department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number date date date contact person identification_number contact number employer_identification_number uil form required to be filed tax years all open years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance we will make this letter and our proposed adverse determination_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 if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action lf 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 o paz director rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter tax_exempt_and_government_entities_division date date department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number uil employer_identification_number a aw i tm ou un tk a he mw mw u o h fs association1 association2 association3 dear this decision revokes and supersedes our decision of date we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under sec_501 the basis for our conclusion is set forth below facts you incorporated as a non-profit corporation on date1 under the name name1 your initial including persons who are self-employed and amending your dissolution procedures on purposes were to receive administer and expend funds for charitable and educational_purposes focused on tax reform on date2 you changed your name to namez2 and filed revised articles changing your purposes to promote the adoption of equitable health care policies through research and public education you filed a second amendment to your articles on date3 expanding your purposes limiting your membership to small_business employers date4 you filed your latest amendments to your articles expanding the membership to include employees three years later you amended your bylaws to create a new category of members called reciprocal association members who are entitled to benefits by virtue of their membership in an association with which you have an agreement you mailed your application_for exemption under sec_501 on july over twenty- five years after your incorporation the current purposes for which you are organized include promoting the adoption of equitable health-care policies engaging in nonpartisan research study and analysis of the health-care system for the benefit of your members and the public preparing educational materials and conducting educational activities in support of your general purposes sponsoring programs including health-care benefit plans for the benefit of your members conducting and sponsoring forums lectures and debates you are a membership association that provides your members access to limited medical indemnity benefits discounts on products and services and information about health care and other topics membership is open to the public anyone is eligible to participate in the programs by paying a fee based on the programs chosen your members now include employers both large and small the self-employed employees and retirees to become a member a person must complete an application form and have the board_of directors accept it you have approximately big_number members from all states marketing agreements you have marketing agreements with multiple firms to sell your memberships a firm receives a marketing fee for each type of membership it sells fees are set out in each marketing agreement and you pay specific fees for each membership your largest marketing agreement is with marketer the marketing agreement authorizes marketer to sell your memberships to any interested individuals the agreement establishes the guidelines for marketer to properly represent and advertise for you by developing and managing a marketing strategy to solicit individuals for membership only licensed insurance agents have authorization to sell memberships for each product sold marketer receives a monthly commission as long as the member remains active marketer does not have authorization to sell to your existing members - products and activities you provide your members with discounts for various consumer programs and services access to limited medical indemnity benefits indemnity benefits information on health care and other topics and scholarship opportunities for medical related studies members choose the type of membership they want based on the products and services they choose while most members purchase memberships that include the medical indemnity benefits memberships are available without it the indemnity benefits are only available in states where the covering insurance_company has a license depending on where they live and the plan they purchase members have access to discounts on many common consumer purchases you offer discount programs for roadside assistance legal services home warranties extended service protection auto protection tradesmen referral services travel dent repairs pet services home protection services funeral services identity theft magazines and household appliances your health-related programs and services include access to indemnity benefits discounts on various health care services and information on health care issues the health care services include discounts on vision and dental care prescription drugs vitamins and laboratory tests call-in nurse and doctor lines doctor evaluations accident benefits emergency medical transportation term life_insurance hospital negotiation service and international medical services you provide information on general health care diseases injuries treatments providers research programs and clinical trials as stated in your literature the indemnity benefits you offer are limited they do not cover all medical_expenses nor provide comprehensive medical coverage there are payment limits for medical services in addition to limited coverage for certain persons and for those with pre- existing conditions if the member’s costs exceed the stated limits the member is responsible for payment of additional_amounts neither you nor the insurance_company will pay the extra charges the policies state this is not basic health insurance or major medical coverage and is not designed as a substitute for basic health insurance or major medical coverage although you provide access to indemnity benefits you are not an insurance_company you do not provide the actual coverage to your members nor do you assume any risk of economic loss a separate insurance_company provides the indemnity benefit policies for those members who either cannot afford an individual_health_insurance policy or do not qualify for an employer-provided plan you provide them access to the indemnity benefits you do not pay any of the premiums from your general funds but rather collect the dues from the participating members and pay the insurance_company the premiums along with the related marketing agreement fees to your marketing agencies you publish a magazine aimed at educating your readers on living a healthy lifestyle accessing community resources and improving their mental health and well-being you mail the magazine to your members and any non-members who have requested a subscription you also provide free copies to medical and physician offices throughout the united_states and at various functions throughout the year the magazine is also available to the public on your website for no charge and the web visitor may request you mail them a free print copy in addition to providing the magazine on your public website you post information on federal statutes and regulations that affect health care proposed_legislation relating to health- care policies and how the member may contact their representatives in washington dc and their own state you also publish nonpartisan research and analysis regarding the health-care system in america you provide scholarships to students studying medical subjects such as nursing medical scholarships each year covering a two-year period dollar_figure technology dental hygiene health-care assistance and nutrition the scholarship program awards five dollar_figure per academic year and is available to all members their children and their grandchildren once applicants apply to the program your selection committee selects the awardees based on need and scholastic excellence you also fund a scholarship at university for students in the nursing school the selection committee which is the board_of directors does not take into consideration the age gender race religion or sexual orientation of the applicant and the relatives spouses children parents etc of the selection committee are not eligible to receive a scholarship the scholarship recipients do not need to continue their membership to renew the scholarship for the second year you state that you engage in advocacy for the health and well-being of your members and for promoting the adoption of equitable health-care policies you are a member of association1 association2 and association3 you also provide information on important health-care initiatives to federal and state legislatures and executive branch officials you count as charitable activities your donations of a small percentage of your monthly membership dues to your sec_501 charitable foundation and if a member loses their job or is otherwise unable to pay for their benefits you will extend the member's current level of benefits coverage for three months law sec_501 of the internal_revenue_code provides that an organization described in sec_501 is exempt from income_taxation sec_501 of the code provides exemption from federal_income_tax for c ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare and whose net_earnings do not inure to the benefit of any private_shareholder_or_individual sec_1_501_c_4_-1 of the income_tax regulations states that an organization primarily engaged in promoting the common good and general welfare of the people of the community is operated exclusively for the promotion of social welfare this includes an organization operated primarily for bringing about civic betterments and social improvements sec_1_501_c_4_-1 explains that an organization whose primary activity is the carrying on of a business in a manner similar to for-profit organizations is not operated primarily for the promotion of social welfare revrul_54_394 1954_2_cb_131 stated that a nonprofit organization that provided antenna services only to its members to enable them to receive television reception was not exempt as a social_welfare_organization because the benefits were only available to members and not the community in general in revrul_62_167 1962_2_cb_142 a nonprofit organization whose primary activity was to retransmit tv signals which were available to any television in the community qualified for exemption under sec_501 because its activities benefited the community in general distinguishing revrul_54_394 1954_2_cb_131 in which the television services were available only to members of the organization who paid membership fees and monthly maintenance charges this revenue_ruling described an organization that operated its system for the benefit of all television owners in the community and obtained memberships and contributions