notice_of_deficiency determined that petitioner’s total_tax liabilities were dollar_figure for and dollar_figure for consequently respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’s federal income taxes for and respectively and accuracy-related_penalties of dollar_figure and dollar_figure under sec_6662 for and respectively the deficiencies were based on petitioner’s failure to report the gain on the sale to parker development of the 25-percent interest in the happy valley property that had been transferred to her from mr walker in date the accuracy-related_penalties were imposed because the underpayment_of_tax on petitioner’s and returns was determined to be attributable to petitioner’s negligence or disregard of the rules or regulations under sec_6662 or alternatively to a substantial_understatement_of_income_tax under sec_6662 the whipsaw_position this case is related to a refund action that is pending before the u s court of federal claims walker family_trust v united_states no t the walker family irrevocable_trust which is the plaintiff in the above-referenced refund action owns its interest in mr walker’s claim by virtue of an assignment made by mr walker’s estate petitioner’s deficiency action and the refund action brought by the walker family irrevocable_trust constitute what is known as a whipsaw_position for respondent because of the inconsistent positions taken by the two parties with respect to the gain resulting from the sale of the happy valley property to parker development opinion petitioner’s gain on the sale of the happy valley property petitioner contends that under sec_1041 she is liable for tax on only percent of the gain that resulted from the sale of the happy valley property to parker development sec_1041 provides a broad rule_of nonrecognition-of-gain treatment for sales gifts and other transfers of property between spouses or between former spouses and incident_to_divorce sec_1041 the basic policy of sec_1041 is to treat a husband and wife as one economic unit and to defer but not eliminate the recognition of any gain_or_loss on interspousal property transfers until the property is conveyed to a third party outside the economic unit 102_tc_77 this policy extends to transfers of property between former spouses so long as the transfers take place incident_to_divorce see sec_1041 in advancing her argument petitioner assumes that she can disavow the form of the transactions that occurred with respect to the happy valley property based on this assumption petitioner asserts that the following substance should control the tax consequences of the transactions involving the happy valley property the quitclaim_deed of date constituted a written request from mr walker to petitioner that she sell his 25-percent interest in the happy valley property to a disinterested third party therefore petitioner’s sale of the happy valley property to parker development took place on behalf of mr walker petitioner contends that this substance falls within the scope of the second situation described in sec_1_1041-1t q a-9 temporary income_tax regs fed reg date accordingly petitioner concludes that she should be provided nonrecognition-of-gain treatment under sec_1041 as to the 25-percent interest in the happy valley property that she sold on behalf of mr walker as a backstop to her substance over form argument petitioner contends that she filed her and returns in accordance with an agreement that she had with mr walker that he would report one-half of the gain resulting from the sale of petitioner’s undivided 50-percent interest in the happy valley property conversely respondent argues that petitioner failed to report a gain on the sale of property that she acquired in a transaction incident to her divorce from mr walker respondent contends that petitioner agreed to accept a 25-percent interest in the happy valley property from mr walker within year of their divorce and in partial satisfaction of the equalizing money judgment furthermore respondent asserts that petitioner’s substance over form argument has no merit and that mr walker’s alleged agreement to report part of the gain resulting from the sale of the happy valley property is not determinative in order to decide whether petitioner reported the correct amount of gain on the sale of the happy valley property on her and returns we begin by considering whether petitioner can disavow the form of the transactions involving the happy valley property a petitioner’s assumption that she can disavow the form of the transactions involving the happy valley property in favor of their alleged substance as a general_rule a taxpayer is bound by the form of the transaction that the taxpayer has chosen 118_tc_32 steel v commissioner tcmemo_2002_113 see 99_tc_561 taxpayers are ordinarily free to organize their affairs as they see fit however once having done so they must accept the tax consequences of their choice whether contemplated or not and may not enjoy the benefit of some other route that they might have chosen but did not 417_us_134 see also in re steen 509_f2d_1398 n 9th cir maintaining that to allow a taxpayer to challenge his own forms in favor of asserted substance would encourage posttransactional tax planning and unwarranted litigation and would raise a monumental administrative burden and substantial problems of proof for the government young’s letter of date and coburn’s response to young’s letter on date establish that petitioner had been advised that she had several options that she could pursue with respect to using mr walker’s 25-percent interest in the happy valley property to satisfy at least a part of her equalizing money judgment in particular coburn’s response to young’s letter asserted that if petitioner chose to accept mr walker’s interest in the happy valley property within year of the end of their marriage and then decided to sell her undivided_interest in that property she would be responsible for the entire amount of tax resulting from the sale the record in this case demonstrates that this option was the one that petitioner chose to follow petitioner voluntarily entered into the settlement agreement with mr walker on date and accepted his 25-percent interest in the happy valley property in consideration for a credit against the dollar_figure equalizing money judgment in accordance with the settlement agreement mr walker transferred his 25-percent interest in the happy valley property to petitioner on date pursuant to a quitclaim_deed the quitclaim_deed was recorded on date thus mr walker no longer had any rights in the happy valley property as of the date petitioner signed the bargain and sale deed that conveyed an undivided 50-percent interest in the happy valley property to