tment of the treasur oee nte ral revenue seevice washington d c y tax exempt ando government entities division date feb i i unfair tires liek sol03- 0l03-3o oo yf4 of vey oy 48ul of o0 oo v4 roy employer_identification_number contact person identification_number telephone number - i a - n o m m z z o o x dear sir or madam we have considered the ruling requests dated date and date submitted on behalf of m a private_foundation its three independent directors d e and f the independent directors and c the fourth director these parties request rulings under sec_501 sec_4941 and sec_4945 of the internal_revenue_code in connection with the proposed settlement the settlement of a lawsuit brought against the estate of b the estate by c _ facts m was formed in exempt from federal_income_tax as an organization described in sec_501 of the code and is also classified as a private_foundation under sec_509 m carries out its exempt purposes by making grants to public_charities under the nonprofit corporation statute of the state of n m is the independent directors are all residents of n and were business colleagues and friends of b the founder of m who died in tn b executed his last will and testament the will after b died the will was admitted to probate in a court of the state of n the probate_court consistent with b's direction the probate_court appointed a certain bank as the personal representative and executor of the estate the personal representative in the will b made specific bequests to numerous individuals ranging in amount from dollar_figure x to dollar_figurex c received a bequest of dollar_figurex and no other_property b left the residue of his estate estimated to total over dollar_figurex to m aside from being b's long-time friend and employee c served for many years as an employee and as the assistant secretary and assistant treasurer of o another nonoperating private_foundation which was established by b's parents and and- served as directors of o for many years in c timely filed a claim and accompanying complaint the claim against the estate in the probate_court alleging among other things that b had breached a promise to provide retirement benefits to her through his will and that b had failed to compensate her for services which she rendered to him during his lifetime damages of dollar_figurex from the estate plus punitive and treble_damages interest attomeys’ fees and costs a few days later the personal representative denied c's claim in total and in in the claim c seeks compensatory the estate filed an answer in the probate_court denying liability for the claim after extended negotiations conducted with the assistance of a neutral mediator c and the estate have executed a conditional settlement agreement the settlement agreement’ the estate and m through the independent directors have carefully evaluated and considered the assertions by c and evidence submitted during discovery in support of her claim-and have determined that the amount that the estate proposes to pay c in connection with the settlement is fair adequate and reasonable the grounds thereof are explained below a neutral mediator has stated in his report to the probate_court that in his opinion the settlement is a fair and reasonable compromise of a genuinely disputed action the mediator devotes nearly one-third of his legal practice to the mediation and compromise of lawsuits serving as mediator in over big_number cases he has never acted as counsel for the estate c m or any of the independent directors for over years c provided personal and business services to both b-ahd o in b hired c to serve as financial assistant and bookkeeper to manage his business investments and affairs over the years c’s duties steadily increased she served as program and office manager assistant secretary and assistant treasurer for o she managed the organization's day-to-day operations consulted with its board and other officers and provided oversight with respect to investment funds after over years_of_service c retired from o in tn these capacities aside from the above business functions c performed a variety of personal services for b she managed his household and personal finances this included the hiring and supervision of household employees- including housekeepers cooks and gardeners- and the payment of b's bills further when b became ill which was frequent during his final years c would employ and assist b’s home nursing staff she continued to serve b's business and personal needs even after her retirement from o during several periods when b was severely ill over the years c resided at his home to be available hours a day seven days a week this included b's final illness from through in addition c has served as a director and as the secretary of m since in these capacities she has conducted most of the day-to-day work of m including evaluating grant proposals communicating with applicants and grantees balancing the checkbook and maintaining corporate records she did not receive any compensation from m for these services although c continues to serve as an m director and as its secretary she has not participated in any of m's discussions of the lawsuit or of the settlement and she has not participated in m's decision to consent to the settlement over the years that c worked for b and o her annual salary gradually increased to the point where shortly before she retired from o at the end of approximately dollar_figurex at that time c received certain health benefits which were paid for partially by o and partially by b premiums after c retired from o assumed responsibility for providing all of her health insurance benefits and continued to pay for her long-term care insurance b also paid the entire cost of c's long-term care insurance her annual salary was during her employment c received small gifts from b from time to time along with his other employees the total value of such gifts did not exceed dollar_figurex twice in the purchased used cars from b at prices that the parties determined to be fair and reasonable because of her unique familiarity with b's business affairs particularly his investments in oil and mineral_interests the personal representative hired c to assist in the administration of the estate after b's death for these services the estate is paying her the annual equivalent of dollar_figurex which was roughly her annual salary from b at the time of his death over the course of her fong employment b and c developed a close personal relationship c accompanied b to numerous civic social and charitable functions over the years the two also traveled together and spent home of b's family during these vacations c continued to perform her professional responsibilities as financial assistant and bookkeeper and she also managed the daily activities of the family household c asserts that in attorney to‘prepare a prenuptial agreement although they did not marry the personal relationship between c and b remained close and c continued to perform a broad variety of personal services for b accepted and relied upon b's representations will in her claim c has alleged that because of this relationship she that he would provide for her retirement in his b proposed marriage to her and directed his annually at the summer c expected that her total retirement package would include a stipend equal to her annual salary less social_security payments as well as continued health benefits according to the claim and supporting materials b made numerous personal assurances to c that he would provide for her retirement through his will over the years c retained a financial planner who met with her and with b to discuss her retirement among other issues b met with the financial planner and c on two separate occasions and assured him that c need not concern herself with a separate retirement_plan because b had personally established a fund that upon his death would supply sufficient funds to provide c income for the rest of her life accordingly c did not plan or establish any individual_retirement_plan for herself relying upon b's representations through the years in recognition of c's longstanding service and dedication to o its board_of directors approved a partial retirement benefit for her in her total salary upon her retirement o agreed to pay c a monthly stipend of dollar_figurex or approximately dollar_figure annually that stipend has been paid since her retirement from o at the end of according to her claim c did not question this arrangement or seek a greater retirement benefit because she understood that b personally would substantially supplement the monthly payment from o with a retirement fund that he had implemented or planned to implement on her behalf that represented a relatively small portion of since c filed her claim with the probate_court the parties have engaged in discovery and extensive arm's length negotiations regarding the lawsuit both the personal representative and m's independent directors have carefully evaluated the merits of c's allegations and the evidence she has supplied in support thereof ultimately to avoid the expense delay and uncertainty of protracted litigation the possibility of distracting publicity about m and b's personal life and the potential for a significant adverse judgment the estate and m have determined that it is in m’s best interests for the estate to compromise and settle the lawsuit accordingly on mediator the parties reached the settlement which has been memorialized in the settlement agreement this agreement includes the following key provisions under the direction and