on a voluntary basis therefore the organization qualified for exemption under sec_501 revrul_73_349 1973_2_cb_179 noted that an organization formed to purchase low-cost groceries for its members was not exempt as a social_welfare_organization even though membership was open to all individuals in the community the members paid for the cost of the food and a monthly service charge to cover operating costs it operated primarily for the private benefit of its members any benefits to the community were not sufficient to meet the requirement that it operate primarily for the common good and general welfare of the people of the community an organization provided sick benefits to its members and paid death_benefits to member’s beneficiaries in revrul_75_199 1975_1_cb_160 only individuals in a particular ethnic group in a certain geographical area who were of good moral character and health could become members it was essentially a mutual self-interest organization whose income provided direct and economic benefits to its members any benefit to the larger community was minor and incidental therefore it did not qualify for exemption under sec_501 of the code where the benefit from an organization is limited to that organization's members except for some minor and incidental benefit to the community as a whole the organization is not operated exclusively for the promotion of social welfare within the meaning of sec_501 c of the code revrul_75_199 1975_1_cb_160 distinguishes mutual benefit societies from social welfare organizations by comparing revrul_54_394 with revrul_62_167 one organization only benefited its members who paid membership fees and monthly charges the mutual benefit society while the other organization made their services available to everyone in the community the social_welfare_organization the organization in revrul_78_132 1978_1_cb_157 facilitated the exchange of personal services among its members which was open to all individuals in a particular community the members received economic benefit even though they did not use cash for payment every service had a corresponding credit hour amount which the organization tracked for each member the community realized minimal if any benefit from the organization the organization was a private cooperative enterprise that operated primarily for its member's economic benefit and was not exempt as a social_welfare_organization under sec_501 t he exemption granted to social welfare organizations is made in recognition of the benefit which the public derives from their social welfare activities and we think it only fair to determine a particular organization's right to an exemption largely on the basis of the effect its operations have on the public 331_f2d_923 2d cir cert_denied 379_us_839 the court in 488_f2d_684 2d cir held that an organization did not promote the common good even though its activities benefited the community because only members could utilize its services it repaired damage to city streets its members caused in the course of their plumbing activities performing the repairs in proportion to the member's payment for the services however it would not repair damage created by non-member plumbers or other enterprises that burrow into the city streets the organization in 759_f2d_792 10th cir provided property and casualty insurance to members of the church and their dependents if a member left the church the organization would cancel their insurance the court determined that the church did not promote social welfare because it sold insurance the organization operated as a mutual_insurance_company not as a church the court concluded that the presence of a substantial non-exempt purpose such as insurance for its members in return for premiums precluded the organization’s exempt status under sec_501 as an organization primarily engaged in the promotion of social welfare in 850_f2d_1510 11th cir a tax-exempt association of schools formed a_trust to provide health hospital disability life accidental death and dismemberment dental and prescription drug insurance to its member schools’ employees and their dependents and beneficiaries citing 759_f2d_792 the court held that since the trust had a substantial private purpose of providing insurance to its members in return for premiums it was not an organization exclusively engaged in the promotion of social welfare under sec_501 the organization in vision service plan v united_states no 04-cv-1993 wl e d cal date provided eye care services to the employees of its subscriber companies vsp claimed that it was exempt under sec_501 because it served broad segments of the community through direct services and charitable activities the court found that servicing small employers or rural subscribers did not equate to promoting social welfare additionally the services vsp provided for the medicaid medicare and healthy families contracts were profitable its charitable activities were insubstantial compared to its profits and the executive compensation packages cost-cutting measures and business practices with the public were paid and operated in a manner similar to for-profit organizations the tax_court found that an insurance_trust organization created to provide its members access to insurance at group rates was not exempt under sec_501 54_tc_1325 nonacq on different grounds 1974_2_cb_5 action on dec aod lexi sec_146 date the organization offered benefits only to its employer members and their employees w here the primary economic benefit from an organization is limited to that organization’s members the organization is not operated exclusively for the social welfare within the meaning of the statute d pincite the organization did not have the requisite civic concern to constitute ‘social welfare ’ and therefore under sec_501 did not qualify for tax exemption analysis rationale social welfare as described in sec_501 an organization organized as a nonprofit and operated exclusively for the promotion of social welfare may be exempt from federal_income_tax under sec_501 an organization operates exclusively for the promotion of social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community this includes organizations operated primarily for bringing about civic betterments and social improvements see sec_1_501_c_4_-1 if an organization operates primarily for the benefit of its members rather than for the community as a whole it is not operating exclusively for the promotion of social welfare see n y state ass’n of real_estate bds group ins fund t c pincite w here the primary economic benefit from an organization is limited to that organization’s members the organization is not operated exclusively for the social welfare within the meaning of the statute id an organization's right to exemption under sec_501 depends largely on the basis of the effect its operations have on the public people’s educ camp soc'ty inc f 2d pincite even if the community benefits incidentally an organization that provides its services it is frequently the case that an organization is exclusively or at a preferential price to its members does not promote the common good or general welfare see contracting plumbers coop restoration corp f 2d pincite see also vision service plan wl pincite found not to qualify under c because it is operating primarily for the benefit of its members rather than for the purpose of benefitting the community as a whole the organizations in revrul_75_199 and revrul_78_132 were both denied sec_501 exemption because the benefit to the community was minimal the first organization provided sick benefits to its members and paid death_benefits to member’s beneficiaries revrul_75_199 only individuals in a particular ethnic group in a certain geographical area who were of good moral character and health could become members the organization was essentially a mutual self- interest organization whose income provided direct and economic benefits to its members any benefit to the larger community was minor and incidental similarly the second organization facilitated the exchange of personal services among members operating primarily for the private benefit of its members revrul_78_132 it was a private cooperative enterprise that operated primarily for its member’s economic benefit the community realized minimal if any benefit from the organization similar to the organization in 54_tc_1325 you offer your members access to low cost indemnity benefits like the organization in revrul_75_199 you are a mutual self-interest organization operating for the benefit of your members rather than the community as a whole your programs are not available to non-members the only products non-members can access are the magazine and the information on your website t he fact that an organization promotes health care or is part of the health care industry does not alone ensure exempt status within the tax code vision service plan wl pincite merely offering membership to anyone in the community does not fulfill the requirement to -promote the common good and social welfare see revrul_73_349 organization that was open to all individuals in the community purchased low-cost groceries for its members who paid for both the cost of the food and a monthly service charge operated primarily for the private benefit of its members and had minimal benefits to the community although you accept all individuals that apply for membership and pay the appropriate fees this is not enough to contribute to the social welfare of the community representatives in washington dc you also publish a free healthy living magazine contribute to your sec_501 foundation and other charitable organizations and offer scholarships for medical related studies in addition to posting the magazine on your public website the website also presents information about federal health care laws and regulations so your members may easily contact their you state that besides providing access to low cost benefits and services to your members while the above activities are worthy they are not your primary activities your magazine resembles public relations material more than a medical information magazine compared to your gross revenues your average amount of charitable_contributions from is negligible averaging less than contributions has decreased every one of the last four years in20 contributions were’ half percent less than the magazine and scholarships the figures do not noticeably change but merely jump to an average of ‘percent andin20__ contributions were - even adding in the amounts spent on __percent of your gross_receipts _ contributions were of your gross revenues for that four-year period contributions were’ percent additionally the amount of __ your charitable percent percent and you did not demonstrate that you are primarily engaged in the promotion of social welfare vision service plan wl pincite rather you are a privately-devoted endeavor id like the members of the organization in vision service plan your members enjoy the benefit of the services precisely to the extent that members use and pay