t c no united_states tax_court american stores company and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date p purchased the stock of ls prior to purchasing ls p had negotiated with the federal trade commission to satisfy the antitrust concerns about the purchase shortly after p’s purchase of ls and day after the ftc entered its final consent order the state of california filed an antitrust suit in federal district_court objecting to p’s purchase of ls the state asked for various remedies including divestiture the district_court issued a temporary injunction prohibiting p from integrating the business operations of ls and p the district court’ss opinion was the subject of an appeal and was ultimately resolved by the supreme court thereafter p and the state settled the antitrust suit p incurred substantial legal fees in defending against the state’s antitrust suit those legal fees were deducted as ordinary and necessary business_expenses r disallowed those deductions based on r’s determination that the legal fees should be capitalized - - held p’s legal fees incurred in defending against the state’s antitrust suit arose out of and were incurred in connection with p’s acquisition of ls the origin of the state’s antitrust claim was p’s acquisition of ls p’s legal fees must be capitalized fredrick j gerhart kevin m johnson and thomas edward doran for petitioner mark h howard for respondent opinion ruwe judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’s federal_income_tax for its taxable years ending date and date respectively hereinafter referred to as the and tax years after concessions the only issue for decision is whether petitioner may deduct or must capitalize legal fees and costs legal fees incurred in defending an antitrust suit brought by the state of california subsequent to petitioner’s acquisition of lucky stores inc this case is before the court fully stipulated see rule the stipulation of facts and the attached exhibits are incorporated herein by this reference background petitioner is an affiliated_group_of_corporations which annually files a consolidated federal_income_tax return american stores company american stores is the common parent of the affiliated_group and it filed the petition on behalf of all eligible members of the group pursuant to sec_1 income_tax regs at the time the petition was filed american stores a delaware corporation maintained its mailing address and principal office pincite east south temple salt lake city utah petitioner files its income_tax returns on the basis of a 52-53-week fiscal_year ending on the saturday nearest to each january petitioner prepared and filed the consolidated income_tax returns for its and tax years using the accrual_method of accounting by date american stores and its subsidiaries operated approximately big_number retail units in states during the and tax years petitioner principally engaged in the retail_sale of food and drug merchandise petitioner is one of the nation’s leading retailers operating combination drug food stores super drug centers drug stores and food stores petitioner sells both food and nonfood merchandise such as prescription drugs tobacco_products housewares health and beauty aids and sundry merchandise for home and family use petitioner maintains a substantial inventory for its various retail grocery and drug stores throughout the nation prior to its acquisition of lucky stores inc lucky stores petitioner conducted its activities through american stores’ wholly owned subsidiaries american super stores inc comprised of acme markets inc jewel food stores star market and jewel osco american food and drug inc comprised of skaggs alpha beta and buttrey food-drug american drug stores inc a nationwide drug chain and alpha beta company alpha beta during the tax_year american stores also acquired and commenced operations through lucky stores lucky stores operated food stores in california arizona nevada and florida acquisition of lucky stores in date the second and third largest grocery store chains in the state of california vons and safeway merged american stores determined that acquiring lucky stores would complement alpha beta’s operations in california on date american stores initiated a hostile takeover bid or tender offer for all the outstanding shares of lucky stores for dollar_figure per share tender offer at the time of the tender offer alpha beta stores constituted california's fourth largest retail grocery chain alpha beta operated supermarkets in california in northern california and in southern california lucky stores operated stores located throughout california and it was the largest grocery store chain in the state of california on date american stores amended its tender offer increasing the offer to dollar_figure for each lucky stores share this increase in price was attributable in part to competing bids by - - other companies interested in acquiring lucky stores on date the board_of directors for lucky stores approved the amended tender offer and a merger proposal with american stores ftc’s actions on date american stores gave notice of its intention to purchase all the stock of lucky stores to the federal trade commission ftc pursuant to the hart--scott-rodino antitrust improvements act of publaw_94_435 sec 90_stat_1390 codified pincite u s c sec 18a in response to american stores’ hart-scott--rodino filing the ftc conducted an investigation of the proposed merger and worked to negotiate a settlement with american stores the ftc and american stores negotiated a preliminary settlement of the ftc's concerns about the tender offer this preliminary settlement was reflected in two simultaneous actions taken by the ftc on date first the ftc filed an administrative complaint charging that american stores’ acquisition of lucky stores violated section of the clayton act ch 38_stat_731 as amended and codified pincite u s c sec and sec_5 of the federal trade commission act ch 38_stat_719 as amended and codified pincite u s c sec_45 second the ftc filed a proposed consent order proposed consent order as part of the proposed consent order the tender offer was permitted to proceed subject_to certain -- - conditions the conditions were contained in an agreement titled hold separate agreement hold separate agreement that agreement required american stores to a refrain from integrating the assets of american stores and lucky stores until american stores had divested itself of of it sec_54 alpha beta supermarkets in northern california b maintain separate books_and_records for the acquisition cc prevent any waste or deterioration of lucky stores’ california operations d refrain from replacing the executives of lucky stores e maintain lucky stores as a viable competitor in california f refrain from selling or otherwise disposing of lucky stores’ california warehouses distribution or manufacturing facilities and retail grocery stores g preserve separate purchasing for lucky stores’ retail grocery sales relying on the ftc’s proposed consent order of date american stores proceeded with its tender offer to purchase percent of lucky stores stock american stores’ tender offer for lucky stores stock was carried out by a wholly owned subsidiary of alpha beta alpha beta acquisition corp abac abac had been formed solely for the purpose of acquiring the stock of lucky stores on date abac acquired more than percent of the lucky stores common_stock at dollar_figure per share as between abac and the former lucky stores shareholders abac’s acceptance and purchase of stock was final and irrevocable petitioner’s objective in acquiring lucky stores was to achieve future long-term benefits from the merger of the alpha - beta chain of stores and lucky stores the long-term benefits being sought were a greater market share in the california grocery market greater operating efficiencies in the combined operations of the two chains and the adoption of some of the management operating policies of lucky stores such as lucky stores’ everyday low pricing policy on date abac was merged with and into lucky stores pursuant to short-form_merger provisions of the delaware general corporation law as a result of the short-form_merger abac disappeared and lucky stores became a wholly owned subsidiary of alpha beta the total consideration paid_by american stores in the tender offer and merger exceeded dollar_figure billion for purposes of state law the merger was final and irrevocable after its acquisition of lucky stores american stores complied with the requirements of the hold separate agreement and did not integrate the operations of lucky stores with the operations of alpha beta state of california’s actions in date american stores provided the state of california with the filings it had made with the ftc pursuant to section of the clayton act through that filing american stores gave formal notice to the state of california of its intentions to acquire all of the lucky stores stock and to merge abac into lucky stores --- - the ftc allowed in accordance with its regulations a comment period during which the public was invited to submit comments on the proposed consent order the attorney_general of california submitted comments expressing concern that american stores’ acquisition of lucky stores would reduce competition in the retail supermarket industry in california the ftc entered a final consent order on date on date the state of california filed suit against american stores abac and lucky stores in the united_states district_court for the central district of california district_court the state of california claimed that the merger violated federal and state antitrust laws by decreasing competition in the supermarket industry in california the state of california requested various forms of relief including rescinding the merger transaction a divestiture of lucky stores or alternatively a permanent hold separate agreement like the one that american stores had entered into with the ftc the district_court issued a temporary restraining order against american stores and lucky stores on date the order required the continuation of the hold separate agreement and the maintenance of the status quo at american stores and its subsidiaries and lucky stores and its subsidiaries until a hearing on the preliminary injunction could be held the opinion of the district_court in this matter was published as - state of 697_fsupp_1125 c d cal american stores appealed the decision of the district_court the court_of_appeals for the ninth circuit