guidance of a neutral i ii i - the estate will pay to c a total net amount of dollar_figurex net of her attorneys’ fees which the estate will pay subject_to a cap of dollar_figurex and net of taxes which the estate will calculate and pay in addition to the dollar_figurex as of the effective date of the settlement agreement c will provide a full and complete release in favor of b the estate the personal representative m and the independent directors and c's claim will be dismissed with prejudice the settlement is conditioned on the approval of the probate_court vhich was obtained on and a favorable ruling from the irs that the settlement will not affect m’s exempt status under code section c result in self-dealing under sec_4941 or constitute a taxable_expenditure under sec_4945 independent of the settlement agreement the personal representative has decided to continue to employ c through c will continue on a part-time basis at a present rate of compensation reduced_rate of pay until the personal representative has determined that c’s continued services are necessary for the administration and winding up of 8's various financial and business interests in particular c has extensive experience with b's oil and mineral holdings which span several states she is also familiar with b’s other real_estate as a full-time_employee of the estate at her -5- interests and loans made by b that are secured_by real_estate interests in the western united_states the personal representative presently is attempting to collect on these debts or attach new properties as security and c’s assistance has been and will remain vital in these endeavors in addition b's business office remains open and c has continued to manage certain interests such as properties b had leased to various tenants on the estate’s behalf in a meeting on the independent directors of m unanimously agreed that the settlement is fair and reasonable and that the settlement is in the best interests of m c did not attend or participate in the meeting the independent directors have been guided in the evaluation of the settlement by m's legal counsel who has served as attorney for both m and the estate and has recommended that the estate and m agree to the settlement further m and the estate have taken into account the guidance of the neutral mediator who also recommended that all of the parties agree to the settlement rulings requested m and the independent directors request the following rulings the settlement and its implementation will not adversely affect m's exemption from federal_income_tax under sec_501 of the code the settlement and its implementation will not constitute self-dealing by m under sec_4941 of the code the settlement and its implementation will not constitute self-dealing by m that would result in personal liability to the independent directors under sec_4941 of the code the settlement and its implementation will not constitute taxable_expenditures by m under sec_4945 of the code and the settlement and its implementation will not constitute taxable_expenditures by m that would result in personal liability to the independent directors under sec_4945 of the code law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational scientific or other specified exempt purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual and which does not engage in proscribed legislative or political activities sec_1_501_c_3_-1 of the income_tax regulations states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of the purposes specified in code section c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 defines the words private_shareholder_or_individual in code sec_501 as referring to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes under code sec_501 unless it serves a public rather a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_69_383 1969_2_cb_113 holds that the sec_501 tax exempt status of a hospital will not be jeopardized where after arm’s length negotiations it enters into an agreement with a hospital-based radiologist to compensate him on the basis of a fixed percentage of the department's income the rationale for the ruling is as follows the parties had negotiated the agreement on an arm’s length basis the radiologist had no control_over the hospital itself the amount of compensation was reasonable in terms of the responsibilities and activities assumed and further the amount was not excessive when compared to the amounts received by other radiologists in comparable circumstances sec_4941 and sec_4941 of the code impose excise_taxes upon any act of self-dealing between a private_foundation and any of its disqualified persons the taxes are to be paid_by any disqualified_person other than a foundation_manager acting only as such who participates in the act of self-dealing sec_4941 and sec_4941 of the code impose excise_taxes on a foundation_manager who participates in an act of self-dealing between the private_foundation and a disqualified_person where the foundation_manager knows that such act is an act of self-dealing under sec_4941 sec_4946 of the code states that the term disqualified_person includes a foundation_manager within the meaning of subsection b sec_4946 provides that the term foundation_manager means with respect to a private_foundation an officer director or trustee of the foundation or an individual having similar powers or responsibilities sec_4941 d d of the code provides that the term self-dealing means any direct or indirect payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person sec_4941 provides that self-dealing also means the transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_53_4941_d_-1 of the foundation and similar excise_taxes regulations provides that for purposes of code sec_4941 the term self-dealing includes any direct or indirect transaction described in sec_53_4941_d_-1 of the regulations sec_53 d -1 b of the 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 whether or not encumbered held by an estate or revocable_trust including a_trust - which has become irrevocable on a grantor’s death regardless of when title to the property vests under local law if - the administrator or executor of an estate or trustee of a revocable_trust either- i iii iv v 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 code 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 aprit the transaction either a results 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 out of its exempt purposes or c is required under the terms of any option which is binding on the estate_or_trust - sec_4945 and sec_4945 of the code impose excise_taxes to be paid_by a private_foundation that makes a taxable_expenditure as defined in sec_4945 sec_4945 and sec_4945 of the code impose excise_taxes to be paid bya foundation_manager who agrees to the foundation's making of an expenditure knowing that it is a taxable_expenditure unless such agreement is not willful and is due to reasonable_cause sec_4945 of the code defines the term taxable_expenditure to mean any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 the latter section states purposes that substantially coincide with those stated in sec_501 sec_53_4945-6 of the regulations provides that expenditures to acquire investments and reasonable expenses thereof entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 ordinarily will not be treated as taxable_expenditures under code sec_4945 analysis the settlement helps ensure m's continued operation in furtherance of exempt purposes under sec_501 of the code as represented by m with respect to the investments described in sec_53_4945-6 of the regulations above as with the compensation arrangement at issue in revrul_69_383 the settlement has been reached after arm's length negotiations involving c and the personal representative of the estate although c and officer of m she has recused herself from all discussions relating to the lawsuit and the settlement by m and has not participated in m’s approval of the settlement the personal representative m through the independent directors the neutral mediator and the probate_court have all concluded that the settlement is fair and reasonable in light of the potential for an adverse judgment the likelihood of extended and expensive litigation and possible harm to the charitable mission reputation and purposes of m also the amount of the settlement represents a very insignificant sum in comparison to the amount that the estate will still be able to distribute to m therefore it is clear that the settlement will not result in the inurement of m's net_earnings to the benefit of c is a director we also note that the settlement will allow the estate to convey the residue of b’s assets to m more quickly and will in turn enable m to make significant grants in furtherance of its charitable purposes and to perform other exempt_activities the foregoing demonstrates that the settlement expedites the carrying out of m's exempt purposes and as such should not jeopardize m’s tax exempt status under sec_501 of the code the estate administration exception to the self-dealing rules is described in sec_53 d -1 b of the regulations and includes five specific requirements inasmuch as the settlement satisfies all five requirements based on m's representations neither m nor any of the independent directors will engage in an act of self-dealing under sec_4941 of the code by entering into the settlement and consenting to its implementation by the estate as a director and officer of m c is a foundation_manager of m and is therefore a disqualified_person sec_4941 of