for the services d serving only the interests of your members is clearly a non-exempt purpose additionally you did not establish that any benefit the community might derive from your members having access to indemnity benefits and other discounted services is more than incidental remote and tenuous therefore because your activities benefit only your members rather than the community as a whole you do not operate primarily for bringing about civic betterments and social improvements under sec_1_501_c_4_-1 commerciality if an organization’s primary activity is carrying on a business with the public in a manner similar to for-profit organizations then it does not operate primarily for the promotion of social welfare sec_1_501_c_4_-1 for example an organization that provided property and casualty insurance to members of its church was not exempt as a social_welfare_organization because selling insurance was its primary activity mutual aid assoc of the church of the brethren f 2d pincite it operated as a mutual_insurance_company not as a church it treated its surplus and profit as would any mutual_insurance_company the ultimate considerations adequate security margin and to provide better protection and service to its members d citations removed carrying on a business similar to a for-profit business as the primary activity precluded the organization’s exempt status as one primarily engaged in the promotion of social welfare in creating and using its surplus and profit were to provide a reasonable and likewise the court found that vision service plan operated for the benefit of its members and in a similar fashion to for-profit businesses vsp’s services are most beneficial to private paying members the subscribers and the enrollees mjembers of vsp enjoy the benefit of vsp’s services precisely to the extent that members use and pay for the services serving the interests of these private subscribers is clearly a non-exempt purpose see vision service plan wl pincite citations omitted the court also noted that vsp remained competitive by paying brokers commissions to bring in new clients and that it paid more in brokerage fees than on charity work d pincite you operate in a commercial manner by facilitating access for your members to purchase indemnity benefits and other discounted products and services in exchange for a fee but you do not provide the services and products yourself additionally you contract with marketing companies to sell your memberships to individuals paying the companies fees based on the membership level sold only licensed insurance agents have authorization to sell your memberships once a member joins and chooses an indemnity benefit you collect the premiums as a part of the membership fee then remit the premiums to the insurance_companies and pay the associated commission to the selling agents you are similar to the trust created by a tax-exempt association of schools to provide various kinds of insurance to its member schools’ employees am ass'n of christian sch voluntary employees beneficiary ass’n welfare plan trust v u s 850_f2d_1510 the court stated that since the trust had a substantial private purpose to provide insurance in return for premiums it was not an organization exclusively engaged in the promotion of the social welfare d pincite you also provide members the ability to remain in the member programs for three months without charge when they have lost their job other than for work-related misconduct or by voluntarily quitting however if a member was unemployed when they joined they are not eligible for this program this program does not promote social welfare as it only benefits your members in fiscal years --20 youcollected an average of dollar_figurevalue1 in fees from your members during that same time you paid an average of dollar_figurevalue2 for member benefits which included indemnity benefit premiums and service fees and an average of dollar_figurevalue3 in commissions to your marketing organizations the majority of which went to marketer these two expenses combined account for an average of’ of your total expenses adding the remaining expenses in you spend very little on charitable or social welfare activities you operate for a substantial private purpose selling indemnity benefits and other discounted services in exchange for a fee and carry on activities similar to the activities of for- profit businesses because your primary activity is the carrying on of a business in a manner similar to for-profit organizations you do not operate primarily for the promotion of social welfare and are not exempt under sec_501 ruling based on the facts and circumstances we find that you did not establish that you operate primarily for bringing about civic betterments and social improvements as required by sec_1_501_c_4_-1 furthermore you did not distinguish your activities from those carried on by for-profit businesses as required in sec_1_501_c_4_-1 because you do not operate exclusively for the promotion of social welfare as required by sec_501 you do not qualify for exemption under sec_501 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 must include 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 you should make this request 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 if 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 you can find all forms and publications mentioned in this letter at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination jetter that 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 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 she received your fax if if you have any questions please contact the person whose name and telephone number are in the heading of this letter sincerely holly o paz director rulings and agreements


t c summary opinion united_states tax_court richard orin berge petitioner v commissioner of internal revenue respondent docket no 7319-04s filed date richard orin berge pro_se mindy s meigs for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for the taxable_year after concessions the issues for decision are whether petitioner is entitled to a schedule c car and truck expense deduction in excess of the amount allowed by respondent and whether legal fees associated with the settlement of a legal action are ordinary and necessary business_expenses properly deductible on schedule c background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in los angeles california on the date the petition was filed in this case petitioner graduated from southwestern university law school in los angeles california in date petitioner was admitted to the state bar of california on date also during taxable_year petitioner became a certified_public_accountant in the state of california 1petitioner concedes that he is not entitled to deductions claimed on schedule a itemized_deductions of dollar_figure 2petitioner claimed a car and truck expense deduction of dollar_figure on his schedule c profit or loss from business respondent in the notice_of_deficiency disallowed dollar_figure of the claimed schedule c car and truck expense deduction thus respondent allowed petitioner a car and truck expense deduction for taxable_year of dollar_figure during taxable_year petitioner was employed full-time as a consultant for arthur anderson llp as part of his employment with arthur anderson llp petitioner traveled to various arthur anderson llp offices also during the year in issue petitioner was a self- employed attorney accountant petitioner assisted clients with drafting documents for different types of transactions and provided tax_return preparation valuation and assorted legal and paralegal accounting and tax consulting services petitioner’s business petitioner drove about big_number business-related miles of which approximately big_number miles were for travel to the chapman university law school library in the city of orange in orange county california as previously stated petitioner is an alumnus of southwestern university school of law the southwestern university school of law library is located approximately miles from petitioner’s home in petitioner and donna lynn wold ms wold entered into an oral agreement whereby ms wold purchased a bmw 525i and then agreed to sell the vehicle to petitioner after he paid her a downpayment and made monthly payments as a result of problems stemming from this oral agreement petitioner filed a complaint against ms wold in the superior court of the state of california for the county of orange on date alleging breach of contract fraud conversion defamation and specific performance this case was docketed as case no the complaint states in pertinent part as follows plaintiff petitioner an individual comes now and alleges as follows first cause of action - breach of contract on or about june plaintiff petitioner and defendant ms wold entered into an agreement whereby plaintiff agreed to purchase a bmw 525i the vehicle from the defendant by tendering to defendant a down payment on the vehicle and by making sixty monthly payments to defendant and defendant agreed to sell said vehicle to the plaintiff by accepting said down payment and sixty monthly payments pursuant to the agreement plaintiff was entitled to the exclusive use possession control and ownership of the vehicle subject only to defendant’s security_interest in the vehicle and a third party security_interest in the vehicle said security interests to be discharged by defendant’s payment of the sixty monthly payments to the third party as a proximate result of defendant’s failure to perform in accordance with the agreement as herein alleged plaintiff has suffered monetary damages in an amount to be proven at trial second cause of action - fraud on or about june plaintiff and defendant entered into an agreement wherein defendant represented to plaintiff that upon payment by plaintiff of all amounts to be paid to rockwell federal credit_union and defendant under the purchase agreement for the vehicle between defendant and tilo’s european autohaus that defendant would transfer title to the vehicle to plaintiff at the time defendant made this agreement with plaintiff defendant intended sic keep the title to the vehicle in the name of defendant and not transfer title to the vehicle to plaintiff as was required per the terms of the agreement between plaintiff and defendant defendant has previously represented to plaintiff that plaintiff is the owner of the vehicle yet defendant continues to refuse to execute any necessary documents to transfer title to the vehicle to plaintiff defendant never intended to transfer the vehicle to plaintiff per defendant’s earlier representations instead defendant has subsequently represented that defendant always intended to demand the return of the plaintiff’s vehicle upon payment in full of the liability for the vehicle as a result of defendant’s fraudulent statements and acts and failure to transfer title per the agreement plaintiff has suffered damages in the form of monies expended for the purchase maintenance and repair of the