office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b04 posts-107229-08 uilc date april to case manager large midsize business third party communication none date of communication not applicable from marie c milnes-vasquez acting chief branch corporate ------------------------------------------------------------------------------------------------------------------ ------------- subject legend taxpayer cooperative patron patron patron patron patron products services year ---------------------------------------------------- ------------------------ ----------------------------------------------- ------------------------------- ------------------------------ --------------------------------------- -------------------------------------- --------------------------------------------- -------------------------------------- ------- posts-107229-08 date date -------------------------- ---------------------- issue whether the intercompany_transaction matching_rule of sec_1_1502-13 applies to ensure that cooperative and patrons take into account in the same taxable_year their items from the intercompany_transactions at issue conclusion the intercompany_transaction matching_rule of sec_1_1502-13 does apply to ensure that cooperative and patrons take into account in the same taxable_year their items from the intercompany_transactions at issue as a result cooperative will defer taking into account its deduction for patronage_dividends until the year in which patrons take into account their corresponding items of income i in general facts taxpayer parent is the common parent of an affiliated_group_of_corporations parent consolidated_group that files a consolidated federal_income_tax return under an accrual_method of accounting the primary business of the group is to manufacture and sell products and services to domestic and foreign markets the parent consolidated_group is under audit for taxable years ended date and date cooperative was organized in year to qualify as a cooperative entity to which the rules of sec_1381 through subchapter_t of the internal_revenue_code code are applicable since its organization cooperative has conducted most of the parent consolidated group’s manufacturing and procurement operations parent and each of patron patron patron patron and patron collectively the patrons were patrons of cooperative in the years at issue each of the patrons is a member of the parent consolidated_group ii taxpayer’s reporting position taxpayer takes the position that cooperative is taxable as a cooperative under subchapter_t taxpayer further takes the position that notwithstanding the fact that cooperative and each of its patrons are members of the parent consolidated_group this memorandum assumes that this legal conclusion is accurate should cooperative not qualify to be taxed as a cooperative under subchapter_t the intercompany_transaction issue presented herein becomes moot posts-107229-08 the cooperative and the patrons should be entitled to report their items that flowed from the intercompany patronage_dividends at different times cooperative should be entitled to a deduction under sec_1382 in the taxable_year before the patronage_dividend was paid but under sec_1385 and the regulations thereunder the patrons should not include an equivalent amount of income until the year of the payment the taxpayer did not apply the intercompany matching_rule of sec_1_1502-13 to override the result provided under subchapter_t as a result the cooperative deducted its patronage_dividend amounts one year before the patrons included such patronage_dividends in income law and analysis law i subchapter_t sec_1382 provides in pertinent part in determining the taxable_income of a cooperative there shall not be taken into account amounts paid during the payment period for the taxable year- as patronage_dividends as defined in sec_1388 for purposes of this title any amount not taken into account under the preceding sentence shall in the case of an amount described in paragraph or be treated in the same manner as an item_of_gross_income and a deduction therefrom the payment period for any taxable_year is the period beginning with the first day of such taxable_year and ending with the 15th day of the ninth month following the close of such year sec_1382 a patronage_dividend is defined as an amount_paid to a patron by a cooperative on the basis of quantity or value of business done with or for such patron under an obligation to pay such amount which existed before the cooperative received the amount so paid and which is determined by reference to the net_earnings of the organization from business done with or for its patrons sec_1388 sec_1385 provides that patrons must include in gross_income patronage_dividends from a cooperative these amounts are includible in gross_income in the tax_year in which they are received even though the cooperative organization was allowed a deduction for such amounts in its preceding_taxable_year sec_1_1385-1 under sec_1381 the rules of subchapter_t including the rules relating to deduction and inclusion of patronage_dividends discussed above apply to any corporation operating_on_a_cooperative_basis with exceptions that are inapplicable here posts-107229-08 a corporation must meet certain requirements to be treated as operating_on_a_cooperative_basis these include subordination of capital democratic control by the members and operation at cost and the vesting in and allocation among the members of all fruits and increases arising from their cooperative endeavor 44_tc_305 revrul_82_51 1982_1_cb_117 in addition certain additional factors are considered in determining whether a taxpayer qualifies as a cooperative under this analysis i the cooperative must be engaged in some joint effort actively with for or on behalf of its members ii there must be a minimum number of patrons and iii upon liquidation current and former members