the cade imposes taxes upon any act of self-dealing between a private_foundation and any of its disqualified persons sec_4941 defines the term self-dealing to include any direct or indirect sale_or_exchange or leasing of property between a private_foundation and a disqualified_person or any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation neither the code nor regulations specifically define the term indirect self-dealing however the case law and other authorities establish that an estate’s assets that will pass to a private_foundation may be treated as assets of the foundation for purposes of sec_4941 therefore any sale exchange or other transfer of such assets to a disqualified_person may constitute indirect self-dealing see 87_tc_1016 and 572_fsupp_9 because m holds a residuary interest in the assets of the estate we must review the settlement herein of c's lawsuit against the estate to ensure that it does not contravene the self-dealing provisions of the code pursuant to the estate administration exception of sec_53 d -1 b of the regulations a transaction with respect to a private foundation's interest or expectancy in property held by an estate does not constitute indirect self-dealing if five specific conditions are met in the rockefeller and reis cases cited above the estate administration exception did not apply because one or more of the requisite conditions had not been met in contrast based on m's representations the settlement herein satisfies each of the five conditions as explained below accordingly its implementation will not result in indirect self-dealing under sec_4941 of the code the executor of the estate has the power to reallocate the property of the estate to another beneficiary the executor or personal representative herein of the estate possesses the power under item i paragraph d of b's will to compromise settle and pay or receive payment for any claim for or against the estate without obtaining court approval moreover the relevant n statute grants the personal representative of an unsupervised estate the authority to satisfy and settle claims by virtue of the personal representative's authority to settle all claims against the estate it has the power to reallocate the property of the estate to another beneficiary thereby satisfying the second of the three alternative tests of sec_53 d -1 b i of the regulations the settlement has been approved by the probate_court with jurisdiction over the estate on the personal representative and c jointly filed a petition with the probate_court seeking approval of the terms of the settlement notice of this petition was provided to the attorney_general of n the attorney_general did not object to the petition on the probate_court held a hearing regarding the petition which was attended by the personal representative and c probate_court approved the terms of the settlement accordingly the requirement of sec_53 d -1 b ii of the regulations has been met in an order dated _ the the settlement will occur before the estate is considered terminated for federal_income_tax purposes the personal representative has not yet distributed the estate’s assets and no tax clearances have been received accordingly the estate has not yet been terminated for federal estate_tax purposes and the requirement of sec_53 d -1 b iii of the regulations is satisfied the estate is receiving an amount which equals or exceeds the fair_market_value of m's interest or expectancy in such property at the time of the transaction in her lawsuit c has sought over dollar_figurex in damages fees and costs from the estate the estate and m through the independent directors have evaluated her claims carefully and thoroughly aside from analyzing the merits of the action evidence furnished by c and independent investigation and interviews by the estate and its attorneys the estate and m have considered the exorbitant costs substantial delay and overall uncertainty of protracted litigation of the lawsuit the risk of adverse publicity for m and for b personally from such litigation and the potential for a significant adverse judgment that would diminish markedly the assets that m would ultimately receive from the estate after careful consideration of all these factors and arm’s length negotiations with c the estate has approved the settlement similarly m’s independent directors have unanimously concluded that the settlement is in m’s best interests and that the amount to be received by c under the settlement is equal to the fair_market_value of her claims against the estate’s assets the attorney serving as counsel for both m and the estate has assisted in the negotiation of the settlement and based upon the information above has recommended that m and the estate agree to the settlement further the parties have taken their dispute to mediation and the neutral mediator has recommended that the parties agree to the settlement the recommendations of the mediator and counsel as buttressed by the approval of the probate_court reflect their views that the settlement is in the best interests of the estate and m this leads to the conclusion that the fair_market_value of m's interest in the estate following the settlement is at least as great as that it would receive absent this resolution of c’s lawsuit as required by sec_53 d -1 b iv of the regulations the settlement wil result in the foundation receiving an interest at least as liquid as the one it gave up and will result in m receiving an asset related to the active carrying out of its exempt purposes upon entering into the settiement m will receive an interest which is more liquid than until the settlement the possibility that c would prevail on her claim has what it is giving up created a risk that m's interests in the residue of the estate could be reduced significantly accordingly the precise value of m's interest in the estate has been uncertain if the settlement is approved by the service then m will finally be free to receive the entire residue of the estate approximately dollar_figurex without the risk of substantial loss in litigation this interest will be more liquid than m's present_interest because the assets will be unencumbered by c’s claim and free of the potential for reduction by the costs of litigation or through an adverse judgment inasmuch as the assets that b bequeathed to m have to date been held by the estate m has not been able to use those assets to further its exempt purposes service approval of the settlement will enable it to be finalized and m will receive funds which it can use to carry out its exempt purposes consequently the settlement satisfies the first of the three alternative tests of sec_53_4941_d_-1 of the regulations based on the foregoing analysis the settlement satisfies the requirements of the estate administration exception set forth in sec_53 d -1 b of the regulations and therefore does not constitute an act of self-dealing under sec_4941 of the code sec_4941 of the code imposes taxes upon a foundation_manager of a private_foundation who knowingly participates in an act of self-dealing between the foundation and a disqualified_person as directors of m the independent directors are foundation managers as that term is defined by sec_4946 for the reasons stated above based on m's representations the settlement satisfies the requirements of the estate administration exception of sec_53 d -1 b of the regulations and thus does not constitute an act of self-dealing accordingly the independent directors have not participated in any act of self- dealing by m and are not subject_to taxation under sec_4941 sec_4945 of the code imposes a tax upon any taxable_expenditure which is defined under sec_4945 to mean any amount_paid or incurred by a private_foundation for any of several identified purposes m has not yet received any assets from the estate and the settlement amount will be paid_by the estate and not by m in light of the fact that the settlement has been reached while the estate’s assets are held by the personal representative m is not liable for any taxable_expenditure under sec_4945 sec_4945 of the code defines the term taxable_expenditure to mean an amount_paid or incurred by a private_foundation for other than the exempt purposes set forth in sec_170 sec_53_4945-6 of the regulations provide that expenditures and related expenses to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 ordinarily will not be treated as taxable_expenditures under sec_4945 d the exact disposition of the residue of the estate is presently in dispute because of c’s claim in order to resolve that dispute the personal representative has agreed to the settlement as a result of the settlement the estate will avoid incurring substantial additional attorneys’ fees and court costs but more importantly the settlement will allow the residue of the estate to pass to m and will enable m to obtain income and funds which will be used to make grants for charitable purposes as described in sec_170 accordingly the participation by the estate and m in the settlement should be deemed a cost of acquiring income and assets to be used in furtherance of m’s exempt purposes and therefore not a taxable_expenditure sec_4945 of the code imposes excise_taxes to be paid_by a foundation_manager who knowingly agrees to the foundation's making of a taxable_expenditure based on m’s representations that the settlement costs including estate legal fees are fair and reasonable and for the reasons set forth above the settlement is not a taxable_expenditure by m consequently the independent directors have not agreed to any