vehicle which defendant refuses to transfer to the plaintiff third cause of action - conversion on date defendant wrongfully took possession of said vehicle and numerous items of plaintiff’s personal_property contained inside said vehicle against plaintiff’s wishes and despite plaintiff’s objections defendant maintained exclusive possession and control of said vehicle and items of personal_property and refused to return same to plaintiff until date defendant’s actions have caused plaintiff to suffer damages including lost work time transportation costs and other damages as a result of defendant’s deprivation of plaintiff’s ownership_interest in said vehicle additionally pursuant to california civil code section plaintiff is presumptively entitled to damages for the value of the converted property in the amount of dollar_figure fourth cause of action - defamation on or about date and on numerous occasions thereafter defendant made numerous statements concerning plaintiff to toni arzate arzate a close personal friend of plaintiff’s these statements were made to arzate in the form of messages left for arzate by defendant which were recorded and maintained in permanent form on magnetic tape the statements that defendant made to arzate imputed to plaintiff characteristics of infidelity dishonesty criminal behavior fraud and other loathsome characteristics these statements exposed plaintiff to hatred contempt and ridicule from arzate which has caused plaintiff to be shunned and avoided by arzate said statements were made by defendant in an attempt to damage plaintiff’s personal relationship with arzate and did damage said relationship because plaintiff is involved in an intimate personal relationship with arzate which has been damaged due to defendant’s libelous statements to arzate fifth cause of action - specific performance plaintiff’s request for specific performance is necessary to ensure plaintiff has an adequate remedy for defendant’s failure to transfer the vehicle per the agreement or june on date ms wold answered petitioner’s complaint and filed a cross-complaint against petitioner for breach of contract fraud conversion and for possession of personal_property related to the sale of an automobile and loans of money ms wold’s answer and cross-complaint states in pertinent part as follows first cause of action - breach of contract plaintiff donna wold alleges that on or about through an oral agreement was made between donna wold and richard o berge plaintiff donna wold lent money to defendant richard o berge and paid his expenses and debts on defendant’s promise that he would repay said money lent and paid on behalf of and for the benefit of defendant defendant was to repay said money lent and paid upon his graduation from law school plaintiff is informed and believes and thereon alleges that defendant has graduated from law school and despite plaintiff’s demand therefore has failed and refused to repay the said money lent and paid_by plaintiff on behalf of and for the benefit of defendant on or about date the defendant breached the agreement by the following acts defendant has failed and refused to repay the money lent to him and has failed and refused to repay the money paid_by plaintiff on behalf of and for the benefit of defendant plaintiff suffered damages legally proximately caused by defendant’s breach of the agreement as follows the sum of dollar_figure lent to defendant and paid on behalf of and for the benefit of defendant second cause of action - common counts plaintiff donna wold alleges that defendant richard o berge became indebted to plaintiff within the last four years for goods wares and merchandise sold and delivered to defendant and for which defendant promised to pay plaintiff the sum of the total of all payments according to proof on auto for money lent by plaintiff to defendant at defendant’s request and for money paid laid out and expended to or for defendant at defendant’s special instance and request the amount of dollar_figure plus all payments owing on auto which is the reasonable value is due and unpaid despite plaintiff’s demand plus prejudgment_interest according to proof third cause of action - fraud plaintiff donna wold alleges that defendant richard o berge on or about through defrauded plaintiff as follows promise without intent to perform defendant made a promise about a material matter without any intention of performing it as follows defendant promised to repay plaintiff for money lent to him and paid for his benefit and on his behalf by plaintiff plaintiff would not have lent defendant money nor paid money for his benefit if plaintiff had known that defendant did not intend to repay plaintiff defendant was to repay plaintiff upon his graduation from law school plaintiff is informed and believes that defendant has graduated from law school defendant has failed and refused to repay plaintiff plaintiff donna wold discovered defendant’s intention not to perform within the last year in justifiable reliance upon defendant’s conduct plaintiff was induced to act as follows plaintiff lent money to defendant and paid money for the benefit and on behalf of defendant in the total sum of dollar_figure because of plaintiff’s reliance upon defendant’s conduct plaintiff has been damaged in the sum of dollar_figure fourth cause of action - conversion plaintiff donna wold alleges that defendant richard o berge was the legal proximate cause of damages to plaintiff by the following acts or omissions to act defendant intentionally caused the damage to plaintiff on or about a date uncertain at this time discovered within year at orange county california defendant converted a coin collection belonging to and in the custody and control of plaintiff defendant converted said coin collection to his own use without the permission or consent or knowledge of plaintiff defendant has failed and refused to return the coin collection to plaintiff or its reasonable value of dollar_figure despite demand therefore plaintiff is informed and believes and thereon alleges that defendant has sold the coin collection and has retained and or spent the proceeds for his own use or benefit plaintiff prays for damages in the sum of dollar_figure and for exemplary damages pursuant to exemplary damages attachment page of this complaint incorporated herein by this reference fifth cause of action - possession of personal_property cross-complainant ms wold is and at all times herein mentioned was the owner and legal_title holder of a certain bmw 525i automobile valued at approximately dollar_figure plaintiff ms wold is entitled to the immediate and exclusive possession of the personal_property automobile described above on or about cross-complainant deposited with cross- defendant petitioner the personal_property automobile described above in consideration of an oral agreement that cross defendant make all monthly payments required under the purchase contract whereby cross-complainant purchased said automobile that cross-defendant maintain comprehensive insurance on said automobile that cross-defendant maintain the vehicle in good working order and pay the annual registration fees and any other costs associated with the operation and maintenance of the automobile until all payments required under the purchase contract were made by cross-defendant upon cross-defendants sic performance of all the foregoing terms cross-complainant would transfer title of the automobile to cross-defendant cross-defendant breached the agreement by failing to perform all terms of the agreement as aforesaid to wit cross- defendant has failed to make all payments required under the agreement has failed to pay registration fees for the automobile and has failed to maintain comprehensive insurance on the automobile at all times on date petitioner and ms wold agreed to mediation of their dispute on date petitioner and ms wold filed a conditional settlement agreement and stipulation for entry of judgment settlement agreement with respect to case no the settlement agreement states in pertinent part as follows whereas the parties hereto desire to resolve all matters between them without further litigation together with all claims accounts damages demands and causes of action which said parties ever had now have or may have in the future arising from or in any way connected with the matters asserted in the action herein or which could have been asserted in the action including but not limited to a claim or cause of action of any kind not arising from or connected with the matters asserted in the action herein together with any and all representations made in connection herewith by the parties therefore in consideration of the following covenants obligations and undertakings it is hereby stipulated by and between the parties as follows judgment payment by plaintiff petitioner defendant ms wold shall have judgment in her favor and against plaintiff in the sum of fifteen thousand dollars dollar_figure plus interest at the legal rate from entry of judgment if any in this action defendant shall not have the judgement entered so long as plaintiff pays to defendant the following sum a six thousand dollar_figure in cash cashier’s check or certified funds on or before date b in no event shall the six thousand dollars dollar_figure be paid later than date p m without such later payment being deemed a default on the part of defendants except by modification of this stipulation in writing and executed by all parties hereto d provided that the payment and letter pursuant to this stipulation are received by defendant on or before date defendant will provide plaintiff with an executed request for dismissal of her cross-complaint with prejudice upon payment timely made and plaintiff will provide defendant with an executed request for dismissal of his complaint with prejudice and will execute a transfer of title to plaintiff of the bmw automobile at issue in this litigation on or about date petitioner filed his form_1040 u s individual_income_tax_return for taxable_year on schedule c profit or loss from business attached to the return petitioner claimed a car and truck expense deduction of dollar_figure petitioner also claimed on schedule c a legal and professional service expense deduction of dollar_figure subsequently respondent determined that petitioner was not entitled to dollar_figure of the claimed schedule c car and truck expense deduction nor any portion of the claimed schedule c legal and professional service expense deduction accordingly respondent issued to petitioner a notice_of_deficiency determining a deficiency of dollar_figure in petitioner’s federal_income_tax discussion as a general_rule the determinations of the commissioner in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving the commissioner’s determinations in the notice_of_deficiency to be in error rule a 290_us_111 as one exception to thi sec_3at trial petitioner conceded that due to a miscalculation the proper amount of the car and truck expense deduction based on mileage traveled should have been dollar_figure