published its opinion in that appeal as state of 872_f2d_837 9th cir the court_of_appeals affirmed the district court's finding that california had shown a likelihood of success on the merits of the case and possible irreparable harm the court_of_appeals however found that the preliminary injunction ordered by the district_court was tantamount to an indirect divestiture which was not a remedy available to private plaintiffs under section of the clayton act the united_states supreme court granted certiorari to the state of california see 493_us_916 prior to granting certiorari justice o’connor entered a stay continuing the district court’s injunction pending further review by the supreme court see 495_us_271 the supreme court reversed the judgment of the court_of_appeals for the ninth circuit and remanded the case for further proceedings the supreme court held that divestiture is a form of injunctive relief within the meaning of section of the clayton act and that the district_court had the authority to divest the acquirer of any part of the acquirer’s ownership_interest in the acquired company see id the supreme court -- - answered the specific question before it stating we are merely confronted with the naked question whether the district_court had the power to divest american of any part of its ownership_interest in the acquired lucky stores either by forbidding the exercise of the owner's normal right to integrate the operations of the two previously separate companies or by requiring it to sell certain assets located in california we hold that such a remedy is a form of injunctive relief within the meaning of section of the clayton act id pincite the supreme court remanded the matter for further proceedings the court_of_appeals for the ninth circuit vacated part of its earlier opinion and remanded the case to the district_court the preliminary injunction obtained by the state of california was modified on at least four occasions a modification filed with the district_court on date permitted american stores to integrate specified northern california operations of alpha beta with specified northern california operations of lucky stores following a stipulated divestiture of specified alpha beta assets american stores ultimately settled the dispute with the attorney_general of california by entering into a stipulation for entry of consent decree on date the california consent decree the california consent decree did not require american stores to divest any of its lucky stores stock and lucky stores remains a wholly owned subsidiary of american stores instead the california consent decree required american stores to dispose_of approximately of it sec_175 southern california alpha beta stores and of its newly acquired southern california lucky stores together with most of the related alpha beta support facilities the california consent decree did not require petitioner to divest any supermarkets in northern california or nevada beyond those specified in the date modification on date pursuant to the california consent decree american stores sold its stock in alpha beta company for approximately dollar_figure million to food-4-less supermarkets inc at the time of the sale the assets of alpha beta included stores located in southern california the attorney_general of california and the district_court approved this transaction as fulfilling the requirements of the settlement agreement and the california consent decree from date and continuing throughout the course of antitrust litigation with california lucky stores was a member of american stores’ consolidated_group as such american stores included lucky stores in its consolidated financial statements and consolidated federal_income_tax returns lucky stores accounted for dollar_figure of the total american stores’ affiliated_group gross revenue of dollar_figure for the tax_year lucky stores was only a member of american stores’ consolidated_group during the tax_year for the period from date to date and dollar_figure of the total american stores’ affiliated_group gross revenue of dollar_figure for the tax_year in the tax_year return petitioner did not claim an ordinary and necessary business_expense deduction for the legal fees attributable to the ftc proceeding involving the acquisition of lucky stores petitioner incurred approximately dollar_figure million in such legal fees in the tax_year petitioner also did not deduct investment banking fees incurred in the acquisition of lucky stores stock instead petitioner capitalized all of these expenditures as costs incurred in the process of acquiring lucky stores from june of until the end of the tax_year american stores’ subsidiary lucky stores paid dollar_figure in legal fees to defend against the claims of the attorney_general of california for violations of federal and state antitrust laws arising from the acquisition of lucky stores american stores charged these legal fees to account no lucky acquisition and moved these expenses to american food and drug inc in the financial books_and_records of american food and drug inc for the tax_year american stores capitalized the dollar_figure for legal fees associated with the antitrust litigation with the attorney_general of california petitioner’s accountants prepared a journal entry for these legal fees on its consolidated corporation income_tax return for the tax_year petitioner reported on schedule m-1 a deduction for legal and related expenses in connection with ca attorney_general litigation in the amount of dollar_figure this deduction is found on the tax_return schedules m-1 and m-2 at the second page of statement of the return the tax_return includes this amount as a form-1120 u s_corporation income_tax return line-26 deduction as detailed on statement of the return during the tax_year american stores’ subsidiary lucky stores paid dollar_figure for legal fees associated with the antitrust litigation with the attorney_general of california american stores charged these legal fees to account no lucky acquisition and moved these expenses to alpha beta american stores capitalized the dollar_figure for legal fees on the financial books_and_records of alpha beta for the tax_year petitioner’s accountants prepared documentation for these legal fees on petitioner’s corporation income_tax return for the tax_year petitioners claimed a deduction for legal fees -- ca attorney_general litigation in the amount of dollar_figure the return includes this amount as a form-1120 line-26 deduction during the tax_year american stores’ subsidiary lucky stores paid dollar_figure for legal fees associated with the antitrust litigation with the attorney_general of california of the dollar_figure lucky stores paid dollar_figure to the law firm of sonnenschein carlin nath for legal work on the antitrust case and paid dollar_figure for other expenses related to the antitrust case on petitioner’s corporation income_tax return for the tax_year petitioner claimed a deduction on form_1120 line for various items including litigation expenses of dollar_figure american stores included the dollar_figure for legal fees and costs identified above in the litigation expenses for financial reporting purposes american stores was required to account for its acquisition of lucky stores using the purchase_accounting method pursuant to accounting practices board opinion no apb under this method american stores’ acquisition was treated as an acquisition of lucky stores’ assets lucky stores’ liabilities were treated as if they were assumed by american stores in this hypothetical asset acgquisition under the purchase_accounting method petitioner was required to identify and quantify all of lucky stores’ ‘on date american stores filed a form_8023 corporate qualified_stock_purchase elections related to the acquisition by american stores of lucky stores and related entities in the lucky stores affiliated_group -- - liabilities including liabilities for current and pending litigation the legal fees associated with lucky stores’ current and pending litigation were required to be capitalized under the purchase_accounting method because they were considered liabilities that american stores assumed in the hypothetical asset purchase and as such the legal fees and other liabilities were treated as additional consideration that american stores paid for lucky stores’ assets in addition to the legal fees related to the state of california’s antitrust suit petitioner also capitalized under the purchase_accounting method more than dollar_figure million of lucky stores’ legal fees incurred in connection with employment discrimination suits torts and other litigation although petitioner capitalized these legal expenses for financial_accounting purposes under the purchase_accounting method petitioner claimed them as ordinary and necessary business_expenses on its consolidated federal_income_tax returns for the and tax years with the exception of the legal fees incurred in connection with the state of california's antitrust suit respondent allowed petitioner to deduct for federal_income_tax purposes the legal fees related to lucky stores that petitioner had capitalized under the purchase_accounting method for financial reporting purposes in the notice_of_deficiency respondent disallowed legal fees incurred by petitioner in defending against the state of - california’s antitrust suit respondent disallowed dollar_figure of deductions for legal fees claimed for the tax_year and disallowed separate deductions of dollar_figure and dollar_figure for legal fees claimed for the tax_year discussion the issue for decision is whether legal fees incurred in connection with the state of california’s antitrust litigation are deductible as ordinary and necessary business_expenses under sec_162 respondent determined that the legal fees must be capitalized pursuant to sec_263 petitioner argues that the legal fees were postacquisition expenditures incurred in defending its business operations income_tax deductions are a matter of legislative grace and the burden of clearly showing the right to the claimed deduction is on the taxpayer see rule a 503_us_79 moreover deductions are strictly construed and allowed only as there is clear provision therefor indopco inc v commissioner supra pincite quoting 292_us_435 the principal difference between a deduction and an item that must be capitalized and amortized is the timing of the recovery_of the expenditure the supreme court in indopco inc 7unless otherwise indicated section