taxable_expenditure by m and are not subject_to taxation under sec_4945 rulings based on m's representations and the applicable law we are able to rule as follows the settlement and its implementation will not adversely affect m’s exemption from federal_income_tax under sec_501 of the code the settlement and its implementation will not constitute self-dealing under sec_4941 of the code the settlement and its implementation will not constitute self-dealing by m that would result in personal liability to the independent directors under sec_4941 of the code the settlement and its implementation will not constitute taxable_expenditures by m under sec_4945 of the code the settlement and its implementation will not constitute taxable_expenditures by m that would result in personal liability to the independent directors under sec_4945 of the code any changes that may have a bearing upon m's exempt status should be reported to the ohio tax exempt and government entities te_ge customer service office the mailing address is internal_revenue_service te_ge customer service p o box cincinnati oh the telephone number there is a toll free number this ruling is limited to the applicability of the provisions of sec_501 sec_4941 and sec_4945 of the code and does not purport to rule on any facts that were not represented in this ruling further we have not determined whether the methodology you are using to determine fair_market_value or fair and reasonable costs is proper pursuant to a power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative we are also sending a copy of this ruling to the ohio te_ge customer service office because this letter could help resoive any questions about m’s exempt status it should be kept with m’s permanent records if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter i a3 this ruling is directed only to m and c d e and f the parties that requested the ruling sec_6110 of the code provides that it may not be used or cited as precedent thank you for your cooperation sincerely bevecta vy drox gerald v sack manager exempt_organizations technical group


internal_revenue_service number release date index numbers -------------------------- ------------------------------------------- ------------------------------ ------------------------------ department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-106979-08 date date legend partnership ---------------------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------- a --------------------------------------------- b --------------------------------------------- prior members ----------------------------- ----------------------------- ------------------------ ------------------------------------------------------------------- ---------------------------------------------------------------- --------------------------------------------------------------------- state a b c ------------- ---------------------- -------------------------- -------- dear ---------------------- plr-106979-08 we received a letter dated date and subsequent correspondence submitted on behalf of partnership requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code this letter responds to that request facts according to the information submitted partnership was formed on a as a limited_liability_company under the laws of state b acquired an interest in partnership from prior members on b thus partnership’s current members are a and b it was intended that a sec_754 election be filed on behalf of partnership for taxable_year c however when partnership’s partnership tax_return for c was filed an election to adjust the basis of partnership property was inadvertently not filed with the return law and analysis sec_754 provides in part that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election plr-106979-08 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusions based on the facts and representations submitted partnership has established that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied consequently partnership is granted an extension of time of days from the date of this letter for making a sec_754 election effective for c the election should be made in a written_statement and filed with the appropriate service_center for association with partnership’s c partnership tax_return a copy of this letter should be attached to the statement filed a copy of this letter is enclosed for that purpose except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion as to whether partnership is a partnership for federal tax purposes this ruling is directed only to the taxpayer requesting it according to sec_6110 this ruling may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to partnership’s authorized representative sincerely s william p o’shea associate chief_counsel passthroughs special industries enclosures copies of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service p o box irs cincinnati oh release number release date uil code date employer id number contact person id number contact telephone number form you must file tax years dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action we’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter rev catalog number 47632s if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 sincerely tamera ripperda director exempt_organizations enclosures notice redacted letter proposed adverse determination under sec_501 redacted letter final adverse determination under sec_501 - no protest letter rev catalog number 47632s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date legend incorporation date b c state d county contact person identification_number contact number fax number employer_identification_number vil dear we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues e do you qualify for exemption under sec_501 of the code no for the reasons described below do you meet the requirements under sec_501 of the code no for the reasons described below e facts you are an organization that counsels local homeowners about their options and rights with respect to foreclosure and loan modifications letter cg you were incorporated on b as a non-profit corporation under c law to provide education and charitable assistance to the general_public by helping people acquire and maintain housing all of your directors are experienced in the fields of real_estate housing counseling services foreclosure prevention counseling services and credit debt management all three directors also serve as officers you have adopted a conflict of interest policy with respect to your directors directors will not be paid salaries however they may be paid a reasonable fee for attending meetings of the board in addition they may be allowed reasonable reimbursement or advancement for expenses_incurred in the performance of their duties compensation of officers will be reasonable and paid in return for the performance of services related to your tax-exempt purposes no current plans exist to contract for services from third parties article i of your bylaws states that your objectives and purposes are to help people own and keep their own homes through educationa classes and individual counseling for first time home buyers facilitating down payment assistance for low income home buyers educational classes to help homeowners keep and maintain their homes counseling home owners who are having trouble making their monthly payments working with banks to modify mortgages facilitating the delivery of rescue funds to help low income homeowners become current on their mortgages buying homes to keep people from having to move out including facilitating lease or lease with option to buy agreements for seniors who lose their homes property management especially of properties in those lease and lease option arrangements processing short_sales agreements and counseling people who are losing their homes on the their housing options processing mortgage loan applications to enable low and medium income people to buy homes counseling seniors on reverse mortgages to help them keep their homes facilitating real_estate sales and purchases for low and median income families e e e e you will help people own and keep their own homes you initially considered property management especially of properties in lease and lease option arrangements to be your main directive several of your activities were expected to generate income the income producing activities included_property management processing short_sale agreements counseling people who are losing their homes on the their housing options processing mortgage loan applications to enable low and medium income people to buy homes and facilitating real_estate sales and purchases for low and median income families e letter cg catalog number 47630w funds are also raised through donations gifts and grants you concentrate on helping clients residing in d county but you will not turn away any c residents in need of your services low income seniors are your primary focus to help clients having trouble making their monthly mortgage payments you initially planned to offer e educational classes followed by counseling and working with lenders to facilitate a mortgage modification rescue funds to bring mortgages current if a homeowner does not qualify for a loan modification education for seniors concerning reverse mortgages to buy the home in a short_sale and rent it back to the client if no other option works to work with the client to improve their financial situation in order to allow the client to purchase the home back when the lease terminates or help process the short_sale and