parker development date petitioner entered into the foregoing transactions after having been advised of the tax consequences of the form of those transactions there is no reason here to disregard that form b application of sec_1041 to the transactions involving the happy valley property because petitioner cannot invoke the doctrine_of substance over form we must consider whether two separate transactions qualify for nonrecognition-of-gain treatment under sec_1041 the first transaction involves mr walker’s transfer of his 25-percent interest in the happy valley property to petitioner in consideration for a settlement agreement that provided to mr walker a credit against the dollar_figure equalizing money judgment that he owed to petitioner the second transaction involves petitioner’s sale of her undivided 50-percent interest in the happy valley property to an unrelated third party parker development sec_1041 provides in pertinent part as follows sec_1041 transfers of property between spouses or incident_to_divorce a general_rule --no gain_or_loss shall be recognized on a transfer of property from an individual to or in trust for the benefit of -- a spouse or a former spouse but only if the transfer is incident to the divorce b transfer treated as gift transferee has transferor’s basis --in the case of any transfer of property described in subsection a -- for purposes of this subtitle the property shall be treated as acquired by the transferee by gift and the basis of the transferee in the property shall be the adjusted_basis of the transferor c incident_to_divorce --for purposes of subsection a a transfer of property is incident to the divorce if such transfer-- occurs within year after the date on which the marriage ceases or is related to the cessation of the marriage mr walker’s transfer of his 25-percent interest in the happy valley property to petitioner on date took place incident to their divorce because it occurred within year after the date on which their marriage ceased date sec_1041 consequently mr walker’s transfer of his interest in the happy valley property to petitioner qualified for nonrecognition-of-gain treatment under sec_1041 see also sec_1_1041-1t q a-10 temporary income_tax regs fed reg date providing that the transferor_of_property under sec_1041 is to recognize no gain_or_loss on the transfer regardless of whether the transfer is in exchange for consideration petitioner received the 25-percent interest in the happy valley property with a basis equal to mr walker’s adjusted_basis in that 25-percent interest sec_1041 see also sec_1_1041-1t q a-11 temporary income_tax regs fed reg date providing that in all transfers subject_to sec_1041 the basis of the transferred property in the hands of the transferee is the adjusted_basis of such property in the hands of the transferor immediately before the transfer regardless of whether the transfer is a bona_fide sale in which the transferee pays the transferor consideration for the transferred property petitioner’s sale of her undivided 50-percent interest in the happy valley property in date is not a transaction that falls within the statutory language of sec_1041 because it was not a transfer to or on behalf of her spouse or her former spouse and incident_to_divorce therefore sec_1041 does not relieve petitioner from recognizing the gain resulting from the sale of her interest in the happy valley property petitioner argues that sec_1_1041-1t q a-9 temporary income_tax regs fed reg date qualifies her for nonrecognition-of-gain treatment under sec_1041 for the sale of the 25-percent interest in the happy valley property received from mr walker in date sec_1_1041-1t q a-9 temporary income_tax regs fed reg date applies only to transfers made by a taxpayer to a third party on behalf of that taxpayer’s spouse or former spouse generally a transfer by a taxpayer is considered to have been made on behalf of that taxpayer’s spouse or former spouse if it satisfied a specific legal_obligation or liability of that taxpayer’s spouse or former spouse 167_f3d_1240 9th cir 981_f2d_456 9th cir 102_tc_77 as discussed above mr walker’s transfer of his 25-percent interest in the happy valley property on date satisfied a specific legal_obligation that he owed to petitioner ie a portion of the equalizing money judgment and gave her control_over an undivided 50-percent interest in that property petitioner’s subsequent sale of her interest in the happy valley property did not satisfy any other legal_obligation or liability that mr walker owed to her or anyone else thus petitioner did not make the sale in the interest of or as a representative of mr walker cf 215_f3d_1201 11th cir 114_tc_14 therefore petitioner’s sale of her interest in the happy valley property was not made on behalf of mr walker accordingly sec_1_1041-1t q a-9 temporary income_tax regs fed reg date is not applicable to this case c petitioner’s argument that she filed her and returns in accordance with an agreement that she had with mr walker petitioner relies on friscone v commissioner tcmemo_1996_193 for her argument that she filed her and returns in accordance with an agreement that she had with mr walker that he would report one-half of the gain resulting from the sale of petitioner’s undivided 50-percent interest in the happy valley property the principal issue in friscone was whether following an agreement between a husband and wife that was incorporated in a divorce decree the gain on the subsequent sale of certain stock owned by the husband was to be attributed to him in its entirety or only in the portion awarded to him by the divorce decree in holding that only the gain on the portion awarded to the husband by the divorce decree was to be attributed to him we considered the manner in which the divorce decree divided the proceeds of the sale of the stock between the husband and wife even though title to the stock remained with the husband up to the time of its sale under the terms of the divorce decree we concluded that the divorce decree substantively transferred ownership of percent of the stock to the wife therefore we decided that the husband was liable for the tax on only percent of the proceeds of the sale of the stock friscone reflects the proposition that when a divorce decree controls the apportionment of property between a husband and wife each of them is liable only for the tax on the gain resulting from the sale of their portion of that property to a third party petitioner’s and mr walker’s divorce decree set forth that they would receive separate 25-percent interests in the happy valley property as discussed above petitioner accepted mr walker’s 25-percent interest in the happy valley property in consideration for a credit against