references are to the internal_revenue_code applicable to the subject years and rule references are to the tax_court rules_of_practice and procedure v commissioner supra pincite explained the primary effect of characterizing a payment as either a business_expense or a capital_expenditure concerns the timing of the taxpayer's cost_recovery while business_expenses are currently deductible a capital_expenditure usually is amortized and depreciated over the life of the relevant asset or where no specific asset or useful_life can be ascertained is deducted upon dissolution of the enterprise through provisions such as these the code endeavors to match expenses with the revenues of the taxable_period to which they are properly attributable thereby resulting in a more accurate calculation of net_income for tax purposes to qualify as an allowable deduction under sec_162 an item must be paid_or_incurred during the taxable_year be for carrying on any trade_or_business be an expense be a necessary expense and be an ordinary_expense 403_us_345 respondent argues that the legal fees were neither ordinary nor for carrying on any trade_or_business but were expenditures associated with the acquisition of a capital_asset in one sense the term ordinary in sec_162 prevents the deduction of expenses that are not normally incurred in the type of business in which the taxpayer is engaged ordinary in the sense of normal usual or customary in a taxpayer’s trade_or_business 308_us_488 more importantly the term ordinary serves as a means to clarify the distinction often difficult between those expenses that are currently deductible and those that are in the nature of capital - - expenditures which if deductible at all must be amortized over the useful_life of the asset 383_us_687 expenses_incurred in defending a business and its policies from attack are generally ordinary and necessary---and deductible- -business expenses see eg 320_us_467 a dentist's mail order business faced ruin when the postmaster general deprived him of access to the mails the supreme court held that his legal fees incurred in litigating the propriety of the postmaster general’s order were properly deductible as ordinary and necessary business_expenses commissioner v tellier supra holding that the taxpayer’s legal costs incurred in his defense against charges of past criminal conduct arising out of his business activities were deductible under sec_162 on the other hand no current deduction is allowed for a capital_expenditure see sec_263 indopco inc v commissioner supra pincite a particular cost no matter what its type may be deductible in one context but may be regquired to be capitalized in another context simply because other cases have allowed a current deduction for similar expenses in different contexts does not require the same result here for example in 418_us_1 the supreme court made the following observation about wages paid_by a taxpayer in its trade_or_business of course reasonable wages paid in the carrying on of a trade_or_business qualify as a deduction from gross_income but when wages are paid in connection with the construction or acquisition of a capital_asset they must be capitalized and are then entitled to be amortized over the life of the capital_asset so acquired petitioner’s reliance on 694_f2d_703 fed cir and e i du pont de nemours co v united stat432_f2d_1052 3d cir to support the proposition that expenses_incurred in an antitrust defense are always deductible is misplaced as previously indicated expenditures which otherwise might qualify as currently deductible must be capitalized if they are incurred in connection with the acquisition of a capital_asset commissioner v idaho power co supra pincite as stated in 688_f2d_1376 11th cir the requirement that costs be capitalized extends beyond the price payable to the seller to include any costs incurred by the buyer in connection with the purchase such as appraisals of the property or the costs of meeting any conditions of the sale see eg 397_us_572 90_sct_1302 25_led_577 397_us_580 90_sct_1307 l bd 2d further the code provides that the requirement of capitalization takes precedence over the allowance of deductions s sec_161 sec_261 see generally 418_us_1 94_sct_2757 41_led_535 thus an expenditure that would ordinarily be a deductible expense must nonetheless be capitalized if it 1s incurred in connection with the acquisition of a capital_asset the function of these rules is to achieve an accurate measure of net_income for the year by matching outlays - - with the revenues attributable to them and recognizing both during the same taxable_year when an outlay is connected to the acquisition of an asset with an extended life it would understate current net_income to deduct the outlay immediately x ‘we do not use the term capital_asset in the restricted sense of sec_1221 instead we use the term in the accounting sense to refer to any asset with a useful_life extending beyond one year distinguishing between expenses that can be deducted under sec_162 and those that must be capitalized under sec_263 is not always an easy task as the supreme court has noted the cases sometimes appear difficult to harmonize and each case ‘turns on its special facts ’ indopco inc v commissioner supra pincite quoting deputy v du pont supra pincite after considering all the facts and circumstances we must determine whether the costs incurred in defending the state of california’s antitrust litigation are better viewed as costs associated with defending a business or as costs associated with facilitating a capital_transaction see 397_us_572 in woodward the supreme court rejected a subjective primary purpose test in favor of the objective origin_of_the_claim_test used in 372_us_39 under the origin_of_the_claim_test the nature of the transaction out of which the expenditure in controversy arose governs whether the item is a deductible expense or a capital_expenditure regardless of the motives of the payor making the payment see - woodward v commissioner supra pincite in determining whether legal fees paid for business advice and counsel are capital we look to the nature of the services performed by the adviser rather than the designation or treatment by the taxpayer see 76_tc_351 affd 722_f2d_1462 9th cir 63_tc_86 affd 539_f2d_409 5th cir our inquiry focuses on whether the services were performed in the process of defending the business or whether the services were performed in the process of effecting a change in corporate structure for the benefit of future operations see indopco inc v commissioner u s pincite in 397_us_580 the supreme court held that litigation expenses_incurred to determine the price of stock whose title had already passed to the acquiring_corporation under state law were costs that arose out of the acquisition process itself and therefore capital and nondeductible in 112_tc_89 this court analyzed a similar question by asking whether the expenses were sufficiently related to the acquisition process and essential to the achievement of the long-term benefits of the acquisition see id pincite in applying the origin_of_the_claim_test courts look beyond the formal characterization of the claim see 473_f2d_1217 7th cir all the circumstances surrounding the claim must be considered see id pincite the district_court described the state of california’s antitrust complaint in the following terms the state requests a preliminary injunction preventing and restraining alpha beta and lucky and all persons acting on their behalf from taking any_action either directly or indirectly in furtherance of the proposed acquisition of lucky and requiring alpha beta to hold and operate separately all of lucky’s california assets and businesses pending final adjudication of the merits of this action and such injunctive relief including recission as is necessary and appropriate to prevent the effect of the unlawful activities alleged complaint pincite furthermore the state seeks to permanently enjoin alpha beta and lucky from carrying out any agreement understanding or plan the effect of which would be to combine the supermarket business of alpha beta and lucky state of 697_fsupp_1125 c d cal the supreme court described the complaint in the following terms the state sued claiming that the merger violates the federal antitrust laws and will harm consumers in california cities the complaint prayed for a preliminary injunction requiring american to operate the acquired stores separately until the case is decided and then to divest itself of all of the acquired assets located in california 495_us_271 in 526_f2d_135 6th cir legal expenses paid in settlement of a derivative action were held to be nondeductible capital expenditures the court found that the origin of the derivative claim was the taxpayer’s efforts to acquire the shareholder’s stock the court stated that although conserving the stock’s value was the immediate purpose of the derivative action the test of deductibility relates to the origin rather than the purpose - - the supreme court held the district_court had the power to divest american of any part of its ownership interests in the acquired lucky stores either by forbidding the exercise of the owner’s normal right to integrate the operations of the two previously separate companies or by requiring it to sell certain assets located in california under section of the clayton act id pincite the claim of the state of california that gave rise to petitioner’s legal fees was an alleged violation of section of the clayton act that section prohibits the acquisition of stock or assets in another company if the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly u s c sec the antitrust claim in the instant case involved american stores’ right to acguire lucky stores the legal fees incurred in the antitrust action arose out of and were incurred in connection with petitioner’s acquisition of lucky stores petitioner places great emphasis on the fact that legal_title to all the lucky stores shares had passed before the antitrust litigation was commenced in united_states v hilton hotels corp supra pincite the supreme court noted that the prior passage of title in the underlying stock acquisition in question was a distinction without a difference in deciding whether costs of litigation arose out of the process of -- - acquisition this court reached a similar result in 104_tc_584 affd without published opinion 142_f3d_442 9th cir at the time the antitrust legal fees were being incurred the supreme court described