this amount is rounded to the nearest dollar rule sec_7491 places upon the commissioner the burden_of_proof with respect to any factual issue relating to liability for tax if the taxpayer maintained adequate_records satisfied the substantiation requirements cooperated with the commissioner and introduced during the court_proceeding credible_evidence with respect to the factual issue although neither party alleges the applicability of sec_7491 we conclude that the burden_of_proof has not shifted to respondent with respect to any of the issues in the present case deductions are a matter of legislative grace and are allowed only as specifically provided by statute and as previously stated petitioner bears the burden of proving that he is entitled to the claimed deductions 503_us_79 292_us_435 car and truck expenses as previously stated petitioner claimed a car and truck expense deduction of dollar_figure on his schedule c however as previously noted at trial petitioner conceded that due to a miscalculation the proper amount of the car and truck expense deduction that should have been claimed was dollar_figure ie big_number miles pincite cents per mile respondent in the notice_of_deficiency disallowed dollar_figure of the claimed schedule c car and truck expense deduction allowing the remainder of dollar_figure respondent contends that the disallowed portion of the deduction represents the miles driven by petitioner for personal reasons ie to visit his family in orange county california and therefore said travel was not an ordinary_and_necessary_expense relating to his trade_or_business petitioner maintained a contemporaneous trip sheet which established the trips taken by petitioner the starting point and destination of each trip and the specific mileage of each trip the trip sheet establishes that petitioner drove big_number miles in taxable_year therefore since petitioner satisfies all other substantiation provisions of sec_274 the only issue for us to decide is whether the disallowed portion of the mileage was driven for business purposes as previously stated respondent alleges that the disallowed mileage for trips taken by petitioner to the chapman law school library for legal research and claimed on the trip sheet were for personal reasons ie to visit his family in orange county and not for business reasons petitioner testified in response to respondent’s questioning that his family lived in orange county approximately of the trips or approximately big_number of the claimed miles on the trip sheet were to chapman law school library located in orange county and there were law school libraries closer than chapman law school library to petitioner’s arthur anderson llp office and his home in los angeles california one of which was the southwestern university school of law library in other words respondent argues that petitioner should have conducted his legal research at a law library that was closer to petitioner’s home and work office than the chapman law school library respondent argues that since the primary reason petitioner traveled to the chapman law school library was to visit his family the mileage associated with this travel is not deductible under sec_262 as a personal_expense sec_162 allows a deduction for ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business for an expense to be ordinary the transaction that gives rise to the expense must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business welch v helvering supra pincite the taxpayer bears the burden of demonstrating that the amount of the expenditure disallowed satisfies the requirements of sec_162 65_tc_87 affd per curiam 540_f2d_821 5th cir the determination of whether an expenditure satisfies the requirements of sec_162 is a question of fact 112_tc_183 petitioner testified at trial that the primary reason for his trips to chapman law school library was to conduct legal research for his business clients further petitioner testified that he found the chapman law school library was superior to the libraries that were closer to his residence upon the basis of the record in this case we find that the primary purpose for petitioner’s trips to chapman law school library was to conduct legal research for his business clients and therefore said travel is directly connected to petitioner’s business petitioner’s visits to his family if such visits occurred were a secondary consideration we hold for petitioner on this issue as modified by petitioner’s concession at trial legal fees at issue in the present case are legal fees of dollar_figure for taxable_year incurred by petitioner in connection with a lawsuit and its subsequent settlement petitioner maintains that the legal fees are deductible by him under sec_162 as ordinary and necessary business_expenses relating to his sole_proprietorship respondent however argues that the legal fees are nondeductible because the origin of the claim in the underlying action is personal and not proximately related to petitioner’s business in order to be deductible on schedule c an expense must be directly connected with or proximately result from a trade_or_business of the taxpayer see 276_us_145 91_tc_352 the deductibility of the legal fees in the present case depends on the origin and character of the claim for which the expenses were incurred and whether the claim bears a sufficient nexus to the taxpayer’s business or income-producing activities see 372_us_39 the supreme court stated that the origin and character of the claim with respect to which an expense was incurred rather than its potential consequences upon the fortunes of the taxpayer is the controlling basic test id pincite the origin_of_the_claim_test is factual and the factors to be considered include allegations in the complaint the legal issues involved the nature and objectives of the litigation the defenses asserted the purposes for which the amounts claimed as deductible were expended and the background of litigation and all facts pertaining to the controversy 59_tc_708 thus in order for petitioner’s legal fees to be deductible on his schedule c the origin of those legal services must have been rooted in his business in case no filed by petitioner on date in the superior court of the state of california county of orange petitioner pleaded five causes of action four of the causes of action breach of contract fraud conversion and specific performance were related to an oral agreement between petitioner and ms wold the fifth cause of action was brought for defamation which allegedly resulted in damage to an intimate personal relationship between petitioner and another individual it is obvious from the allegations in the complaint and cross-complaint the legal issues involved the nature and objectives of the litigation the background of the litigation and all facts pertaining to the controversy that the origin of the lawsuit was of a personal nature and not proximately related to petitioner’s trade_or_business therefore we sustain respondent’s determination on this issue we have considered all of the other arguments made by the parties and to the extent that we have not specifically addressed them we conclude they are without merit reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jul uniform issue list tll lat attention legend employer a organization b council c county d county e city f state m agreement g agreement h agreement i statute n statute o statute p statute q plan x dear this is in response to your request for a ruling dated date as supplemented by additional information dated date and date under sec_414 of the internal_revenue_code the code the following facts and representations were submitted in connection with your request organization b a federally recognized indian_tribe ‘tribe is located in counties d and e and city f within state m the governing body of organization b is council c employer a is the law enforcement agency for organization b employer a exercises the powers of a state m law enforcement agency pursuant to statute n council c created employer a a tribal police department in responsibilities include the enforcement of tribal and state law within the geographic boundaries of organization b the organization b reservation organization b funds its tribal police department and pays the salaries for its employees out of tribal governmental appropriations and federal grants in order to promote the ability of a tribe and state m to provide effective and efficient law enforcement services on the tribe’s reservation state m passed legislation statutes n and o treating tribal police departments as state law enforcement agencies and treating their police officers as state peace officers provided certain requirements are met statute n authorized employer a to exercise the powers of a state m law enforcement agency to appoint state licensed peace officers and to grant those officers the same powers j the police department’s as peace officers employed by local units of government this legislative authorization to exercise state police powers was predicated on employer a meeting the following four statutory requirements agreeing to be subject_to liability for its torts and those of its peace officers and other employees acting within the scope of their employment or duties arising out of the law enforcement agency function to the same extent as any other state m municipal law enforcement agency filing with state m’s board_of peace officer standards and training the board ’ a bond or certificate of insurance for liability coverage with the statutory maximum single occurrence amounts and an annual cap for all occurrences within a year of three times the single occurrence amount requirements similar to those imposed on municipalities filing with the board a certificate of insurance for liability of its law enforcement officers employees and agents for lawsuits under the united_states constitution and agreeing to be subject_to state m laws relating to data practices of law enforcement agencies employer a has exercised the powers of a state m law enforcement agency since meeting these statutory requirements in preventing and detecting crime and enforcing the general criminal laws of state m these are the same powers the legislature of state m has granted law enforcement agencies of state m and its local units of government these include arresting and charging a person employer a’s peace officers are required to meet the same licensure and training standards as peace officers appointed by other law enforcement agencies of state m and its local units of government statute o defines a peace officer as an employee or an elected or appointed official of a political_subdivision or law enforcement agency who is licensed by the board charged with the prevention and detection of crime and the enforcement of the general criminal laws of the state and who has the full powers of arrest and a peace officer who is employed by a law enforcement agency of a federally recognized tribe and who is licensed by the board like every other law enforcement agency in