the dollar_figure equalizing money judgment mr walker then transferred his 25-percent interest in the happy valley property to petitioner pursuant to a quitclaim_deed this transfer extinguished his ownership_interest in the happy valley property consequently the divorce decree no longer controlled the apportionment of the happy valley property between petitioner and mr walker as of the date of its sale to parker development therefore the reasoning of friscone is of no help to petitioner in this case because petitioner controlled an undivided 50-percent interest in the happy valley property at the time of its sale she had the right to receive the income generated by the sale of that interest and to enjoy the benefit of that income when it was paid to her by parker development one of the general principles of tax law is that income is taxed to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid 311_us_112 this general principle dictates that the gain that was recognized on the sale of petitioner’s interest in the happy valley property was taxable to her consequently no effect can be given to an agreement between petitioner and mr walker as to how the gain on the sale of her interest in the happy valley property was going to be reported on her and returns see 78_tc_100 13_tc_397 affd per curiam 200_f2d_560 2d cir estate of ballantyne v commissioner tcmemo_2002_160 affd sub nom ballantyne v commissioner 341_f3d_802 8th cir bonner v commissioner tcmemo_1979_435 sec_6662 accuracy-related_penalty respondent determined accuracy-related_penalties under sec_6662 under sec_6662 a taxpayer may be liable for a penalty of percent on the portion of an underpayment_of_tax due to inter alia negligence or disregard of the rules or regulations sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax_return sec_6662 sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard sec_6662 a taxpayer’s disregard is intentional if the taxpayer knows of the rule_or_regulation that is disregarded sec_1_6662-3 income_tax regs respondent has the burden of production under sec_7491 and must come forward with sufficient evidence indicating that it is appropriate to impose the penalty see 116_tc_438 once respondent meets his burden of production the taxpayer must come forward with persuasive evidence that respondent’s determination is incorrect id as discussed above petitioner was advised as to the tax consequences of her transactions involving the happy valley property by coburn in his correspondence of date even though petitioner was aware of the tax consequences of these transactions her and returns do not reflect the correct amount of gain that she recognized on the sale of her undivided 50-percent interest in the happy valley property because she failed to provide to coburn the settlement agreement and quitclaim_deed that transferred mr walker’s 25-percent interest in the happy valley property to her when mr walker filed an amended_return for petitioner made a misrepresentation to coburn by stating that the transaction embodied by the settlement agreement and quitclaim_deed did not take place this evidence satisfies respondent’s burden of production under sec_7491 petitioner contends that respondent’s determination to impose the accuracy-related_penalty due to negligence or disregard of the rules or regulations is incorrect because the position that she took on her and returns had a reasonable basis a return position that has a reasonable basis is not attributable to negligence or disregard of the rules or regulations see sec_1 b income_tax regs the reasonable basis standard is not satisfied however by a return position that is merely arguable or that is merely a colorable claim see sec_1_6662-3 income_tax regs see also indeck energy servs inc v commissioner tcmemo_2003_ expressing that the reasonable basis standard was a standard significantly higher than the not frivolous standard prior to that standard’s being defined by an amendment to sec_1 b income_tax regs petitioner has presented neither persuasive evidence nor authority justifying her rejection of the tax_advice she received prior to entering into the transactions with mr walker and parker development petitioner’s position on her and returns was based on an unwarranted assumption that she could disavow the form of the transactions involving the happy valley property for their alleged substance therefore we conclude that petitioner did not have a reasonable basis for the position taken on her and returns a taxpayer may also be liable for a penalty under sec_6662 on the portion of an underpayment due to a substantial_understatement_of_income_tax sec_6662 an understatement of income_tax is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 an understatement is defined as the excess of the tax required to be shown on the return over the tax actually shown on the return less any rebate sec_6662 in this case the understatement on each of petitioner’s returns satisfies the definition of substantial the amount of the understatement subject_to the penalty is reduced however to the extent it is attributable to the tax treatment of any item by the taxpayer if there is or was substantial_authority for such treatment sec_6662 alternatively the amount of the understatement may be reduced to the extent it is attributable to any item if the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return and there is a reasonable basis for the tax treatment of such item by the taxpayer sec_6662 petitioner’s treatment of the transactions involving the happy valley property on her and returns was not supported by substantial_authority furthermore petitioner neither disclosed the relevant facts in those returns nor had a reasonable basis for the position taken on those returns consequently the understatements of income_tax on petitioner’s and returns cannot be reduced under sec_6662 whether the sec_6662 penalty is applied because of an underpayment attributable to negligence or disregard of the rules or regulations or to a substantial_understatement_of_income_tax the penalty will not be imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner supra pincite the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made by taking into account all of the pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor in deciding whether a taxpayer acted with reasonable_cause and in good_faith is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability id petitioner primarily argues that she acted with reasonable_cause and in good_faith because she filed her and returns in accordance with an agreement that she had with mr walker that he would report one-half of the gain resulting from the sale of petitioner’s undivided 50-percent interest in the happy