must participate on a proportionate basis in any distribution of the cooperative's assets ii consolidated_return rules sec_1502 provides the secretary shall prescribe such regulations as he may deem necessary in order that the tax_liability of any affiliated_group_of_corporations making a consolidated_return and of each corporation in the group may be returned determined computed assessed collected and adjusted in such manner as clearly to reflect the income_tax_liability and the various facts necessary for the determination of such liability and in order to prevent the avoidance of such tax_liability in carrying out the preceding sentence the secretary may prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns the final sentence of sec_1502 was added to the statute in however it is applicable retroactively to all years see p l sec_844 118_stat_1418 this section and the amendment made by this section shall apply to taxable years beginning before on or after the date of the enactment of this act sec_1_1502-13 provides rules for taking into account items of income gain deduction and loss of consolidated_group members from intercompany_transactions intercompany_transaction regulations the purpose of the intercompany_transaction regulations is to provide rules to clearly reflect the taxable_income and tax_liability of the group as a whole by preventing intercompany_transactions from creating accelerating avoiding or deferring consolidated_taxable_income or consolidated_tax_liability sec_1_1502-13 sec_1_1502-13 provides separate_entity and single entity treatment -the selling member s and the buying member b are treated as separate entities for some purposes but as divisions of a single corporation for other purposes the amount and location of posts-107229-08 s’s intercompany items and b’s corresponding items are determined on a separate_entity basis separate_entity treatment the timing and the character source and other attributes of the intercompany items and corresponding items although initially determined on a separate_entity basis are redetermined under this section to produce the effect of transactions between divisions of a single corporation single entity treatment for example if s sells land to b at a gain and b sells the land to a nonmember s does not take its gain into account until b’s sale to the nonmember sec_1_1502-13 provides that as divisions of a single corporation s and b are treated as engaging in their actual transaction and owning any actual property involved in the transaction further although they are treated as divisions s and b nevertheless are treated as having any special status that they have under the code or regulations the regulations define intercompany_transaction broadly as any transaction between corporations that are members of the same consolidated_group immediately after the transaction the regulations further define s as the member transferring property or providing services and b as the member receiving the property or services sec_1_1502-13 s’s income gain deduction and loss from an intercompany_transaction are its intercompany items an item is an intercompany_item whether it is directly or indirectly from an intercompany_transaction sec_1_1502-13 s’s intercompany items include amounts from an intercompany_transaction that are not yet taken into account under its separate_entity method_of_accounting sec_1_1502-13 b’s income gain deduction and loss from an intercompany_transaction or from property acquired in an intercompany_transaction are its corresponding items an item is a corresponding_item whether it is directly or indirectly from an intercompany_transaction or from property acquired in an intercompany_transaction sec_1 b i the recomputed_corresponding_item is the corresponding_item that b would take into account if s and b were divisions of a single corporation and the intercompany_transaction was between those divisions sec_1_1502-13 the attributes of an intercompany_item or corresponding_item are all of the item’s characteristics except amount location and timing necessary to determine the item’s effect on taxable_income and tax_liability the regulations provide the following examples of attributes character source treatment as excluded from gross_income or as a noncapital nondeductible amount and treatment as built-in_gain or loss under sec_382 or sec_384 sec_1_1502-13 the principal rule within the intercompany_transaction regulations that implements single entity treatment is the matching_rule of sec_1_1502-13 under the matching_rule s and b are generally treated as divisions of a single corporation for posts-107229-08 purposes of taking into account their items from intercompany_transactions sec_1 a the matching_rule provides a timing rule which directs when b and s must take into account their items from an intercompany_transaction under this timing rule b takes its corresponding_item into account under its own separate_entity accounting_method sec_1_1502-13 s takes its intercompany_item into account to reflect the difference for the year between b’s corresponding_item taken into account and the recomputed_corresponding_item the item that b would have taken into account if s and b were divisions of a single corporation sec_1_1502-13 the matching_rule also provides guidance regarding the manner in which the single entity structure of the intercompany_transaction rules affects the attributes of intercompany and corresponding items this rule provides that the separate_entity attributes of s’s intercompany items and b’s corresponding items are redetermined to the extent necessary to produce the same effect on consolidated_taxable_income and consolidated_tax_liability as if s and b were divisions of a single corporation and the intercompany_transaction were a transaction between divisions thus the activities of both s and b might affect the attributes of both intercompany items and