the status of the merger involved in this case in the following terms thus as a matter of legal form american and lucky were merged into a single corporate entity on date but as a matter of practical fact their business operations have not yet been combined california v american stores co u s pincite on this same point the district_court noted if the hold separate agreement has meaning this is not a completed merger alpha beta and lucky pursuant to the hold separate agreement are performing numerous functions as separate entities they retain their separate names and with them their respective corporate identities while defendants maintain that it is verbal calisthenics to issue injunctive relief to stop a merger contending that such is tantamount to divestiture they nevertheless ask the court to perform a linguistic triathalon to understand how a hold separate agreement is equivalent to a completed merger the court is unable to make such a leap in reasoning state of cal v american stores co f_supp pincite fn ref omitted when the legal fees were incurred the substance of the merger was not complete despite the passage of title in the lucky stores shares the hold separate agreement and the subseguent injunction issued by the district_court preserved the status quo that existed prior to the lucky stores acquisition by preventing the integration of the two supermarket chains in order - - to protect the california consumers from anticompetitive behavior until the injunction was lifted american stores faced the possibility of divestiture petitioner’s objective in acquiring lucky stores was to achieve future long-term benefits from the merger of the alpha beta chain of stores and lucky stores these benefits could not be realized if the state of california’s antitrust suit was successful although petitioner became the owner of lucky stores it was unable to realize the long-term benefits being sought until the antitrust suit was resolved the origin of the state of california’s antitrust suit was american stores’ acquisition of lucky stores the expenditure of funds to defend against the antitrust litigation conferred long- term benefits on american stores american stores was not defending an existing business structure from attack rather it was attempting to establish its right to create such a structure these benefits are comparable to the benefits that were required to be capitalized in 503_us_79 we hold that petitioner is not entitled to deduct the legal fees it incurred in contesting the state of california’s antitrust suit decision 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 psi b01 - plr-112249-04 date date -------------------------------------------- legend x ------------------------------------------------------ country entity date dear ---------------- this letter responds to a letter dated date written on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts -------- -------------------------------- ---------------------- according to the information submitted x is a country entity x intended to elect to be treated as a disregarded_entity for federal tax purposes effective date however the form_8832 entity classification election inadvertently was not timely filed x represents that it is an entity that is eligible to elect under sec_301_7701-3 to be a disregarded_entity for federal_income_tax purposes sec_301_7701-3 provides in part that a business_entity that is not law and analysis 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 plr-112249-04 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made we conclude that the requirements of 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 form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date to be valid the election must contain any consents required under sec_301_7701-3 and iii further a copy of this letter should be attached to the election plr-112249-04 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely s heather c maloy heather c maloy associate chief_counsel passthroughs and special industries being sent to your authorized representative enclosures cc --------------------------- copy of this letter copy for sec_6110 purposes -------------- ------------------------------------- --------------------- -------------------------------------- ------------------------------------------------------------- -------------------------------------- -------------------------


department of the treasury internal_revenue_service washington d c nov number release date cc dom fs it a uilc internal_revenue_service national_office field_service_advice memorandum for donald williamson jr assistant regional_counsel lc cc ser lc attn kim a palmerino from deborah a butler assistant chief_counsel field service cc dom fs subject inquiry regarding whether receipt of certain fees represents a return of basis this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer a b c d e f g date date year year act x security aa bb cc dd ee ff x y z issue s whether dd received by taxpayer subsequent to date but attributable the sale of x securities prior to date should be included in gross_income or should be excluded as a return of basis conclusion the dd should be included in gross_income under the circumstances presented below facts we rely on the facts set forth in your memorandum and in a private_letter_ruling related to taxpayer in addition we rely on facts we have obtained through communications with you taxpayer is a corporation that was created by a on date taxpayer’s principal activity consists of obtaining a from various financial institutions and issuing bb in those aa in the form of securities taxpayer was exempt from all federal and state taxes until date effective on date taxpayer was made subject_to federal_income_tax by the act taxpayer does not originate aa taxpayer purchases aa from the financial institutions that make the loans the aa are then pooled and investors are sold securities that are identified with specific pools of aa one type of security that taxpayer issues is the x security x securities have a stated principal_amount and a stated_interest rate by their terms they convey to investors a beneficial_ownership interest in the underlying pool of aa the principal due on an x security is equal to a fixed percentage of the outstanding principal_amount of the underlying loans at the time the securities are issued the fixed percentage is generally principal payments are made on the x securities as principal payments are received on the underlying loans taxpayer has established policies concerning its securities programs including eligibility requirements for the aa and for the financial institutions from which it purchases aa taxpayer has also developed accounting reporting and financial requirements to monitor the compliance of financial institutions participating in the programs at the time the aa are transferred to taxpayer the selling institutions generally enter into contracts to provide primary services on the loans primary services include collection of periodic loan payments from the borrowers remittance of the payments to taxpayer maintenance of escrow accounts for payments of insurance and taxes maintenance of records relating to the loans and handling delinquent payment problems in exchange for providing primary services on the loans the financial institutions are entitled to receive part of the interest collected on the loans income earned on the principal and interest payments between the time those payments are collected and the time they are remitted to taxpayer and other fees including fees for late payments and maintenance of escrow accounts after taxpayer sells the x securities taxpayer remains entitled to receive certain interest payments on the loans taxpayer is also entitled to receive income earned on principal and interest payments between the time the payments are received from the institutions that service the loans and the time the payments are remitted to the holders of the securities taxpayer accounts for the income from the issuance of x securities as a sale of assets taxpayer excludes the specific pools of aa associated with the specific x securities that are sold from its retained a portfolio the purchase_price of the aa is reported as the cost of sales and to the extent the proceeds from the issuance of the x securities exceed taxpayer’s basis in the aa the income is reported as gain as indicated above taxpayer receives income from the aa in addition to the proceeds from the issuance of the x securities taxpayer describes this income as interest margin interest margin is defined by taxpayer as the difference between the stated_interest on the face of the aa and the interest retained by the seller in essence the interest margin is the interest retained by taxpayer after the x securities are sold taxpayer divides the interest margin into two components the cc and the dd the basis for the allocation of the interest margin is unclear from the facts we have however according to information provided by taxpayer the allocation of part of the interest margin to the dd was based on its conclusion that as an economic matter part of the interest margin could represent payment for things other than the cost of providing bb and providing actual services to administer the pool this conclusion was reached in connection with the preparation of taxpayer’s initial federal_income_tax return according to taxpayer the dd also called the ff is considered contingent primarily because of the possibility of a prepayments in addition taxpayer argues the dd is contingent because it relies on taxpayer’s continued rendition of adequate services for tax purposes the cc component of the interest is recognized by taxpayer as ordinary_income when monthly a payments are received if the proceeds received from the sales of x securities exceed taxpayer’s basis in the aa the dd is also recognized as ordinary_income each month as it is received if the proceeds from the sales of x securities do not exceed taxpayer’s basis in the aa taxpayer compares the deficit with the present_value of the dd if the present_value of the dd is greater than the deficit the difference is treated as a deferred loss if the present_value of the dd is less than the deficit the difference is claimed as a loss in the situations where taxpayer treats the difference as a deferred loss taxpayer offsets the deferred loss by the dd portion of each monthly payment until the deferred loss is completely offset after the deferred loss is completely