valley property in essence petitioner argues that even though she incorrectly reported the amount of the gain that she realized on the sale of her interest in the happy valley property on her and returns we should conclude that she believed that such an agreement could shift a portion of her tax_liability to mr walker respondent counters by arguing that mr walker never told petitioner either orally or in writing that he would pay any amount of the tax resulting from the sale of the happy valley property as discussed above the alleged agreement that petitioner argues existed between herself and mr walker would not have relieved her from her duty to assess her correct_tax liability for and see pesch v commissioner t c pincite neeman v commissioner t c pincite estate of ballantyne v commissioner tcmemo_2002_160 bonner v commissioner tcmemo_1979_435 furthermore the evidence of the alleged agreement is conflicting and unreliable petitioner’s purported belief is ultimately attributed by her to the agreement that she would receive dollar_figure in the divorce settlement free of tax and not to any agreement with mr walker at the time of the transfers of the happy valley property the settlement agreement’s terms to the contrary suggest that petitioner would be assumed to pay dollar_figure in capital_gains taxes on the sale of the happy valley property to a third party and that the credit received by mr walker against his debt to her by reason of the transfer would be reduced proportionately the compelling facts again are that petitioner had been advised of the tax consequences of the transactions involving the happy valley property before she entered into them she should have provided coburn with the settlement agreement and quitclaim_deed so that he could determine the proper tax treatment of mr walker’s transfer of his 25-percent interest in the happy valley property to her because petitioner failed to provide this information to coburn and subsequently denied to him that the transaction occurred we conclude that petitioner’s efforts to assess her proper tax_liability were neither consistent with reasonable_cause nor in good_faith see 94_tc_473 59_tc_473 estate of ballantyne v commissioner supra sec_1 c i income_tax regs see also nowak v commissioner tcmemo_1994_428 upholding imposition of negligence_penalty where taxpayers ignored competent tax_advice given to them by their accountant about proposed transaction conclusion we hold that respondent did not err in his determination that petitioner failed to report the correct amount of gain from the sale of her interest in the happy valley property on her federal_income_tax returns for and we also hold that respondent’s determination to impose accuracy-related_penalties under sec_6662 was warranted due to petitioner’s negligence or disregard of the rules or regulations or alternatively to a substantial_understatement_of_income_tax we have considered the arguments of the parties not specifically addressed in this opinion those arguments are either without merit or irrelevant to our decision to reflect the foregoing decision will be entered for respondent


no third party internal_revenue_service national_office technical_advice_memorandum contact district_director information copy ’ taxpayer’s name taxpayer's address key district_office ep eo chief ep eo division taxpayer's identification_number years involved date of conference b k o i s q o i t t o i a l u a i issues whether under the circumstances described the post meets the requirements for continued recognition of exemption as an organization described in sec_501 revenue code with deductibility of contributions under sec_170 and a of the internal if the post remains exempt under sec_501 of the code whether bar restaurant income from nonmembers rental income constitute unrelated_business_taxable_income under sec_512 income from saturday night dances and pull-tab revenues boled facts the post is a veterans’ organization which is exempt under sec_501 of the code as an organization described in sec_501 with deductibility of contributions under sec_170 group exemption issued a charter by b on c the post which was incorporated on b and a was the post is included in the b the post follows the b national constitution the purposes to uphold and defend as stated in the national constitution are the constitution of the united_states of america to maintain law and order to foster and perpetuate a one hundred percent americanism to preserve the memories and incidents of their association in the great wars to inculcate a sense of individual obligation to the community state and nation to combat the autocracy of both the classes and the masses to make right the master of might to promote peace and good will on earth to safeguard and transmit to posterity the principles of justice freedom and democracy and comradeship by our devotion to mutual helpfulness to consecrate and sanctify our eligibility is open to anyone who was a member of the army or who being a citizen of the united states’ at the time of navy marine corps coast guard or air force of the united_states and assigned to active_duty at sometime during a period of war his entry therein served on active_duty in the armed_forces of any of the governments associated with the united_states service from the armed_forces must have been terminated by honorable discharge or honorable separation active members at his discharge papers and make an application in writing and any person wishing to become a member must show no person may be a member of more than one post there are only a time as of date the post had members there were members of d and members of e the post's facility consists of two halls one for saturday night dances and the other for rental to individuals or groups a lounge which contains a bar area for post meetings building a kitchen and a meeting room the building is identified by a sign on the the activities of the post consist of saturday night dances and lounge facilities for the members special occasion parties bull roasts americanism activities awarding scholarships and other community activities schools donates the meeting room to community organizations and the post donates flags to area ber sponsors baseball teams for various age groups and scout troops the hall is rented to members and the general_public renters pay a cleaning deposit if liquor is served a one day liquor license must be obtained from the county by the renters kitchen privileges are not available to the renters who are required to hire a caterer at the option of the renter is under of the total rents the value of the table and chairs the post provides tables and chairs the post's guest policy is posted at the entrance of the lounge and