counsel the client on their housing options if all else fails e e e you also intended to educate and counsel first time homebuyers if a client improved his her financial situation to the point which would qualify for a home loan you expected to locate down payment assistance for the purchase in addition you would process mortgage applications to help low and medium income people to buy homes and facilitate real_estate purchases you subsequently made changes to the proposed activities described in your application you no longer plan to manage or own any properties process mortgage applications facilitate real_estate sales purchases be involved with down payment assistance or offer pre-purchase housing counseling post-purchase housing classes or financial education classes credit counseling you will conduct foreclosure prevention counseling of your time in the future you estimate your time will be allocated to foreclosure prevention counseling - pre-purchase housing counseling - post purchase housing classes - financial education classes and counseling - when asked to submit detailed descriptions of your proposed pre-purchase housing counseling post purchase housing classes and financial education classes and counseling you stated you no longer expect to provide any of these services foreclosure prevention counseling is your only remaining activity in conducting this program you e interview the clients to obtain financial data as well as information regarding the mortgage delinquency issue explain various options such as refinance loan modification repayment plan partial claim bankruptcy deed in lieu or selling the house and e letter cg catalog number 47630w e explain effects of each of the options to assist the client in determining the best option for their situation your program involves from one to ten meetings with clients the initial meeting usually lasts about an hour at that meeting the client provides basic financial information and details about the delinquent mortgage after reviewing the client's responses you discuss the client’s budget based upon the data provided and recommend an approach the client makes the final_decision as to which approach to take to date all your clients have chosen apply for the loan modification option you do not provide a written budget analysis or ongoing educational sessions your counselor assists each client with completing the paperwork to submit a request to the lender for mortgage mitigation the counselor also communicates with the lender on behalf of the client while your counselor is a hud certified housing counselor you have not nor expect to applied for certification as a hud approved housing counseling agency any subsequent meetings are much shorter except for the meeting to discuss the mortgage company’s determination you sometimes refer people to attorneys or real_estate agents a list of bankruptcy attorneys and real_estate agents may be provided to clients in need of services however no particular individual is recommended none of your directors are compensated for providing services to you and you do not charge a fee for your program law sec_501 of the code provides that corporations may be exempted from tax if they are organized and operated exclusively for charitable or educational_purposes and no part of their net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes letter cg catalog number 47630w sec_1_501_c_3_-1 of the regulations provides that an organization's assets must be dedicated to an exempt_purpose either by an express provision in its governing instrument or by operation of law sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations assigns the burden_of_proof to an applicant organization to show that it serves a public rather than a private interest and specifically that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 in its generally accepted legal sense and includes the relief of the poor and distressed or of the underprivileged sec_1_501_c_3_-1 of the regulations provides that the term educational as used in sec_501 of the code relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community sec_501 imposes requirements on organizations otherwise described in sec_501 or if the provision of credit_counseling_services is a substantial purpose sec_501 defines for purposes of sec_501 the term credit_counseling_services to mean i the providing of educational information to the general_public on budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit ii the assisting of individuals and families with financial problems by providing them with counseling or iii a combination of the activities described in clauses i and ii in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the organization provided information to the public on budgeting buying practices and the sound use of consumer credit through the use of films speakers and publications it aided low- income individuals and families who have financial problems by providing them with individual counseling and if necessary by establishing budget plans under the budget plan the debtor letter cg catalog number 47630w voluntarily made fixed payments to the organization holding the funds in a_trust account and disbursing the funds on a partial payment basis to the creditors the organization did not charge fees for counseling services or proration services the debtor received full credit against his debts for all amounts paid the organization did not make loans to debtors or negotiate loans on their behalf finally the organization relied upon contributions primarily from the creditors participating in the organization's budget plans for its support the service found that by aiding low-income individuals and families who have financial problems and by providing without charge counseling and a means for the orderly discharge_of_indebtedness the organization was relieving the poor and distressed moreover by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization was instructing the public on subjects useful to the individual and beneficial to the community thus the organization was exempt from federal_income_tax under sec_501 of the code the service compared this holding with the holding of revrul_65_299 which holds that a nonprofit organization formed to advise counsel and assist individuals in solving their financial difficulties by budgeting their income and expenses and effecting an orderly program for the payment of their obligations qualifies for exemption from federal_income_tax under sec_501 of the code rather than under sec_501 outside the context of credit counseling individual counseling has in a number of instances been held to be a tax exempt charitable activity revrul_78_99 1978_1_cb_152 free individual and group counseling of widows revrul_76_205 1976_1_cb_154 free counseling and english instruction for immigrants revrul_73_569 1973_2_cb_178 free counseling to pregnant women revrul_70_590 1970_2_cb_116 clinic to help users of mind-altering drugs revrul_70_640 1970_2_cb_117 free marriage counseling revrul_68_71 c b career planning education through free vocational counseling and publications sold at a nominal charge overwhelmingly the counseling activities described in these rulings were provided free and the organizations were supported by contributions from the public revproc_86_43 1986_2_cb_729 describes the methodology test the internal_revenue_service uses to determine when the advocacy of a particular viewpoint or position is educational under sec_501 of the code and c -1 d of the regulations the revenue_procedure states that the focus of sec_1_501_c_3_-1 is on the method the organization uses to communicate to others not the content of its communication the method of communication is not educational if it fails to provide a development from the relevant facts that would materially aid a listener or reader in a learning process one factor indicating the method is not educational is as follows t he approach used in the organization's presentations is not aimed at developing an understanding on the part of the intended audience or readership because it does not consider their background or training in the subject matter the remaining factors relate specifically to advocacy organizations and the full and fair exposition part of the regulation in 326_us_279 66_sct_112 90_led_67 the supreme court held that the presence of a single nonexempt purpose catalog number 47630w letter cg if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes in 70_tc_352 the court found that a corporation formed to provide consulting services did not satisfy the operational_test under sec_501 of the code because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational or scientific but rather commercial in addition the court found that the organization's financing did not resemble that of the typical sec_501 organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup alll projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations in consumer credit counseling service of alabama inc v united_states u s t c d d c the court held that an organization that provided free information on budgeting buying practices and the sound use of consumer credit qualified for exemption from income_tax because its activities were charitable and educational the consumer credit counseling service of alabama is an umbrella organization made up of numerous credit counseling service agencies these agencies provided information to the general_public through the use of speakers films and publications on the subjects of budgeting buying practices and the sound use of consumer