state m and its local units of government employer a can only appoint peace officers licensed by the board state m regulates the training education and standards of conduct relating to employer a’s peace officers through the licensing process the state m legislature created the board to set training and licensing standards for peace officers in state m the board is mandated by statute o to promulgate rules governing peace officers relying upon this statutory mandate the board has promulgated extensive rules governing the education licensure and continuing education of peace officers included are rules governing the certification of schools delivering peace officer training and the minimum educational requirements for peace officer license applicants and rules governing the licensure examination itself including the eligibility requirements for sitting for the exam also included are the specific rules setting forth the requirements for maintaining a peace officer license to receive a renewal of their license officers must certify that they have completed a certain minimum number of hours of continuing education classes approved and accredited by the board during a three year period in addition officers must uphold the specific standards of conduct promulgated by the board failure to meet these standards of conduct may result in the suspension or revocation of an officer’s license by the board if the police officers of employer a therefore fail to maintain their state m peace officer licenses they no longer qualify under the definition of peace officer in statute o and the provisions of statute n granting them police powers under state law no longer apply statute n provides that in order to coordinate define and regulate the provision of law enforcement services on reservation lands governmental units and the tribe shall enter into agreements pursuant to statute p for the purposes of entering into these agreements the tribe shall be considered a governmental_unit as that term is defined in statute p statute p defines governmental_unit in general to include every city county town school district other political_subdivision of state m or another state or another state and any agency of state m or the united_states and includes any instrumentality of a governmental_unit for purposes of statute p an instrumentality of a governmental_unit means an instrumentality having independent policy making and appropriating authority statute n therefore requires organization b to enter into mutual aid cooperative agreements pursuant to statute p with counties d and e and city f to define coordinate and regulate the provision of law enforcement services on the respective parts of the organization b reservation that lie within counties d and e and city f for matters arising within the boundaries of city f the city f police department will be the law enforcement agency with which employer a coordinates its efforts for matters arising outside of the boundaries of city f the county d and county e sheriffs’ departments will be the law enforcement agencies with which employer a coordinates its efforts organization b has entered into agreement g with county d agreement h with county e and agreement i with city f the agreements provide that organization b’s police officers will operate according to county d county e and city f procedures when exercising state authority that organization b’s officers will coordinate activities with the city f police department and the sheriffs’ departments of counties d and e that organization b’s officers will transfer arrested individuals to the county d and county e jails to be processed by the county d and county e sheriffs pursuant to state procedures that persons arrested by organization b’s officers under state law will be subject_to prosecution by the county d or county e attorney’s office pursuant to state procedures that organization b’s officers will participate in the radio dispatch system of county d and county e pursuant to their procedures that organization b’s officers will prepare investigative reports in accordance with applicable procedures of county d county e or city f that organization b’s officers will be obligated to attend hearings in county court as necessary and that individuals arrested in city f by organization b’s officers will be incarcerated in county d’s jail and prosecuted depending on the nature of the offense by the city f attorney’s office in practice when enforcing state laws organization b’s officers will be under or the county d attorney’s office pursuant to a cooperative aid agreement between county d and city f the supervision and direction of the county d and county e sheriffs the city f chief of police and the county d and county e attorneys the sheriffs chief of police and county attorneys will have ultimate authority over crime scenes and criminal investigations agreements g h and i provide that nothing in the agreement shall be construed to limit or release county d county e or city f respectively from criminal jurisdiction or responsibility otherwise possessed by the county or city under applicable law in light of organization b’s compliance with statute n and its agreements with county d county e and city f employer a is treated by the state legislature as a law enforcement agency of state m employer a’s licensed police officers are recognized by the legislature of state m as state peace officers and as such are entitled to enforce state laws within the geographic boundaries of the organization b reservation plan x provides retirement disability and surviving_spouse benefits to certain peace officers and firefighters in state m these benefits are authorized and governed by statute q plan x is a contributory defined_benefit_plan pursuant to statute q the state m legislature authorized employer a’s peace officers to become members of plan x contingent on the internal_revenue_service ruling that employer a is an agency_or_instrumentality of state m for purposes of enforcing state law and that contributions made by employer a to plan x on behalf of its peace officers are contributions to a governmental_plan within the meaning of code sec_414 based on the foregoing you request the following rulings that contributions made by organization b to plan x on behalf of its board licensed that employer a is an agency_or_instrumentality of state m for purposes of enforcing state law and police officers are contributions to a governmental_plan within the meaning of code sec_414 sec_414 of the code provides that a governmental_plan means a plan established and maintained for its employees by the government of the united_states by the government of any state or political_subdivision thereof or by any agency_or_instrumentality of any of the foregoing revrul_89_49 1989_1_cb_117 provides that a plan will not be considered a governmental_plan within the meaning of code sec_414 merely because the sponsoring_organization has a relationship with a governmental_unit or some quasi-governmental power one of the most important factors to be considered in determining whether an organization is an agency_or_instrumentality of the united_states or any state or political_subdivision thereof is the degree of control that a governmental entity or entities exercise over the organization's everyday operations other factors include whether there is specific_legislation creating the organization the source of funds for the organization the manner in which the organization's trustees or operating board are selected and whether the applicable governmental_unit considers the employees of the organization to be employees of the applicable governmental_unit although all of the above factors are considered in determining whether an organization is an agency_or_instrumentality of a government the mere satisfaction of one or all of the factors is not necessarily determinative in this case employer a performs the functions of preventing and detecting crime and enforcing state m’s general criminal laws on behalf of state m and county d county e and city f political subdivisions of state m employer a operates in coordination with the county d and county e sheriffs’ departments and the city f police department pursuant to joint powers agreements in this regard employer a’s police officers will be under the supervision and direction of the sheriffs chief of police and county or city attorneys who have ultimate authority over crime scenes and criminal investigations state m exercises considerable control_over the everyday activities and actions of employer a extensive state standards govern the qualifications of police officers because by definition a peace officer of employer a must be licensed by the board in order to be considered a state peace officer employer a police officers who are licensed by the board are licensed under state m law which means that they must comply with the continuing education and licensing requirements of state m if employer a’s police officers fail to maintain their state peace officer licenses they would no longer qualify under the definition of peace officer under statute o and would no longer be authorized to exercise state m police powers there are situations where employer a police officers may be placed under the direct control of local state law enforcement officers and when employer a police officers are exercising state authority they operate under state and county procedures state m law also governs the duties liabilities and data practices of the employer a police officers the day-to-day results of law enforcement activity within the geographic boundaries of the organization b reservation are largely controlled by state m procedures and institutions when an employer a police officer arrests someone for a violation of state law that person is taken to a jail run by county d or county e whether or not a suspect apprehended by an employer a police officer is prosecuted is a decision made by the county d county e or city f attorney’s office not any organization b prosecuting authority employer a’s authority to exercise the powers of a state m law enforcement agency has been granted by statute n the exercise of that power is subject_to conditions imposed by statute state m has the authority to revoke employer a’s ability to act as a state law enforcement agency at any time the laws being enforced are those of state m state m has the power to and does heavily regulate the training education licensure and standards of conduct of employer a’s peace officers under the express provisions of statutes n and p state m treats council c of organization b as a state governmental_unit for purposes of law enforcement activities council c of organization b is treated as a unit of state government for the purpose of entering into cooperative agreements with other state m law enforcement agencies accordingly based on the above facts and representations we conclude with respect to your ruling requests that contributions made by employer a to plan x on behalf of its peace officers who are licensed by the board are considered contributions by an agency_or_instrumentality of state m or political_subdivision thereof for purposes of code sec_414 and participation in plan x by such peace officers of employer a will not adversely affect the status of plan x as a governmental_plan within the meaning of sec_414 no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code the above rulings are based on the assumption that plan x is qualified under sec_401 of the code and its related trust exempt under sec_501 at all relevant times this letter_ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions concerning this letter please call 9e t ep ra t1 at sincerely calm a latins manager employee_plans technical group deleted copy of ruling notice of intention to disclose enclosures