next to the guest book keycard system to limit access to nonmembers and also has a sign- guests must leave prior to or at the time in roster for guests the member who signed them in leaves the facility does not pay for food or beverages at the post examination the key district_office kdo noted that the sign- in roster was not accurately maintained the post has implemented a during the the guest pull-tab instant bingo tickets are sold at the bar a separate cash register is used for the sale of the tickets box of tickets is opened until the previous box is sold tickets are sold by the post's officers and volunteers records were maintained of the gross_receipts from the sale of pull-tabs or amounts of deposits tabs were reported net of expenses detailing the gross_sales to qualified members versus other individuals pull-tabs were not sold at weekly dances no records were maintained all amounts relating to pull- the no no other fundraising activities include dances appreciation there are no restrictions on who may attend or to whom hour special occasion dances and parties member is given tickets to sell the door members may sell their tickets saturday night and are advertised by word-of-mouth conducting the weekly dances the post is not competing with any commercial enterprise within the area as there are no commercial dance halls in the area the dances are held every no tickets are sold at for the dances each in the saturday night dances are conducted by volunteer labor records were not maintained on the number and hours of volunteers do the planning setting up facility volunteer labor used to conduct the dances or the number of persons members and nonmembers who attended the dances estimated that setting up for a dance requires five volunteers for two hours each operating the dance requires eight volunteers for four hours each cleaning of the facility takes five volunteers an hour and a half and hours selling tickets and accounting for funds members each spend two and cleaning of the for a total of it wa sec_107 hours of volunteer labor per dance two or three paid musicians who play three or four hours for a total of between six and twelve paid hours per dance do not generally receive tips the post band that receives between dollar_figure to dollar_figure if tips are received they go to for each dance the post enters into a contract with a generally there are volunteers the post filed forms for all years under examination but did not file forms 990-t failed to complete the forms as required missing items relate to the reporting of net_revenues from some activities and not segregating the various activities reporting income from d and e as contributions and not attaching all required schedules the kdo stated that the post such incorrect or an auxiliary e supports the post and is separately of the code the auxiliary is tax-exempt under section chartered by f is included in f’s group ruling c the f organization issues membership cards to e’s members who are permitted to use the post's facilities and participate in the programs and services of the post post meetings hold positions as be appointed to a post committee a post officer or serve on or e’s members cannot vote at as it d is a society within the post that is also separately is not recognized as tax-exempt the d society which abides by the g constitution and d’s members cannot vote at post meetings hold membership cards are d elects its own officers uses chartered bylaws issued by the g organization the post’s facilities and participates in programs and services of the post positions as post committee no information was provided as are some adult members and some of d’s members are also members information was of the post not provided as to whether the post reported the income received or disbursed on behalf of d is generally considered a youth society there a post officer or serve on or be appointed to a the post has control of d’s funds to the age of the members while d issue - law sec_501 c of the code provides for the exemption from federal_income_tax of a post or organization of veterans of the united_states armed_forces if such post or organization is a organized in the united_states or any of its possessions at least percent of the members of which are b past or present members of the armed_forces_of_the_united_states and substantially_all of the other members of which are individuals who are cadets or are spouses widows or widowers of past or present members of the armed_forces_of_the_united_states or of cadets and no part of the net_earnings of which inures to the c benefit of any private_shareholder_or_individual sec_1 c -1 of the income_tax regulations of the code provides that to be described in sec_501 an organization must be operated exclusively for one or more of the purposes listed in that section c provision of social and recreational activities for the organization’s members of the regulations lists as one of these purposes the sec_1 c - sec_1 c -1 c of the regulations provides that of the code must c -1 a of the regulations to promote the social welfare of the community as an organization described in sec_501 be operated exclusively for one or more of the following purposes to defined in sec_1 assist disabled and needy war veterans and members of the united_states armed_forces and their dependents and the widows and orphans of deceased veterans and assistance to hospitalized veterans or members of the armed_forces_of_the_united_states perpetuate the memory of deceased veterans and members of the armed_forces and to comfort their survivors programs for religious charitable scientific literary or educational_purposes of their members or dependents of their members or both provide social and recreational activities for their members to provide insurance benefits for to sponsor or participate in activities to provide entertainment care to carry on programs to a patriotic nature to conduct to or in senate report no 92nd cong 2d sess congress stated that for purposes of sec_501 substantially_all mean sec_90 percent percent of the members that do not have to be past or present members of the armed_forces_of_the_united_states to be cadets or spouses etc section dollar_figure c organization’s total membership may consist of individuals not mentioned above of the code therefore of the thus only percent of percent have a sec_6001 of the code provides that every person liable or for the collection thereof for any_tax imposed by the code shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 of the code provides except as provided in sec_6033 a every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement however and a statement of its operations for a certain year its records were so incomplete