credit they also provided counseling on budgeting and the appropriate use of consumer credit to debt-distressed individuals and families they did not limit these services to low-income individuals and families but they did provide such services free of charge as an adjunct to the counseling function they offered a debt management plan approximately percent of a professional counselor's time was applied to the debt management plan as opposed to education the agencies charged a nominal fee of up to dollar_figure per month for the debt management plan this fee was waived in instances when payment of the fee would work a financial hardship the professional counselors employed by the organizations spent about percent of their time in activities such as information dissemination and counseling assistance rather than those connected with the debt management programs the primary sources of revenue for these organizations were provided by government and private_foundation grants contributions and assistance from labor agencies and united way an incidental amount of their revenue was from service fees thus the court concluded that each of the plaintiff consumer credit counseling agencies was an organization described in sec_501 as a charitable and educational_organization see also credit counseling centers of oklahoma inc v united_states u s tax case d d c in which the facts were virtually identical and the law was identical to those in consumer credit counseling service of alabama inc v united_states discussed immediately above in solution plus inc v commissioner tcmemo_2008_21 the tax_court held that a credit_counseling_organization was not exempt under sec_501 because it was not organized and operated exclusively for educational or charitable purposes and impermissibly served letter cg catalog number 47630w private interests the organization was formed by an individual with experience selling debt management plans the founder and his spouse were the only members of the organization's board_of directors the organization did not have any meaningful educational program or materials for providing to people who contacted the organization and its financial education seminars for students constituted an insignificant part of the organization’s overall activities the court held that the organization's purposes were not educational because its activities are primarily structured to market determine eligibility for and enroll individuals in dmps purposes are not to inform consumers about understanding the cause of and devising personal solutions to consumers’ financial problems or to consider the particular knowledge of individual callers about managing their personal finances the tax_court also held that the organization's purposes were not charitable because its potential customers are not members of a charitable_class that are benefited in a 'non-select manner away unless they meet the criteria of the participating creditors because they will be turned its the tax_court further held the organization would operate for the private interests of its founder because the founder and spouse were the only directors the founder was the only officer and employee and his compensation was based in part on the organization’s dmp sales activity levels the organization was a family-controlled business that he personally would run for financial gain using his past professional experience marketing dmps and managing a dmp call center the court further held that the organization's principal activity of providing dmp services which were only provided if approved by a caller's creditors furthered the benefit of private interests finally the tax_court held that the facts in credit_counseling_services of alabama v united_states u s t c d d c stand in stark contrast because the sale of dmps is the primary reason for solution plus's existence and its charitable and educational_purposes are at best minimal application of law sec_501 of the code sets forth two main tests for an organization to be recognized as exempt an organization must be both organized and operated exclusively for purposes described in sec_501 sec_1_501_c_3_-1 of the regulations to satisfy the sec_501 operational_test an organization must establish that it is operated exclusively for one or more exempt purposes sec_1_501_c_3_-1 of the regulations you failed to establish that you are operated exclusively for one or more exempt purposes your activities are not educational you are distinguishable from the organizations in consumer credit counseling service of alabama supra and revrul_69_441 by the methodology you use to conduct your counseling activities to date you have not held any seminars clinics workshops or other educational programs the only activity that you currently conduct is the provision of foreclosure counseling and the processing of loan modifications you typically meet with clients only once for about an letter cg catalog number 47630w hour before recommending a particular approach clients provide you with basic financial information as well as information regarding their delinquent mortgage you do not provide a written budget analysis to clients unlike the organizations in consumer credit counseling service of alabama supra and revrul_69_441 supra you do not offer counseling sessions that are structured primarily to improve your clients’ understanding of their financial problems or their skills in solving them while your counselor does explain options to the client essentially all of your time is spent filling out the information that is needed to submit a statement of their financial condition to the lender communicating with a homeowner to fill out a financial worksheet and an intake sheet is not an educational activity because the communication does not provide a development from the relevant facts that would materially aid a listener or reader in a learning process revproc_86_43 supra you do not provide an ongoing educational program to your clients your counseling sessions are used solely to solicit the information required to submit a statement of financial condition to the lender in an effort to obtain a loan modification finally a significant amount of your time is spent on the negotiation process with the lender therefore you failed to establish that your interactions with clients provide instruction or training useful to the individual and beneficial to the community within the meaning of sec_1_501_c_3_-1 of the regulations you do not operate a substantive on-going educational program you do not dedicate any revenue to activities involving educational programs you do not allocate any expenses to training employees like the organization in solution plus supra you did not provide evidence that you help clients develop an understanding of the cause of their financial problems or a plan to address their financial problems you provided no evidence that you intend to establish long- term counseling relationships with your clients thus your activities are not educational within the meaning of sec_501 in addition you do not meet the requirements for consideration under sec_501 of the code because you do not provide educational information or counseling to the public your activities are not charitable all of your time and resources are devoted to providing foreclosure prevention services to individuals while you stated that your primary focus is on seniors you offer your services to any resident of c therefore your services are not directed exclusively to low-income individuals or any other recognized charitable_class accordingly you are unlike the organizations described in consumer credit counseling service of alabama supra and revrul_69_441 supra which aided low-income individuals and families who have financial problems thereby relieving the poor and distressed thus you failed to establish that your activities are charitable within the meaning of sec_501 of the code private benefit an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest see sec_1_501_c_3_-1 of the regulations your financial assistance to homeowners in refinancing their mortgages directly benefits the homeowner by performing a service that they would otherwise have to provide themselves letter cg catalog number 47630w therefore you have not demonstrated that your operations serve a public rather than a private interest as required by sec_1_501_c_3_-1 of the regulations conclusion based on the facts and information provided you are not operated exclusively for an exempt_purpose as required by sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations because you are not educating your clients nor do you provide your services to poor or distressed individuals any public purposes for which you may operate are only incidental to your primary nonexempt purpose of assisting clients with obtaining a mortgage modification or otherwise deal with a foreclosure you do not serve a public rather than a private interest as required by sec_1_501_c_3_-1 of the regulations accordingly you do not qualify for exemption as an organization described in sec_501 of the code if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury declare that examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury declare that prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and letter cg catalog number 47630w complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn't already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven't provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax-exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we'll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements letter cg catalog number 47630w you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely director exempt_organizations enclosure publication letter cg catalog number 47630w