offset the dd are included in income according to taxpayer for tax purposes it had deferred loss from the issuance of x securities in prior years in the amount of x as of date for book purposes taxpayer includes the dd in income as it is received and amortizes any loss from the sales of x securities on a straight-line basis over the life of the aa in the pool for year and year examination made adjustments in the amounts of y and z respectively based on the determination that taxpayer is required to report both the cc and the dd as income in the year received law and analysis b of the act repealed taxpayer’s exemption from federal_income_tax effective date c of the act provides generally that the adjusted_basis of any asset of taxpayer held on date shall for purposes of determining any loss be equal to the lesser_of the adjusted_basis of such asset or the fair_market_value of such asset as of such date for purposes of determining any gain c specifies that the adjusted_basis of any asset of taxpayer held on date shall be equal to the greater of the adjusted_basis of such asset or the fair_market_value of such asset as of such date d of the act provides generally that c shall not apply to any right to receive income with respect to any ee or other similar interest in any aa not including any aa the legislative_history relating to b indicates that for purposes of the basis rules rights to income retained by taxpayer under ee and similar interests in aa sold prior to date are not to be considered to have a built-in-income component on date which could be treated as an asset held by taxpayer as of the date of taxability the comments relating to the conference agreement emphasize that taxpayer is to be treated as having no basis in income rights with respect to ee or similar interests sold in aa under the provisions of b where the ee related security or similar interest was sold or issued by taxpayer prior to date id in addition congress states its intent with respect to the treatment of the income attributable to ee or similar obligations sold or issued prior to date as follows thus income received by taxpayer which is attributable to ee or similar obligations sold prior to date is to be taxable in the year received regardless of whether such income is attributable to services performed by taxpayer prior to date to guarantees provided by taxpayer or to a built-in income or profit component which may be considered to exist as of date additionally taxpayer is not to be entitled to a deduction for depreciation or amortization with respect to its income rights in these obligations and is to have no basis in such income rights under the basis provisions of the conference agreement for purposes of determining gain_or_loss on the sale or disposition of such income rights id we believe that dd are income attributable to ee and not as taxpayer argues part of the sale proceeds from its sale of x securities thus we believe d of the act and the related legislative_history control the treatment of the taxpayer’s dd and that taxpayer should be treated as having no basis in such fees the dd should not be considered part of the sale proceeds from the sale of x securities because the fees do not arise out of the sale of the x securities rather the fees arise out of taxpayer’s ownership_interest in the underlying pool of aa a portion of which is sold via the x securities in e it was determined that an arrangement whereby ee were sold constituted a_trust the ruling characterized the sale of the ee as a transfer of an ownership_interest in each of the underlying aa subsequent revenue rulings have applied the same basic principles to securities issued under similar arrangements and have consistently concluded that the sale of ee constitutes a sale of an ownership_interest in the underlying aa see f g based on e and its progeny taxpayer argues that it sells its entire_interest in the underlying aa when it sells x securities according to taxpayer because the holder of the security acquires all rights to any income derived from the aa by virtue of its purchase of the security any amounts taxpayer retains must be characterized either as payment for services or as payment for the security we believe taxpayer’s logic is flawed because it is based on the assumption that taxpayer transfers its entire_interest in the underlying aa when it sells x securities nothing in the rulings compels this conclusion and we do not believe the facts of this case support it as a result of taxpayer’s purchase of the aa from the originating banks it becomes entitled to payments of interest and principal such rights are independent and separable 311_us_112 as owner of the aa taxpayer is entitled to sell some or all of its rights to the payments of interest and principal to which it is entitled taxpayer accomplishes this through the sale of x securities although there is no dispute that the sale of the securities transfers an ownership_interest in the aa to the purchaser of the security the question of whether taxpayer’s entire_interest in the aa is transferred depends on the terms of the agreement between the parties 683_f2d_125 5th cir in the instant case when taxpayer sells x securities it retains a certain percentage of the interest due on the aa the service has recognized the industry’s practice of compensating a bank for servicing aa by allowing a bank that sells aa to retain a percentage of the interest due on the aa more specifically the service has recognized that taxpayer retains a certain portion of interest from the aa as compensation_for services when the interests in the aa are sold via the x securities these servicing fees are treated as having been paid_by the recipient of the services despite the fact that in actuality they are interest payments emanating from the aa thus taxpayer properly treats the retained_interest that represents reasonable_compensation for services as income in the period it is received the issue here however arises out of taxpayer’s treatment of retained_interest that it claims exceeds the reasonable_compensation for providing services in this regard we note that it is unclear to us how taxpayer has reached the determination that a portion of the retained_interest exceeds the reasonable_compensation for providing services we believe taxpayer’s position is inconsistent with its argument that receipt of the dd depends on its continued provision of adequate services if it is determined that taxpayer receives the dd as compensation_for providing services the fees should be included in gross_income as earned under sec_61 if it is determined that the dd exceed the reasonable_compensation for services it follows that taxpayer does not receive these excess amounts on account of the services it provides further because the amounts are not paid_by the buyer of the securities there is no basis for treating them as ff in addition to the above we are concerned that taxpayer’s treatment of the dd fails to consider the impact of adjustments made to income when the original sale occurred according to the facts we have been provided taxpayer accounted for the sale of x securities as the sale of assets and excluded the aa from its retained aa portfolio the purchase_price of the aa was reported as cost of sales if this is true the negative impact from the sale of aa at a loss should have been reflected in taxpayer’s income for the period in which the sale was made generally a sale gives rise to a realization event for tax purposes requiring the immediate recognition of gain_or_loss 499_us_554 499_us_573 sec_1001 taxpayer’s method which purports to recover basis from sales that occurred prior to date inappropriately allows taxpayer to move losses from sales in pretax years to later years where they can be offset by taxable_income we do not believe taxpayer’s arguments justify this treatment taxpayer argues it is entitled to adjust basis under sec_1016 sec_1016 provides for proper adjustments to basis in property in respect of any period during which such property was held by a person or by an organization not subject_to income_taxation sec_1016 requires adjustments to basis in such cases for exhaustion wear_and_tear obsolescence amortization and depletion to the extent actually sustained we have several problems with taxpayer’s arguments under sec_1016 first it is unclear to which assets taxpayer’s purported basis adjustments relate we see the sale of the x securities as closed_transactions thus to the extent the sale of the securities disposed of taxpayer’s interest in the underlying aa prior to date taxpayer would no longer hold the aa the basis of which it seeks to adjust sec_1016 neither requires nor supports basis adjustments to assets no longer held by the taxpayer at the time it becomes subject_to income_taxation if the asset under consideration is taxpayer’s retained_interest in the income flow from the aa that exceeds the reasonable_compensation for services then in the absence of b of the act taxpayer would be entitled to adjust the basis of that asset under sec_1016 to the extent it was retained after date provided taxpayer could establish both its basis in that asset and an appropriate amount as an adjustment as we have indicated however we believe b of the act and the related legislative_history require that taxpayer be treated as having no basis in such rights to fees as of date even assuming taxpayer was entitled to adjust its basis in its retained_interest in the excess income flow from the aa under sec_1016 it is questionable whether taxpayer’s offset of losses from prior years constitutes a proper basis_adjustment within the meaning of the section adjustments under sec_1016 are intended to reflect the exhaustion wear_and_tear obsolescence amortization or depletion of an asset held for a period during which the owner was not subject_to income_tax such adjustments decrease basis to increase the gain or reduce the loss a taxpayer recognizes when the property is disposed of in a taxable_year in this case taxpayer is not disposing of its interest in the income stream and it is not reducing basis to reflect wear_and_tear taxpayer is seeking to recover losses_incurred in pretax years by reducing current income we do not view sec_1016 as authorizing the recovery_of losses from sales in pretax years accordingly sec_1016 does not support taxpayer’s treatment of the dd with respect to taxpayer’s arguments under sec_453 and the regulations thereunder we believe they are equally misplaced because in our view the sale of x securities is not an installment_sale within the meaning of sec_453 sec_453 defines an installment_sale as a disposition of property where at least one payment is to be received after the close of the taxable_year in which the disposition occurs the facts of the instant case do not suggest that the sales of x securities constitute dispositions of property with payments_to_be_received in subsequent years rather as between taxpayer and the buyers of the securities the sales of the securities appear to be closed_transactions as of the date of the sale thus while the receipt of the dd may be attributable to the sale of securities in a general sense there does not appear to be a direct relationship between the income flow generated by the underlying property and amounts received in consideration for the purchase of securities accordingly in our view the disposition of the x securities does not generate payments_to_be_received after the close of the taxable_year of the sale and the sale cannot be characterized as an installment_sale because there is no installment_sale taxpayer is not entitled to installment_method accounting taxpayer has not articulated a basis for allowing it to offset current income with prior year losses accordingly we conclude that the general rules under sec_61 apply to the dd and that they should be treated as taxable_income in the year received case development hazards and other considerations deborah a butler assistant chief_counsel field service thomas d moffitt acting chief income_tax accounting branch by