corresponding items sec_1_1502-13 sec_1_1502-13 discusses the application of the matching_rule to intercompany_transactions involving so-called special status entities that section provides notwithstanding the general_rule of paragraph c i of this section application of the matching_rule to attributes to the extent an item’s attributes determined under this section are permitted or not permitted to a member under the internal_revenue_code or regulations by reason of a member’s special status the attributes required under the internal_revenue_code or regulations apply to that member’s items but not to the other member the regulations exempt certain intercompany_transactions from application of the matching_rule see sec_1_1502-13 providing for bank and thrift group members to increase or reduce their reserves on a separate_entity basis sec_1_1502-13 providing for separate_entity reporting of intercompany direct insurance transactions but emphasizing that intercompany reinsurance transactions are subject_to the matching_rule the timing rules contained in the intercompany_transaction regulations are a method_of_accounting for intercompany_transactions to be applied by each member in addition to the member’s other methods_of_accounting sec_1_1502-13 to the extent that the timing rules of sec_1_1502-13 are inconsistent with a member’s otherwise applicable methods_of_accounting the timing rules of sec_1_1502-13 control id s’s or b’s application of the timing rules of sec_1_1502-13 to an intercompany_transaction clearly reflects income only if the effect of that transaction as a whole including for example related costs and expenses on consolidated_taxable_income is clearly reflected id posts-107229-08 sec_1_1502-80 provides that t he internal_revenue_code or other law shall be applicable to the consolidated_group to the extent the regulations do not exclude its application i cooperative rules in general analysis in general as described above to the extent that a cooperative operates in the prescribed manner and distributes its income to its patrons in compliance with the requirements of subchapter_t the cooperative may avoid any federal_income_tax on otherwise taxable_income under sec_1382 the cooperative may claim a deduction from its income in any taxable_year for qualifying patronage_dividends paid up to ½ months following the close of that taxable_year the patronage distributions are included in the taxable_income of the patrons in the year of receipt therefore under such circumstances the code effectively grants a one-year deferral on the taxation of the income earned by the cooperative and distributed as patronage_dividends ii cooperatives and patrons within a consolidated_group the outcome described above is clearly applicable to a cooperative and its patrons where the entities are not members of the same consolidated_group however because cooperative s and patron b are members of the same consolidated_group the timing rules of the intercompany_transaction regulations apply to ensure single entity treatment of the combined cooperative and patron application of these rules ensures a clear reflection of the tax_liability of the group as a whole as required by sec_1502 because cooperative and patrons are members of the same group the payment of patronage_dividends qualifies as an intercompany_transaction under the broad definition of that term see sec_1_1502-13 application of the matching_rule of the intercompany_transaction regulations ensures that the intercompany_item of s the deduction of cooperative is taken into account in the same taxable_year as the corresponding_item of b the income of patron which is generated by the same intercompany_transaction cf sec_1_1502-13 ex offsetting items due to intercompany payment of rent to be taken into account in a single taxable_year the timing rule provided within the matching_rule of sec_1_1502-13 directs when a consolidated_group must take into account b’s corresponding items and s’s intercompany items from an intercompany_transaction under this timing rule b the patron takes its corresponding items into account under its own separate_entity accounting_method sec_1_1502-13 because each patron is b in the transactions at issue the application of the rules of subchapter_t to the receipt by the patrons of the patronage_dividends is unchanged and the patrons must include such amounts in income in the year of receipt however under the timing rule s cooperative will take posts-107229-08 its intercompany_item into account to reflect the difference for the year between b’s corresponding_item taken into account and the recomputed_corresponding_item the item that b would have taken into account if s and b were divisions of a single corporation sec_1_1502-13 if cooperative and patron had actually been divisions of a single corporation a transfer of funds from one division cooperative to a second division patron would have resulted in no net_income or deduction to the corporation therefore application of the matching_rule results in the cooperative taking into account its deduction in the same year in which the patron includes the patronage_dividend in income the inclusion of the two completely offsetting items in a single taxable_year will result in the same net outcome to the group that would have resulted if s and b had been divisions of a single corporation no net_income or deduction application of this timing rule results in cooperative taking into account its patronage deduction its intercompany_item one year later than generally required outside of consolidation under sec_1382 parent consolidated_group will not be able to take advantage of the deferral provided under the rules of subchapter_t with regard to its intercompany_transactions this is admittedly a different outcome than would obtain if cooperative had not been a member of parent consolidated_group this type of outcome was explicitly