t c memo united_states tax_court stuart and betsy bobry et al petitioners v commissioner of internal revenue respondent docket nos filed date sherman f levey for petitioners raymond m boulanger and kevin m murphy for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies in petitioners’ joint federal income taxes and accuracy-related_penalties for through as follows cases of the following petitioners are consolidated herewith harold and terri bobry docket no and michael and doris bobry docket no stuart and betsy bobry docket no year deficiency sec_6662 accuracy-related_penalty dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number harold and terri bobry docket no year deficiency accuracy-related_penalty sec_6662 dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number michael and doris bobry docket no year deficiency dollar_figure big_number big_number big_number accuracy-related_penalty sec_6662 dollar_figure big_number big_number big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after settlement the issues for decision are the amount of lyell metal co inc ’s lyell metal’s cost-of-goods sold and whether petitioners are liable for the accuracy- related penalties findings_of_fact some facts have been stipulated and are so found petitioners resided in pittsford new york when their petitions were filed during the years in issue petitioners stuart bobry harold bobry and michael bobry harold and michael are sons of stuart bobry owned all of the stock in lyell metal an s_corporation as follows year percentage of stock ownership stuart harold michael dollar_figure dollar_figure dollar_figure during through lyell metal was engaged in the scrap metal recycling business in the vicinity of rochester new york lyell metal purchased scrap metal from large industrial users of scrap metal from small businesses and from individuals in the rochester new york metropolitan area much of the trade in scrap metal occurs by way of cash transactions industrial companies from which large quantities of scrap metal are purchased will often accept payment by check while most small businesses and individuals from whom scrap metal is purchased accept payment only by cash during through lyell metal maintained certain books_and_records relating to its purchase of scrap metal by check and by cash with regard to lyell metal's purchase of scrap metal by check lyell metal's books_and_records reflect the amount and date of the checks the payee the nature and quantity of scrap metal purchased and other information regarding each transaction with regard to lyell metal’s purchase of scrap metal by cash lyell metal's records are not as complete as they are for the purchase of scrap metal by check with regard to the purchase of scrap metal by cash upon receipt in lyell metal’s yard of scrap metal from customers lyell metal’s yard employees would prepare receipts in triplicate showing unit cost total cost metal type and weight of scrap metal received the customers would then present the receipts to the cashier in lyell metal’s front office and the cashier would pay customers in cash the amount indicated on the receipts for each transaction the cashier would verify the information on the receipt for accuracy would give one of the copies of the receipt to the customer and would retain two copies of the receipt during through at the end of each business_day one of lyell metal’s office clerks would compare and verify conformity of the records of the total amount of cash that lyell metal had paid out that day to purchase scrap metal as per the retained copies of the receipts with the cash register tape on the next business_day an office clerk would prepare a lyell metal check made payable to cash in the total amount of the cash that lyell metal had paid out on the prior business_day to purchase scrap metal would cash this check at the bank and would place the cash received in lyell metal’s front office cash register to replenish the cash that had been used the prior day to purchase scrap metal the canceled checks made payable each day to cash along with lyell metal’s other canceled checks were returned by the bank and were retained for each year by lyell metal the retained canceled checks made payable to cash represented the primary record that lyell metal used to keep track of its cost of scrap metal purchased by cash along with its more complete records relating to its cost of scrap metal purchased by check for example lyell metal used the total amount of the canceled checks made payable to cash during a week as the total amount for cash purchases of scrap metal for that week lyell metal's records do not reflect names addresses or other identifying information regarding the customers from whom lyell metal purchased scrap metal by cash during through lyell metal retained all of the canceled checks made payable to cash during and through october of however lyell metal retained for only to weeks the daily cash register tapes and the copies of the receipts reflecting lyell metal’s purchases of scrap metal before the cash register tapes and the copies of the receipts were disposed of lyell metal's accountant occasionally would spot check the accuracy of the receipts with the inventory records that were maintained by lyell metal since october of lyell metal has retained the daily cash register tapes and copies of the receipts reflecting its purchases of scrap metal by cash such receipts however do not reflect the identity of the customers from whom lyell metal purchased scrap metal during through certain inventory records were maintained by lyell metal and apparently reflect only the type and quantity of scrap metal that was purchased by check and by cash and the scrap metal that was part of lyell metal’s inventory at any one point in time for and lyell metal’s cost-of-goods sold was computed based on the canceled checks ie those checks made payable to specific payees to take into account scrap metal purchased by check and also the checks made payable each day to cash to take into account scrap metal purchased by cash for lyell metal's cost-of-goods sold was computed based on the copies of the receipts of scrap metal purchased that were retained for that year and also on the canceled checks the receipts and canceled checks reflected the same total cash purchases of scrap metal for the year on some occasions lyell metal paid cash for expenses unrelated to the purchase of scrap metal for example lyell metal paid cash for the services of an electrician on date respondent requested of lyell metal in writing that lyell metal obtain record and retain for respondent detailed information namely names addresses social_security numbers and employee identification numbers identifying the customers from whom lyell metal purchased scrap metal by cash as of the date of trial lyell metal has not complied with respondent’s request lyell metal’s reported gross_profit margins federal_income_tax returns and respondent’s audits based on the evidence before us from and lyell metal’s gross_profit margins as reflected by gross revenue and cost-of-goods sold as reported on lyell metal’s tax returns exceeded the average gross_profit margins of similarly sized scrap metal companies for the record does not reflect an average gross_profit margin for scrap metal companies for through the following schedule reflects lyell metal’s gross revenue and total cost-of-goods sold as reported on its federal_income_tax returns lyell metal’s gross_profit margins based on the tax returns as filed and the average gross_profit margins of similarly sized companies within the scrap metal industry lyell metal’s reported reported gross_profit margins year gross revenue cost-of-goods sold lyell metal industry average dollar_figure dollar_figure big_number big_number big_number big_number for through lyell metal filed federal_income_tax returns as an s_corporation for each year in issue lyell metal included in its claimed cost-of-goods sold calculation purchases of scrap metal by check and by cash in preparing lyell metal’s federal_income_tax returns for the years in issue and in calculating lyell metal’s cost-of-goods sold as claimed on lyell metal’s tax returns with respect to scrap metal purchased by cash lyell metal’s accountant relied primarily on and used the total dollar amount of the canceled checks made payable to cash and the inventory records for the portion of and for during which copies of the customer receipts and cash register tapes were retained the accountant also used the retained copies of the receipts and cash register tapes that reflected purchases of scrap metal by cash the following schedule reflects for through lyell metal's calculation of its total purchases of scrap metal by check and by cash and lyell metal's total cost-of-goods sold as reported on lyell metal's federal_income_tax returns calculation of purchases of scrap metal lyell metal's reported year by check by cash total purchases cost-of-goods sold lyell metal’s dollar_figure big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number for through petitioners timely filed their joint federal_income_tax returns reflecting the pass-through tax consequences of lyell metal’s s_corporation status on audit respondent disallowed for each year for lack of substantiation approximately percent of lyell metal’s reported purchases of scrap metal by cash and respondent determined the tax deficiencies in dispute herein based on this disallowance the percent of alleged purchases of scrap metal by cash that respondent allowed apparently reflects respondent’s estimate of lyell metal’s total cash purchases of scrap metal for amounts under dollar_figure per transaction for respondent disallowed percent of lyell metal’s reported purchases of scrap metal by cash even though lyell metal's reported amount therefor was based not only on the canceled checks made payable to cash but also on the copies of the receipts and cash register tapes that were retained by lyell metal for that reflected cash purchases respondent's disallowance for apparently was based on the fact that the canceled checks and copies of the receipts did not contain all of the information that respondent had requested about the identity of lyell metal’s customers during the audit respondent found no corroborating evidence of unreported income on the part of petitioners the following schedule reflects for through lyell metal’s claimed purchases of scrap metal by cash that were disallowed by respondent and lyell metal’s total cost-of-goods sold as