department of the treasury internal_revenue_service te_ge eo examinations commerce street mc dal dallas tx tax exempt and government entities ome date release number taxpayer_identification_number release date uil code certified mail dear person to contact identification_number contact telephone number this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated january 19xx is hereby revoked and you are no longer exempt under sec_501 of the code effective june 20xx the revocation of your exempt status was made for the following reason s as a result of our examination for the tax years ended may 20xx may 20xx and may 20xx it was determined that either a the organization has been inactive since 20xx and there have been no regular exempt financial activities or operations conducted or planned since that time or b the organization has been operating but in a manner and for a purpose significantly different from the manner of operation and purpose for which it was granted exempt status contributions to your organization are no longer deductible under sec_170 after june 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending may 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments these courts at the following addresses by referring to the enclosed publication you may write to united_states tax_court second street nw washington d c united_states court of federal claims madison place nw washington d c united_states district_court for the district of columbia constitution avenue nw washington d c the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you’ve tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit taxpayeradvocate irs gov or call if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter margaret von lienen director eo examinations sincerely enclosure publication letter catalog number 34198j internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examination sec_801 tom martin drive room birmingham al department of the treasury date date taxpayer_identification_number form_990 tax_year s ended may 20xx 20xx 20xx person to contact id number contact numbers manager’s name id number manager’s contact number response due_date certified mail - return receipt requested why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies dear letter rev catalog number 34809f effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you letter rev catalog number 34809f thank you for your cooperation enclosures report of examination form_6018 publication publication sincerely acting director eo examinations letter rev catalog number form 886-a rev date explanation of items schedule number or exhibit name of taxpayer tax identification_number year period ended may 20xx 20xx 20xx issue sec_1 whether the continues to qualify for exemption under c of the internal_revenue_code facts the organization was formed on august 19xx when the articles of incorporation for domestic non-profit corporations were filed with the state of organization as stated in the articles is as follows to improve and stimulate the economy of the purposes of the particularly in low-to moderate-income neighborhoods and disadvantaged small businesses located therein by providing such private equity_capital and loan funds as may be necessary or desirable for the sound financing and carrying on of the business operations of small businesses and for their growth expansion and modernization the initial examination appointment was conducted with the power_of_attorney poa during the initial examination it was discovered that the organization had ceased to provide loans the date of the last loan payment was on september 20xx it was also discovered that the organization maintains office space with another non-profit organization that is a c the _tand the c organization would on a regular basis comingle funds it was stated by the poa that the organizations would comingle funds to help pay expenses if one organization lacked funds it was noted on the bank statements that large funds would come from the c organization and would be deposited into the account of the the funds would later be deposited back into the account of the c organization it was also stated by the poa that the technical assistance to the c organization the organization was asked in information_document_request for the year ended may 20xx why they were stating on form_990 that they were still providing loans to organization and the response from the poa was that the organization stopped providing loans due to the economy and that they had intended on providing loan again is providing law sec_501 exempts from federal_income_tax organizations which are organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals or no part of the net_earnings of which inures to the benefit of any private shareholder or individuals no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office tax reg c -1 d i states that an organization may be exempt as an organization described in c if it is organized and operated exclusively for one or more of the following purposes religious charitable scientific testing or public safety literary educational or prevention of cruelty to children or animals sa ne iee ese ege age ss nen a sea form 886-a catalog number 20810w _-page sn eas a se rs tes er eee rse os ses sss sot re ts publish no irs gov department of the treasury-internal revenue service explanation of items schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended may 20xx 20xx 20xx sec_1_501_c_3_-1 of the federal tax regulations regulations provides that in order to be exempt as an organization described in sec_501 of the internal_revenue_code irc the organization must be one that is both organized and operated exclusively for one or more purposes specified in that section if an organization fails to meet either the organizational or operational_test it does not meet the requirement for tax exemption sec_1_501_c_3_-1 of the regulations specifies that with regard to the primary activities within the operational_test an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose revproc_90_27 1990_1_cb_514 date states that a ruling or determination_letter recognizing exemption may be revoked or modified by a notice to the taxpayer to whom the ruling or determination_letter originally was issued enactment of legislation or ratification of a tax_treaty a decision of the unites states supreme court issuance of temporary or final regulations or issuance of a revenue bulletin the revocation or modification may be retroactive if the organization omitted or misstated material fact operated in a manner materially different from that originally represented or in the case of organizations to which sec_503 applies engaged in a prohibited_transaction with the purpose of diverting corpus or income of the organization from its exempt_purpose and such transaction involved a substantial part of the corpus or income of such organization where there is a material_change inconsistent with exemption in the charter the purpose of the method of operation of an organization revocation or modification will ordinarily will take effect as of the date of such material_change in cases where a ruling or determination_letter was issued in error or is no longer in accord with the holding of the service when sec_7805 relief is granted see sec_15 and or rev_proc retroactivity of the revocation or modification ordinarily will be limited to a date not earlier than that on which the original ruling or determination_letter is modified or revoked tax payer’s position the taxpayer’s poa declared that the organization is not providing loans the organization is agreeing that the organization’s tax exempt status should be revoked because the organization is not operating for its exempt_purpose governments’ position the organization does not pass the operational_test as specified in sec_1_501_c_3_-1 of the regulations because the lack of activities is evidence that they were not operated exclusively for one or more charitable purposes to be considered as operating exclusively for charitable purposes the organization would have had to engage in activities which accomplish one or more of such exempt purposes as specified in sec_501 of the code an organization will not be regarded if more than an insubstantial part of its activities is not in furtherance or an exempt_purpose publish no irs gov department of the treasury-internal revenue service catalog number 20810w form 886-a page form 886-a rev date explanation of items schedule number or exhibit name of taxpayer tax identification_number year period ended may 20xx 20xx 20xx in addition to the lack of any charitable activity the organization has not provided evidence of conducting meetings the organization’s funds have been comingled with those of a c organization the organization has clearly failed to conduct any exempt_activities since 20xx additionally the organization has failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under sec_501 accordingly it is the government's position that the organization’s exempt status should be revoked back to may 20xx conclusion the organization received exemption under c of the internal_revenue_code after providing information about their intended activities as described in their articles of incorporation however the organization has engaged in activities that are not for its exempt_purpose that is stated under internal_revenue_code sec_501 the operational_test concerns the organizations activities an organization whose activities are not within the statute will not qualify for exemption by virtue of a well written charter the sec_501 tax exempt status of the revoked effective may 20xx because it is not operating exclusively for tax exempt purposes pursuant to the requirements set forth in sec_1_501_c_3_-1 of the regulations should be as a a a a en os ec oe ata leela form 886-a catalog number 20810w publish no irs gov _-page department of the treasury-internal revenue service


