t c summary opinion united_states tax_court lawrence amos zumo petitioner v commissioner of internal revenue respondent docket no 19563-12s l filed date lawrence amos zumo pro_se kristina l rico and jason m kuratnick for respondent summary opinion jacobs judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case the dispute between the parties concerns respondent’s determination sustaining the filing of a lien to collect petitioner’s unpaid federal_income_tax for and unless otherwise indicated all section references are to the internal_revenue_code as amended in effect at all relevant times background at the time he filed his petition petitioner resided in maryland petitioner and his wife filed a joint federal_income_tax return on or around date a joint federal_income_tax return on or around date a joint federal_income_tax return on or around date and a joint federal_income_tax return on or around date they did not pay the tax reported thereon on the basis of amounts reported on these returns respondent made the following assessments year tax dollar_figure big_number big_number big_number additions to tax sec_6651 sec_6651 dollar_figure dollar_figure dollar_figure -0- dollar_figure dollar_figure dollar_figure dollar_figure petitioner’s tax_year was included in the petition on date respondent moved to dismiss petitioner’s tax_year for mootness and to strike the year from the petition the court granted respondent’s motion on date petitioner is a neurologist the income from his practice has been declining because of a reduction in both patient volume and medical insurance reimbursements petitioner and his wife own numerous properties--their primary residence and rental properties unfortunately the residence was severely damaged by fire and the rental properties failed to yield sufficient income to allow them to be robust investments petitioner and his wife also owned a liquor store which was operated from the first floor of the property in which they resided additionally petitioner received royalties the amounts of which are not in the record from a book he wrote the couple have a 19-year-old son and a 9-year-old daughter on date respondent mailed petitioner a letter notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 advising petitioner that respondent was going to file a notice_of_federal_tax_lien on date to collect unpaid liabilities for taxable years and letter further informed petitioner that he could request a hearing with the internal_revenue_service office of appeals on date respondent received a completed form request for a collection_due_process or equivalent_hearing sec_6330 hearing from petitioner petitioner did not dispute his self-assessed taxes for or but he asserted that he had paid hi sec_2010 tax_liability in full on date respondent received a form_656 offer_in_compromise from petitioner for and petitioner stated that there was doubt as to full collectibility of the taxes he offered dollar_figure to settle his tax obligations petitioner claimed financial hardship arising from the destruction of his residence as a result of a fire on date an increase in property taxes on his income-producing rental properties decreased insurance reimbursements and the failure of his tenants to pay rent petitioner stated he would borrow funds to settle his tax obligations from family and friends by letter dated date respondent acknowledged receipt of petitioner’s request for a sec_6330 hearing by letter dated date respondent informed petitioner that his request was assigned to an appeals officer petitioner’s case was assigned to settlement officer lynne mcdermott on date settlement officer mcdermott wrote petitioner a letter in which she scheduled a telephone sec_6330 hearing and requested him to submit form 433-a collection statement for wage earners and self-employed individuals detailing certain financial information petitioner provided no documentation to substantiate this assertion on date petitioner sent settlement officer mcdermott a completed form 433-a in which he reported his monthly income was dollar_figure and his monthly living_expenses were dollar_figure resulting in disposable monthly income of dollar_figure settlement officer mcdermott reviewed the information she accepted petitioner’s claim that he had dollar_figure in monthly income but she determined his allowable monthly expenses were dollar_figure leaving a disposable monthly income of dollar_figure this determination was based on the amounts petitioner substantiated as well as national and local standards for the size of petitioner’s family specifically settlement officer mcdermott determined the following modifications to petitioner’s reported monthly expenses she increased petitioner’s national standard expense an expense not further defined in the record by dollar_figure inasmuch as petitioner had reported dollar_figure and the national standard expense for a four-person family such as petitioner’s was dollar_figure per month she reduced petitioner’s reported expenses for two automobiles public transportation out-of-pocket health care expenses and total healthcare expenses respondent accepted petitioner’s expense claims with respect to housing and utilities transportation taxes and other secured debt petitioner had reported dollar_figure for one automobile and dollar_figure for another she reduced the expense amount to dollar_figure for each car pursuant to the amount allowed by the standard for baltimore maryland petitioner reported dollar_figure for public transportation but settlement officer mcdermott allowed only dollar_figure for petitioner’s son’s school commute because she had already allowed expenses for petitioner’s cars petitioner reported dollar_figure for out-of-pocket health expenses but settlement officer mcdermott reduced that amount to the national standard of dollar_figure because petitioner did not substantiate the amount reported petitioner reported dollar_figure for other health care expenses but settlement officer mcdermott reduced the amount to dollar_figure because that was the substantiated amount for petitioner’s health insurance premium she disallowed petitioner’s dollar_figure reported child care expenses because she determined that petitioner’s wife was a stay-at-home parent and petitioner failed to substantiate the reported amount on form 433-a petitioner did not state that his wife worked nor did he provide information as to salary if any his wife received settlement office mcdermott also disallowed dollar_figure reported for life_insurance payments because petitioner failed to substantiate that amount in actuality petitioner owned a third car but he failed to inform settlement officer mcdermott of this fact she determined that petitioner had overstated the fair market values of his and his wife’s assets consequently settlement officer mcdermott reduced the amounts petitioner reported as the values of the rental properties vehicles bank accounts and individual_retirement_accounts settlement officer mcdermott ultimately determined that the aggregate fair_market_value of the assets was dollar_figure and the assets had an appeals equity value of dollar_figure petitioner failed to inform settlement officer mcdermott that he and his wife owned and operated a liquor store consequently settlement officer mcdermott did not include the store’s income or the value of the store’s liquor license in her calculations petitioner further failed to inform settlement officer mcdermott of his book royalties resulting in that income’s not being included in her calculations settlement officer mcdermott reviewed the administrative file transcripts and verified that the requirements of all applicable law and administrative procedure were met she verified that petitioner’s and taxes were properly assessed reviewed the notice of demand and confirmed that petitioner failed to pay the assessments settlement officer mcdermott also appeals equity value is an asset’s fair_market_value reduced by of its fair_market_value and then reduced again by all encumbrances verified that the notice_of_federal_tax_lien filing was properly issued and that the lien was properly filed petitioner his wife and settlement officer mcdermott held a telephone sec_6330 hearing on date settlement officer mcdermott rejected petitioner’s offer-in-compromise determining that the tax collection potential was more than the dollar_figure petitioner proposed and that he could satisfy his income_tax obligations by paying monthly installments settlement officer mcdermott noted that before the filing of the lien petitioner had entered into a dollar_figure per month installment_agreement with respondent she informed petitioner that he was no longer bound to pay the dollar_figure monthly installments instead acting within her discretion settlement officer mcdermott offered petitioner the option of paying either installments of dollar_figure per month over a period of months or installments of dollar_figure per month over the remaining collection_period petitioner tentatively agreed to pay dollar_figure monthly petitioner also requested that the lien be released in order to permit him to refinance his properties settlement officer mcdermott rejected that request but she informed petitioner that the tax_lien could be subordinated to any bank refinancing loan on date petitioner called settlement officer mcdermott was not involved in the dollar_figure per month installment_agreement settlement officer mcdermott leaving her a message that he would not agree to any installment_agreement but rather he intended to petition the tax_court on date petitioner sent a fax to settlement officer mcdermott confirming the information stated in his message and requested settlement officer mcdermott to reconsider her denial of his dollar_figure offer-in-compromise petitioner stated that he had overstated his income and failed to report all of his expenses although he provided no documentation reflecting this statement petitioner further informed settlement officer mcdermott that he was concerned about the possibility that he or his wife might suffer a sudden catastrophic illness or even death although at the time neither was ill settlement officer mcdermott called petitioner on date leaving a message that she had reviewed his fax and would not reconsider her rejection of his offer-in-compromise on date respondent issued a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination sustaining respondent’s lien to collect petitioner’s unpaid income_tax for and in an attachment to the notice_of_determination settlement officer mcdermott reviewed the facts of the case and set forth the reasons for her determination the attachment stated that the notice_of_federal_tax_lien is necessary to protect the government’s interest in your assets in the event you encumber or sell them as a result retaining the nftl balances the need for efficient collection with your concern that any collection action be no more intrusive than necessary a standard of review discussion this case involves a review of respondent’s determination to proceed with collection of petitioner’s unpaid tax_liabilities for through collection_due_process hearings under sec_6320 regarding liens are conducted in accordance with sec_6330 sec_6320 we therefore refer to such hearings as sec_6330 hearings throughout this opinion after the commissioner issues a notice_of_determination following an administrative hearing the taxpayer may petition this court for review of the commissioner’s determination sec_6320 sec_6330 our review of that determination is subject_to the provisions of sec_6330 the review that we are required to conduct in sec_6320 cases focuses on the commissioner’s determination because petitioner does not dispute the underlying tax_liabilities for the years at issue we review respondent’s as noted supra note the court granted respondent’s motion to dismiss petitioner’s tax_year for mootness and to strike the year from the petition determination for abuse_of_discretion see 114_tc_604 114_tc_176 an abuse_of_discretion is defined as any_action that is unreasonable arbitrary or capricious clearly unlawful or lacking sound basis in fact or law 439_us_522 112_tc_19 b the settlement officer’s calculation of petitioner’s income and expenses petitioner argues that settlement officer mcdermott did not properly calculate his and his family’s monthly income and living_expenses thus he contends she erred in determining his family’s financial situation petitioner asserts that because of this miscalculation settlement officer mcdermott abused her discretion by not accepting his dollar_figure offer-in-compromise we do not agree with petitioner’s assertion that settlement officer mcdermott abused her discretion indeed settlement officer mcdermott accepted petitioner’s income calculation as set forth on the form 433-a without modification in this regard we note that because petitioner failed to inform settlement officer mcdermott of the income from his liquor store or his book royalties the amount she accepted as petitioner’s monthly income was probably understated with respect to settlement officer mcdermott’s calculation of petitioner’s monthly living_expenses we are mindful that in general the commissioner may rely on national and local collection financial standards published by the secretary and for the commissioner to deviate from these standards the taxpayer is required to demonstrate that he would not have adequate means to provide for his basic living_expenses marascalco v commissioner tcmemo_2010_130 aff’d 420_fedappx_423 5th cir the commissioner requires taxpayers to provide reasonable substantiation and documentation with respect to such assertions internal_revenue_manual pt date date as noted supra pp settlement officer mcdermott relied on national standards because petitioner failed to substantiate his reported expenses and we are mindful that settlement officer mcdermott increased the amount of the national standard expenses from the reported dollar_figure to dollar_figure petitioner next argues that respondent failed to take into account his declining financial position resulting from his difficulties with his medical practice the decline in rents from his rental properties and the fire damage to his residence but as we stated supra p settlement officer mcdermott accepted petitioner’s own calculation of his income in making her determination moreover she determined that petitioner had overstated the value of his assets including the values of his rental properties bank accounts individual_retirement_accounts and vehicles consequently she reduced their respective values to reflect the financial reality of petitioner’s situation finally petitioner argues that settlement officer mcdermott failed to account for the possibility of a sudden catastrophic illness or death during the installment_payment period but petitioner and his wife were in good health and any question as to their suffering an illness is hypothetical moreover sec_6159 permits the commissioner to alter modify or terminate an installment_agreement should the taxpayer’s financial condition change therefore should a medical emergency occur petitioner is not prevented from seeking a modification reflecting the changed situation in sum we find that settlement officer mcdermott did not abuse her discretion in calculating petitioner’s income and allowable expenses c the settlement officer’s refusal to withdraw the notice of tax_lien at the sec_6330 hearing petitioner requested that respondent withdraw the filed tax_lien to permit him to borrow money against his rental properties settlement officer mcdermott refused this request but informed petitioner that the lien could be subordinated to a loan under certain circumstances the commissioner has discretion to withdraw a notice_of_federal_tax_lien sec_6323 the lien notice may be withdrawn if a the filing of the notice of the lien was premature b the taxpayer has entered into an agreement under sec_6159 ie an installment_agreement to satisfy the liability by means of installment payments unless the agreement provides otherwise c the withdrawal will facilitate the collection of the tax_liability or d with the consent of the taxpayer or the national_taxpayer_advocate the withdrawal of the notice would be in the best interest of the taxpayer as determined by the national_taxpayer_advocate and the united_states while respondent may withdraw the notice_of_federal_tax_lien under this section there is no requirement to do so see sec_6323 sec_301_6323_j_-1 proced admin regs settlement officer mcdermott did not abuse her discretion in refusing to withdraw the notice_of_federal_tax_lien petitioner requested that respondent withdraw the lien notice to allow him to borrow additional funds from his bank but her offer to subordinate respondent’s lien to a new bank loan would have accomplished petitioner’s goal moreover settlement officer mcdermott’s review of petitioner’s administrative file revealed that the notice_of_federal_tax_lien was necessary to protect the government’s interest in petitioner’s assets d other matters considered at the sec_6330 hearing sec_6330 and provides that the settlement officer must verify that the requirements of applicable law and administrative procedure have been met and consider whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection be no more intrusive than necessary in her testimony at trial settlement officer mcdermott demonstrated that she verified that the requirements of all applicable law and administrative procedure were met and that she determined that the filing of the lien appropriately balanced the need for efficient collection_of_taxes with petitioner’s concern that the collection action be no more intrusive than necessary we are satisfied that the mandates of sec_6330 and have been met to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index numbers ---------------------------------------------------------- ----------------------------------- -------------- -------------------------- 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 b03 plr-128801-09 date date legend x ---------------------------------------------------------- country ------------------------- date ---------------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative 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 classified as a disregarded_entity for federal tax purposes facts x was formed under country law on date x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x intended that it be classified as a disregarded_entity effective date however due to inadvertence a valid form_8832 entity classification election to treat x as a disregarded_entity effective date was not timely filed law and analysis sec_301_7701-3 provides 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 as provided in sec_301_7701-3 an eligible plr-128801-09 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 that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to 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 conclusion based 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 sixty days from the date of this letter to elect to be classified as a disregarded_entity for federal tax purposes effective date the plr-128801-09 election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp plr-152312-01 date date distributing controlled a controlled b shareholder shareholder shareholder shareholder shareholder business a state x date date a b plr-152312-01 c d e f g h i dear this letter responds to your date request for rulings on certain aspects of a proposed transaction additional information was submitted in letters dated date date and date the information submitted in such request and subsequent correspondence is summarized below the rulings contained in this letter are based upon the facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for a ruling verification of the information representations and other data may be required as part of the audit process summary of facts distributing is a state x corporation that was incorporated on date distributing files its federal_income_tax return on a calendar_year basis and uses the cash_method_of_accounting distributing is engaged directly in business a and elected to be taxed as an s_corporation within the meaning of sec_1361 of the internal_revenue_code effective date distributing has outstanding a shares of voting common_stock which are owned by shareholder b shares shareholder c shares shareholder c shares shareholder c shares and shareholder d shares shareholder is the parent of shareholder shareholder and shareholder shareholder is a_trust the life_beneficiary of which is shareholder who holds a power_of_appointment over the remainder_interest in the trust shareholder has provided by will that upon the death of shareholder the shares of stock of distributing controlled a and controlled b held by shareholder will be distributed among shareholder shareholder and shareholder respectively plr-152312-01 distributing has submitted financial information indicating that business a has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years series disputes have arisen among shareholder shareholder and shareholder regarding a number of fundamental business matters affecting business a the conflicts among shareholder shareholder and shareholder are having an adverse effect on the daily operations of business a to eliminate those disputes distributing has proposed the following transaction the proposed transaction i distributing will form controlled a and controlled b as wholly owned subsidiaries incorporated in state x controlled a and controlled b each will have outstanding immediately prior to the proposed transaction c shares of voting and e shares of non-voting common_stock following the proposed transaction controlled a and controlled b each will elect to be taxed as s_corporations pursuant to sec_1362 ii distributing will transfer f percent based on net fair_market_value of its business a assets to controlled a in exchange for all of the outstanding_stock of controlled a and the assumption by controlled a of related liabilities the controlled a transfer distributing will transfer f percent based on net fair_market_value of its business a assets to controlled b in exchange for all of the outstanding_stock of controlled b and the assumption by controlled b of related liabilities the controlled b transfer iii distributing will distribute all of the controlled a and controlled b stock as follows the distributions shareholder will receive g shares of the controlled a non- voting_stock and g shares of the controlled b non-voting stock in exchange for all of the distributing stock held by shareholder shareholder will receive all of the controlled a voting_stock in exchange for all of the distributing stock held by shareholder shareholder will receive all of the controlled b voting_stock in exchange for all of the distributing stock held by shareholder shareholder will receive h shares of controlled a non-voting stock and h shares of controlled b non-voting stock in exchange for i shares of distributing stock held by shareholder iv effective immediately after the distributions the trustees of shareholder will give shareholder an irrevocable proxy for the term of the trust with regard to the voting of the distributing stock held by shareholder representations the taxpayer has made the following representations concerning the controlled a transfer the controlled b transfer and the distributions a the fair_market_value of the stock of controlled a and controlled b received by each of the distributing shareholders will be approximately equal to the fair_market_value of the distributing stock surrendered by the shareholder in the exchange plr-152312-01 b no part of the consideration to be distributed by distributing will be received by a distributing shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing c the five years of financial information submitted on behalf of business a represents its present operations and there have been no substantial operational changes since the date of the last financial statement submitted d following the distributions distributing controlled a and controlled b will each continue independently and with its separate employees the active_conduct of its share of all the integrated activities of business a conducted by distributing before consummation of the proposed transaction e the distributions will be carried out to eliminate shareholder disputes that if permitted to continue would jeopardize the operation and continued success of business a the distributions are motivated in whole or substantial part by this corporate business_purpose f distributing is an s_corporation within the meaning of sec_1361 controlled a and controlled b each will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distributions and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing controlled a or controlled b g there is no plan or intention by the distributing shareholders to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing controlled a or controlled b after the distributions except for transfers by gift to family members h there is no plan or intention by either distributing controlled a or controlled b directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the distributions other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 i there is no plan or intention to liquidate either distributing controlled a or controlled b to merge any of these corporations with any other corporation or to sell or otherwise dispose_of the assets of any of the corporations after the distributions except in the ordinary course of business j for purposes of sec_355 immediately after the distributions no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distributions plr-152312-01 k for purposes of sec_355 immediately after the distributions no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of stock of either controlled a or controlled b entitled to vote or percent or more of the total value of shares of all classes of stock of either corporation that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distributions or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distributions l the total adjusted_basis and the fair_market_value of the assets transferred to controlled a in the controlled a transfer and to controlled b in the controlled b transfer by distributing will in each instance equal or exceed the sum of the liabilities assumed as determined under sec_357 by controlled a and controlled b respectively m the liabilities assumed as determined under sec_357 in the controlled a transfer and the controlled b transfer were incurred in the ordinary course of business and are associated with the assets being transferred n the income_tax_liability for the taxable_year in which investment_credit_property including any building to which sec_47 applies is transferred will be adjusted pursuant to sec_50 or a or sec_47 as in effect before amendment by public law title 104_stat_1388 if applicable to reflect an early disposition of the property o distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the proposed transaction p no intercorporate debt will exist among distributing controlled a and controlled b at the time of or after the distributions q no two parties to the proposed transaction are investment companies as defined in sec_368 and iv r payments made in connection with any continuing transactions among distributing controlled a and controlled b will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length s the distributions are not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the combined voting power of all classes of stock entitled to vote of either distributing controlled a or controlled b or stock possessing percent or more of the total value of all classes of stock of either distributing controlled a or controlled b plr-152312-01 t distributing controlled a controlled b and their respective shareholders each will pay their own expenses if any incurred in connection with the proposed transaction rulings based solely on the information submitted and representations set forth above we rule as follows the controlled a transfer and the controlled b transfer followed by the distributions will each be a reorganization under sec_368 distributing controlled a and controlled b each will be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on both the controlled a transfer and the controlled b transfer sec_361 and sec_357 no gain_or_loss will be recognized by controlled a on the controlled a transfer and no gain_or_loss will be recognized by controlled b on the controlled b transfer sec_1032 the basis of each asset received by controlled a and controlled b will equal the basis of that asset in the hands of distributing immediately before its transfer to either controlled a or controlled b sec_362 the holding_period of each asset received by controlled a and controlled b will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by distributing on the distributions sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of shareholder shareholder shareholder and shareholder on the receipt of stock of controlled a and controlled b as the case may be in exchange for their distributing stock sec_355 the basis of the stock of controlled a and controlled b in the hands of shareholder shareholder and shareholder as the case may be will equal the basis of the distributing stock surrendered by such shareholder in exchange therefor sec_358 the aggregate basis of the stock of distributing controlled a and controlled b in the hands of shareholder immediately after the distributions will in each case equal the basis in the distributing stock held by such shareholder immediately before the distributions allocated in proportion to the fair_market_value of the stock of distributing controlled a and controlled b held by such shareholder immediately after the distributions in accordance with sec_358 sec_358 and sec_1_358-2 plr-152312-01 the holding_period of the stock of controlled a and controlled b received by shareholder shareholder shareholder and shareholder as the case may be will include the holding_period of the distributing stock surrendered by such shareholder in exchange therefor provided the distributing stock is held as a capital_asset on the date of the distributions sec_1223 as provided in sec_312 proper allocation of earnings_and_profits among distributing controlled a and controlled b will be made under sec_1_312-10 caveats and procedural statements no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in this transaction should attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed under the power_of_attorney on file in this office a copy of this letter is being sent to distributing’s authorized representative cc sincerely lewis k brickates acting chief branch office of associate chief_counsel corporate


t c memo united_states tax_court south community association petitioner v commissioner of internal revenue respondent docket no 10959-03x filed date roger j makley lance a gildner and john t ernest for petitioner william i miller and linda c grobe for respondent memorandum findings_of_fact and opinion laro judge respondent determined that petitioner is not exempt from federal_income_tax under sec_501 and sec_1 john t ernest entered an appearance for petitioner on date and withdrew as petitioner’s counsel on date revoked petitioner’s tax-exempt status effective date petitioner has exhausted its administrative remedies and has petitioned this court to declare its qualification for tax-exempt status under sec_501 see sec_7428 see also rule a b g following the parties’ filing with the court of the administrative record underlying respondent’s determination the court’s granting of the parties’ joint motion to calendar this case for trial and the conclusion of the ensuing trial we decide whether respondent properly revoked petitioner’s tax-exempt status under sec_501 we hold that respondent did findings_of_fact some facts were stipulated and are so found we incorporate herein by this reference the parties’ stipulations of fact and the exhibits submitted therewith petitioner is an association that was formed by larry parr parr on date when its petition for declaratory_judgment was filed petitioner’s principal_place_of_business was in middletown ohio on date respondent determined that petitioner was a sec_501 organization exempt from federal_income_tax the determination was effective as of the day of petitioner’s formation at the time of this determination petitioner did not section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure and dollar amounts are rounded conduct any gaming activity according to its bylaws petitioner’s exempt_purpose was and is to provide aid for all forms of education at some time between date and date petitioner began a gaming operation gaming operation the gaming operation was the idea of parr who during the relevant years did not work for petitioner but whose company sold to petitioner the supplies that petitioner used in the gaming operation from until the years audited by respondent in connection with his determination revoking petitioner’s exemption petitioner contributed dollar_figure to various charities generally for the purposes of starting educational programs building a school and transporting handicapped individuals to various schools petitioner’s contributions during the respective years were dollar_figure dollar_figure dollar_figure and dollar_figure many of the recipients of these contributions were charities controlled by petitioner’s president james clausing clausing petitioner funded its contributions almost entirely through its gaming operation petitioner’s gaming operation consisted of its sale of bingo cards and instant pull-tab tickets petitioner sold its bingo each of petitioner’s instant pull-tab tickets was a paper ticket with a covered symbol upon purchasing an instant pull-tab ticket and uncovering the symbol the purchaser won a prize if the symbol was one that was predesignated to win continued cards and instant pull-tab tickets at bingo_games that petitioner held at a bingo hall in middletown ohio from p m to p m on every saturday and sunday an average of approximately patrons attended the bingo_games each night that the games were held beginning in petitioner also sold instant pull-tab tickets at one or two other locations on each saturday and sunday from a m to p m and on every other day of the week from a m to p m petitioner’s sales of instant pull-tab tickets represented most of petitioner’s gaming receipts in each of the years through in addition to sales of instant pull-tab tickets petitioner’s remaining income for those years was from interest and from petitioner’s sales during the bingo_games of bingo cards raffle tickets and concessions eight or nine individuals generally worked in the bingo hall on each night that the games were held these individuals consisted of bingo workers instant pull-tab ticket workers concession workers kitchen workers a security guard and one or two game administrators clausing and or mark carroll carroll continued whether the instant pull-tab ticket contained one of the predesignated symbols was a matter of luck in and petitioner sold instant pull-tab tickets at a storefront booth in middletown ohio in and petitioner also sold instant pull-tab tickets at a second booth petitioner’s vice president petitioner recruited its bingo instant pull-tab ticket concession and kitchen workers collectively nonofficer nonsecurity guard workers through informal means such as by word of mouth all of petitioner’s nonofficer nonsecurity guard workers were trained by one of petitioner’s officers diane whitaker whitaker whitaker instructed those workers on how to handle money and how to keep certain records whitaker also scheduled petitioner’s gaming activities and approved any time off taken by the nonofficer nonsecurity guard workers whitaker and or another one of petitioner’s officers informed these workers that they would be paid in cash for their services and that they were not to discuss this payment arrangement with anyone the services performed in the gaming operation by the nonofficer nonsecurity guard workers were demanding and it was not easy for those workers to take a day off many of those workers were pressured to work in the bingo_games on both saturday and sunday were required to give advance notice for any vacation time that they sought and seldom received time off petitioner required that its nonofficer nonsecurity guard workers who worked at the bingo_games be at the bingo hall from p m until approximately just after p m as of the latter time the workers were then required to accompany clausing and or carroll to a bank where the receipts from that night’s activities were deposited petitioner generally paid each of its nonofficer nonsecurity guard workers dollar_figure in cash a day for his or her work in the gaming operation exclusive of tips or christmas bonuses petitioner did not report any of these payments either to the recipient eg through a form_w-2 wage and tax statement or to respondent in addition to working for petitioner in the gaming operation many of the nonofficer nonsecurity guard workers also worked fulltime for employers other than petitioner at least one of the nonofficer nonsecurity guard workers traveled more than miles to work in the gaming operation ohio law requires that a security guard be present during the bingo_games and petitioner paid a security agency to furnish a security guard to work at the bingo_games while the games were conducted petitioner also paid the security agency to furnish a security guard to work with petitioner’s instant pull-tab ticket workers when and on the sites where the instant pull-tab tickets were sold for the services of these security guards petitioner paid the security agency dollar_figure dollar_figure dollar_figure and dollar_figure during through respectively clausing was petitioner’s president and full-time administrator from through he worked for petitioner an average of hours per week in and an average of hours per week in through during through petitioner reportedly paid clausing compensation of dollar_figure dollar_figure dollar_figure and dollar_figure respectively as to the gaming operation clausing negotiated the bingo supply contracts ran the bingo_games handed out tickets at the bingo_games collected the proceeds from petitioner’s sales of bingo cards and instant pull-tab tickets deposited most of petitioner’s daily proceeds in the bank prepared daily sheets and managed petitioner’s inventory eg of instant pull-tab tickets clausing also each day visited the sites where petitioner sold its instant pull-tab tickets and when there counted money and prepared daily sheets as to petitioner’s activities other than the gaming operation nongaming operation clausing ran petitioner’s monthly board meetings made annual decisions about grants and wrote checks to petitioner’s grant recipients the amount of time that clausing spent on petitioner’s nongaming operation was substantially less than the amount of time that clausing spent on the gaming operation carroll was petitioner’s vice president in through and an administrator of its gaming operation in and carroll reportedly was not paid_by petitioner in and petitioner reportedly paid carroll dollar_figure and dollar_figure in and respectively carroll worked for petitioner an average of hours per week in and an average of hours per week in as part of his work for petitioner carroll sometimes visited the sites where the instant pull-tab tickets were sold and supervised the bingo_games from through petitioner received no public support for those years petitioner reported to respondent that its gross_income was as follows year gaming operation interest_income dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number during petitioner’s audit clausing and petitioner’s counsel informed petitioner’s workers that one of respondent’s agents might question the workers on whether they were paid_by petitioner for their work in the gaming operation clausing and petitioner’s counsel advised the workers on what they should and should not say in response to the questions opinion sec_501 generally provides that organizations described in sec_501 are exempt from federal_income_tax sec_501 includes within that description certain corporations organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes exemptions from tax are exceptions to the norm and petitioner bears a heavy burden to prove that it falls within the terms of the quoted text see 505_f2d_1068 6th cir see also fla hosp trust fund v commissioner 103_tc_140 taxpayers generally bear the burden of proving that the commissioner improperly revoked an exemption from tax under sec_501 affd 71_f3d_808 11th cir in order for petitioner to prevail on the issue that we decide herein we must find that petitioner was both organized and operated exclusively for one or more exempt purposes see sec_1_501_c_3_-1 income_tax regs we focus on the statute’s requirement as to operation because the parties do not dispute the statute’s requirement as to organization under the regulations 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 such exempt purposes specified in sec_501 sec_5 sec_7491 was added to the code by the internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 effective for court proceedings arising from examinations commencing after date sec_7491 provides that the burden_of_proof shifts to the commissioner in specified circumstances we need not and do not decide whether sec_7491 applies in the setting of a declaratory_judgment action such as we have here petitioner in its posttrial brief makes no mention of sec_7491 and we conclude that even if sec_7491 did apply in the setting of a declaratory_judgment action it would not apply here see eg sec_7491 sec_7491 applies with respect to an issue only if the taxpayer establishes certain requirements see also mediaworks inc v commissioner tcmemo_2004_177 c -1 c income_tax regs an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose id see also 893_f2d_529 2d cir affg tcmemo_1988_380 respondent revoked petitioner’s tax-exempt status effective date respondent advances the following grounds for revocation petitioner had as its primary activity the operation of a trade_or_business ie its gaming operation that was not in furtherance of its exempt_purpose petitioner operated as a feeder_organization within the meaning of sec_502 and petitioner’s operation served the private interests of its founder parr and his company petitioner argues in response to respondent’s determination that petitioner was operated exclusively for an exempt_purpose according to petitioner its gaming operation should not be deemed unrelated to its exempt_purpose in that it asserts all of the work in carrying on its gaming operation was performed by uncompensated workers cf sec_513 respondent disputes that substantially_all of the work in that operation was uncompensated we agree with respondent that petitioner’s carrying on of the gaming operation disqualified petitioner from the tax exemption that it seeks to retain in support of their respective positions the parties each called witnesses to testify about any compensation paid_by petitioner for services performed in the gaming operation petitioner’s witnesses on this subject were clausing parr edward helton helton shawna phillips phillips karen cornett cornett and lulu blair collectively petitioner’s six witnesses petitioner’s six witnesses generally testified that they were not paid for any services that they performed in the gaming operation and that they believed none of petitioner’s workers was paid for his or her work in the gaming operation respondent’s witnesses on this subject were jessica seaks melissa conyer and linda grooms collectively respondent’s three witnesses respondent’s three witnesses generally testified that petitioner surreptitiously paid both them and each other nonofficer worker cash of dollar_figure a day exclusive of tips and christmas bonuses and that one or more of petitioner’s officers instructed them respondent’s witnesses and petitioner’s other nonofficer nonsecurity guard workers not to disclose this payment arrangement to anyone our resolution of this dispute turns mainly on a determination of the credibility of petitioner’s six witnesses and respondent’s three witnesses such a determination epitomizes the ultimate duty_of a trial_court as trier of fact to determine the truth of a matter on the basis of conflicting oral testimony we must be wary on the one hand of the courtroom's becoming a quagmire in which an honest litigant is mired and on the other hand of the courtroom’s becoming a refuge for the proficient liar see 58_tc_560 hawkins v commissioner tcmemo_1993_517 affd without published opinion 66_f3d_325 6th cir we have evaluated each referenced witness’s testimony by observing his or her candor sincerity and demeanor and by assigning weight to the elicited testimony for the primary purpose of finding disputed facts see 115_tc_43 affd 299_f3d_221 3d cir we determine the credibility of each witness weigh each piece of evidence draw appropriate inferences and choose between conflicting inferences in finding the facts of a case see id see also 372_us_108 326_us_287 316_us_164 we hear and view the testimony of respondent’s three witnesses to be more credible than that of petitioner’s six witnesses whom we find to be not credible our perception of petitioner’s six witnesses and our resulting disregard of their testimony is supported by our review of independent indicia of reliability found in the record and from the reasonable inferences that we draw therefrom first clausing the security guards and carroll at least in and were undisputably paid_by petitioner for their services and we find such as a fact petitioner asserts that it paid clausing and carroll only to work in its nongaming activities and that any work they performed in the gaming operation was without compensation we consider that assertion to be incredible we find as a fact that petitioner’s payments to clausing and carroll were at least in part payment for services that they performed in connection with the gaming operation indeed we would be hard put to find to the contrary given that almost all of petitioner’s resources including the time of its workers were devoted to the gaming operation and that the gaming operation represented the lion’s share of petitioner’s activities we conclude from the record before us that clausing’s and carroll’s compensation from petitioner was attributable in small part to their services in petitioner’s nongaming activity and for the most part to their services in the gaming operation the mere fact that petitioner may label all of their compensation as being paid only for the former purpose is not dispositive of this matter second as we understand it none of the four of petitioner’s six witnesses who received the dollar_figure payments from petitioner ever reported those payments as income petitioner of petitioner’s six witnesses clausing and parr were never paid the dollar_figure payments does not dispute a proposed finding of fact by respondent which we find as a fact that clausing and counsel for petitioner advised petitioner’s workers on what the workers should and should not say in response to questions that respondent might ask them during petitioner’s audit as to the gaming operation and their compensation therefrom we believe that each of petitioner’s six witnesses at the time of his or her testimony knew that the dollar_figure payments were reportable as taxable_income and that those payments were not reported as such we surmise that petitioner’s six witnesses also were generally aware at the time of their testimony of the potential repercussions of not reporting the dollar_figure payments as income and the consequences of any admission that they may make at trial as to that omission third five of petitioner’s six witnesses were generally longtime workers for petitioner who continued to work for petitioner as of the time that they testified in this proceeding and the sixth parr was petitioner’s founder and its key supplier petitioner’s six witnesses’ allegiance to petitioner and to its interests in this proceeding cannot be denied petitioner and petitioner’s six witnesses all have much to lose from a decision here adverse to petitioner and have much to gain from a decision here favorable to petitioner fourth we conclude from the record at hand that some if not all of petitioner’s four witnesses who received the dollar_figure payments would have declined to work in the gaming operation had they received no compensation_for their services we find in the record that working in the gaming operation was demanding that the nonofficer nonsecurity guard workers were pressured to work in the bingo_games on both saturday and sunday for a total of hours exclusive of the additional time that they were required to spend accompanying clausing and or carroll to the bank to deposit the days’ receipts that those workers were required to give advance notice for any vacation time that they sought and that those workers were seldom given time off we also find in the record that at least helton phillips and cornett also worked full-time for employers other than petitioner and that at least cornett traveled more than miles to work in the gaming operation given that we are unable to find on the basis of credible_evidence in the record that any of petitioner’s workers worked in the gaming operation out of motivation to further petitioner’s educational purpose or even out of motivation by charitable impulses in general we are hard pressed to and do not conclude that any of petitioner’s four witnesses who received the dollar_figure payments would have steadily and consistently worked for petitioner without being paid for his or her services as to respondent’s three witnesses we perceive the testimony of those witnesses to be candid sincere and credible petitioner attempts to discredit that testimony by arguing that respondent’s three witnesses seek revenge against petitioner because their services in the gaming operation were discontinued we find this attempt unavailing given that none of respondent’s three witnesses reported her receipt of the dollar_figure cash payments as income we do not believe that they simply out of revenge testified against their self-interests by admitting clearly and under oath that they received the dollar_figure payments and knowingly did not report those payments as income in addition to its witnesses petitioner relies upon approximately affidavits contained in the administrative record these affidavits which were mostly signed in bulk in june or september of and were submitted to respondent during the audit were from various workers of petitioner and stated that the affiant was not paid for his or her services in the gaming operation we are unpersuaded by these affidavits and we give them no weight the affiants included workers of petitioner who did not work for petitioner during the relevant years and of petitioner’s officers including clausing carroll and whitaker many of the affiants did not testify at trial so as to be subject_to our determination of their credibility or to questioning as to the circumstances under which they signed or otherwise acquiesced in the statements contained in the affidavits as to the affidavits most of them were written pro forma on petitioner’s letterhead and were prepared by petitioner’s legal counsel for purposes of respondent’s audit and presumably for purposes of any litigation that resulted thereafter in some cases the affidavits were incomplete as to the dates of the affiant’s service in the gaming operation the affidavits for the most part were presented to the affiants for their signature at a monthly board meeting of petitioner in the presence of petitioner’s current trial counsel who signed as notary of many of the affidavits petitioner also challenges a characterization of the security guards as workers in petitioner’s gaming operation for purposes of the substantially_all test of sec_513 we conclude that the characterization is appropriate petitioner argues that the security guards did not work in the gaming operation because they were independent contractors rather than employees we disagree the fact that the security guards were directly compensated by another entity through a contract with petitioner is of no consequence to our determination under sec_513 a plain reading of that section requires that we focus on the work performed in carrying on such trade_or_business we read nothing in the statute that limits this work to that performed by employees as opposed to independent contractors see also executive network club inc v commissioner tcmemo_1995_21 finding that casino workers paid in tips by players worked for compensation even though the exempt_organization did not pay the workers directly cf 82_tc_193 finding that workers who conducted bingo_games in a building rented by the organization were compensated when the organization’s rental payments included payment for all labor for the supervision and handling of each bingo occasion upon the premises petitioner also argues that the security guards were not petitioner’s workers in that petitioner paid the security agency to safeguard petitioner against an attempted theft or robbery and the guards did not actually work in carrying on petitioner’s gaming operation in this regard petitioner asserts the security guards were not an attraction important to the success of the gaming operation the security guards provided little labor in the absence of a theft or robbery and the gaming participants received no direct products or services from the security guards in addition petitioner asserts the guards never called bingo numbers never sold bingo cards or instant pull-tab tickets and never assisted in the actual administration of the gaming operation we find petitioner’s argument unpersuasive if the security guards had not been present at the bingo_games petitioner would have been precluded from conducting these games by virtue of the state law requirement that security guards be present at bingo_games moreover irrespective of that law the security guards were physically present at the bingo_games and at the locations of the instant pull-tab ticket sales and they were an integral part of those activities while petitioner asks this court to view the role of the security guards narrowly so as not to consider them as working in the gaming operation absent their acting in the setting of a robbery or an attempted robbery we decline to do so the role of the security guards as we see it was to prevent a robbery from being attempted in the first place primarily by virtue of their physical presence at the sites of the bingo_games and the instant pull-tab ticket sales we consider the security guards to be part of the workforce of the gaming operation cf 696_f2d_372 5th cir concluding that a bartender’s services on bingo night were connected with the carrying on of the bingo_games although the bar was down the hall from the games affg tcmemo_1981_546 and conclude that the security guards worked in the gaming operation for purposes of the substantially_all test accordingly on the basis of our review of the record before us we find that many if not all of the workers in the gaming operation were compensated for their work we do not find that any of the workers in the gaming operation were uncompensated within the meaning of sec_513 the gaming operation was petitioner’s principal activity and was conducted by petitioner as a business for profit petitioner does not argue nor do we find that this activity was in furtherance of its exempt_purpose we therefore conclude that respondent properly revoked petitioner’s tax-exempt status effective date because petitioner was not operated exclusively for an exempt_purpose see 28_tc_1128 cf piety inc v commissioner supra while congress allows certain organizations tax-exempt status for specific limited activities petitioner attempts to retain tax- exempt status for activities that are outside of those permitted we have considered all arguments made by petitioner for a contrary holding and we conclude that any of those arguments not discussed herein is without merit decision will be entered for respondent nor does petitioner argue in its posttrial brief that any part of its activities is a bingo_game as defined in sec_513 in fact as to petitioner’s sale of instant pull-tab tickets the source of most of petitioner’s gaming receipts in each of the years through the parties have stipulated that petitioner’s instant pull-tab ticket activity is not a bingo_game as defined in sec_513 see also 98_f3d_190 5th cir affirming this court’s determination that instant bingo_games are not bingo_games within the meaning of sec_513 affg tcmemo_1995_439