third party communication date of communication month dd yyyy cca_2016011208465807 id uilc number release date from sent tuesday date am to cc bcc subject re tefra question hi ------- i do not believe the indirect partner’s bankruptcy will have any effect on the indirect partner’s ability to sign a statute extension on behalf of an entity-partner because the entity-partner did not file for bankruptcy and the indirect_partner is acting as a representative of that entity and not in his individual capacity please let me know if you have any further questions thanks -------- ----------------- ---------------------- -------------- -------------------------------- ----------------------------


internal_revenue_service number release date index number ---------------------- --------------------------------------------- ---------------------------- ------------------------- ------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b01 plr-117090-15 date date legend x --------------------------------------------------- --------------------------------------------------- country d1 d2 --------------- -------------------------- ---------------------------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was organized under the laws of country on d1 x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity effective d2 x failed to timely file a properly executed form_8832 plr-117090-15 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 x represents that it acted reasonably and in good_faith x also represents that granting the relief requested will not prejudice the interests of the government law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an entity classification election must be signed by a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity's organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if an entity classification election is to be effective for any period prior to the time that it is filed each person who was an owner between the date the election is to be effective and the date the election is filed and who is not an owner at the time the election is filed must also sign the election sec_301_7701-3 generally provides that if an entity classification election is made to change the classification of an entity each person who was an owner on the day before the effective date of the election and who is not an owner at the time the election is filed must also sign the election under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure plr-117090-15 notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d2 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owner of x filing within days of this letter all required returns including amended returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code plr-117090-15 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by laura c fields laura c fields senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


t c memo united_states tax_court leon solomon verrett iii and charlotte i verrett petitioners v commissioner of internal revenue respondent docket no filed date leon solomon verrett iii and charlotte i verrett pro sese olivia j hyatt for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined deficiencies in petitioners’ federal_income_tax of dollar_figure dollar_figure and dollar_figure for and respectively years at issue respondent disallowed among other things petitioners’ claimed deductions for expenses arising from a construction activity 1dollar amounts are rounded to the nearest dollar construction activity leon solomon verrett iii petitioner conducted respondent also determined petitioners liable for the accuracy-related_penalty under sec_6662 for the years at issue after concessions by petitioners only two issues for decision remain the primary issue is whether petitioner’s construction activity was for profit during the years at issue we hold that it was not we are also asked to decide whether petitioners are liable for the accuracy-related_penalty under sec_6662 for the years at issue we hold that they are findings_of_fact the parties have stipulated some facts we incorporate the stipulation of facts and the accompanying exhibits by this reference petitioners resided in north carolina when they filed the petition mrs verrett is a doctor and earned wage income of dollar_figure dollar_figure and dollar_figure for the years at issue petitioner performed construction services under the moniker leon’s not so odd jobs beginning in the construction 2all section references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated 3petitioners concede all adjustments to their income_tax for the years at issue except with respect to deductions from the construction activity claimed on schedule c profit or loss from business activity has not generated a profit for any of the years it has operated petitioner was employed as a purchasing manager before starting the construction activity petitioner managed his construction activity from a home_office the construction activity had a listing in the local telephone directory the construction activity did not have a business plan a dedicated bank account or an internet presence petitioner did not use computer_software to track finances although he had done so as a purchasing manager petitioner was not licensed as a general contractor the construction activity consequently generated limited income without the license because petitioner could not lawfully undertake larger construction jobs petitioner owned a tractor four trailers various power tools and other machinery that he used in his construction activity petitioner charged lower rates than did other local contractors petitioner did not follow the industry practice of applying a overhead charge to the cost of materials rather petitioner directed his clients to purchase the materials from a home improvement store most of petitioner’s construction services during the years at issue involved uncompensated projects for his family and his church petitioner renovated his own home and restored his mother-in-law’s home after it suffered water damage petitioner was the volunteer director of a dollar_figure million construction_project at his church petitioner used the same tools and equipment for these endeavors that he used when providing paid construction services petitioners claimed construction activity income of dollar_figure dollar_figure and dollar_figure and expenses of dollar_figure dollar_figure and dollar_figure for the years at issue respondent issued petitioners the deficiency_notice for the years at issue petitioners timely filed a petition opinion we are asked to decide whether petitioner conducted his construction activity for profit within the meaning of sec_183 when it failed to generate a profit during any of the years at issue or any of the other years he conducted the activity we are also asked to decide whether petitioners are liable for the accuracy-related_penalty we address each of these issues in turn i sec_183 analysis whether a taxpayer may deduct expenses related to an activity depends on whether it is carried on for profit sec_162 sec_212 a taxpayer generally may not deduct losses attributable to an activity unless that activity is engaged in for profit sec_183 an activity is engaged in for profit if the taxpayer has an actual honest profit objective even if it is unreasonable or unrealistic sec_1_183-2 income_tax regs petitioner bears the burden of proving by a preponderance_of_the_evidence that he was engaged in the construction activity for profit see rule a the decision in this case is appealable to the united_states court_of_appeals for the fourth circuit absent stipulation to the contrary so we apply that law see 54_tc_742 aff’d 445_f2d_985 10th cir we examine whether the taxpayer engaged in the activity with the actual and honest objective of making a profit see hendricks v commissioner tcmemo_1993_396 aff’d 32_f3d_94 4th cir this court considers whether an activity is engaged in for profit on a case-by- case basis taking into account all the facts and circumstances involved see 72_tc_411 aff’d without published opinion 647_f2d_170 9th cir the taxpayer’s expectation of profit need not be reasonable but it must be bona_fide see 94_tc_41 78_tc_642 aff’d without opinion 702_f2d_1205 d c cir golanty v commissioner t c pincite sec_1_183-2 income_tax regs greater weight is given to objective facts rather than to the taxpayer’s statement of intent see 781_f2d_724 9th cir aff’g lahr v commissioner tcmemo_1984_472 72_tc_659 sec_1_183-2 and b income_tax regs we structure our analysis of whether an activity is engaged in for profit around nine nonexclusive factors sec_1_183-2 income_tax regs the nine factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his or her advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved id no factor or set of factors is controlling nor is the existence of a majority of factors favoring or disfavoring a profit objective controlling 544_f3d_900 8th cir aff’g tcmemo_2007_309 hendricks v commissioner f 3d pincite golanty v commissioner t c pincite sec_1_183-2 income_tax regs moreover certain factors may be given more weight than others because they are more meaningfully applied to the facts see vitale v commissioner tcmemo_1999_131 aff’d without published opinion 217_f3d_843 4th cir all nine factors do not necessarily apply in every