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-106233-99 date date in re legend grantor spouse trust sister grandson son this letter is in response to a letter dated date requesting a rulings under sec_2041 of the internal_revenue_code in grantor and spouse grantors created trust for the benefit of son and his family article second paragraph of trust provides the trustees with the authority to distribute the net_income of trust to son and his living issue paragraph also provides the trustees with the discretion to distribute principal from trust to son and his living issue for their comfortable maintenance support health education and well- being article second paragraph of trust provides son with a testamentary_power_of_appointment and states as follows special_power_of_appointment upon the death of the survivor of son and his issue or twenty-one years after the death of the survivor of son his sister sister and his son grandson whichever shall first occur the trustees shall pay over the then remaining principal and undistributed_income free and clear of any trust in such amounts and proportions as son shall appoint to or among any one or more of grantors’ issue and the spouse of issue by a will referring specifically to the power herein given to him if or to the extent son does not exercise the power_of_appointment given by the preceding sentence the trustees shall hold and dispose_of the remaining principal and undistributed_income in accordance with the terms of the following paragraph of this article second son has requested a ruling that the testamentary_power_of_appointment over trust is not a general_power_of_appointment within the meaning of sec_2041 and therefore the existence exercise failure to exercise or partial or complete release of the power_of_appointment will not cause the value of the property in trust to be included in son’s gross_estate under sec_2041 sec_2041 provides that the value of the gross_estate includes the value of all property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent's gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment is considered to exist on the date of the decedent's death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent's death notice has been given or the power has been exercised sec_2041 provides with exceptions not relevant here that the term general_power_of_appointment means a power that is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 of the estate_tax regulations provides that the term general_power_of_appointment as defined in sec_2041 means any power_of_appointment exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 provides that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the decedent or his creditors or the decedent's_estate or the creditors of his estate in this case son may appoint by will to the class consisting of grantor’s issue and the spouses of such issue because son's power_of_appointment is a testamentary power son may not appoint any part of the trust to son or to son's creditors during son's life in addition based on the terms of the trust instrument the reference to grantor’s issue as a permissible class of appointees of son’s testamentary power is properly viewed as not including son’s estate or son’s creditors after son’s death accordingly based on the information submitted and the representations made we conclude son's testamentary_power_of_appointment over the principal of the trust does not constitute a general_power_of_appointment within the meaning of sec_2041 and the existence exercise failure to fully exercise or partial or complete release of son's power to appoint the principal of the trust will not cause the value of the property in the trust to be included in son's taxable_estate 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely yours assistant chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date vil dear contact person identification_number contact number employer_identification_number this is our final_determination that the letter recognizing you as exempt from federal_income_tax under sec_501 of the internal_revenue_code the code as an organization described in sec_501 was issued in error and should be revoked recently we sent you a letter setting forth the basis for our conclusion providing the notice described in sec_12 of revproc_2011_9 and giving you days to file a protest since we did not receive a protest within the requisite time period the proposed revocation is now final this determination is effective on the date noted above you must file federal_income_tax returns or other appropriate return for the periods following the date of this letter file the returns in accordance with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty we will make this letter and our proposed revocation letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions notice if you agree with our deletions you do not need to take any further action if you disagree with our proposed deletions follow the instructions in if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely holly paz acting director exempt_organizations rulings and agreements enclosure notice redacted proposed revocation letter redacted final revocation letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number legend state party dear we have determined that the letter recognizing you as exempt from federal_income_tax under sec_501 of the internal_revenue_code the code as an organization described in sec_501 was issued in error and should be revoked this letter sets forth the basis for our conclusion and provides the notice described in sec_12 of revproc_2011_9 facts you were formed on date as a nonprofit corporation under the laws of state your articles of incorporation state that your purpose is the i dentification of lyoung women interested in potential party leadership roles and the development of a political leadership training program for such women in state your bylaws further state that your purpose is t o identify educate motivate and inspire emerging party leaders at the local and state level in state to create and maintain a program to train these indentified individuals how to be an effective party leader and how to prepare to run for public_office and to educate these identified individuals important public policy issues and the legislative process you are an affiliate of a national organization that shares the same purposes you conduct a training program for women who are members of party including sessions covering campaigns and elections fundraising public speaking networking media skills and other topics related to running for political office z law sec_501 of the internal_revenue_code code exempts from federal_income_tax organizations described in sec_501 sec_501 of the code describes civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_501 indicates that subparagraph a shall not apply to an entity unless no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual sec_1_501_c_4_-1 of the income_tax regulations regulations states that an organization may be exempt as an organization described in sec_501 of the code if not organized or operated for profit and is operated exclusively for the promotion of social welfare it is sec_1_501_c_4_-1 of the regulations states that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community such as bringing about civic betterments and social improvements revrul_73_306 1973_2_cb_179 provides that an organization formed for the purpose of promoting the common interest of tenants who reside in a particular apartment complex does not qualify for exemption under sec_501 of the code any person regularly living in the complex was eligible for membership the organization represented its member-tenants in negotiations with the management of the complex in order to secure better maintenance and services as well as reasonable rentals the ruling holds that the organization was not described in sec_501 because it operated essentially to benefit its members and thus was not primarily engaged in activities that promote the common good and general welfare of the community in contrast revrul_80_206 1980_2_cb_185 holds that an organization formed to promote the legal rights of all tenants in a community instead of limiting its benefits to member-tenants does qualify for exemption under sec_501 of the code revrul_73_349 1973_2_cb_179 holds that an organization formed to purchase groceries for its members at the lowest possible prices on a cooperative basis is not exempt under sec_501 of the code rather the organization was a cooperative enterprise operated primarily for the private economic benefit or convenience of its members and provided only incidental benefit to the community revrul_75_286 1975_2_cb_210 describes an organization that was formed by the residents of a city block to preserve and beautify that block to improve all public facilities within the block and to prevent physical deterioration of the block government to plant trees on public property within the block organizing residents to pick up litter and refuse in the public streets and on public sidewalks within the block and encouraging residents to take an active part in beautifying the block by placing shrubbery in public areas much of the public area improved by the organization was part of the public roadway lying between the sidewalk and the street in front of private property owned by members of the organization membership in the organization was restricted to residents of the block and