that the organization was unable the service held that the failure or to furnish such statements inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on is the grounds that the organization has not established that it observing the conditions required for the continuation of exempt status issue - rationale an organization described in sec_501 of the code carries out activities in furtherance of its exempt purposes only when the activities are exclusively in furtherance of the purposes listed in sec_1 c -1 c of the regulations among these purposes is the provision of social and recreational activities for its members organization described in sec_501 provides social and recreational activities for its members or for guests whose is engaged in activities in expenses are paid_by members it furtherance of its exempt purposes therefore when a veterans’ where goods or services are furnished to nonmembers who generally if an organization has not kept adequate provide payment for such goods or services their furnishing is outside the scope of sec_1 c -1 c of the regulations books_and_records concerning its financial transactions with nonmembers and more than percent of its gross_receipts are derived from sales transactions eg restaurant and bar sales the presumption will be that the organization's exempt status should be revoked because it c activities rebutted determine whether or not the organization primarily engaged in sec_501 activities all facts and circumstances must be reviewed to however this presumption may be is not primarily engaged in section here the post has presented evidence that during the years under examination it engaged in extensive activities that were in furtherance of exempt purposes under sec_501 such activities include patriotic activities social code activities membership meetings and various charitable and social welfare activities of the during the time of the examination there was no permanent mechanism in place to maintain records to distinguish between income from veteran members members’ families bona_fide guests auxiliary members and non-veterans in activities such however as the bar restaurant gambling and social activities it should be noted that the post has a key card system to limit access to the bar and restaurant members of the general_public if any using the post’s bar and restaurant facilities may raise an unrelated_business_income_tax ubit post's tax-exempt status under sec_501 see infra but would not adversely affect the of the code under these circumstances issue whether members of the e auxiliary and the d society should be considered members of the post for purposes of section of the code must be considered to determine if the c post meets the membership requirements of sec_501 the members of a post are not considered members of the post is formed and is recognized as tax-exempt and therefore e’s members are not considered members of the post a sec_501 auxiliary that is related to the e auxiliary is separately a separate organization as the auxiliary here even though d is not recognized as tax-exempt it is an d’s primary purposes are to d’s members cannot be post however d’s members may participate in many of the association and chartered by g promote patriotism and teach leadership to the members of d are not considered members of the post under the constitution and by-laws of b officers or attend post meetings unless they are also members of the post post's activities both social and patriotic as well as have full use of the post’s facilities post's exempt purposes under sec_501 may function as a program of the post the facts presented in this case considered members of the post continue to meet the membership limitations under sec_501 c the members of d should not be as organized d furthers the therefore the post would nevertheless based on of the code and members although the post’s completing of its forms for the years in question was not entirely sufficient we believe the post has generally maintained the records required under sec_6001 of the code to determine that it meets the requirements for continued recognition of exemption under sec_501 supra any unlike the situation described in rev failings of the post with respect to recordkeeping and filing returns do not rise to a level that would support revocation of exemption under sec_501 whether an inadequate records notice may be appropriate under these circumstances the kdo may wish to consider rul issue - conclusion based upon the information presented the post meets the requirements for continued recognition of exemption as an organization described in sec_501 deductibility of contributions under sec_170 a of the code with and issue - law sec_5il a of the code provides for the taxation of unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code provides in part that the term unrelated_business_taxable_income means the gross_income derived by an organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it certain deductions and computed with the modifications provided in sec_512 less sec_512 of the code excludes rents_from_real_property and all rents from personal_property leased with such property if the rents attributable to such personal_property are the exclusion an incidental amount of the total rents received does not apply if more than of the lease is attributable to personal_property or if the determination of the amount of such rent depends on the income or profits derived by any person from the property leased sec_1_512_b_-1 of the regulations excludes rents_from_real_property and rents from personal_property leased with real_property if the rents attributable to personal_property generally do not exceed percent of the total rents from all property leased sec_1_512_b_-1 of the regulations states that payments for the use or occupancy of rooms and other space where services are also rendered to the occupant such as for the use or occupancy of rooms or other quarters in hotels boarding houses or apartment houses furnishing hotel services or in tourist camps or tourist homes motor courts or motels or for the use or occupancy of space in parking lots warehouses or storage garages do not constitute rent from real_property generally services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only service for example constitutes such service whereas the furnishing of heat and light the cleaning of public entrances exits stairways and lobbies the collection of trash etc not considered as services rendered to the occupant the supplying of maid are sec_513 of the code provides that the term unrelated_trade_or_business means any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis of its exemption under sec_501 the term does not include any