redetermined by respondent cash purchases disallowed by respondent cost-of-goods sold year for lack of substantiation as redetermined by respondent dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number respondent’s adjustments to lyell metal’s claimed cost-of- goods sold increased lyell metal’s alleged gross_income for the years in issue and this alleged additional income was charged to petitioners’ joint federal_income_tax returns for through respondent also determined accuracy- related penalties against petitioners for negligence relating to the adjustments to lyell metal's cost-of-goods sold opinion in calculating gross_income taxpayers may offset gross revenue with cost-of-goods sold 88_tc_654 65_tc_422 affd per curiam 584_f2d_53 5th cir taxpayers generally bear the burden_of_proof regarding the proper amount of their cost-of-goods sold rule a 290_us_111 371_f2d_684 n 1st cir affg tcmemo_1966_99 31_tc_56 taxpayers are expected to maintain adequate_records to substantiate claimed cost-of-goods sold sec_6001 sec_1 a income_tax regs where taxpayers do not have adequate_records but where the record suggests that they clearly incurred an offset to gross_income courts may estimate the offset based on the evidence 39_f2d_540 2d cir respondent argues that lyell metal failed to substantiate adequately its purchases of scrap metal by cash because lyell metal did not maintain records of specific purchases of scrap metal by cash nor records that identified the specific customers from whom lyell metal purchased scrap metal by cash petitioners argue that lyell metal’s records namely for and the canceled checks made payable to cash that were used daily to replenish lyell metal’s front office with the amount of cash paid out the prior day to purchase scrap metal and for copies of the retained receipts cash register tapes and the canceled checks made payable to cash adequately establish and substantiate its purchases of scrap metal by cash petitioners also argue that the accuracy of lyell metal’s reported cost-of-goods sold is supported by the average gross_profit margins within the scrap metal industry the evidence in this case supports the basic accuracy of lyell metal's reported scrap metal purchases and reported cost- of-goods sold for all the years in issue lyell metal retained its canceled checks made payable to cash and its general inventory records for lyell metal also retained copies of its receipts and its cash register tapes reflecting cash purchases of scrap metal which records corroborate the basic accuracy of using in this case lyell metal's canceled checks made payable to cash to compute the total cash purchases of scrap metal for and thereby for the earlier years as well for through lyell metal’s reported gross_profit margins exceeded the average gross_profit margins of similarly sized companies within the scrap metal industry if respondent’s determinations for through were sustained lyell metal would be taxed on the basis of gross_profit margins that would be twice the industry average although the evidence indicates that lyell metal was a profitable company it does not indicate that lyell metal was that much more profitable than other scrap metal companies and it does not indicate that petitioners realized anywhere near the income charged to them by respondent although the evidence largely supports the accuracy of lyell metal’s reported cost-of-goods sold the evidence does indicate that lyell metal did improperly include in its cost-of-goods- sold computation some expenses for non-cost-of-goods-sold items ie lyell metal paid for some expenses by cash that were not related to the purchase of scrap metal and to that extent lyell metal’s purchases and its cost-of-goods-sold computation was overstated and lyell metal’s records relating to cash purchases of scrap metal are not as complete as they should be we do not condone lyell metal’s failure to maintain more complete and accurate records with regard to individual purchases of scrap metal particularly those where lyell metal made payment therefor by cash based on the evidence before us we hold that lyell metal is entitled to include percent of its calculation of its purchases of scrap metal by cash as part of its cost-of-goods- sold computation for the years in issue cohan v commissioner supra the 5-percent reduction that we sustain is supported by the fact that lyell metal did include some non-cost-of-goods-sold items in its cost-of-goods sold computation for some years and by lyell metal’s incomplete recordkeeping for through the following schedule reflects our computation and estimate of lyell metal’s total purchases of scrap metal by cash of lyell metal’s total cost-of-goods sold and of the additional income to be charged to lyell metal and to the shareholders thereof year cash purchases cost-of-goods sold additional income estimated estimated estimated dollar_figure big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number under sec_6662 a 20-percent accuracy-related_penalty applies to underpayments of tax attributable to either negligence or to a disregard of the rules or regulations taxpayers are expected to maintain adequate_records and failure to do so may constitute negligence and a disregard of rules or regulations sec_6001 see also 40_tc_30 bard v commissioner tcmemo_1990_431 petitioners bear the burden_of_proof with respect to this issue rule a as indicated for the years in issue lyell metal failed to maintain complete records prior to lyell metal retained copies of receipts reflecting its cash purchases of scrap metal for only to weeks and for all of the years in issue lyell metal failed to maintain any identifying information relating to customers to whom lyell metal paid cash for scrap metal we sustain respondent’s determination of the accuracy-related_penalties to reflect the foregoing decisions will be entered under rule


internal_revenue_service p o box cincinnati oh november release date department of the treasury employer_identification_number contact person - id number date date contact telephone number legend b university c academic focus d association x dollars dollar amount dear uil you asked for advance approval of your scholarship grant procedures under sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 description of your request you will provide a scholarship in order for a student to obtain an advanced ph d degree in the field of c the ph d candidate will research c approaches for people with aphaia as well as research_and_development of language based c software on various technology platforms in english and other languages applicants are required to be enrolled in band should be focused on a career in c you will award one scholarship up to x dollars per academic calendar_year previous scholarship awardees can apply in consecutive years letter catalog number 58263t the recipients will be selected on an objective and nondiscriminatory basis based on the criteria reasonably related to the purpose of the grant the criteria consist of looking at prior academic performance recommendations from instructors financial need and personal interviews concerning the candidates' motivation character ability and potential specifically the criteria used to determine eligibility for scholarship are transcript to show proof of enrollment in a ph d program at b curriculum vitae verifying the student's research is in the field of c curriculum vitae verifying the student has earned a certificate of clinical competence from d proof verifying the student's ph d advisor has an academic position in a department in b and a background in c curriculum vitae shows evidence of publications and presentations that include c content curriculum vitae shows evidence that the student is engaged in research being conducted in the c testing teaching lab at b student speaks more than one language your program will be announced publicly through the relevant department at b to directly attract qualified candidates final selection of an awardee is approved by your board_of directors on an objective and nondiscriminatory basis the amount will be given directly to b and will be dispersed in three installments throughout the academic year you will obtain reports to document the student has performed the activities that the scholarship is intended to finance and you will investigate any possible misuse of funds you will maintain records that include information used to evaluate the qualifications of potential grantees identifications of the grantees the amount and purpose of each grant and all grantee reports and other follow up data basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis letter catalog number 58263t - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 a ii other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter enclosures redacted letter notice sincerely director exempt_organizations letter catalog number 58263t


internal_revenue_service national_office technical_advice_memorandum date number release date third party communication date of communication month dd yyyy tam-108603-07 index uil no case-mis no ----------------------------- ----------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference legend ------------------------------------------------ ------------------------------- --------------------------------------------- ---------------- ------- ------------------ -------------------------- -------------------------- taxpayer subsidiary a consultant ----------------------------- business a ---------------------------------------------------------------------------------------------- --------------------------------------------------------- business b ----------------------------------------------------------------------------------- market a year year year date date date date date date date date -------------------------------------- ------- ------- ------- -------------- ---------------------- ----------------------- -------------------------- ----------------------- ---------------------- ----------------- ------------------ tam-108603-07 ------------------- ---------------------- ---------------------- ------------------------------------- -------------------------- -------------------------- date date date date date date issue whether costs incurred by the taxpayer in investigating and pursuing potential business restructurings that were not consummated by the taxpayer are deductible as ordinary and necessary business_expenses under sec_162 are deductible pursuant to the provisions of sec_165 