internal_revenue_service number release date index number --------------------------------------- ----------------------------- ---------------------------------------- ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-157123-04 date date --------------------------------------- ---------------- ----------------- -------------------- legend x -------------------------------------------------- sh1 ---------------------------------------------------- sh2 ---------------------------------------------------- sh3 ---------------------------------------------------- trust1 -------------------------------------------------- trust2 -------------------------------------------------- trust3 -------------------------------------------------- trust4 --------------------- -------------------------------------------------- trust5 -------------------------------------------------- ---------------------- trust6 -------------------------------------------------- ---------------- ---------------------------- --------------------------------------- ---------------------------------- ------------- --------------------- ---------------------- -------------------------- ------------------------------- -------------------------------- --------------------------------------------- plr-157123-04 b1 b2 b3 b4 b5 b6 state d1 d2 d3 d4 d5 d6 dear --------------- this responds to a letter dated date sent by your authorized representative requesting inadvertent termination relief under sec_1362 of the internal_revenue_code --------------------------- -------------------------- ---------------------- -------------------- ------------------ ---------------- statement of facts according to the information submitted and representations therein x was incorporated on d1 pursuant to the laws of state x made an election to be treated as an s_corporation effective d1 on d2 sh1 transferred a portion of sh1’s shares to trust1 for the benefit of b1 sh1 further transferred an additional portion of sh1’s shares to trust2 for the benefit of b2 a qualified_subchapter_s_trust qsst election was not filed by b1 or b2 on d3 sh2 transferred a portion of sh2’s shares to trust3 for the benefit of b3 and b4 also on d3 sh3 transferred a portion of sh3’s shares to trust4 for the benefit of b5 plr-157123-04 and b6 on d4 trust4 distributed all of its shares of x to two sub-trusts trust5 and trust6 accordingly subsequent to d4 trust4 was no longer a shareholder of x with respect to the transfer of x’s shares to trust1 and trust2 sh1 represents that despite being advised by an attorney and an accountant sh1 was not advised to direct the beneficiaries of each trust to file a qsst election on behalf of each trust consequently a qsst election for trust1 and trust2 was not filed on d2 with respect to the transfer of x’s shares to trust3 sh2 represents that sh2 in good_faith believed that because sh1 had transferred a portion of sh1’s shares to a_trust after consultation with an attorney and accountant a similar transfer by sh2 would not cause the termination of x’s status as an s_corporation sh2 further represents that sh2 relied upon an accountant who failed to advise sh2 that trust3 was an ineligible s_corporation shareholder with respect to the transfer of x’s shares to trust4 and subsequently sub-trusts trust5 and trust6 sh3 represents that sh3 in good_faith believed that because sh1 had transferred a portion of sh1’s shares to a_trust after consultation with an attorney and accountant a similar transfer by sh3 would not cause the termination of x’s status as an s_corporation sh3 further represents that sh3 relied upon an accountant and upon sh2 both of whom failed to advise sh3 that trust4 trust5 and trust6 were ineligible s_corporation shareholders x sh1 sh2 and sh3 represent that in a reasonable period of time after discovery of the ineligibility of each trust as a shareholder steps were taken so that x was again a small_business_corporation on d5 two weeks after learning that trust1 and trust2 were ineligible s_corporation shareholders b1 and b2 filed late qsst elections on d6 two days after learning that trust3 trust5 and trust6 were ineligible shareholders each trust distributed all of the shares of x to the individual beneficiaries of each respective trust all of whom are domestic individuals it is further represented that at all relevant times x and its shareholders treated x as an s_corporation and filed their tax returns accordingly x and all of its shareholders for the relevant period have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate and other than a_trust described in sec_1362 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock plr-157123-04 sec_1361 provides that for purposes of sec_1361 trusts that may be shareholders of an s_corporation include a_trust all of which is treated as owned by an individual who is a citizen or resident_of_the_united_states sec_1361 provides in part that in the case of a qualified_subchapter_s_trust with respect to which a beneficiary makes an election under sec_1361 - such trust shall be treated as a_trust described in sec_1361 sec_1361 provides that the term qualified_subchapter_s_trust qsst means a_trust - a the terms of which require that - i during the life of current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation - a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consent or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken - a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations set forth above we conclude that x's election to be treated as an s_corporation terminated on d2 when sh1 transferred a portion of sh1’s shares to ineligible shareholders and had x’s s_corporation not terminated on d2 it would have terminated on d3 when sh2 and sh3 transferred a portion of their shares to trust3 and trust4 respectively we also plr-157123-04 conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided that the beneficiary of trust1 b1 and the beneficiary of trust2 b2 each file a qsst election for their respective trusts with the appropriate service_center effective d2 within days of the date of this letter and provided that x's s_corporation_election is not otherwise terminated under sec_1362 a copy of this letter should be attached to the election in addition this ruling is contingent upon the distribution of stock held by trust3 trust5 and trust6 to eligible shareholders on or before the date which is sixty days after the date of this letter except as specifically provided herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is an s_corporation for federal tax purposes and whether trust1 and trust2 are qssts under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 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 being sent to your authorized representatives s david r haglund enclosures copy of this letter copy for sec_6110 purposes cc david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries sincerely


t c memo united_states tax_court larry m levy and diane levy petitioners v commissioner of internal revenue respondent docket no filed date larry m levy and diane levy pro sese kenneth c peterson for respondent memorandum findings_of_fact and opinion foley judge by notice dated date respondent determined deficiencies in and penalties on petitioners’ federal income taxes as follows penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number big_number big_number unless otherwise indicated all section references are to the - internal_revenue_code for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the issues remaining for determination are whether petitioners are entitled to deduct in certain advances made to jensen talbert fine jewelers inc jtfj entitled to deduct in payments made pursuant to personal guaranties of jtfj debt and liable for the sec_6662 accuracy-related_penalty findings_of_fact when the petition was filed larry and diane levy resided in newport beach and torrance california respectively rt background jtfj owned and operated the jensen talbert fine jewelry store the store robert levy larry levy’s father was the sole shareholder of jtfj prior to diane levy worked as a salesperson in the store in she began managing the store’s day-to-day operations 1ie she supervised employees acted as lead salesperson and purchased inventory diane levy received wages of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure in through respectively prior to larry levy began making advances to jtfj by date larry levy had advanced dollar_figure to jtfj in larry levy started working for jtfj he worked for jtfj an - - average of hours per week hours per week during the peak retail periods from through and more than hours per week from through he provided financial sales and management services to jtfj from through jtfj did not compensate him for his services during through he worked for and received wages from american laser corporation california jamar inc and jamar industries during and larry levy operated a consulting business raising capital for but not advancing funds to his client corporations il the note and the agreement on date robert levy as president of jtfj executed a note the note which was secured_by jtfj’s assets but subordinated to all current or future financial obligations to republic bank the security_interest in jtfj’s assets was not perfected payment of principal and accrued interest was due on or before date on date larry levy robert levy and jtfj executed the joint_venture agreement the agreement to provide cash-flow for jtfj the agreement provided that larry levy make additional advances to jtfj guarantee corporate debts and deliver professional services relating to jtfj’s operations and continuing capital needs in exchange he would receive a percent interest in jtfj’s profits which was payable at his discretion after the advances were repaid further pursuant to q4e- the agreement jtfj reimbursed dollar_figure of expenses larry levy incurred on behalf of jtfj the agreement characterized all of larry levy’s advances as loans petitioners’ advances were all made directly to jtfj by date jtfj was unable to pay its bills as they became due between date and date larry levy advanced an additional dollar_figure on date the note was not paid as required by its terms tii advances and bankruptcy on date jtfj filed for protection under chapter of the bankruptcy code the bankruptcy court’s file was subsequently lost after the bankruptcy filing larry levy continued to advance funds to jtfj ie an additional dollar_figure between date and date by date larry levy had advanced dollar_figure to jtfj ie dollar_figure prior to date and dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure in jtfj’s taxable years ending date through date respectively of these advances dollar_figure of the dollar_figure was memorialized by a written note pursuant to the agreement larry levy guaranteed a number of jtfj’s debts from through petitioners paid dollar_figure on the personal guaranties made to jtfj’s creditors ie dollar_figure in dollar_figure in dollar_figure in dollar_figure in and dollar_figure in - - larry levy filed a claim as a creditor in jtfj’s bankruptcy proceeding during the bankruptcy he agreed to subordinate his claim to that of betty jo byers ms byers was a jtfj creditor and former bookkeeper who lent dollar_figure to jtfj larry levy personally guaranteed the loan ms byers received dollar_figure from larry levy pursuant to a judgment and subsequent garnishment of his wages in date the bankruptcy court ordered the sale of jtfj’s assets to majestic jewelers majestic jewelers agreed to pay the bankruptcy trustee dollar_figure for jtfj’s assets ie dollar_figure at the time of purchase and the remainder in installments majestic jewelers’ payments would go to jtfj’s secured creditors first to republic bank and then to petitioners on date the chapter case was converted to a chapter case in after making only a few small payments majestic jewelers defaulted on its obligations after majestic jewelers defaulted petitioners were pursuant to larry levy’s personal guaranty reguired to repay dollar_figure to republic bank pursuant to the bankruptcy plan petitioners would have received the remaining payments petitioners deducted dollar_figure as business_bad_debt on their tax_return and claimed a net_operating_loss_carryover on their and tax returns - - opinion respondent determined that the advances and guaranty payments were capital contributions to jtfj entitling petitioners to a short term capital_loss deduction in anda short-term_capital_loss carryover deduction of dollar_figure per year in and petitioners contend that they are entitled to a sec_166 business_bad_debt deduction of dollar_figure in in the alternative petitioners contend that they are entitled to deduct these payments as sec_165 losses or as sec_162 a ordinary and necessary business_expenses i the joint_venture petitioners contend that they are entitled to an ordinary deduction because the advances to jtfj and guaranty payments were made pursuant to a joint_venture petitioners further contend that the entity became worthless in a joint_venture has been defined as a special combination of two or more persons where in some specific venture a profit is jointly sought without any actual partnership or corporate designation see 27_tc_840 whether an entity will be recognized as a joint_venture for tax purposes is determined by reference to the same principles that govern recognition of a partnership see 42_tc_1067 stating that the _- _- parties’ agreement and conduct shall be closely scrutinized the inquiry is whether considering all the facts---the agreement the conduct of the parties in execution of its provisions their statements the testimony of disinterested persons the relationship of the parties their respective abilities and capital contributions the actual control of income and the purposes for which it is used and any other facts throwing light on their true intent--the parties in good_faith and acting with a business_purpose intended to join together in the present conduct of the enterprise 337_us_733 fn ref omitted this was not a joint_venture larry levy and robert levy did not come together to make a profit the agreement merely formalized the parties’ previous actions where larry levy advanced money to jtfj in exchange for an interest in the profits moreover the alleged joint_venture did not transact business obtain a taxpayer_identification_number file partnership tax returns maintain bank accounts or receive income or incur expenses further the parties to the agreement did not report the pass-through of any income or loss accordingly we conclude that the advances were not made through a joint_venture and petitioners are not entitled to deduct them as a loss on the worthlessness of a partnership_interest il bad_debt deduction in the alternative petitioners contend that they are entitled pursuant to sec_166 to a business_bad_debt loss for their advances and payments on personal guaranties --- - respondent contends that the advances and guaranty payments were capital contributions to jtfj respondent further contends that even if they were loans petitioners were not engaged in a trade_or_business that would allow these payments to be characterized as business bad_debts sec_166 allows a deduction for any debt that becomes worthless during the taxable_year and distinguishes between business and nonbusiness bad_debts a business_bad_debt is a debt that is proximately related to the taxpayer’s trade_or_business see 373_us_193 sec_1_166-5 income_tax regs nonbusiness bad_debts are treated as short term capital losses and are subject_to the sec_1211 limitations on capital losses see sec_166 a the guaranty payments petitioners were not in the trade_or_business of acting as a guarantor llarry levy’s consulting business did not guarantee the debts of any corporation see sec_1_166-9 income_tax regs in addition the guaranties were not made to protect petitioners’ trade_or_business as employees of jtfj because protection of their status as employees was not the dominant motivation for making the guaranties see 405_us_93 stating that to qualify for the business_bad_debt deduction the taxpayer’s trade_or_business must be the dominant motivation for making the guaranties larry - levy received no compensation_for his services to jtfj and diane levy’s wages were very small in comparison to the amount of the loans guaranteed see id pincite considering the amount of salary to be protected in relation to the amount advanced petitioners’ guaranty payments ie dollar_figure in dollar_figure in dollar_figure in dollar_figure in and dollar_figure in were made with a profit_motive the agreements were legally enforceable against petitioners and the guaranties were however made before the obligations became worthless see sec_1_166-9 income_tax regs the guaranty payments were worthless when made petitioners made only dollar_figure of guaranty payments during the years in issue all during accordingly petitioners are not entitled to deduct the guaranty payments in petitioners however are entitled to deduct dollar_figure as a nonbusiness_bad_debt b the advances to determine whether a payment is a loan or a contribution_to_capital numerous factors are considered see dixie dairies corp v commissioner t c see also 748_f2d_1365 9th cir stating that factors are considered revg tcmemo_1983_120 no individual factor is controlling and the determination of whether advances are loans or contributions to capital requires -- - consideration of all of the circumstances see dixie dairies corp v commissioner supra pincite all of the interest on petitioners’ advances was accrued not paid and with the exception of the note there was no fixed maturity_date for repayment of the advances see 424_f2d_1330 9th cir concluding that advances were an equity_investment in similar circumstances further petitioners agreed to subordinate their interest to those of republic bank and betty jo byers whose debt they had personally guaranteed see o h kruse grain milling v commissi279_f2d_123 9th cir stating that subordination to later incurred debt is an indication of equity rather than debt affg tcmemo_1959_110 made many advances when jtfj had no working_capital see datamation servs inc v commissioner tcmemo_1976_252 stating that a transaction appears to be a contribution_to_capital where advances are made to provide working_capital and repayment depends solely on the borrower’s success and participated in jtfj’s management see o h kruse grain milling v commissioner supra pincite stating that where the taxpayer participates in management advances are more likely capital contributions than debt moreover petitioners made the advances in exchange for the future receipt of a 50-percent interest in jtfj’s profits see agualane shores inc v commissioner 269_f2d_116 5th cir stating that an equity_investment is subject_to the risks but entitled to share in the profits of the venture affg 30_tc_519 accordingly we conclude that dollar_figure ie the total deduction of dollar_figure less the dollar_figure in guaranty payments made by petitioners and the dollar_figure lent pursuant to the note was a contribution_to_capital and that petitioners are not entitled to a sec_166 deduction we further conclude that the dollar_figure note was a bona_fide loan the loan evidenced by the note was legally enforceable it was made with a profit_motive before the obligation became worthless and not in the course of petitioners’ trade_or_business the debt became worthless upon majestic jewelers’ default in thus the loss relating to the loan is deductible in as a nonbusiness_bad_debt tii loss deduction sec_165 allows a deduction for certain losses sustained during the taxable_year that are not compensated by insurance or otherwise petitioners’ capital interest in jtfj became worthless in when jtfj’s assets were transferred to majestic jewelers for less than the amount of outstanding debt although petitioners were entitled to a capital_loss deduction in that year and a carryover pursuant to sec_1211 and sec_1212 to the years in issue they are not entitled to the full deduction in see sec_165 iv expense deduction petitioners contend in the alternative that they are entitled to a sec_162 deduction relating to an ordinary and necessary business_expense sec_162 provides that a taxpayer engaged in a trade_or_business may deduct all ordinary and necessary expenses petitioners have failed to establish that jtfj’s corporate expenses were the ordinary and necessary expenses of their trade_or_business petitioners therefore are not entitled to deduct the advances and guaranty payments as ordinary and necessary business_expenses pursuant to sec_162 a v accuracy-related_penalty respondent determined that petitioners were negligent in determining their and liabilities and are liable for a sec_6662 penalty the penalty applies to the portion of petitioners’ underpayment that is attributable to negligence or disregard of rules or regulations see sec_6662 petitioners relying on the advice of an attorney and an accountant made a reasonable attempt to accurately report their bad_debt deduction see sec_6664 as a result petitioners are not liable for the accuracy-related_penalty contentions we have not addressed are moot irrelevant or meritless to reflect the foregoing decision will be entered under rule