trade_or_business in which substantially_all the work in carrying on such trade_or_business is performed for the organization without compensation sec_513 of the code provides that for the purposes of a trade_or_business merely because it this section the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services identity as within a larger aggregate of similar activities or within a larger complex of other endeavors which may be related to the exempt purposes of the organization activity carried on for profit constitutes an unrelated_trade_or_business no part of such trade_or_business shall be excluded from such classification merely because it does not result in profit an activity does not lose is carried on or may not where an sec_513 f of the code provides that the term unrelated in congress passed pub trade_or_business does not include the conduct of certain bingo_games subsequently clarified in by public law sec to apply the same treatment to certain other games of chance that were then in operation and conducted under a state law enacted on date the state of north dakota this law applies only to gaming activities conducted in subsequently amended to october sec_311 law announcement 1989_45_irb_41 was published by the service as a reminder to tax-exempt organizations that income from the public conduct of certain bingo_games and other gaming activities may be subject_to the unrelated_business_income_tax imposed by sec_511 of the code the rules applicable to this area conduct of charitable gaming activities other than bingo is excluded from the definition of unrelated_business_taxable_income only in the state of north dakota currently income from the the announcement recaps rev_rul 1969_1_cb_158 provides that income from a short term lease that included utilities and janitorial services was rent within the meaning of sec_512 code and should be excluded in determining unrelated_business_taxable_income of the issue - rationale although the post is exempt from federal_income_tax under it of the code is still subject_to tax on sec_501 income derived from any unrelated_trade_or_business regularly carried on by it income_tax on such income if three conditions are present the income is from a trade_or_business is regularly carried on substantially related to the exercise or performance by the post of its exempt_function the post is subject_to the unrelated business the trade_or_business is not the trade_or_business and the sale_of_goods or performance of services for the a trade_or_business even when undertaken production_of_income is by a tax-exempt_organization _activities such as the sale of food and beverages pull-tabs and hall rentals and displays the required profit_motive activities therefore constitute a trade_or_business for purposes of sec_513 of the code the post derives profits from such a trade_or_business is considered to be regularly carried on when the activity is conducted with sufficient frequency and continuity to indicate a continuing purpose of the post to derive some of its income from such activity occur on a very frequent basis and therefore these activities are regularly carried on the post’s activities clearly the post’s activities constitute a regularly carried on trade_or_business whether these activities are substantially related to the post’s exempt purposes and whether any of the exceptions contained in sec_512 activity can be considered substantially related a nexus must exist between the goods sold or the services provided and the accomplishment of the post’s exempt purposes of the code are applicable the real issue here however is a nexus does before any if - ll- exist then the revenue generated from such activities will not be treated as unrelated_business_taxable_income sec_1 c -1 c of the regulations lists the provision of social and recreational activities for its members as one of the appropriate exempt purposes of organization restaurant for its bona_fide members recreational endeavors sponsored or facilitated by a post should first and foremost focus on the bona_fide veteran members of a post's facilities by those other than such veterans needs to be closely scrutinized this provision permits a post to operate a bar or any socializing or a veterans’ use with respect to sales of food and beverages gambling falling within the nontaxable category are bona_fide activities and hall rentals for purposes of sec_501 c of the code revenues derived from bona_fide members are not taxable while amounts from the general_public are subject_to tax guests ie individuals who are accompanied by a bona_fide member and who do not themselves pay for food beverages or gambling family members and relatives of the bona_fide members including spouses children grandchildren parents grandparents and siblings sec_1 the membership requirements for auxiliary units of veterans’ organizations societies would fall within the nontaxable category in computing unrelated_business_taxable_income c -1 d of the regulations which denotes these categories of individuals are set forth in also members of the post’s auxiliary units or also coming within the nontaxable category are certain one question presented is whether the use of the post’s as organized d facilities by a member of d furthers the exempt_purpose of the post is an appropriate post function and the use of the post’s facilities in most instances would be consistent with the requirements under sec_501 code of d would meet the substantially related test activities are sponsored by the post and further post purposes of the based upon the information presented income from members as their another nontaxable category consists of individuals who although they are not members of the local post other posts that are covered by the c group exemption accordance with this category any bona_fide member of national organization or a local b post could partake of the social and recreational activities offered by the post any revenues resulting from such activities would not constitute unrelated_business_taxable_income because the substantially related test under sec_513 of the code would be met in are members of a state or book -12- on the other hand the substantially related test would not be met where food beverages and gambling activities are made available to nonmembers of the post paying guests members of the public and members of veterans’ organizations not part of b thus providing goods and services to the foregoing categories of individuals does not contribute importantly to the accomplishment of any exempt_purpose listed in sec_1 c -1 c of the regulations with regard to amounts derived from hall rentals the prior of the code with respect to hall rentals that would analysis is also applicable to the extent