or are nondeductible capital expenditures pursuant to sec_263 conclusion costs incurred by the taxpayer in investigating and pursuing non-mutually exclusive potential business restructurings that were not consummated by the taxpayer are deductible pursuant to sec_165 at the time the taxpayer abandoned each potential option costs incurred by the taxpayer in investigating and pursuing mutually exclusive transactions must be capitalized as part of the costs of the completed restructuring transactions facts the taxpayer is primarily engaged in the business of business a to consumers and small businesses prior to year the taxpayer also operated two businesses that provided business b services the value of the taxpayer’s stock remained stagnant between year and year in response to this lack of growth the taxpayer began exploring strategic alternatives to restructure in some way that would acquire and focus resources on its core activities in date the taxpayer engaged consultant to provide advice with respect to its restructuring goals from date to date the taxpayer investigated a variety of restructuring proposals including maintaining the status quo leveraged recapitalization or full recapitalization with a spin-off of the lesser business divisions and divestiture of lesser business divisions the divestiture proposal contained several subparts including a targeted stock offering or an ipo with a split-off or spin-off these three general proposals were presented to the taxpayer’s board_of directors on date by consultant on date the taxpayer’s board_of directors voted to eliminate consideration of maintaining the status quo and leveraged or full recapitalization thus as of date only the divestiture proposal including a targeted stock offering or an ipo with a split-off or spin-off remained under consideration by the taxpayer tam-108603-07 on date the taxpayer’s board_of directors voted to eliminate consideration of a spin- off or targeted stock offering leaving only an ipo with a split-off under consideration on the same day the board_of directors approved a business reorganization to form two companies the taxpayer and subsidiary a consisting of all of taxpayer’s lesser business divisions on date the taxpayer contributed subsidiaries assets and liabilities of its lesser business divisions to subsidiary a on date subsidiary a filed a form s-4 registration_statement for an initial_public_offering of stock ipo with the securities_and_exchange_commission sec on date the taxpayer finalized its decision to divest subsidiary a through an ipo and split-off an ipo of the common_stock of subsidiary a was completed on date on market a accordingly after date the common_stock of subsidiary a was owned by both the taxpayer and unrelated public shareholders the taxpayer then began taking steps to perform the split-off in which certain shareholders of stock in the taxpayer would exchange their stock in the taxpayer for stock in subsidiary a on date subsidiary a filed a statement with the sec concerning the contemplated split-off however on date the taxpayer abandoned the split-off when it became apparent that a split-off of subsidiary a would not maximize shareholder value it filed a statement with the sec withdrawing the split-off registration on date the taxpayer’s board_of directors approved a spin-off of subsidiary a the spin off was completed on date the field contends that the taxpayer only intended to enter into one restructuring transaction and that the various proposals discussed above were mutually exclusive according the field maintains the costs of investigating and pursuing all proposals must be capitalized pursuant to sec_263 as part of the ipo and spin-off transactions that were actually consummated the taxpayer claims that the various restructuring proposals were not mutually exclusive that the taxpayer could and ultimately did enter into a combination of transactions the taxpayer claims it is entitled to a deduction under sec_165 for the costs of any proposals that were abandoned alternatively the taxpayer contends that it is entitled to deduct any investigatory costs incurred when it was investigating whether to enter into a restructuring transaction and which transaction to choose pursuant to revrul_99_23 law and analysis sec_162 of the internal_revenue_code allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business see 403_us_345 however sec_263 provides that no deduction is allowed for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the tam-108603-07 value of any property or estate see 224_f3d_874 8th cir sec_165 allows a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise in order to be deductible under this section a loss must be evidenced by a closed and completed transaction fixed by an identifiable_event and sustained during the year sec_1_165-1 of the income_tax regulations further only a bona_fide loss may be deducted substance and not mere form governs in determining whether a loss is deductible deductions for abandonment losses are not specified in sec_165 however sec_1_165-2 of the regulations provides that a loss is deductible under sec_165 if it is incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of any nondepreciable_property in a case where such business or transaction is discontinued or where such property is permanently discarded from use therein accordingly restructuring costs otherwise capital pursuant to sec_263 are deductible losses under sec_165 when the proposed transaction is abandoned revrul_73_580 1973_2_cb_86 if a taxpayer investigates and pursues multiple separate transactions costs properly allocable to any abandoned transactions are deductible even if some transactions are completed 15_tc_106 acq 1951_1_cb_3 further if a taxpayer engages in a series of transactions and abandons one of those transactions a loss is allowed even if the taxpayer later proceeds with a similar transaction 18_tc_1100 30_bta_878 30_bta_973 acq xiii-2 c b aff’d 80_f2d_573 9th cir these authorities allow a deduction upon the abandonment of a proposed transaction even if subsequent or alternative transactions are pursued by contrast if the proposals are mutually exclusive alternatives meaning that only one can be completed then no abandonment_loss is proper unless the entire transactions is abandoned the costs of pursuing any alternatives not consummated must be capitalized as part of the cost of the completed alternative 267_f3d_510 6th cir costs of engineering studies to evaluate potential sites to build a distribution facility are capital where the taxpayer intended to choose only one location to build the facility 66_tc_478 costs of sale include costs of unsuccessful contacts 79_tc_109 investment was a single transaction rather than separate efforts to obtain one successful lease finally revrul_99_23 1999_1_cb_998 provides that expenditures incurred in order to determine whether to enter a new business and which new business to enter are investigatory costs that are start-up_expenditures under sec_195 tam-108603-07 the facts in this case show that the taxpayer investigated a variety of proposed restructuring transactions which can be grouped into three main categories maintenance of the status quo recapitalization and various divestiture scenarios for the lesser business divisions while it is clear that option maintenance of the status quo is mutually exclusive with pursuing any type of restructuring transaction we do not believe that taxpayer seriously considered this option or that any substantial portion of the costs at issue were incurred in pursuing an option of doing nothing we agree with the taxpayer that options and were not mutually exclusive and that the taxpayer could have entered into some type of recapitalization transaction and also one or more of the divestiture transactions being considered under option thus like the taxpayer in sibley lindsay curr co the taxpayer here is entitled to a deduction under sec_165 for costs associated with the recapitalization option in year because there is clear evidence of abandonment when its board_of directors voted to eliminate consideration of this option on date our analysis of the costs associated with option the divestiture of the lesser business divisions is more complex because we agree in part with the taxpayer’s position and in part with the field’s position the taxpayer claims it could have entered into a combination of the option subparts and indeed it did by finally consummating both an ipo and a spin-off of subsidiary a the taxpayer further claims that while impracticable it was possible to have entered into both a split-off and a spin-off since when it began consideration of option it had two separate businesses in its lesser business divisions one to split-off and one to spin-off the field contends that all costs associated with option were part of a single divisive transaction that was consummated as an ipo spin-off of subsidiary a while we might agree with the taxpayer in theory the facts in this case demonstrate that the taxpayer only pursued a single divestiture transaction beginning on date when the board_of directors voted to eliminate consideration of a spin-off or a targeted stock offering on that same date the board_of directors approved a business reorganization which would place all of the assets of the taxpayer’s lesser business divisions in subsidiary a two months later on date the taxpayer contributed all of the assets and liabilities of its lesser business divisions to subsidiary a thus beginning with date the taxpayer pursued only one divestiture option that included an ipo and split-off of subsidiary a the ipo was completed shortly thereafter and the taxpayer began taking steps to complete the split-off however the taxpayer did not complete the split-off after determining that it would not maximize shareholder value the taxpayer claims it abandoned the split-off transaction and went back to the drawing board and reconsidered all of its divestiture options during date we believe a more accurate description of the events is that the taxpayer modified the divestiture transaction from a split-off to a spin-off and completed the spin-off less than tam-108603-07 two months later in general terms a spin-off and a split-off are very similar transactions a spin-off is a pro_rata distribution by a corporation of the stock of a subsidiary sec_355 see generally bittker and eustice federal income_taxation of corporations and shareholders dollar_figure 7th ed a split-off is also a pro_rata distribution