case see green v commissioner tcmemo_1989_436 see also akelis v commissioner tcmemo_1989_182 a manner in which the taxpayer conducts the activity we begin with the first factor by considering whether petitioner carried on the construction activity in a businesslike manner see sec_1_183-2 income_tax regs an activity is operated in a businesslike manner when among other things the organizer had a business plan advertised the services maintained complete records and instituted changes in an effort to earn a profit see engdahl v commissioner t c pincite rinehart v commissioner tcmemo_2002_9 sec_1_183-2 income_tax regs petitioner did not develop a business plan nor maintain a dedicated bank account for the construction activity see keating v commissioner tcmemo_2007_309 his marketing efforts were limited to placing a listing in the telephone directory the construction activity did not have a web site petitioner did not maintain complete and accurate records petitioner also charged a significantly lower rate than did competing services he acknowledged that he needed to increase his prices to make a profit further he rejected the industry practice of charging overhead on materials most of the construction activity was devoted to charitable and unpaid personal projects this is inconsistent with a venture motivated by profit finally petitioner understood that the construction activity’s income would be limited unless he became a licensed general contractor he never did so he suggests that the costs associated with the license were prohibitive there is no indication however that petitioner attempted to finance his costs for the license his claimed inability to afford the license is inconsistent with his accumulation of substantial tools and machinery we find that petitioner did not conduct the construction activity in a businesslike manner this factor weighs in favor of respondent b the expertise of the taxpayers or advisers the second factor is whether petitioner developed his own expertise and sought guidance from industry experts see sec_1_183-2 income_tax regs petitioner acknowledged his practices made the construction activity consistently unprofitable he testified that he came from a family of construction workers yet nothing in the record established his relatives were experts or that he consulted with them we find that petitioner did not demonstrate any business expertise or consult with any experts this factor weighs against petitioner c the taxpayer’s time and effort the third factor focuses on the time and effort the taxpayer expended in carrying on the activity sec_1 b income_tax regs petitioner spent significant time on his construction activity during the years at issue respondent emphasizes however and we agree that petitioner devoted most of his time to projects for his church or his family the construction activity therefore had a substantial personal aspect see id we note that during the years at issue petitioner’s paid projects generated only dollar_figure of income while the construction activity resulted in net losses of dollar_figure accordingly we find this factor favors respondent d expectation that property used in the activity may appreciate fourth we weigh petitioner’s expectation that the assets used in the construction activity may appreciate see sec_1_183-2 income_tax regs the construction activity did not have any appreciating assets rather all of the assets were depreciable this factor favors respondent e taxpayer’s success in other similar activities a taxpayer’s previous success in similar activities may show that the taxpayer has a profit objective even though the current activity is presently unprofitable see sec_1_183-2 income_tax regs a taxpayer’s success in other unrelated activities also may indicate a profit objective see daugherty v commissioner tcmemo_1983_188 petitioner was a skilled tradesman petitioner did not have any experience however operating a construction company nor did petitioner apply transferable skills from his past professional experience to the construction activity we find that petitioner did not have previous experience operating a similar venture this factor also favors respondent f history of income or losses the sixth factor is the taxpayer’s history of income or losses with respect to the activity see sec_1_183-2 income_tax regs petitioner acknowledges that the construction activity was never profitable neither petitioner’s pricing nor his decision to disregard the general contractor’s license constitute an unforeseen circumstance outside of his control see id nor can the years at issue be reasonably characterized as the construction activity’s startup stage see id this factor weighs against petitioner g amount of occasional profits the seventh factor is whether the activity generated any occasional profits see sec_1_183-2 income_tax regs the construction activity never generated any profits this factor also weighs against petitioner h financial status of the taxpayer respondent argues that the eighth factor the financial status of the taxpayer negates petitioner’s profit_motive see sec_1_183-2 income_tax regs he asserts that the construction activity losses benefited the couple by offsetting mrs verrett’s substantial wage income from her medical practice we agree this factor favors respondent i elements of personal pleasure the last factor looks to elements of personal pleasure or recreation see sec_1_183-2 income_tax regs petitioner enjoyed the activity and derived personal satisfaction from helping his church the community and his family we note however that petitioner’s enjoyment of the construction activity is not sufficient to cause the activity to be classified as a hobby if other factors indicate that he engaged in it for profit see id this factor favors respondent j sum of the factors after considering all the facts and circumstances we find that petitioner has not shown that he engaged in the construction activity for profit we recognize that petitioner was an able craftsman his desire to be a contributing member of his community is admirable petitioner’s decisions regarding pricing the general contractor’s license and unpaid projects however show that he was not primarily motivated by profit it is significant that the construction activity has never generated a profit a for-profit enterprise would not repeatedly and consistently generate losses without changing its practices nor can we ignore that the losses offset mrs verrett’s wage income we conclude that during the years at issue petitioner did not engage in the construction activity with the dominant objective and intent of realizing a profit and petitioners are not entitled to the expense deductions claimed to the extent they exceed the gross_income from the construction activity ii accuracy-related_penalty we now turn to respondent’s determination that petitioners are liable for an accuracy-related_penalty under sec_6662 for each year at issue a taxpayer is liable for an accuracy-related_penalty on any part of an underpayment attributable to among other things negligence or a substantial_understatement_of_income_tax sec_6662 and the commissioner has the burden of production and must come forward with sufficient evidence that it is appropriate to impose a penalty sec_7491 see 116_tc_438 the taxpayer bears the burden_of_proof as to any defense to the accuracy-related_penalty sec_7491 rule a higbee v commissioner t c pincite negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the code or to exercise ordinary and reasonable care in the preparation of a tax_return sec_6662 sec_1_6662-3 income_tax regs a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return that would seem to a reasonable and prudent person to be too good to be true under the circumstances sec_1_6662-3 income_tax regs there is a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of either of the tax required to be shown on the return or dollar_figure sec_6662 b d a sec_1_6662-4 income_tax regs petitioners conceded almost all of the adjustments set forth in the deficiency_notice the record does not support the conclusion that the construction activity was for profit there is nothing in the record to show that petitioners made a reasonable attempt to comply with the code further petitioners’ concessions and the court’s decision result in a substantial_understatement_of_income_tax for each of the years at issue see higbee v commissioner t c pincite jarman v commissioner tcmemo_2010_285 respondent has met his burden of production a taxpayer is not liable for an accuracy-related_penalty however if the taxpayer acted with reasonable_cause and in good_faith with respect to any portion of the underpayment sec_6664 sec_1_6664-4 income_tax regs the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge experience and education of the taxpayer and the reliance on the advice of a professional sec_1_6664-4 income_tax regs petitioners have not demonstrated that they acted with reasonable_cause petitioners have not provided any evidence that the conceded deductions were made in good_faith or with reasonable_cause nor have petitioners shown reasonable_cause for claiming deductions for the construction activity losses we find under the relevant facts and circumstances that petitioners did not act with reasonable_cause and in good_faith with respect to the years at issue we therefore hold petitioners liable for the accuracy-related_penalty under sec_6662 for the years at issue we have considered all arguments made in reaching our decision and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent