internal_revenue_service number release date index number ----------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------- id no ----------- telephone number -------------------- refer reply to cc tege plr-100489-16 date date -------------------------------------------------------------- ------------------ ------- ----------------------------- ------------------- taxpayer date state county city legislation --------------------------------------------------------------- year ------- dear we are responding to a letter dated date requesting rulings that taxpayer’s income is excludable from gross_income under sec_115 of the internal_revenue_code code and that contributions to taxpayer are deductible by donors because taxpayer is a government instrumentality under the terms of sec_170 we construe the facts provided as follows facts according to taxpayer a recent residential foreclosure crisis aggravated a period of long-term economic and demographic decline in state consequently state enacted legislation in year to help a specific community address the consequences of this compounded crisis the new law was extended to most state counties on date and it was designed to better equip the counties to address the crisis in particular it authorized the creation of a new type of organization to use various streamlined procedures and coordinate with government non-profit and commercial entities to stabilize communities and contribute to their economic development subsequently state again amended state law to improve the procedures contained in the new law and to afford organizations created under the law additional means of financial support among other additions and revisions prior to year state and county engaged in activities aimed at accomplishing community development similar to those addressed plr-100489-16 under the new law but the procedures and tools available under prior state law were not as robust as those contained in the new law pursuant to the new law county established taxpayer as its agent to facilitate the effective reclamation revitalization and return to economic productivity of abandoned or foreclosed real_estate located in county county can dissolve taxpayer at any time in accordance with state law taxpayer’s organizational documents allow a board_of directors of five to nine members the board must include county’s treasurer and two county commissioners these county directors unanimously select additional directors including one who represents city and one who represents certain townships the selected directors may be removed by a majority of all of the directors none of the directors receive compensation_for their services to taxpayer pursuant to a contract the office of county auditor manages taxpayer's daily operations taxpayer maintains a conflict of interest policy that supplements state’s conflict of interest policy for public officials and employees among other things taxpayer’s policy requires its officers directors and employees to sign a written form each year stating that they understand and agree to comply with taxpayer’s conflict of interest policy state law requires taxpayer to adhere to state’s open meetings and public records requirements taxpayer must also provide an annual financial report to state and the report must be available on taxpayer’s website taxpayer also makes available on its website other information such as agenda and minutes of board meetings as well as its policies forms for its programs and lists of available properties taxpayer’s directors may appoint non-voting members to participate in meetings and to serve on committees and a majority of the directors can remove a non-voting member currently taxpayer does not have non-voting members taxpayer represents that if it does appoint non-voting members they will be subject_to its conflicts of interest policy taxpayer’s organizational documents provide that taxpayer is intended to have the status of an organization whose income is excludable from gross_income pursuant to sec_115 of the code and that its authority and activities are limited accordingly further the organizational documents require written annual statements from taxpayer’s officers and directors confirming that they understand taxpayer exercises essential governmental functions and that its income accrues to county the organizational documents also provide for periodic reviews to ensure taxpayer is performing essential governmental functions and that its compensation arrangements are reasonable and the result of arm’s length bargaining taxpayer has adopted written policies and procedures governing the acquisition and disposition of residential and commercial properties and selection of demolition and plr-100489-16 rehabilitation contractors the policies and procedures are intended to provide consistency transparency standards and safeguards to prevent abuse taxpayer’s funding is derived from several sources the bulk of the taxpayer’s funding comes from county and state with county committing a specified percentage of a delinquent tax and assessment collection fund taxpayer also receives grant money from state to acquire and demolish abandoned residences in addition taxpayer derives a limited amount of revenue from its property sales taxpayer has executed a formal agreement with city to set out procedures for cooperation priority rights of acquisition of properties and standards for taxpayer’s activities in city it works closely with the political subdivisions of county to support their priorities and plans and made a grant to city’s community improvement corporation to address blighted properties in the downtown area state law directs that taxpayer must use revenue from its activities solely in furtherance of its statutory purposes taxpayer’s articles of incorporation provide that upon dissolution all remaining assets will be distributed to state a political_subdivision of state or an entity whose income is excludable from gross_income under sec_115 of the code law sec_115 of the code states that gross_income does not include income derived from the exercise of any essential_governmental_function and accruing to a state or any political_subdivision thereof sec_170 provides that there shall be allowed as a deduction any charitable_contribution as defined in sec_170 payment of which is made within the taxable_year sec_170 states that for purposes of sec_170 the term charitable_contribution means a contribution or gift to or for_the_use_of a state a possession_of_the_united_states or any political_subdivision of any of the foregoing or the united_states or the district of columbia but only if the contribution or gift is made for exclusively public purposes revrul_77_261 1977_2_cb_45 holds that income generated by an investment fund that is established by a state to hold revenues in excess of the amounts needed to meet current expenses is excludable from gross_income under sec_115 because such investment constitutes an essential_governmental_function and the income accrues to the state or its political subdivisions the ruling explains that the statutory exclusion is not intended to extend to the income of a state or municipality resulting from its own participation in activities but rather to the plr-100489-16 income of an entity engaged in the operation of a public_utility or the performance of some governmental function that accrues to either a state or political_subdivision of a state the ruling points out that that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and that are within the ambit of a sovereign to conduct revrul_90_74 1990_36_irb_5 provides that the determination of whether a function is an essential government function depends on the facts and circumstances of each case the ruling considers a risk-sharing pool created by local governments under state law county governments could form and become members of a non-profit organization to pool their casualty risks the governing body of each county authorizes it to join and designate an individual to represent it at meetings and elect the board_of directors the counties pay initial deposits and annual fees based upon size and other determinants of risk the organization also earns investment_income it reimburses members for casualty losses if dissolved it will distribute its assets to its members the revenue_ruling states that political subdivisions insure against risks from casualties employee negligence worker’s compensation and employee health to satisfy government obligations the private benefit to employees from the insurance is held to be incidental to the public benefit the revenue_ruling finds that pooling casualty risks through a separate organization instead of purchasing commercial insurance fulfills the obligations of the political subdivisions to protect their financial integrity the revenue_ruling further concludes that the income of the organization accrues to political subdivisions because the organization’s income does not benefit private interests the organization’s income is used to reimburse counties for their losses and to reduce the annual fees that they would otherwise be required to pay the organization and the organization’s assets were required to be distributed to the counties upon its dissolution revrul_57_128 1957_1_cb_311 provides that in cases involving the status of an organization as a wholly owned instrumentality of one or more states or political subdivisions the following factors are taken into consideration whether it is used for a governmental purpose and performs a governmental whether performance of its function is on behalf of one or more states or function political subdivisions whether there are any private interests involved or whether the states or political subdivisions involved have the powers and interests of an owner whether control and supervision of the organization is vested in public authority or authorities if express or implied statutory or other authority is necessary for the creation and or use of such an instrumentality and whether such authority exists and plr-100489-16 the degree of financial autonomy and the source of its operating_expenses revrul_75_359 1975_2_cb_79 provides that a voluntary association of counties is separate from its member counties and qualifies as a wholly-owned instrumentality of those counties which are political subdivisions and is formed and operated exclusively for the public purposes of the member counties therefore the revenue_ruling holds that contributions to the association are deductible as contributions for_the_use_of political subdivisions subject_to the limitation of sec_170 revrul_69_453 1969_2_cb_182 applies the six factors of revrul_57_128 to rule that a soil and water conservation district formed as a private non-stock corporation by private individuals is not an instrumentality of the state the revenue_ruling finds the state has no authority or control_over the district’s expenditures has no authority to remove any member of the district’s board and the district funds its operations through fees that it charges landowners for work done for the purpose of soil conservation moreover the revenue_ruling notes the state has no claim to the district’s assets after the district’s dissolution revrul_65_196 1965_2_cb_388 holds that a sports area commission formed pursuant to an agreement which was authorized by the enactment of a state law legalizing such agreements between a city and two villages to erect and operate an athletic stadium is an instrumentality of political subdivisions of the state the commission is comprised of members appointed by councils of the city and villages as their representatives each member is required to be a citizen and resident of the state and may not be a member of the governing body of the city or the villages the sole source of financing for the commission comes from bonds issued by the city the city is authorized to issue bonds upon the request of the commission to fund the athletic stadium the revenue_ruling finds the commission is an instrumentality of the city and two villages by whose agreement it was formed because it meets substantially_all of the revrul_57_128 factors the commission was created by the city and villages as their instrumentality and validated by state law the commission members are delegated certain authority under the terms of the agreement between the city and villages control and supervision of the assets of the commission are in the hands of the city and villages there are no private interests involved and the city upon the commission’s direction is responsible for the project’s finances rulings requested because taxpayer’s income is derived from its performance of an essential_governmental_function and accrues to state county or other political subdivisions of state or entities whose income is excludable from gross_income pursuant to sec_115 taxpayer’s income is excludable from gross_income pursuant to sec_115 plr-100489-16 because taxpayer is an instrumentality for purposes of sec_170 contributions to it are deductible to the extent otherwise allowed by sec_170 analysis issue in year state amended the law that it and county had used to target problems such as blighted vacant and foreclosed properties the amendments streamlined procedures and gave counties new tools to tackle community ailments worsened by a burgeoning real_estate crisis county created taxpayer in accordance with the new state law and it designated taxpayer to be its agent to carry out the statutory purposes of combating community deterioration by restoring abandoned and blighted property and promoting economic and housing development in county private interests do not benefit from taxpayer’s activities more than incidentally transforming blighted abandoned or foreclosed property into safe and economically productive property is an essential_governmental_function for purposes of sec_115 of the code county can dissolve taxpayer at any time and it controls taxpayer’s board_of directors county is taxpayer’s most consistent source of funding although taxpayer obtains funding from state and to a much lesser extent from the sale of property taxpayer acquires in furtherance of its purposes taxpayer operates according to state’s open meetings and public records rules is required to submit an annual financial report to state’s official auditor and it must display the report on its website private interests do not benefit from taxpayer’s activities more than incidentally taxpayer’s articles ensure that upon dissolution its assets will be distributed to state county another political_subdivision of state or to an entity whose income is excludable from gross_income under sec_115 therefore taxpayer’s income accrues to a state or political_subdivision of a state issue the second ruling requested raises the issue of whether taxpayer is a separate wholly- owned instrumentality of one or more political subdivisions of state such that taxpayer is eligible to receive charitable_contributions within the meaning of sec_170 sec_170 generally defines the term charitable_contribution for purposes of sec_170 to include a contribution or gift to or for_the_use_of a state or any political_subdivision of the state provided the contribution or gift is made for exclusively public purposes taxpayer is not itself a political_subdivision of state therefore contributions to taxpayer cannot constitute charitable_contributions to a political_subdivision of state for purposes of sec_170 however pursuant to revrul_75_359 contributions to taxpayer may constitute charitable_contributions for_the_use_of political subdivisions of plr-100489-16 state which are deductible under sec_170 subject_to the limitation of sec_170 if taxpayer qualifies as a separate wholly-owned instrumentality of one or more political subdivisions of state a determination of whether taxpayer is a wholly-owned instrumentality of one or more political subdivisions of state is made by applying the factors set forth in revrul_57_128 governmental purpose and function the first factor under revrul_57_128 is whether taxpayer is used for a governmental purpose and performs a governmental function taxpayer was established by county as its agent to facilitate the governmental purposes of reclamation revitalization and return to economic productivity of abandoned or foreclosed real_estate located in county accordingly we conclude taxpayer is used for a governmental purpose and performs a governmental function performance on behalf of political subdivisions the second factor under revrul_57_128 is whether performance of taxpayer’s function is on behalf of one or more states or political subdivisions taxpayer was established pursuant to legislation by county as its agent to exercise the governmental purposes referenced above prior to taxpayer’s formation state and county engaged in activities aimed at community development similar to those presently performed by taxpayer a majority of taxpayer’s board_of directors represent county and its political subdivisions further taxpayer’s organizational documents require annual written statements from its officers and directors confirming they understand taxpayer exercises essential governmental functions and its income accrues to county based on these facts we find that taxpayer’s function is performed on behalf of county which is a political_subdivision of state private interests involved the third factor under revrul_57_128 is whether there are any private interests involved or whether state or political subdivisions have the powers and interests of an owner taxpayer’s revenue accrues to state and political subdivisions of state state law requires taxpayer to adhere to state’s open meetings and public records requirements taxpayer must also pursuant to state law provide an annual financial report to state and post it on its website furthermore taxpayer adopted a conflicts of interest policy that supplements state’s conflict of interest policy for public officials and employees among other things taxpayer’s policy requires its officers directors and employees to sign a written form each year stating they understand and agree to comply with taxpayer’s conflicts of interest policy taxpayer’s organizational documents provide for periodic reviews to ensure taxpayer is performing essential governmental functions and its compensation arrangements are reasonable and the result of arm’s length bargaining taxpayer has also adopted written policies and plr-100489-16 procedures governing the acquisition and disposition of residential and commercial properties and selection of demolition and rehabilitation contractors such policies and procedures are intended to provide consistency transparency standards and safeguards to prevent abuse should taxpayer dissolve its articles of incorporation state that remaining assets will be distributed to state a political_subdivision of state or an entity whose income is excludable from gross_income under sec_115 therefore based on the facts stated we conclude there are not more than incidental private interests involved and that political subdivisions of state have the powers and interests of an owner with respect to taxpayer control and supervision the fourth factor under revrul_57_128 is whether control and supervision of taxpayer is vested in public authority or authorities under the facts stated taxpayer’s board_of directors must consist of five to nine members the board is required to include county's treasurer and two of its commissioners these county board members unanimously select additional members including one who represents city and one who represents certain townships the directors selected by the county directors may be removed by a majority of all of the directors thus the directors who represent county and political subdivisions within county must always be a majority of taxpayer’s board_of directors county can dissolve taxpayer at any time in accordance with state law therefore based on the facts provided we conclude the control and supervision of taxpayer is vested in public authorities statutory authority the fifth factor under revrul_57_128 is whether express or implied statutory or other authority is necessary for the creation and use of taxpayer and whether such authority exists pursuant to legislation county established taxpayer as its agent to facilitate the effective reclamation revitalization and return to economic productivity of abandoned or foreclosed real_estate located in county the state legislature has extended and refined the authority in the years since showing continuing approval taxpayer continues to function pursuant to specific state statutory authority consequently we conclude that express statutory authority is necessary for the creation and use of taxpayer and that such authority exists financial autonomy and source of operating_expenses the sixth factor under revrul_57_128 is the degree of taxpayer’s financial autonomy and the source of its operating_expenses taxpayer is dependent on county and state for financial support the most consistent source of taxpayer’s funding is a dedicated percentage of county’s delinquent tax and assessment collection fund taxpayer also receives grant monies from state and it derives a limited amount of revenue from its property sales state law directs that taxpayer must use revenue from plr-100489-16 its activities solely in furtherance of its statutory purposes based on these facts we find that taxpayer is not financially autonomous from state and its political subdivisions rather taxpayer relies heavily upon state and its political subdivisions for the funding of its operating_expenses for the reasons stated above taxpayer is a wholly owned instrumentality of one or more political subdivisions of state similar to the taxpayer described in revrul_65_196 and unlike the one in revrul_69_453 taxpayer is used for a governmental purpose and performs a governmental function taxpayer’s function is on behalf of county which is a political_subdivision of state there are not more than incidental private interests involved and political subdivisions of state have the powers and interests of an owner with respect to taxpayer control and supervision of taxpayer is vested in public authorities express statutory authority is necessary for the creation and use of taxpayer and such authority exists taxpayer is not financially autonomous from state and its political subdivisions but rather relies heavily upon state and its political subdivisions for the funding of its operating_expenses therefore in accordance with revrul_75_359 we conclude that contributions to taxpayer constitute charitable_contributions within the meaning of sec_170 for_the_use_of political subdivisions of state that are deductible under sec_170 subject_to the limitation of sec_170 conclusion consistent with the foregoing we rule that because taxpayer’s income is derived from its performance of an essential_governmental_function and accrues to state county other political subdivisions of state and entities whose income is excludable from gross_income pursuant to sec_115 taxpayer’s income is excludable from gross_income pursuant to sec_115 because taxpayer is an instrumentality for purposes of sec_170 contributions to it are deductible to the extent otherwise allowed by sec_170 these rulings are based on the facts as they were presented in the ruling_request and on the understanding that there will be no material changes to those facts these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections expressly described herein 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 or of any activity or transaction not expressly addressed in this letter plr-100489-16 the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an individual with authority to bind taxpayer as specified in revproc_2016_1 2016_1_irb_1 b or its successors this office has not verified any of the material submitted in support of the request for rulings and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling was based or in the case of a transaction involving a continuing action or series of actions the controlling facts change during the course of the transaction see revproc_2016_1 sec_11 or its successors this ruling letter is directed only to taxpayer sec_6110 provides that it may not be used or cited as precedent this ruling letter will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see the enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to the enclosed notice if you disagree with our proposed deletions you should follow the instructions in the enclosed notice a copy of this ruling letter should be attached to taxpayer’s tax_return for the current_year if the return is filed electronically attach a statement containing the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-100489-16 if you have any questions about this ruling please contact the person whose name and phone number are shown in the heading of this letter sincerely kenneth m griffin chief exempt_organizations branch tax exempt and government entities


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely lois lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number tax_exempt_and_government_entities_division date date legend m n dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below facts you were incorporated under the nonprofit laws of the state of m article il sec_1 b of your articles of incorporation provides that you were formed to develop and maintenance sic a website containing a list of referral links to websites of certain merchants who agree to pay the corporation a commission resulting from such referral you are governed by an eight-member board_of directors which consists of four couples your bylaws provide that the directors serve a life term unless they resign or are removed directors can only be removed for cause in the narrative provided with your application_for exemption you represent that you are an internet based organization founded to utilize pay-for-performance internet marketing systems to raise funds for christian causes you indicate that you expend of your time maintaining a website n through which you link potential customers with paid advertisers you represent that you have no paid employees you operate an online shopping mall utilizing the services of various providers of online marketing services service providers to link shoppers with affiliated retail merchants you earn commissions from the affiliated retail merchants each time a shopper utilizes one of the links on your website to make purchases commissions vary based on your agreement with each affiliated store the service providers facilitate your relationship with the affiliated retail merchants by providing the underlying technology that manages links and tracks results and commissions earned by you the service providers remit payments due to you by the affiliated retail merchants you do not pay a fee for these services as described above you utilize your website to link shoppers with affiliated retail merchants your website provides the affiliated retail merchants as donations these are actually commissions paid to you based on the sales your website generates although you refer to the amounts paid to you by you allow shoppers using your website to direct your earnings by using one or more of the three programs you operate the amount of your earnings that a shopper can direct is based on the commissions generated as a result of the shopper's purchases shoppers set up an account with you to track the purchases they make using your website shoppers can direct the funds to your standard giving account tuition assistance account or tuition supporter account with respect to disbursements under each of the three programs your website provides that checks will be issued annually if the shopper's account balance is at least dollar_figure amounts of less than dollar_figure will remain in the account the funds will be disbursed at the end of the year in which the dollar_figure threshold is met through your standard giving account a shopper can designate one of the charities listed on your website as the recipient of the funds credited to the shopper's account you represent that each charity listed has been recognized as an organization described in sec_501 of the code your tuition assistance account allows a shopper to make a tuition payment to the christian school or college he attends disbursements are made by check payable to the school specified by the account_holder the check is mailed to the account_holder you inform the account_holder that he can mail or drop off the check at his school and ask the school to credit his tuition account the tuition supporter account allows family and friends to direct funds to a specific individual's tuition assistance account your tuition program can be used for any christian school from preschool through college in your letter dated october is structured schools really do not need to choose to participate in our program our members choose to participate and earn toward tuition at their school we do send emails to schools and ask them to help promote our program to families in their newsletters and websites you state the way our tuition program in our letter dated august and tuition supporter accounts result in an impermissible private benefit to the individual students on whose behalf you make tuition payments in your letter dated september choose to use the funds to lower the student’s tuition you state that the funds are donated to the schools and they we stated that your tuition assistance accounts the following statement appears in the documents submitted with form_1023 our tuition assistance program supports individual families by providing funds to christian schools intended to be used by the schools to reduce the tuition cost of these families ’ with respect to disbursements of funds the financial information submitted in your letters dated october tuition assistance accounts as tuition payments for designated students and date identifies disbursements from in your letter dated october and earn toward tuition at their schools you state that shoppers choose to participate at the tuition assistance account page of your website you state start saving for children who have not reached school age your website provides with respect to individuals who wish to at the tuition supporter account page of your website you state you provided a sample letter which you furnish to christian schools it states in part earnings checks are mailed directly to the families sic homes the checks will be made out to the school so that they can be included with the next tuition payment or dropped off at the school you provided a copy of an ad you ran on an online radio station the ad included the following language you posted a classified ad in a local newspaper which stated earn for chr school tuition shop at n and earn for your church or christian school college tuition you represent that you will distribute in your letter dated september approximately of your total receipts through your three programs to date you have distributed dollar_figure thus a total of dollar_figure payable for the benefit of the individuals or charities specified in your accounts of this amount dollar_figure has been distributed to or held in accounts for the benefit of designated individuals the remaining dollar_figure accounts for charitable organizations listed on your website you are holding an additional dollar_figure of your funds have been distributed or are held in accounts has been distributed or is being held in in accounts_payable although you have received some contributions your primary source of support is from the commissions you receive from stores which advertise on your website initially you indicated that you were seeking classification as an organization described in sec_509 of the code in your letter dated september you indicated that you are now seeking classification as an organization described in sec_509 law sec_501 of the code provides in part for exemption from federal_income_tax of organizations organized and operated exclusively for charitable religious or educational_purposes provided no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more 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 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 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 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 of the regulations defines private_shareholder_or_individual as a person having a personal and private interest in the 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 exempt purposes unless it serves a public rather than a private interest therefore to meet the requirement of this subsection 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 sec_1_501_c_3_-1 of the regulations provides that an organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on otherwise than as an insubstantial part of its activities activities which are not in furtherance of one or more exempt purposes even though such organization is by the terms of such articles created for a purpose that is no broader than the purposes specified in sec_501 of the code sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes the relief of the poor and distressed or the of the underprivileged advancement of religion and advancement of education or science sec_1_501_c_3_-1 of the regulations provides that an organization may meet the requirements of sec_501 of the code although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization’s exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business revrul_66_103 1966_1_cb_134 held that a nonprofit organization providing awards and grants including scholarships and fellowship grants to needy individuals to enable them to continue their work in the creative arts as well as to continue their education and studies with no monetary benefit to the donor organization is entitled to exemption from federal_income_tax under sec_501 of the code revrul_69_175 1969_1_cb_149 held that a nonprofit organization formed by parents of pupils attending a private school that provides school_bus transportation for its members' children serves a private rather than a public interest and does not qualify for exemption under sec_501 of the code when a group of individuals associate to provide a cooperative service for themselves they are serving a private interest the organization enables the participating parents to fulfill their individual responsibility of transporting their children to school thus the organization serves a private rather than a public interest accordingly it is not exempt from federal_income_tax under sec_501 revrul_70_186 1970_1_cb_128 describes an organization formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features although the organization clearly benefited the public there necessarily was also significant benefit to the private individuals who owned lake front property the revenue_ruling held that the private benefit was incidental to the accomplishment of the organization's exempt_purpose the benefits to be derived from the organization’s activities flowed principally to the public in fact it would be impossible for the organization to accomplish its purposes without providing benefits to the lake front property owners in contrast revrul_75_286 1975_2_cb_210 describes an organization formed by the residents of a city block to preserve and beautify that block paying the city government to plant trees on public property within the block organizing residents to pick up litter and refuse in the public streets and on public sidewalks within the block and encouraging residents to take an active part in beautifying the block by placing shrubbery in public areas within the block membership in the organization is restricted to residents of the block and those owning property or operating businesses there the revenue_ruling concluded that the organization did not qualify for exemption under sec_501 of the code because it operated to serve private interests by enhancing members’ property rights its activities consist of in revrul_76_442 1976_2_cb_148 an organization’s primary activity is the offering of free legal services for personal tax and estate_planning to individuals who wish to make current and deferred gifts to charity as part of their overall tax and estate_planning the revenue_ruling states that aiding individuals in their tax and estate_planning is not a charitable activity in the generally accepted legal sense the organization is providing commercially available services to individuals who can afford them the revenue_ruling concludes that although funds may ultimately be made available to charity as a result of the organization’s planning assistance to individuals the benefits to the public are tenuous in view of the predominantly private purpose served by arranging individuals’ tax and estate plans the fact that gifts to charity are contemplated in the plans does not convert the organization’s assistance into a charitable activity or one that promotes social welfare within the meaning of the regulations in 72_tc_267 miss georgia scholarship fund the tax_court held that an organization created to award scholarships to the pageant’s contestants did not qualify under sec_501 of the code the scholarships would be forfeited if the winning contestant failed to provide certain services the tax_court held that the amounts awarded were not scholarships because the amounts paid were compensation_for services performed in 326_us_279 66_sct_112 90_led_67 c b better business bureau’ the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 70_tc_352 bsw group inc the court found that a corporation formed to provide consulting services was not exempt 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 nor scientific but rather commercial the court found that the corporation had completely failed to demonstrate that its services were not in competition with commercial businesses the court found that the organization’s financing did not resemble that of the typical 501_c_3_organization it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees for services and those fees were set high enough to recoup all 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 had failed to limit its clientele to organizations that were sec_501 exempt_organizations rationale sec_1_501_c_3_-1 of the 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 purposes specified in such section these tests are independent and an organization must satisfy both to be exempt sec_1_501_c_3_-1 of the regulations provides that an organization is not organized exclusively for one or more exempt purposes if its articles expressly authorize it to carry on otherwise than as an insubstantial part of its activities activities which are not in furtherance of one or more exempt purposes even if its articles limit its purposes and activities to those specified in sec_501 of the code sec_1_501_c_3_-1 ii of the regulations provide that an organization that is organized or operated to serve private rather than public interests cannot be recognized as operating exclusively for exempt purposes providing online marketing services does not further an exempt_purpose article il sec_1 b of your articles provides that you were formed to develop and maintenance sic a website containing a list of referral links to websites of certain merchants who agree to pay the corporation a commission resulting from such referral thus your articles expressly authorize you to carry on activities which are not in furtherance of an exempt_purpose accordingly you do not meet the organizational_test described at sec_1_501_c_3_-1 of the regulations you state in your application that you operate a standard giving program that allows shoppers who use your online marketplace to designate individuals and christian organizations such as churches and schools to receive commissions generated by their online purchases you operate your online marketplace through your website n n serves as a link which allows individuals to purchase and retail merchants to sell goods and services the operation of your website does not differ from similar websites operated by for-profit online marketing firms the contracts you have entered into with your affiliated retail merchants do not differ from the contracts retail merchants enter into with for-profit businesses engaged in online marketing you are primarily supported by the fees generated through your operation of your online marketing business you estimate in your application_for exempt status that building and maintaining the website takes of your time and general administration takes an additional of your time the majority of your time is devoted to the operation of an online marketing business operated in a manner which is indistinguishable from those operated by for-profit businesses you directly compete with those for-profit businesses your primary source of financing fees from the provision of marketing services does not resemble that of a typical 501_c_3_organization thus like the organizations described in revrul_76_442 and bsw group inc supra your primary activity is the operation of a trade_or_business ordinarily carried on by for-profit businesses providing services of an ordinary commercial nature regardless of whether the undertaking is conducted on a nonprofit basis and is beneficial to organizations described in sec_501 does not further a charitable purpose unless the service directly accomplishes a tax-exempt purpose your online marketing services indirectly further an exempt_purpose since some of the profits are distributed to organizations described in sec_501 of the code however the services themselves do not directly further a charitable purpose although you have a charitable purpose the provision of online marketing services is not incidental to that purpose on the contrary the charitable purpose is incidental to your commercial purpose your online marketing services further a substantial nonexempt purpose and preclude recognition of exemption under sec_501 of the code see better business bureau supra furthermore the provision of such services results in a substantial benefit to your affiliated retail merchants in the form of increased sales of your funds have been distributed to or are held in accounts_payable for todate the benefit of the individuals named in your tuition assistance accounts and tuition supporter accounts in your letter dated october not tuition payments but rather are donations to christian schools you provided the following information with respect to these two programs you indicate that these are our tuition assistance program supports individual families by providing funds to christian schools intended to be used by the schools to reduce the tuition cost of these families see documents submitted with your form_1023 with respect to disbursements of funds the financial information submitted in your letters dated october from tuition assistance accounts as tuition payments for designated students and november _ identifies disbursements in your letter dated october participate and earn toward tuition at their schools you state that your members choose to at the tuition assistance account page of your website you state at your tuition supporter account page of your website you state a sample letter you send to christian schools provides with respect to the tuition assistance checks you issue your radio ad states you posted a classified ad in a local newspaper which stated although you characterize distributions made with respect to your tuition assistance accounts and tuition supporter accounts as donations to the schools specified by the account holders the statements above clearly indicate that the distributions are intended to be used as tuition payments by the individuals specified in your tuition assistance accounts these payments result in an impermissible private benefit to the specified individuals you operate in a manner similar to the organization described in revrul_69_175 supra which held that parents who were providing a cooperative service for themselves were serving their own interests and did not qualify for exemption under sec_501 of the code through your tuition assistance accounts and tuition supporter accounts you relieve those individuals of some or all of the responsibility of paying their tuition by providing tuition assistance to designated individuals unlike the activities of the organization described in revrul_70_186 supra the tuition assistance payments you make are not incidental to accomplishing your exempt_purpose distributing funds to organizations described in sec_501 of the code such payments serve no purpose other than to benefit the designated individuals the organization described in revrul_75_286 supra served the private interests of residents of a particular block by enhancing their property like that organization your tuition assistance accounts and tuition supporter accounts were formed to benefit a select group of individuals by providing tuition assistance payments to date through your tuition assistance accounts and your tuition supporter accounts you have distributed or are holding in accounts_payable dollar_figure benefit of designated individuals these payments which result in a private benefit to the designated individuals constitute of the amount which you have distributed or are holding in accounts_payable thus a major objective of your operations is to provide a private benefit to designated individuals for the revrul_66_103 supra held that an organization that provided scholarships based on need was entitled to exemption under sec_501 of the code unlike that organization the payments you make do not constitute scholarships nor are such payments limited to a charitable_class anyone setting up an account on your website is eligible to receive payments shoppers using your website must perform a service purchasing goods to be eligible to receive or designate distributions see miss georgia scholarship fund supra in which the court held that an organization was not exempt under sec_501 the court found that distributions made were not scholarships because the amounts paid were linked to the performance of services although you distribute some funds to organizations described in sec_501 of the code your primary purpose is the operation of an online marketplace a trade_or_business which does not directly further a charitable purpose furthermore your operation of the marketplace results in an impermissible private benefit to your affiliated retail merchants whose sales are increased through participation in your marketplace finally revenue from the operation of your marketplace is distributed to specified individuals through your tuition assistance accounts and tuition supporter accounts these distributions serve no charitable purpose and result in an impermissible private benefit thus you are operated to serve both exempt and non-exempt purposes the non-exempt purposes you serve are substantial the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes see better business bureau supra accordingly you do not meet the operational_test described at sec_1_501_c_3_-1 of the regulations conclusion based on the information above you have failed to demonstrate that you are organized or operated exclusively charitable or educational_purposes within the meaning of sec_501 of the code accordingly we conclude that you do not qualify for exemption under sec_501 because you do not qualify for exemption as an organization described in sec_501 of the code you must file federal_income_tax returns contributions to you are not deductible under sec_170 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you if you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so representation see publication practice_before_the_irs and power_of_attorney all for more information about forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if we do not hear from you within days we will issue a final adverse if you do not intend to protest this determination you do not need to take any further action determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service te_ge se e0o t ra constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations


t c memo united_states tax_court david c and wendy clark et al petitioners v commissioner of internal revenue respondent docket nos filed date paul e kent for petitioners catherine g chang and jon d feldhammer for respondent 1cases of the following petitioners are consolidated herewith american synergy asbestos removal services inc a k a synergy environmental inc docket no clark c trust a k a clark c family_trust reed humpherys trustee docket no american synergy corporation docket no american synergy financial co trust r jacobsen trustee docket no synergy environmental co trust a k a american synergy co trust david c clark trustee docket no and synergy environmental co trust steve shallenberger trustee docket no memorandum opinion haines judge these cases are before the court on respondent’s motions for entry of decision and petitioners’ motions to reform stipulation of settled issues background because the parties anticipated a lengthy trial these cases were set for trial at a special session of the court to commence on date in san francisco california on date respondent’s counsel met with petitioner david clark and petitioners’ counsel to discuss a possible settlement on date respondent wrote petitioners a letter detailing a comprehensive settlement offer addressing all issues raised in the notices of deficiency on which these cases are based one pertinent term of the settlement offer was that petitioners david and wendy clark docket no would concede all adjustments determined in their notice_of_deficiency with the exception of a delinquency addition_to_tax for those adjustments included a rental income adjustment which was associated with american synergy asbestos removal services inc asarsi docket no another term of the proposed settlement was that any penalty or addition_to_tax amounts asserted in the notice_of_deficiency against asarsi would be adjusted relative to the new deficiency amount unless the penalty or addition_to_tax was specifically conceded in respondent’s pretrial memorandum respondent’s letter informed petitioners that the offer would be held open until date pincite p m on date petitioners discussed with respondent the delinquency additions to tax under sec_6651 which were not conceded in respondent’s pretrial memorandum petitioners consistently maintained that asarsi had timely filed its federal_income_tax return after receiving an extension to file however respondent had no record of the extension nor did petitioners produce any such evidence nevertheless in the interest of settlement respondent revised his settlement offer by offering to reduce the addition_to_tax from percent of the related deficiency to percent the revised offer was held open until date pincite a m on date petitioners accepted the revised offer later that day the parties informed the court of the settlement during a conference call the court promptly canceled the date trial session the parties completed a stipulation of settled issues incorporating the terms of the settlement including the reduced delinquency addition_to_tax with respect to asarsi and the rental income adjustment the stipulation of settled issues was filed with the court on date respondent then prepared and sent to petitioners deficiency penalty and addition_to_tax computations as well as proposed decision documents according to the terms of the stipulation of settled issues during the week of date petitioners contacted respondent and stated that petitioners disagreed with respondent’s computations on date respondent received several documents from petitioners including an application_for automatic_extension of time to file corporate_income_tax return for asarsi’s taxable_year however petitioners failed to explain the disagreement with respondent’s computations on date the court filed respondent’s motions for entry of decision which asked the court to enter decisions in accordance with the terms of the stipulation of settled issues on date the court filed petitioners’ motions to reform stipulation of settled issues petitioners’ motions ask the court to modify the stipulation in two respects first petitioners ask the court to modify the stipulation because the rental income assigned to david and wendy clark was also assigned to asarsi second petitioners ask the court to modify the stipulation to eliminate the delinquency addition_to_tax asserted against asarsi for its tax_year because asarsi requested an automatic_extension of time to file a hearing on the motions was held on date in san francisco california discussion a settlement is a contract and consequently general principles of contract law determine whether a settlement has been reached 108_tc_320 affd without published opinion 208_f3d_205 3d cir in settling a case each party agrees to concede some rights which may have been asserted against the opposing party as consideration for those secured in the settlement agreement 26_tc_171 a valid settlement once reached cannot be repudiated by either party and after parties have entered into a binding settlement agreement the actual merits of the settled controversy are without consequence dorchester indus inc v commissioner supra pincite this court has declined to set_aside a settlement duly executed by the parties and filed with the court in the absence of fraud mutual mistake or other similar ground 90_tc_315 42_tc_110 where the parties’ settlement leads to the vacating of an imminent trial date the court applies stringent standards to modify or set_aside the settlement dorchester indus inc v commissioner supra pincite stamm intl corp v commissioner supra pincite in such cases the moving party must satisfy standards akin to those applicable in vacating a judgment entered into by consent dorchester indus inc v commissioner supra pincite stamm intl corp v commissioner supra pincite see 276_us_311 the court has discretion to set_aside a settlement agreement filed with it but its discretion will not be exercised unless good cause is shown saigh v commissioner supra pincite petitioners seek to set_aside the stipulation as it relates to a delinquency addition_to_tax asserted against asarsi during the settlement negotiations petitioners contended that asarsi received an extension of time to file however they were unable to find a copy of the application_for extension petitioners argue that they were told if they could provide the application_for extension the entire addition_to_tax would be conceded by respondent respondent agrees he would have conceded the entire addition_to_tax but only if the application_for extension was provided before the execution of the stipulation petitioners were not able to provide a copy of the application_for extension until date more than months after the settlement was reached nothing in the stipulation of settled issues indicates that the parties intended to leave the issue open after the stipulation was filed with the court nor have petitioners shown that the parties intended to do so accordingly the stipulation regarding asarsi’s delinquency addition_to_tax is binding on the parties petitioners next ask the court to modify the stipulation as it relates to certain rental income arguably attributed to multiple parties petitioners claim that after careful examination of the notices of deficiency and their tax returns they discovered an erroneous duplication of income in the stipulation of settled issues even assuming that petitioners are correct that income was duplicated the court declines to modify the stipulation the settlement stipulation was a compromise and the mere fact that petitioners now feel more confident or knowledgeable on this issue than they did while stipulating the deficiencies is not sufficient grounds for voiding the settlement agreement see saigh v commissioner supra pincite if petitioners made a mistake in agreeing to the settlement respondent contends and the court agrees it was not mutual but unilateral this court has previously held that a party may be bound by its agreement although it has made a unilateral mistake in the calculation of a deficiency stamm intl corp v commissioner supra petitioners have not shown that respondent 2it is not clear on the face of the stipulation of settled issues whether there was a duplication of income 3in 992_f2d_955 9th cir the u s court_of_appeals for the ninth circuit to which an appeal in this case would ordinarily lie set_aside a closing_agreement between taxpayers and the commissioner in pack the court held that the terms of the closing_agreement could not be relied on by the taxpayers to support their contention that waivers suspended continued committed fraud or otherwise improperly induced petitioners to agree to the offer the parties spent considerable time developing these cases and engaging in settlement discussions they were aware or should have been aware of the issues they compromised petitioners represented by competent counsel had the opportunity to review the stipulation before signing it and presumably they did furthermore the stipulation of settled issues is in accord with respondent’s settlement offer accepted by petitioners accordingly the court will not modify the stipulation on the basis of a unilateral mistake petitioners further argue that david clark was the only one who could accurately review the figures in the stipulation but he was out of the country when it was signed and thus unable to review the figures the stipulation was executed by petitioners’ counsel and petitioners do not argue that he lacked the authority to do so furthermore david clark was present at the parties’ settlement discussions and thus was aware of the term sec_3 continued the assessment of interest because the waiver was contrary to the internal_revenue_code code and the closing_agreement specifically stated that its terms were subject_to the code and the closing_agreement did not expressly create the waiver id pincite the reasoning of the court in pack is not applicable in this case the settlement agreement entered into by respondent and petitioners does not state that its terms are subject_to the code in fact respondent made several concessions which are in contravention of the code petitioners do not seek to set those aside of the settlement accordingly the court will not set_aside the stipulation on this basis in his settlement offer respondent made significant concessions which ultimately led to petitioners’ acceptance by accepting the offer petitioners chose to concede some of the rights they might have asserted in consideration for respondent’s concessions petitioners may not now avoid their own concessions while receiving the benefits of respondent’s to reflect the foregoing orders denying petitioners’ motions will be issued and orders and decisions granting respondent’s motions will be entered


significant index number department of the treasury internal_revenue_service washington d c jan tax_exempt_and_government_entities_division se-t' ep ral ad re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning january bases established as of january of dollar_figure this extension applies to the eligible amortization charge which result in a net unfunded_liability as of that date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 d of the code sectien d a of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan's actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the olan year or anyofthe succeeding plan vears ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the and to the ' this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact i sincerely yours dt david m ziegler manager ep actuarial group


department of the treasury internal_revenue_service washington d c date cc dom fs p si uilc number release date internal_revenue_service national_office field_service_advice memorandum for from assistant chief_counsel field service cc dom fs subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent issue s whether interest on the fraud_penalty which runs from the due_date of the return with extensions may be deducted as an administrative expense under sec_2053 of the internal_revenue_code conclusion interest on the fraud_penalty actually paid_or_accrued is deductible provided it is allowable as an expense of the estate under local law and the expense is incurred for the benefit of the estate facts the estate was assessed the fraud_penalty for willful failure to disclose assets of the estate on the estate_tax_return law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2053 provides that the value of the taxable_estate shall be determined by deducting from the value of the gross_estate such amounts for administration_expenses as are allowed by the laws of the jurisdiction whether within or without the united_states under which the estate is being administered sec_20_2053-3 of the estate and gift_tax regulations provides that deductible administration_expenses are those expenses that are actually and necessarily incurred in the administration of the decedent’s estate expenditures not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs legatees or devisees may not be taken as deductions sec_6663 provides that if any part of any underpayment_of_tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to percent of the portion of the underpayment which is attributable to fraud revrul_81_154 1981_1_cb_470 holds that the failure to pay or failure_to_file penalties are not deductible as a necessary administration expense under sec_2053 of the code even if the expense is allowable under local law the willful failure_to_file the estate_tax_return is a breach of the executor’s fiduciary duty and the resulting penalty would not be an expense necessarily incurred in the administration of the decedent’s estate similarly the filing of a fraudulent estate_tax_return is a breach of the executor’s fiduciary duties and cannot be considered a necessary expense of administration of the estate revrul_81_154 however does not address the question of the deductibility of interest on the penalty it does address the deductibility of interest on the late payment of the tax itself and holds that the interest is deductible as an expense of administration of the estate it cites 68_tc_74 acq 1978_1_cb_1 for the proposition that interest_expense is allowable under sec_2053 without regard to the manner in which it was incurred it has been consistently recognized by this and other courts that 'interest on a tax is not a tax but something in addition to a tax ' 23_bta_848 similarly interest on a penalty is not a penalty but something other than a penalty thus even though the penalty may not be deductible for purposes of determining the taxable_estate the interest on the penalty is a separate item and must be evaluated on its own merits to be deductible_interest must be allowed by the laws of the jurisdiction under which the estate is being administered that is it must be allowable as a charge against the probate_estate generally interest on an obligation of an estate is allowed as an expense of administration under the laws of the jurisdiction in which this estate is being probated we have found nothing to indicate that there is an exception to the general_rule for interest on penalties additionally to be allowed as a deduction the interest must be for the benefit of the estate that is the interest must have been actually and necessarily incurred for the benefit of the estate expenses that are not necessary to the settlement of the estate but instead are incurred for the benefit of heirs legatees or devisees are not deductible this does not mean however that there can be no benefit to heirs merely that there must be benefit to the estate see 76_tc_369 and 49_tc_207 as explained by the tax_court a given expense associated with the administration of an estate may be incurred for several reasons this is the sale may have been initiated for the benefit of the heirs but at the same time it may have been necessary to acquire cash to pay expenses preserve the estate or to effect a distribution in such a situation it may be more appropriate to ignore the personal aspects of the transaction and allow the executor to deduct the incurred expenses park's 57_tc_705 it should be noted that in park's estate the court disallowed the claimed deduction of selling_expenses because the estate had sufficient cash available to pay all of the expenses of administration that it was claimed necessitated the sale of estate assets the court concluded that the sale was solely for the benefit of the heirs it is our understanding that here the estate did not have sufficient cash or liquid_assets to pay the tax penalty and interest assessed against it and had to wait until other assets could be sold in addition the estate contested the penalty in the tax_court even though it conceded the omission and undervaluation of many of the assets that generated an underpayment of federal estate_tax it did not concede that the underpayment was with fraudulent intent thus the estate can argue that its delay in payment of the penalty and the incurring of interest on the penalty pending a judicial determination were for the purpose of preserving the assets of the estate and therefore was for the benefit of the estate you note that the allowance of interest on the penalty as an administrative expense will reduce the amount of the taxable_estate and thereby reduce both the amount of the tax and the penalty which is computed on a percentage of the underpayment attributable to fraud in estate of bahr the tax_court fail ed to see the significance of the fact that the interest if deductible would reduce the taxable_estate and thus the ultimate amount of estate_tax paid the result is the same when interest is paid to a private lender as in 36_bta_698 and 57_tc_288 a deductible administration expense by definition reduces the taxable_estate to deny an administration expense deduction upon the mere basis that it would otherwise reduce the amount of estate_taxes paid would result in the disallowance of all administration_expenses we agree that a reduction in both the amount of tax and any addition to the tax computed as a percentage of the tax is inherent in the allowance of deductions from the taxable_estate case development hazards and other considerations if you have any further questions please call by william c sabin senior technician reviewer


department of the treasury i n t e r n al r e v e n u e s e r v i c e washington d c office_of_chief_counsel december number info release date cc ita b02 ------------- genin-159198-04 uil -------------------- -------------------------- --------------------------------------------- ------------------------------------------------- -------------------------------- -------------------------- dear ------------ requested information regarding whether sec_170 of the internal_revenue_code allows a deduction for contributions to a certain fund the fund was established under state law for the use and benefit of certain veterans’ homes that are agencies of the ------------------ --------------------------------------------------------- and for the use and benefit of the veterans that reside in those homes this letter responds to your letter of date in your letter you this letter is an information_letter within the meaning of section dollar_figure of revproc_2004_1 2004_1_irb_7 an information_letter calls attention to a well-established interpretation or principle of tax law without applying it to a specific set of facts in accordance with section dollar_figure of revproc_2004_1 this information_letter is advisory only and has no binding effect on the internal_revenue_service if a taxpayer would like us to determine whether a contribution to the fund would be allowable as a deduction pursuant to sec_170 the taxpayer would need to request a private_letter_ruling information on how to request a private_letter_ruling can be found in revproc_2004_1 2004_1_irb_1 for any charitable_contribution made during the taxable_year a contribution or gift to or for_the_use_of a state or possession_of_the_united_states or sec_170 provides that the term charitable_contribution means in part sec_170 allows subject_to certain restrictions and limitations a deduction any political_subdivision thereof or the united_states or the district of columbia but only if the contribution or gift is made for exclusively public purposes an agency or fund that is an integral part of a governmental_unit generally is eligible to receive charitable_contributions as defined by sec_170 see revrul_73_296 1973_2_cb_67 contributions to united_states army unit funds which are integral parts of the army are deductible under sec_170 see also revrul_82_169 1982_2_cb_72 taxpayers who itemize their deductions generally may deduct the amount of a charitable_contribution of money subject_to the requirements and limitations of sec_170 including the requirement that the charitable_contribution be verified under regulations prescribed by the secretary of course the tax consequences of any such contribution are determined based upon the facts and circumstances of that contribution please contact -------------------- at ------------------- we hope that this information is helpful to you if you have additional questions sincerely clifford m harbourt senior technical reviewer branch income_tax accounting


department of the treasury internal_revenue_service washington d c office_of_chief_counsel number release date date cc ita postf-116306-02 uilc internal_revenue_service national_office legal advice memorandum for associate area_counsel kansas city missouri sb_se from subject heather c maloy associate chief_counsel income_tax accounting this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 of the internal_revenue_code it should not be cited as precedent legend b year dollar_figurex dollar_figurey dollar_figurez state statute issues must b include in gross_income the portion of a punitive_damages award that is deemed rendered to the state pursuant to statute may b deduct the attorneys’ fees and costs allocable to the recovery_of the portion of the punitive_damages that is deemed rendered to the state postf-116306-02 conclusion sec_1 b is not required to include in gross_income the portion of the punitive_damages award that is deemed rendered to the state b may deduct the attorneys’ fees and costs allocable to the recovery_of the portion of the punitive damage award that is deemed rendered to the state facts after her husband died in a helicopter crash b filed a wrongful_death_action against the manufacturers of the helicopter co-plaintiffs included her children and her husband’s parents the defendants appealed a jury verdict and b and the other plaintiffs accepted a remittitur of dollar_figurex in compensatory_damages and dollar_figurey in punitive_damages pre- and post-judgment interest accrued on the award as remitted the award including interest thereon was satisfied in year the contingent_fee agreement provided that the attorneys’ fees would be satisfied from the award of punitive_damages in year statute3 provided fifty percent of any final judgment awarding punitive_damages after the deduction of attorney’s fees and expenses shall be deemed rendered in favor of the because no material differences exist between the facts in her case and those of the co-plaintiffs we address only b’s situation this provision is not binding on the internal_revenue_service for purposes of allocating the attorneys’ fees and costs incurred between the taxable and nontaxable portions of the recovery in year the state amended statute to provide that parties receiving a circuit_court final judgment for purposes of appeal for punitive_damages are required to notify the state of such award except in certain healthcare cases pursuant to this amendment the state explicitly has a lien interest in any final judgment awarding punitive_damages the amended statute provides in part the state shall have a lien for deposit into the tort victims’ compensation fund to the extent of fifty percent of the punitive damage final judgment which shall attach in any such case after deducting attorney’s fees and expenses the state can now intervene in an action to enforce its lien rights as provided under statute and the state cannot satisfy its lien until the attorney’s fees and expenses are paid postf-116306-02 state the circuit clerks shall notify the attorney_general of any final judgment awarding punitive_damages rendered in their circuits with respect to such fifty percent the attorney_general shall collect upon such judgment and may execute or make settlements with respect thereto as he deems appropriate for deposit into the fund the state shall have no interest in or right to intervene at any stage of any judicial proceeding under this section after finding that the attorneys’ fees and litigation expenses claimed were reasonable the trial_court determined that pursuant to statute the state was entitled to dollar_figurez from b’s award of punitive_damages law and analysi sec_1 inclusion in gross_income except as otherwise provided in the internal_revenue_code a taxpayer must include in gross_income under sec_61 all income from whatever source derived the supreme court of the united_states has long recognized that the definition of gross_income sweeps broadly and reflects congress’ intent to exert the full measure of its taxing power and to bring within the definition of income any accession to wealth 515_us_323 504_us_229 in numerous cases courts have struggled to determine whether a taxpayer benefitted from an accession to wealth thereby creating an item_of_income for example courts have employed the anticipatory_assignment_of_income doctrine to determine which taxpayer should be taxed upon income or gain derived from a transaction see 281_us_111 311_us_112 311_us_122 describing this foundational rule as the first principle of taxation 337_us_733 the court has concluded that income is taxable to the party who earns it and that liability may not be avoided by anticipatory assignment of that income lucas v earl u s pincite in resolving these cases the court has also employed the principle that it is the command the taxpayer has over the income that is the concern of the tax laws 312_us_579 under this principle the taxpayer will remain liable for the tax if at the time of realization the taxpayer retains control_over the disposition of the gain or income although the gain or income is transferred to a third party prior to receipt we believe the circumstances of this case warrant application of this principle postf-116306-02 on the death of her husband b prosecuted a wrongful death claim to its conclusion under these circumstances generally b would be considered the owner of the remitted jury verdict by operation of law however one-half of the net punitive_damages was deemed the property of the state at the time the proceeds were realized b had no command over the disposition of the portion of the proceeds deemed rendered to the state consequently we conclude that b is not required to include that portion of the proceeds in her gross_income in a line of cases the irs has argued that statutes creating lien rights in judgments and settlements in favor of attorneys do not transfer any portion of the client’s claim to the attorney and accordingly that the entire litigation proceeds are includible in the gross_income of the client see eg srivastava v commissioner t c m rev’d 220_f3d_353 5th cir 114_tc_399 aff’d 259_f3d_881 7th cir hukkanen-campbell v commissioner t c m aff’d 274_f3d_1312 10th cir cert_denied u s l w u s may we do not believe the position taken in this memorandum is inconsistent with our litigating position in the contingent attorney fee area the distinguishing characteristic of the relationship between the state and b in this case and the attorney and client in a contingent_fee arrangement is that the former is created by operation of law while the latter is created by a voluntary act ie the execution of a contract as indicated above b had no control_over the disposition of the portion deemed rendered to the state in the contingent attorney fee area however a taxpayer disposes of the contingent_fee in order to acquire legal services in bringing a claim to fruition deduction for expenses under sec_212 an individual is entitled to a deduction for ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income this deduction however is limited under sec_265 if the recovery for which the expenses are incurred or paid is exempt from tax under sec_1_265-1 of the income_tax regulations if an expense or amount otherwise allowable as a deduction is allocable to both taxable and exempt_income a reasonable proportion thereof shall be allocated to each accordingly an individual taxpayer may not deduct for example any expenses_incurred or paid to recover income excludable under sec_104 98_tc_1 88_tc_834 80_tc_1104 clearly then b may not deduct any expenses properly allocable to the recovery_of the compensatory_damages component of the settlement because they are excludable from gross_income under sec_104 nevertheless we do not think sec_265 applies to deny b a deduction for the portion of the attorney’s fees allocable to the state’s share of the punitive_damages sec_265 provides that no deduction shall be allowed for a ny amount otherwise postf-116306-02 allowable as a deduction which is allocable to one or more classes of income other than interest whether or not any amount of income of that class or classes is received or accrued wholly exempt from taxes imposed by this subtitle the tax_court has held that the legislative purpose behind sec_265 is to prevent taxpayers from reaping a double tax_benefit by using deductions attributable to tax- exempt_income to offset taxable_income 98_tc_618 aff’d 990_f2d_53 2d cir allowing b to deduct attorney’s fees allocable to the state’s share of the punitive_damages does not result in a double benefit the portion of the punitive_damages on which no tax is paid is not income to b b pays no tax on it because she does not receive it therefore if she does not receive the income the fact that she is not taxed on income that is not hers is not a benefit for purposes of sec_265 the plain language of the statute quoted above supports this interpretation the statute is concerned with deductions allocable to exempt_income of a type that can be received or accrued here the income is neither received nor accrued by b instead it goes to the state under these circumstances sec_265 should not apply this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions


third party communication date of communication month dd yyyy cca_2015082610052907 id uilc number release date from sent wednesday date am to cc bcc subject re d b - issue hi -------- it is our understanding that you wish to give a vendor access to the ffi database which contains information on ffis - including the information we publically publish as well as additional information such as address rep phone number etc for the purpose of doing a demonstration it is our understanding that the demonstration would be for the purpose of determining whether to enter into a contract with the vendor for the provision of technical services to help identify gaps in registration compliance with fatca the disclosures you wish to make are allowable under sec_6103 sec_6103 authorizes irs employees to disclose return_information in connection with their official duties relating to any audit collection activity or civil or criminal tax investigation or any other offense under the internal revenue laws to the extent the disclosure is necessary in obtaining information that is not otherwise reasonably available or with respect to the enforcement of any other provision of title_26 sec_6103 disclosures under sec_6103 may only be made in such situations and under such conditions as the secretary prescribes by regulation sec_301_6103_k_6_-1 permits disclosures of return_information in connection with an irs employee’s official duties related to among other things administrative criminal and civil investigations and enforcement activities to the extent the disclosure is necessary to obtain information related to those official duties or to accomplish properly any activity connected with such official duties this includes but is not limited to disclosures to obtain the services of persons having special knowledge or technical skills including disclosures necessary in connection with preliminary inquiries to the prospective contractee sec_301 k - a v pub disclosure under sec_6103 is only authorized if the irs employee reasonably believes that at the time of the disclosure the information was not otherwise reasonably available or if the employee needs to make the disclosure to carry out the employee’s official duties sec_301_6103_k_6_-1 when determining whether or not the disclosure of the information is necessary the issue is whether the irs employee reasonably believes based on the facts and circumstances at the time of the disclosure that the disclosure is appropriate and helpful to accomplish properly the activities connected with carrying out the employee’s official duties sec_301_6103_k_6_-1 disclosures to accomplish properly an activity connected with official duties is defined as a disclosure of return_information to carry out a function associated with official duties generally consistent with established practices and procedures id sec_301_6103_k_6_-1 in this case the disclosures would be made in order to determine whether or not to enter into a contract with this vendor for the performance of technical services to identify non-compliance with fatca at the time of the disclosure the irs is obtaining information in the form of a demonstration from the vendor to determine whether to enter into a contract with the vendor for services for identifying non-compliance with fatca the irs cannot make a decision whether to contract with the vendor without the demonstration the demonstration requires access to the information contained in the ffi database accordingly disclosure of the ffi database to the vendor for purposes of the demonstration is authorized by sec_6103 because the disclosures are appropriate and helpful to the irs’s official duties identifying non- compliance with fatca the irs is attempting to obtain the services of persons with technical skills and at the time of the disclosure the irs cannot properly accomplish its official duties contracting with individuals for the provision of services for tax_administration without making the disclosure however when making disclosures to the vendor the irs should carefully consider what information is necessary and limit the disclosures it makes to only that information which is necessary for purposes of the demonstration please let me know if you have any questions of if i can be of further assistance thanks ------- --------------- --------------------- ------------- ------------------------------- ---------------------------