by a corporation of the stock of a subsidiary except that the shareholders of the distributing parent_corporation surrender part of their stock in the parent in exchange for the stock of the subsidiary id thus a spin-off results in the existing shareholders continuing to own the stock of both the parent and the subsidiary while a split-off involves the elimination of some shareholders who must surrender their stock in the parent in order to receive stock in the subsidiary however the end result of each transaction is the same for the distributing corporation-it no longer owns any stock in the subsidiary thus based on the facts in this case we believe that the taxpayer pursued a single divestiture transaction beginning on date which consisted of the transfer of assets and liabilities to subsidiary a an ipo consideration and pursuit of a split-off and finally reconsideration and pursuit of a spin-off any costs incurred in consideration or pursuit of an ipo split-off and spin-off incurred beginning in date must be capitalized as part of the capital restructuring that was eventually accomplished finally we turn to the taxpayer argument that it is entitled to deduct certain investigatory costs pursuant to revrul_99_23 1999_1_cb_998 revrul_99_23 holds that costs incurred by a taxpayer in determining whether to acquire an unrelated_trade_or_business and which trade_or_business to acquire are investigatory costs that are start- up expenditures pursuant to sec_195 and are eligible for amortization over a 5-year period the holding of revrul_99_23 is limited to acquisitions of new businesses only since sec_195 only applies to start-up_expenditures for new businesses it does not apply to the facts in this case where the taxpayer only considered divisive not acquisitive transactions caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


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 ita b04 plr-126821-05 date date --------------------------------------- ----------------------------------------- -------------------------- ---------------------- ----------------------- ------------------ --------------------- ----------- --------- taxpayer a taxpayer b home home date date date state state dear -------------- this responds to your letter dated date requesting a ruling on whether you are eligible to exclude gain from the sale of a residence under sec_121 of the internal_revenue_code facts on date taxpayers a and b moved from state to state and purchased home because of taxpayer b’s new job taxpayers a and b represent that after moving into home they became aware of various criminal activities occurring in their neighborhood and their son was assaulted and threatened additionally on date taxpayer a was assaulted by several of the neighbors which resulted in a trip to the hospital emergency room because of the assault and the general nature of the neighborhood taxpayers a and b sold home on date and purchased home law and analysis sec_121 provides that a taxpayer's gross_income will not include gain from the sale_or_exchange of property if during the five-year period ending on the date of the sale_or_exchange such property has been owned and used by the taxpayer as the plr-126821-05 taxpayer's principal_residence for periods aggregating two years or more the full exclusion is available only once every two years sec_121 provides that the maximum exclusion amount is dollar_figure if a husband and wife file a joint_return for the year of the sale both spouses meet the year use test at least one of the spouses meets the 2-year ownership test and neither spouse used the sec_121 exclusion during the last two years sec_121 provides for a reduced maximum exclusion for taxpayers who fail to satisfy the ownership and use tests or the limit of one sale every two years if the primary reason for sale_or_exchange is a change in place of employment health or unforeseen circumstances a sale is by reason of unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer does not anticipate before purchasing and occupying the residence a taxpayer's primary reason for the sale_or_exchange is deemed to be unforeseen circumstances if one of the safe_harbor events such as involuntary_conversion of the residence death or divorce occurs during the period of the taxpayer's ownership and use of the residence as the taxpayer's principal_residence in addition the commissioner may designate other events or situations as unforeseen circumstances in published guidance of general applicability or in a ruling directed to a specific taxpayer see sec_1_121-3t e of the income_tax regulations sec_1_121-3 provides that if a safe_harbor does not apply a sale is by reason of unforeseen circumstances only if the primary reason for the sale is unforeseen circumstances factors that may be relevant in determining the taxpayer’s primary reason for the sale include but are not limited to the extent to which the sale and the circumstances giving rise to the sale are proximate in time the suitability of the property as the taxpayer’s principal_residence materially changes the taxpayer’s financial ability to maintain the property is materially impaired the taxpayer uses the property as the taxpayer’s residence during the period of ownership of the property the circumstances giving rise to the sale are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer’s principal_residence and the circumstances giving rise to the sale occur during the period of the taxpayer’s ownership and use of the property as the taxpayer’s principal_residence the reduced maximum exclusion is computed by multiplying the maximum dollar limitation of dollar_figure dollar_figure for certain joint filers by a fraction the numerator of the fraction is the shortest of the following periods the period of time that the taxpayer owned the property during the 5-year period ending on the date of the sale_or_exchange the period of time that the taxpayer used the property as the taxpayer's principal_residence during the 5-year period ending on the date of the sale_or_exchange or the period of time between the date of a prior sale_or_exchange of property for which the taxpayer excluded gain under sec_121 and the date of the current sale_or_exchange the numerator of the fraction may be expressed in days or months the plr-126821-05 denominator of the fraction is days or months depending on the measure of time used in the numerator based on the facts representations and the relevant law as set forth above we conclude that the primary reason for the sale of home was an unforeseen circumstance consequently the sale of home which you owned and used as your principal_residence for less than two of the preceding five years will allow you to exclude gain up to the reduced maximum exclusion amount under sec_121 caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under ' except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter in addition no opinion is expressed or implied as to whether taxpayers a and b have used home as their principal_residence this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george f wright assistant branch chief branch office of associate chief_counsel income_tax accounting


internal_revenue_service number release date index number --------------------------------------- ----------------------------- ------------------------------- -------------- --------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc corp br2 plr-142985-09 date december legend shareholder shareholder shareholder shareholder a b c d e f g h i j --------------------------------------------- ------------------------------ ----------------------- ---------------------------------------------------- ---- ------ ----- ---- ------ ------ ---- -- --------------- ---- plr-142985-09 k l m date a date b dear ------------- --------------- -- -------------- -------------------- ------------------- this is in response to your letter dated date requesting that we supplement our letter_ruling dated date plr-142584-06 prior letter_ruling the information submitted for consideration in that letter and in later correspondence is summarized below capitalized terms not defined in this letter have the meanings originally assigned to them in the prior letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution described below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing percent or greater interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 the prior letter_ruling addresses certain u s federal_income_tax consequences of the proposed transactions under sec_355 sec_368 and certain other relevant provisions of the internal_revenue_code except as modified below the representations and material facts set forth in the prior letter_ruling remain in effect for purposes of this supplemental letter_ruling supplemental facts plr-142985-09 the material facts as described in the prior letter_ruling are unchanged except as stated below completed steps of the proposed transactions sub has converted from a corporation to a single member limited_liability_company sub conversion which is treated as a disregarded_entity for federal_income_tax purposes distributing represents that the conversion of sub to a limited_liability_company was treated for federal_income_tax purposes as a liquidation under sec_332 controlled llc has converted from a limited_liability_company to a corporation conversion under state y law distributing represents that the conversion was treated as a contribution by sub of all of the assets of controlled llc to controlled in exchange for all of the stock of controlled and the assumption by controlled of all the liabilities associated with controlled llc the authorized capital stock of controlled consists of one class of common_stock which was wholly owned by sub at the time of the conversion sub distributed all of the stock of controlled to distributing on date a changes to facts as previously submitted sub has converted from a corporation to a single member limited_liability_company which is treated as a disregarded_entity for federal_income_tax purposes distributing represents that this conversion of sub to a limited_liability_company is treated for federal_income_tax purposes as a liquidation under sec_332 individual shareholder has loaned distributing approximately dollar_figurek which will remain outstanding following the external distribution the dividend in arrears on the preferred_stock of distributing will be paid in the form of distributing’s promissory note to the individual