that use of the hall by members and individuals in other nontaxable categories would not be subject_to tax otherwise be taxable the question presented is whether such amounts constitute rent from real_property that may be excluded from the computation of unrelated_business_taxable_income under sec_512 rental activities it appears that no personal services are provided and no personal_property other than chairs and tables considered less that of the total rental are provided renter must clean the facility obtain a liquor license and use a caterer other sources similar to the organization described in revrul_69_178 supra which was paid only for_the_use_of space portion of total hall rentals if any question of fact which must be resolved by the post and the kdo the renter may also obtain tables and chairs from in these instances the post appears to be in connection with some of the is subject_to tax isa determining what the thus amounts attributable to the aforementioned distinction between nontaxable members and taxable members of the public is also applicable to et al amounts derived from pull-tabs pull-tabs played by members of the post would not be subject_to tax because such activities are substantially related to the accomplishment of social and recreational purposes set forth in sec_1 information provided it also appears that income from pull-tabs that would otherwise be taxable may also be excluded from ubit if is determined that substantially_all of the work in carrying on the activity is performed without compensation sec_513 c -1 c of the regulations based upon the of the code see it the saturday night dances are regularly carried on for the purpose of raising funds while the dances may provide social activities for the members such activities are not limited to members and their bona_fide guests and income from nonmembers would not be considered related_income while no records appear to be maintained regarding the number of hours needed to conduct the dances the post estimates that the dances are conducted with substantially_all volunteer labor volunteer hours and -13- between six and twelve paid hours per dance circumstances income from the dances would not be subject_to ubit as the activity meets the volunteer labor exception under sec_513 of the code under these issue - conclusion there is no ubit on income from members of the post a members of d and e bona_fide guests and members of other b posts income attributable to the restaurant bar pull-tabs b instant bingo and saturday night dances which is derived from nonmembers paying guests members of the public and members of unrelated veterans’ organizations is subject_to tax unless the activity meets one of the exceptions contained in sec_511 of the code - income from hall rentals to nonmembers where the rent c includes personal_property over of total rents or personal services is subject_to ubit a copy of this memorandum is sec_6110 organization may not be used or cited as precedent to be given to the of the code provides that it -end- 23d


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-114170-00 date date legend taxpayer partnership residence on date the internal_revenue_service issued ltr plr- to taxpayer the purpose of this letter is to inform you that ltr is hereby revoked in accordance with section dollar_figure of revproc_2001_1 2001_1_irb_1 date ltr held that for purposes of sec_121 of the code that taxpayer is treated as owning residence for the period of time that residence was held in partnership we hereby revoke ltr because it is not in accord with the current views of the service sec_7805 of the code provides that the secretary_of_the_treasury or_his_delegate may prescribe the extent if any to which any ruling including any judicial decision or any administrative determination other than by regulation relating to the internal revenue laws shall be applied without retroactive effect section dollar_figure of revproc_2001_1 provides that a letter_ruling found to be in error or not in accord with the current views of the internal_revenue_service may be revoked or modified unless it was a part of a closing_agreement if a letter_ruling is revoked the revocation applies to all years open under the statute_of_limitations unless the service uses its discretionary authority under sec_7805 to limit the retroactive effect of the revocation section dollar_figure provides that except in rare or unusual circumstances the revocation or modification of a letter_ruling will not be applied retroactively to the taxpayer to whom the letter_ruling was issued provided that inter alia the taxpayer relied in good_faith on the letter_ruling and revoking or modifying the letter_ruling would be to the taxpayer’s detriment section dollar_figure prescribes the procedures for requesting relief under sec_7805 plr-114170-00 in accordance with section dollar_figure of revproc_2001_1 taxpayer submitted a statement requesting that we limit the retroactive application of this revocation based upon that statement and pursuant to the authority of sec_7805 of the code we hereby provide that this revocation of ltr will apply to taxpayer without retroactive effect s paul f kugler sincerely associate chief_counsel passthroughs and special industries


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa apjp b02 nmgalib posts-120107-04 uilc date july to associate area_counsel cleveland small_business self-employed cc sb from carol p nachman special counsel administrative provisions judicial practice procedure administration cc pa apjp subject advisory opinion on collection_of_taxes this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent we have reviewed the proposed memorandum entitled advisory opinion on collection_of_taxes and generally concur with your conclusion that sec_6201 allows the overstated withholding credits to be assessed using the math error procedures of sec_6213 to reflect that the withholding credits are assessed in the same manner but are not themselves math errors we recommend reworking the concluding paragraph on page to read --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------------------------------------------------- in addition for the unlimited statute_of_limitations under sec_6501 to apply the taxpayer must have had an intent to evade tax although the taxpayer’s conviction under sec_7206 conclusively establishes that the taxpayer filed a false return it does not conclusively establish that the taxpayer had the requisite intent to evade tax see eg 84_tc_636 we request that you contact this office if the taxpayer claims that the facts in this case and the conviction under sec_7206 are not sufficient to establish an intent to evade tax please call if you have any further questions