those owning property or operating businesses there its activities consisted of paying the city because the activities enhanced the value of the members’ property rights the organization served the private interests of its members and did not qualify for exemption under sec_501 the restricted nature of its membership and limited area in which improvements were made were further indicators of private benefit however by beautifying and preserving public property in cooperation with the local_government the organization was considered to primarily promote the general welfare of the community even though its activities also benefited its members therefore the organization did qualify under sec_501 in 316_f2d_151 3d cir the court held that to qualify for exemption within the meaning of sec_501 of the code the organization must be a community movement designed to accomplish community ends id pincite in 305_f2d_814 4th cir a corporation was organized by world war ii veterans for the purpose of purchasing a government housing project and converting it to cooperative nonprofit housing for its members individuals became members in the corporation by purchasing an apartment unit and as such the number of members was limited to the number of units available the court held that the organization was not described in sec_501 of the code because it was a public-spirited but privately-devoted endeavor that provided only incidental benefit to the community id pincite the organization did not promote social welfare because it furnished housing only to a certain group of individuals rather than on a community basis and did not offer a service or program for the direct betterment or improvement of the community as a whole in 54_tc_1325 an association organized by a small_group interested in obtaining group_insurance did not qualify for exemption because it offered its benefits to only a limited class of its members and their employees the court noted t here is not in such an organization the requisite civic concern to constitute social welfare required for qualification under sec_501 where the primary benefit from an organization is limited to that organization's members and not provided to the community as a whole the organization is not operated primarily for the social welfare in 488_f2d_684 2d cir cert_denied 419_us_827 plumbers working in new york city were responsible for the cuts they made in the city streets repaired the cuts and billed the plumbers individually in what proved to be a highly inefficient system the organization was formed in order to restore the city streets made by its members the joint effort of the plumbers reduced their liability and their expenses and more efficiently repaired the city streets while the court found that the program provided substantial benefits to the public it concluded that the organization primarily served the private economic interests of its members and thus could not be considered exempt under sec_501 of the code prior to the organization’s existence the city had it only repaired cuts in 92_tc_1053 the organization's primary activity was to operate a school the academy training individuals for careers as political campaign professionals the organization represented on its application_for exemption that the academy was an outgrowth of programs operated by the national republican congressional committee nrcc that were designed to train candidates and to train and subsequently place campaign professionals in republican campaigns in addition the nrcc contributed physical assets to the academy two of the academy’s six full-time faculty members had been previously involved in the nrcc’s training program one of the academy’s three initial directors was the executive director of the nrcc at the time and another initial director was a member of the republican national committee at the time the academy's activities were exclusively funded by the national republican congressional trust the academy’s curriculum included discussions concerning how some republicans have won black votes nrcc rnc nrsc state party naughtiness and use of gop allies without a counterbalance of comparable studies of other political parties while applicants to the academy were not required to formally declare their political affiliation to attend the organization’s school the admission panel could deduce such affiliation from the campaign experiences and political references in the applications the court found that this knowledge of an applicant’s political affiliations allowed the admission panel to limit enrollment to applicants who were likely to subsequently work in republican organizations and campaigns indeed the court found that no graduate was known to affiliate with any political_party other than the republican party a substantial number of the members of the academy’s admission panel were affiliated with the republican party the service determined that the organization operated for a substantial non-exempt private purpose the tax_court agreed holding the organization did not operate exclusively for exempt educational_purposes under sec_501 of the code because it conducted its activities to benefit the private interests of republican entities and candidates although these entities and candidates were not organization insiders the court stated that the conferral of nonincidental benefits on disinterested persons may cause an organization to serve a private interest while the school had a legitimate educational program it conducted these activities with the partisan objective of benefiting republican candidates and entities as such a more than incidental private benefit was conferred on republican entities and candidates who employed the academy's students one that precluded exemption under sec_501 analysis based on the information you submitted with your application you are not operated exclusively for the promotion of social welfare within the meaning of sec_501 of the code because your activities primarily serve private interests therefore you do not qualify for exemption from federal_income_tax as an organization described in sec_501 and the your activities do not primarily promote social welfare because you primarily benefit private individuals and interests an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community sec_1_501_c_4_-1 of the regulations an organization recognized under sec_501 is operated primarily for the purpose of bringing about civic betterments and social improvements id to qualify for exemption under sec_501 an organization must primarily benefit the community as a whole rather than select individuals or groups see contracting plumbers coop restoration corp supra new york state ass’n of real_estate boards group ins fund supra lake forest inc supra revrul_75_286 supra a sec_501 organization must be a community movement designed to accomplish community ends erie endowment supra as such a tenants’ organization that benefits all the tenants in the community qualifies for exemption while one that directs its activities toward benefiting only its member-tenants does not compare revrul_80_206 supra with revrul_73_306 supra see also revrul_73_349 supra therefore conferring a sufficient amount of private benefit on select individuals will preclude exemption under sec_501 for an organization that would otherwise qualify even if an organization substantially benefits the community it will fail to qualify for exemption if it primarily benefits private interests see contracting plumbers supra educational activities undertaken to provide a partisan benefit are considered to serve private interests rather than the common good in american campaign academy supra the court denied exemption under sec_501 to a school organized to train individuals for careers as political campaign professionals because its educational activities were operated with the partisan purpose of benefiting republican party entities and candidates the private benefit conferred on these persons was more than incidental and thus demonstrated a substantial non- exempt_purpose that precluded exemption while you requested recognition as an organization described in sec_501 and not sec_501 as was american campaign academy the standard for determining what constitutes private benefit described in american campaign academy applies to both sections as such for purposes of both sec_501 and sec_501 an organization which conducts its educational activities to benefit a political_party and its candidates serves private interests and as discussed above an organization that primarily serves private interests fails to qualify for exemption under sec_501 thus notwithstanding any benefit your educational activities may provide to the community you fail to qualify for exemption because your training program primarily benefits the interests of the party and its candidates according to your articles and bylaws your primary activity is to train and recruit women who are members of the party to run for political office american campaign academy your purpose in conducting this activity is to provide education solely to individuals affiliated with a certain political_party who want to enter politics indeed you measure your success in terms of the number of your graduates who have run for or won elective office representing the party like the school in because your primary activity is an educational program that is limited to women who are members of the party and that is conducted with the partisan objective of increasing the number of the party’s elected officials you primarily serve private interests therefore the operation of your program does not promote social welfare within the meaning of sec_501 of the code conclusion in summary you are not operated primarily to promote social welfare because your activities are conducted primarily for the benefit of a political_party and a private group of individuals rather than the community as a whole accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney all forms and publications mentioned in this letter can be found at www irs qgov forms and publications for more information about representation see publication practice_before_the_irs if you if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final revocation letter the revocation will be effective on the date the final revocation letter is issued revproc_2011_9 sec_12 the final revocation letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely holly paz acting director exempt_organizations rulings and agreements