shareholder the term of the dividend note will be less than l years distributing will contribute as part of the contribution to controlled its promissory note containing the same principal_amount interest rate and payment terms as the mortgage encumbering the land held by sub to effectuate an economic assumption of the mortgage the outstanding principal is approximately dollar_figurem and is due and payable on date b certain of the assets to be contributed to controlled in the contribution are currently pledged to support a line of credit to distributing it is a single purpose plr-142985-09 facility entered into to provide distributing a source of funds to repurchase the outstanding publicly traded indebtedness of sub once the credit arrangement was finalized it was no longer advantageous to repurchase the debt the line of credit will remain outstanding after the external distribution although distributing does not anticipate drawing funds under the line of credit the ownership structure of distributing has changed from that described in the prior letter_ruling at this time individual shareholder owns a percent of the outstanding class a common_stock b percent of the class b common_stock and c percent of the outstanding preferred_stock shareholder owns d percent of the outstanding class a common_stock and e percent of the outstanding class b common_stock shareholder owns f percent of the outstanding class b common_stock shareholder owns g percent of the outstanding class b common_stock shareholder owns h percent of the outstanding class a common_stock common shareholders include all holders of class a common_stock or class b common_stock in the external distribution distributing will distribute to its shareholders all of the stock of controlled individual shareholder will surrender all of its distributing preferred_stock for an amount of controlled stock equal in value to the value of the distributing preferred_stock surrendered all holders of distributing class b common_stock may elect election to surrender shares of distributing class b common_stock that have a value approximately equal to the value of the shares of controlled stock received in exchange thereof to the extent distributing holds any shares of controlled stock following the election such shares will be distributed pro_rata to the remaining common shareholders representations except as otherwise modified distributing and controlled reaffirm each representation made in the prior letter_ruling the following representations of the prior ruling are modified as follows i the total adjusted bases of the assets transferred to controlled by sub in the conversion equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject bb the fair_market_value of the stock of controlled to be received by each individual shareholder and class b shareholders in the external distribution will be approximately equal to the aggregate fair_market_value of the distributing preferred_stock and distributing class b common_stock surrendered by each such shareholder in the exchange plr-142985-09 cc no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing ll the total adjusted bases of the assets transferred to controlled by distributing in the contribution equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject oo other than accounts_payable incurred in the ordinary course of business the line of credit described in the prior letter_ruling and the mortgage note no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the external distribution the following additional representations are made in connection with this supplemental ruling letter internal distribution u the total fair_market_value of the assets deemed contributed to controlled in the conversion will exceed the sum of i the amount of any liabilities assumed within the meaning of sec_357 by controlled in the deemed exchange ii the amount of any liabilities owed to controlled by sub that are discharged or extinguished in connection with the deemed exchange and iii the amount of cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without recognition of gain received by sub in the deemed exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the conversion v neither the business x market activity conducted by sub nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the internal distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop_reg sec_1 in whole or in part throughout the five-year period ending on the date of the internal distribution sub will have been the principal_owner of the goodwill and significant assets of the business x market activity and sub will continue to be the owner following the internal distribution w neither the business x market activity conducted by controlled nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the internal distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop_reg sec_1 in whole or in part throughout the five-year period ending on the date of the internal distribution the sub separate_affiliated_group sag within the plr-142985-09 meaning of sec_355 of the controlled sag will have been the principal_owner of the goodwill and significant assets of the business x market activity and controlled will continue to be the owner following the internal distribution contribution and external distribution xx the total fair_market_value of the assets transferred to controlled in the contribution will exceed the sum of i the amount of any liabilities assumed within the meaning of sec_357 by controlled in the exchange ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without recognition of gain received by distributing in the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the contribution yy neither business x market activity conducted by distributing nor control of an entity conducting the business will have been acquired during the five-year period ending on the date of the external distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop sec_1_355-3 in whole or in part throughout the five-year period ending on the date of the external distribution distributing will have been the principal_owner of the goodwill and significant assets of the business x market activity and distributing will continue to be the owner following the external distribution zz neither the business x market activity conducted by controlled nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the external distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop sec_1_355-3 in whole or in part throughout the five-year period ending on the date of the external distribution the distributing sag or the controlled sag will have been the principal_owner of the goodwill and significant assets of the business x market activity and the controlled sag will continue to be the owner following the external distribution aaa as part of the external distribution distributing and controlled will enter into an agreement whereby distributing will agree to indemnify controlled and make it whole in the event of any foreclosure with respect to the pledged assets ruling plr-142985-09 based solely on the information submitted and the representations set forth above as well as the information and representations submitted with the prior letter_ruling we rule as follows ruling is modified to read as follows in the external distribution no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the shareholders of distributing upon the receipt of controlled stock either in exchange for surrendered distributing class b common_stock and distributing preferred_stock or pursuant to a pro_rata distribution of shares of controlled stock to the common shareholders sec_355 the supplemental facts submitted will not adversely affect the prior letter_ruling which as modified hereby will remain in full force and effect caveats no opinion is expressed about the tax treatment of the proposed transaction described above under other provisions of the code and regulations or the tax treatment of any condition existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the proposed transaction satisfies the business_purpose requirement of sec_1 b ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 or iii whether the proposed transaction is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-142985-09 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely gerald b fleming senior technician reviewer branch corporate cc


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom fi p plr-105936-00 date date legend trust fund a fund b fund c fund d fund e fund f accountant state date date date date date date dear administrator this is in reply to a letter dated date requesting a ruling on behalf of funds a b c d e and f fund or funds you have requested a ruling that funds be granted an extension of time under sec_301 of the procedure and administration regulations to make an election under sec_855 of the internal_revenue_code for funds’ tax_year ending date facts trust is incorporated as a state business_trust each fund is a portfolio of trust and is a regulated_investment_company ric operating under the investment_company act of as amended u s c sec_80a-1 et seq each fund elected to be taxed as a ric under subchapter_m part i of chapter of the internal_revenue_code each fund has maintained its election and qualification as a ric in each tax_year thereafter each fund files its federal_income_tax return on the accrual basis using a date year-end plr-105936-00 trust retains administrator as its fund administrator to see that funds’ annual tax returns are prepared and timely filed administrator contracts with accountant for preparation of funds’ tax returns accountant delivered funds’ completed tax returns for year ending date to administrator on date consistent with prior years administrator held the returns pending actual declaration and payment of the additional dividends by funds in compliance with sec_855 funds’ returns were due_date administrator is responsible for a number of fund groups in addition to trust’s the administrator employee responsible for filing the funds’ tax returns on behalf of trust inadvertently placed the funds’ returns with another group of returns that had date due dates on date when the employee prepared to file the returns due on date he discovered funds’ returns when the discovery was made funds’ returns were put in the mail that day law and analysis sec_855 provides in part that if a ric declares a dividend prior to the time prescribed by law for the filing of its return for a tax_year including the period of any extension of time granted for filing such return and distributes the amount of the dividend to shareholders in the 12-month_period following the close of such tax_year and not later than the date of the first regular dividend payment made after the declaration the amount so declared and distributed shall to the extent the company elects in such return in accordance with regulations prescribed by the secretary be considered as having been paid during such tax_year except as provided elsewhere in the section sec_1_855-1 of the income_tax regulations provides that a sec_855 election must be made in the return filed by the company for the tax_year the election should be made by the taxpayer by treating the dividend or portion thereof to which such election applies as a dividend paid during the tax_year in computing its investment_company_taxable_income or if the dividend or portion thereof to which such election applies is to be designated by the company as a capital_gain dividend in computing the amount of capital_gain dividends_paid during such tax_year after the time for filing the return for the tax_year for which an election is made under sec_855 the election is irrevocable sec_301_9100-1 of the regulations provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i of the regulations sets forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is plr-105936-00 discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the facts and representations submitted we conclude that each fund has satisfied the requirements for our granting a reasonable extension of time to allow it to make the election under sec_855 accordingly funds are granted an extension until date to make an election under sec_855 on their federal_income_tax returns filed for the tax_year ending date except as specifically ruled upon herein we express no opinion concerning any federal excise or income_tax consequences relating to the facts herein under any other section of the code for example we express no opinion as to whether fund in fact has satisfied the requirements of sec_855 and the regulations thereunder we also express no opinion as to whether fund qualifies as a ric under subchapter_m part i of chapter of the code no opinion is expressed as to whether the taxpayer’s tax_liability is not lower in the aggregate for all years to which the regulatory election applies than the taxpayer’s tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the district director’s office will determine the taxpayer’s tax_liability for the years involved if the district director’s office determines the taxpayer’s liability is lower that office will determine the federal_income_tax effect this ruling is limited to providing an extension of time for filing a sec_855 election and does not provide relief from any liability incurred as a result of filing a late return this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours ____________________________ assistant chief_counsel financial institutions products enclosures copy of this letter sec_6110 copy


number release date id office uilc cca_2009102208505437 ---------- from ------------------- sent thursday date am to -------------------- cc ---------------------------------------- subject re advisory opinion question even if this was tefra partnership a poa only represents the person who signed the poa and possibly the partnership the poa does not thereby represent the other partner thus each partner can hire their own representative and we can talk to each partner independently we really don't need anybody to represent the partnership itself since it is not the taxpayer and has no authority to bind any of its partners as to tax matters call me if you would like to discuss this


t c memo united_states tax_court ronald mclean eastern video petitioner v commissioner of internal revenue respondent docket no filed date ronald mclean for petitioner michael k park for respondent memorandum findings_of_fact and opinion dawson judge this case was assigned to special_trial_judge john f dean pursuant to sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below unless otherwise indicated section references are to the internal_revenue_code in effect for the year and quarters at issue and rule references are to the tax_court rules_of_practice and procedure - - opinion of the special_trial_judge dean special_trial_judge this case is before the court on a petition as amended under sec_7436 as in effect at the time the petition was filed the petition seeks review of a notice_of_determination concerning worker classification in a notice dated date respondent determined that felicia reed andrea trent shemeka morgan eric patrick tracey ashley and kathy wayne video workers were employees of ronald mclean eastern video petitioner for federal employment_tax purposes during each of the four quarters of the calendar_year and petitioner is not entitled to relief from federal employment_taxes as provided by sec_530 of the revenue act of publaw_95_600 92_stat_2885 sec_530 as amended the reference here to employment_taxes is to social_security_taxes under the federal_insurance_contributions_act fica and unemployment taxes under the federal_unemployment_tax_act futa the parties have stipulated that the amount of futa taxes due if the video workers were employees is dollar_figure the issues remaining for decision are whether the video workers were common_law employees of petitioner during the four quarters of and if so whether petitioner is entitled to sec_530 relief from employment_taxes due on wages paid to the video workers - - the stipulated facts and exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed ronald mclean mr mclean doing business as ronald mclean eastern video resided in college park georgia findings_of_fact during the quarters at issue petitioner operated as a sole_proprietorship it operated as a video rental business from two locations in atlanta georgia under the name eastern video mr mclean filed a form_1040 individual_income_tax_return for with a schedule c profit or loss from business in the name of fastern video among the items of expense reported on the schedule were contractual services of dollar_figure and wages of dollar_figure petitioner issued forms w-2 wage and tax statement to three employees gladys favors angela trimble and kevin walton for wages totaling dollar_figure for it also filed form sec_941 employer’s quarterly federal tax_return and a form_940 employer’s annual federal unemployment futa_tax return for reporting total wages of dollar_figure paid to employees the three full-time employees performed whatever duties were required to run the video stores the stipulation of facts refers to her as angela halsey while the associated exhibit refers to her as angela trimble there is no explanation in the record for this discrepancy - the video workers were paid a total of dollar_figure in income reported by forms 1099-misc miscellaneous income the video workers were hired with the intent of having them collect late fees and overdue video tapes lates because of bad experiences in the past with hiring outsiders to collect his lates mr mclean decided to hire some people and they’re going to have to work within my operation two of the six video workers however tracey ashley and eric patrick were teenagers who according to mr mclean were employees that worked after school about hours a week at the north moreland location they were not experienced at collection work and there was not much collection work being done at their location their primary function was not collection mr mclean concedes that with respect to the teenagers to be perfectly honest with you they could be considered as w-2 employees the other four video workers were at the metropolitan location it is a free-standing building they worked in the back where there were three desks a storage area a refrigerator and a water cooler there were phones and computers they got the names of lates and nonreturns from printouts made by petitioner all the video workers including those at the metropolitan location were paid_by the hour they used petitioner’s pencils calculators and telephones and all - - the expenses of collection were paid_by petitioner the six video workers had to sign in and out of work and had assigned places of work in mr mclean’s office and at the warehouse area for videos that were up to days late the regular employees would call the customer after that the four collection people would call if there was no response they would send a letter by regular mail petitioner paid the postage if after the first mailing there was no answer the video workers sent a letter by certified mail the postage for which was also paid_by petitioner if there was no response days after the mailing of the certified letter the video workers would prepare an application_for a warrant mr mclean reviewed the applications which he was required to sign then his administrative assistant would file them tracey ashley one of the two teenagers who worked at the north moreland location occasionally worked at mr mclean’s location with one of three video workers from the metropolitan location felicia reed eric patrick or andrea trent when one of them worked at north moreland he did the same kind of work tracey ashley was doing regular video store employee duties according to mr mclean he treated the video workers as contractors because they could have used their own supplies utilities or whatever he added the pay for his three employees - - with that of the six video workers to come up with the deduction for wages on schedule c totaling dollar_figure the amount deducted for contractual services pertained to amounts expended for both inside and outside maintenance at the two video store locations opinion employees or independent contractors chapter of subtitle c of the internal_revenue_code imposes the fica tax and chapter of subtitle c of the internal_revenue_code imposes the futa_tax as applicable to the facts of this case the term employee means an individual who under the usual common_law rules has the status of employee sec_3121 sec_3306 503_us_318 weber v commissioner 103_tc_378 affd 60_f3d_1104 4th cir 89_tc_225 affd 862_f2d_751 9th cir factors that are relevant in determining the substance of an employment relationship include the degree of control exercised by the principal over the details of the work the worker’s investment in the facilities used in his or her work the worker’s opportunity for profit or loss the permanency of the relationship between the parties the because sec_7491 applies only to taxes imposed by subtit a or b it is inapplicable in this case principal’s right of discharge whether the work performed is an integral part of the principal’s regular business the relationship the parties believe they are creating and the provision if any of employee_benefits nlrb v united ins co of am 390_us_254 331_us_704 weber v commissioner supra pincite profl executive leasing inc v commissioner supra pincite see also sec_31 d -- c employment_tax regs setting forth criteria for identifying employees under the common_law rules no single factor is dispositive the court must assess and weigh all incidents of the relationship nationwide mut ins co v darden supra pincite the factors are not weighted equally they are weighted according to their significance in the particular case 980_f2d_857 2d cir while all of the above factors are important the right-to- control test is the master test in determining the nature of a working relationship 92_tc_351 affd 907_f2d_1173 d c cir both the control exercised by the alleged employer and the degree to which the alleged employer may intervene to impose control must be examined 135_f2d_715 2d cir detorres v commissioner tcmemo_1993_161 n o actual control need be exercised as long as the employer has the right to control profl executive leasing inc v commissioner f 2d pincite in order for an employer to retain the requisite control_over the details of an employee’s work the employer need not direct each step taken by the employee profl executive leasing inc v commissioner t c pincite gierek v commissioner tcmemo_1993_642 the employer need not set the employee’s hours or supervise every detail of the work environment to control the employee 823_f2d_337 9th cir two of the six video workers at issue here tracey ashley and eric patrick were teenagers who mr mclean testified were employees that worked after school about hours a week at the north moreland location they were paid_by the hour and performed assigned duties at the place of business they were required to sign into and out from work mr mclean testified that their primary function was not collection and admitted that to be perfectly honest with you they could be considered as w-2 employees on the basis of the evidence in the record the court concludes that tracey ashley and eric patrick were employees of petitioner the other four video workers worked mainly at the metropolitan location and primarily attempted to collect petitioner’s lates they too were paid_by the hour and were required to sign in and out petitioner supplied all the --- - necessary supplies and equipment for them to perform their duties it paid all expenses required to attempt to collect the lates mr mclean and to some extent his administrative assistant supervised the process within which the video workers worked at least three of the four were sometimes assigned to work at the north moreland location to perform duties the same as or similar to those of the two teenage employees working at that location in this case the court is satisfied that petitioner had the authority to exercise and did exercise sufficient control_over the video workers to support a finding that it was their employer see potter v commissioner tcmemo_1994_356 bilenas v commissioner tcmemo_1983_661 in addition the court finds that the investment in the facilities used in the work of the video workers was made by petitioner the pay of the video workers was fixed thereby eliminating the opportunity for profit or loss the work performed by the video workers was an integral part of petitioner’s business and petitioner considered them employees indeed mr mclean’s testimony indicates that because of his prior bad experiences with outside contractors his intent at the outset was to hire employees to collect the lates -- - accordingly the court finds that respondent’s determination as to the classification of the workers in this case as employees is correct sec_530 even though the court finds that the six video workers were employees sec_530 will relieve petitioner of employment_tax liability for the periods at issue if the requirements of sec_530 are satisfied if petitioner shows that it has not treated any of the video workers as employees for any period and has filed all federal tax returns including information returns with respect to each video worker on a basis consistent with its treatment of each individual as not being an employee petitioner will prevail unless it has no reasonable basis for not treating the video workers as employees revenue act of sec_530 92_stat_2885 respondent concedes that forms were timely filed for each of the six video workers under consideration he alleges however that the video workers performed substantially the same duties as petitioner’s three full-time employees yet were treated as independent contractors he also alleges that petitioner has failed to establish that it had any reasonable basis to treat the video workers as independent contractors the court will consider first whether petitioner has failed to establish that it had any reasonable basis to treat the six workers as independent contractors the statute provides a safe_harbor so that a taxpayer shall be treated as having a reasonable basis for not treating an individual as an employee if he reasonably relied on judicial precedent published rulings or technical_advice or a letter_ruling issued to the taxpayer past audit treatment of positions similar to those held by the individuals under consideration or longstanding practice in the taxpayer’s industry a taxpayer who fails to dock his ship in any of the safe harbors is still entitled to relief if he can demonstrate in some other manner a reasonable basis for not treating the individual as an employee 117_tc_141 affd sub nom yeagle drywall co v commissioner fed appx 3d cir date although the reasonable basis requirement is to be construed liberally in favor of taxpayers it is nevertheless petitioner’s burden to show by a preponderance_of_the_evidence that it had a reasonable basis for its treatment of the video workers as other than employees springfield v united_states sec_530 places the burden_of_proof on the secretary with respect to certain aspects of sec_530 sec_530 applies to disputes involving periods after date and therefore does not apply to this case small_business continued 88_f3d_750 9th cir 77_f3d_236 8th cir the only reasons articulated by mr mclean for treating the six video workers as independent contractors are that they could have used their own supplies utilities or whatever and that he had an agreement with them that they would pay their own taxes in the context of the facts of this case these are not reasonable bases on which to rely for the treatment of the video workers as independent contractors instead of employees hence petitioner is not entitled to relief under sec_530 and the court need not address respondent’s allegation that the video workers performed substantially the same duties as petitioner’s three full-time employees amount of taxes due because we have concluded that the six video workers were petitioner’s employees it follows that petitioner is liable for fica and withholding taxes of dollar_figure and futa taxes of dollar_figure for decision will be entered for respondent continued job protection act of publaw_104_188 sec b 110_stat_1767


department of the treasury internal_revenue_service washington d c date nov lke contact person identification_number telephone number t b4 employer_identification_number legend b c d e f g h j decedent's trust survivor's trust dear taxpayer k l m n oo aa we have considered your ruling_request along with supplemental correspondence concerning the application of sec_4941 of the internal_revenue_code specifically the estate_or_trust administration exception from self-dealing under sec_53 d -1 b of the foundation and similar excise_tax regulations you are the survivor's trust as described in the following facts facts b and c created d upon c’s death d divided into two parts each part administered as a separate trust one trust became known as survivor's trust and the other trust became known as decedent's trust and amended and restated survivor's trust in its entirety both survivor's trust st and decedent's trust dt b exercised limited_power_of_appointment over decedent's trust f and h were appointed trustees of dt was set up to benefit several of b’s children and grandchildren including f st was set up to distribute assets to private individuals including h with the residual used to set upa charitable_lead_unitrust ‘clut and a charitable_lead_annuity_trust clat’ these are nonexempt charitable trusts described in sec_4947 of the code and are subject_to some of the excise_taxes imposed on private_foundations under chapter including sec_4941 of the code upon b's death and after several specific gifts to private individuals the residue of the st has been divided between the clut and the clat the charitable_beneficiary of both the clut and the clat is g with f and h serving as trustees b is a substantial_contributor of g through clut and clat the remainder beneficiaries of the clut and clat are b's then living descendants g was exempt from tax under sec_501 of the code and classified as a private_foundation under sec_509 g has split into two separate foundations j and k both new foundations are exempt from taxes under sec_501 pursuant to an agreement by the trustees distributions from clut and clat will be made to j and to k l a limited fiability company llc was created after b's death at the time of b's death all of l's property was held in m at that time m was owned fifty percent st and fifty percent by dt because l was funded exclusively with the property from m the ownership interests of st and dt were the same after b's death another property was acquired bya new llc n this was funded with assets from l and is owned by st and dt and in the same proportion as l the managing member of l and n is currently f small interests in l and n were distributed to a marital trust that was created under st under the terms of st the remaining interests in l and n owned by st will have to be distributed either to the clut or the clat l currently owns many properties some of which are subject_to various mortgages n currently owns one property that is also subject_to a mortgage in addition it is contemplated that new properties may be acquired to enhance or improve the overall economic return of l and n alternatively properties may be disposed of that are not performing at acceptable levels of economic return the acquisition of such new properties may require that debt be used as part of the purchase consideration l and n are flow through entities that are taxed as partnerships thus the unrelated_debt-financed_income will flow through to st and dt ifl and n interests were distributed to the clut or clat income generated by the mortgaged property would likely be characterized as unrelated_business_taxable_income within the meaning of sec_512 and sec_514 of the code in summary f is a trustee of st trustee and beneficiary of dt a trustee of g the beneficiary foundation of the clut and clat and is the managing member of l and n his a trustee and beneficiary of st a trustee of dt and a trustee of g the beneficiary foundation of clut and clat split-interest_trusts such as clut and clat may be subject_to various excise_taxes such as those imposed by sec_4941 taxes on self-dealing and sec_4943 taxes on excess_business_holdings it is foreseeable in the near future that there could be a need to redeem or have the other members of l and n purchase the interest that could be distributed to clut or clat at such time as redemptions or purchases are necessary or appropriate such a transaction may constitute acts of self-dealing the trustees of st propose to sell its remaining interests in l and n to the trustees of dt under the following terms the sale price will be at the appraised fair_market_value the trustees of dt will issue a promissory note to the trustees of st for the sales_price and annual interest-only interest payments will be paid_by dt to st at the rate of aa percent the principal sum shall be due on the day after distribution to the remainder beneficiaries the trustees have made the following representations first st's instrument gives the trustees of st the power to sell its interest in l and n and dt’s instrument gives the trustees of dt the power to buy st’s interest in l and n second o hereinafter court has approved this transaction between dt and st subject_to a favorable response to this ruling_request third the sale of st’s interest in l and n will occur during the administration period before the trust is considered terminated for federal_income_tax purposes fourth the trustees have obtained appraisals for the fair_market_value of st’s interest in l and n and an appraisal of the promissory note to be used as consideration in this transaction the appraised fair_market_value of the promissory note is equal or slightly higher than the appraised fair_market_value of st’s interests in l and n and fifth st will constructively receive an amount which equals or exceeds the fair_market_value of st’s interest in l and n and the promissory note constructively received by st will be at least as liquid as st’s current interests in l and n the promissory note will be negotiable transferable and secured through a pledge of the l and n transfer the promissory note no other party’s consent is needed for such transfer if the seller desires to interests additionally the trustees of st represent that l and n’s operating agreements impose limitations on the transferability of a member's interest as a member of l and n st has no right to demand distributions or to withdraw from l and n furthermore there is no ready market in which to sell st’s interests in l and n even if st could find a potential purchaser f as manager of l and n has sole discretion as to whether to admit the purchaser as a new member without approval from the manager the purchaser would merely receive an assignee interest which would greatly lower the value of the interest sold and the likelihood of finding a potential purchaser law sec_4947 of the code provides that sec_4941 shall apply to charitable lead trusts as if such trusts were private_foundations sec_4941 of the code imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code imposes an additional tax payable by a foundation_manager who knowingly participated in an act of self-dealing between a disqualified_person and a private_foundation sec_4946 of the code defines a disqualified_person as including a a substantial_contributor to the foundation ie a person who contributes or bequeaths more than dollar_figure to such foundation if such amount is greater than of the total contributions or bequests received by the foundation in the taxable_year such bequest is received see code sec_507 sec_4946 and sec_4946 d a family_member of any substantial_contributor including such contributor's spouse children etc see code sec_4946 and sec_4946 e a corporation of which persons who are substantial contributors or family members of such contributors own more than of the total combined voting power see code sec_4946 or g a_trust or estate of which persons who are substantial contributors or family members of such contributors hold more than of the beneficial interests see code sec_4946 sec_4941 d of the code provides in part that the term self-dealing means any direct or indirect a sale_or_exchange or leasing of property between a private_foundation and a disqualified_person b lending of money or other extension of credit between a private_foundation and a disqualified_person and e transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_53 d -1 b of the foundation and similar excise_taxes regulations provides that the term indirect self-dealing shall not include a transaction with respect to a private foundation's interest or expectancy in property held by and estate or a revocable_trust regardless of when title to the property vests under local law if i ii iii iv v the administrator or executor of an estate or trustee of a revocable_trust either a possesses a power of sale with respect to the property b has the power to reallocate the property to another beneficiary or c is required to sell the property under the terms of any option subject_to which the property was acquired by the estate or revocable_trust such transaction is approved by the probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation such transaction occurs before the estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641_b_-3 of this chapter or in the case of a revocable_trust before it is considered subject_to sec_4947 the estate_or_trust receives an amount which equals or exceeds the fair_market_value of the foundation's interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and with respect to transactions occurring after date the transaction either a resuits in the foundation receiving an interest or expectancy at least as liquid as the one it gave up b results in the foundation receiving an asset related to the active carrying c out of its exempt purposes or is required under the terms of any option which is binding on the estate_or_trust sec_53 d -2 c of the regulations states generally that the lending of money or other extension of credit between a private_foundation and a disqualified_person shall constitute an act of self-dealing thus for example an act of self-dealing occurs where a third party purchases property and assumes a mortgage the mortgagee of which is a private_foundation and subsequently the third party transfers the property to a disqualified_person who either assumes liability under the mortgage or takes the property subject_to the mortgage similarly except in the case of the receipt and holding of a note pursuant to a transaction described in sec_53_4941_d_-1 an act of self-dealing occurs where a note the obligor of which is a disqualified_person is transferred by a third party to a private_foundation which becomes the creditor under the note analysis a sale of l and n restricted by the prohibitions against acts of self-dealing between a private_foundation and a disqualified_person interests between the clut and clat and decedent's trust is with respect to the clut and the clat dt and st would qualify as disqualified persons under sec_4946 of the code the decedent in this case b would be considered a substantial_contributor to g and its successors j and k st and dt would also be considered disqualified persons because the remainder beneficial interests are for the benefit of children of the substantial_contributor furthermore since l and n were funded by m owned by dt and st they are also disqualified persons fotlowing the requirements of sec_53 d -1 b of the regulations you have represented that the trustees involved in the transaction possess a power of sale and purchase with respect to the property the transaction has been approved by an appropriate court having jurisdiction over the trust the sale of the interests in l and n will occur during the administration period before the trust is considered terminated for federal_income_tax purposes you have represented that the trustees have obtained fair_market_value appraisals for both the l and n interests and the promissory note to be used as consideration in this transaction you have represented that the note will be negotiable transferable and secured through a pledge of l and n interests you have represented that the note will be an interest as liquid as the interests in l and n exchanged rulings based on your representations we rule as follows the purchase by dt of l and n interests to be distributed to the clut and the clat will not constitute an act of indirect self-dealing under sec_4941 d by the trustees of dt and st the clut and clat will be not subject_to excise_taxes under sec_4941 with respect to the proposed transaction the holding of dt note by the clut and clat pursuant to the proposed purchase agreement will not constitute an act of indirect self-dealing under sec_4941 by the trustees of dt and st because this ruling could help resolve future questions about your federal_income_tax status you should keep it in your permanent records this ruling is directed only to the organizations and trustees that requested it sec_6110 of the code provides that it may not be used or cited as precedent this ruling is limited to the applicability of the provisions of sec_4941 and sec_4946 of the code and does not purport to rule on any facts that were not represented in the ruling_request as supplemented or on any changes of those facts also in this ruling we have not determined whether the methodology you or your independent appraisers are using to determine fair_market_value is proper if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely signed gerald v sack gerald v sack manager exempt_organizations technical group