contemplated by congress in authorizing the consolidated_return_regulations in sec_1502 congress charged the secretary with promulgating regulations to ensure clear_reflection_of_income of each member of the group and the group as a whole in doing so the secretary has express congressional blessing to prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns further the regulations provide explicit examples of cases in which otherwise applicable accounting methods are overridden by application of the matching_rule see eg sec_1_1502-13 ex e otherwise available installment reporting denied under single-entity principles see also sec_1_1502-13 to the extent the timing rules of sec_1_1502-13 are inconsistent with a member’s otherwise applicable methods_of_accounting the timing rules of sec_1_1502-13 control indeed the matching_rule has impact on members’ reporting of their items only in those cases in which the single entity outcome differs from the separate_entity outcome that would result outside of the group see eg sec_1_1502-13 ex no redetermination of attributes or timing where separate_entity and single entity outcomes are identical and exdollar_figure same further this outcome is consistent with the stated purpose of the intercompany_transaction rules which is to provide rules to clearly reflect the taxable_income and tax_liability of the group as a whole by preventing intercompany_transactions from creating accelerating avoiding or deferring consolidated_taxable_income or consolidated_tax_liability sec_1_1502-13 to the extent that cooperative and its patrons as a whole were able to take advantage of the rules of subchapter_t the group would be able to use an intercompany_transaction payment of the patronage_dividend to defer posts-107229-08 consolidated_taxable_income equal to the patronage_dividend through the use of an intercompany_transaction iii responses to taxpayer’s arguments based on application of the special status rule_of sec_1_1502-13 and legislative intent taxpayer argues that the matching_rule of section sec_1_1502-13 does not apply to cause cooperative to take into account its intercompany items in the same year as patrons take into account their corresponding items that flow from the same intercompany_transactions these arguments have no merit a technical arguments - special status taxpayer argues that based on the special status rule_of sec_1_1502-13 cooperative and patrons should be able to report their items from the same intercompany_transactions in different taxable years sec_1_1502-13 provides notwithstanding the general_rule of paragraph c i of this section application of the matching_rule to attributes to the extent an item’s attributes determined under this section are permitted or not permitted to a member under the internal_revenue_code or regulations by reason of a member’s special status the attributes required under the internal_revenue_code or regulations apply to that member’s items but not to the other member as discussed above attribute is specifically defined within the intercompany_transaction rules as all of the intercompany or corresponding item’s characteristics except amount location and timing necessary to determine the item’s effect on taxable_income and tax_liability the regulations provide the following examples of attributes character source treatment as excluded from gross_income or as a noncapital nondeductible amount and treatment as built-in_gain or loss under sec_382 or sec_384 sec_1_1502-13 the issue in this case is whether the cooperative and its patrons must match the timing of the reporting of their items as noted above sec_1_1502-13 provides that the attributes of items of special status entities are exempted from application of the matching_rule however timing is explicitly excluded from the definition of attribute thus the timing of the reporting of cooperative and patron items remain subject_to the matching_rule taxpayer appears to concede that if the matching_rule applies to the timing of the items in question cooperative and patrons must take their items into account in the same taxable_year further taxpayer clearly concedes that under the special status rule_of sec_1_1502-13 only attributes of an intercompany or corresponding_item of a posts-107229-08 special status entity are exempted from redetermination under the matching_rule taxpayer’s arguments go to the putative qualification of the timing of cooperative’s items as an attribute that is exempt from the matching_rule exclusion vs deduction taxpayer argues the patronage_dividends at issue meet the definition of the term attribute because sec_1382 provides that patronage_dividends paid during the proper payment period shall not be taken into account ie is excluded from gross_income to determine the taxable_income of a cooperative taxpayer appears to be relying on the fact that the regulation provides that the treatment of an item as excluded from gross_income is an attribute of that item see sec_1_1502-13 thus taxpayer’s first argument depends upon cooperative’s tax_benefit under subchapter_t constituting an exclusion rather than a deduction however contrary to taxpayer’s claim sec_1382 explicitly provides that for purposes of the internal_revenue_code the amount of any patronage_dividend will be treated in the same manner as an item_of_gross_income and a deduction therefrom therefore taxpayer’s claim is facially unsupportable and does not merit further discussion special status assuming cooperative’s item is a deduction taxpayer next argues that even if the cooperative’s intercompany_item does constitute a deduction the timing of such item should be treated as an attribute for purposes of the intercompany_transaction rules this argument is also without merit the intercompany_transaction regulations are a tightly-drafted set of rules which are based on well-defined principles the purposes of the regulations are carried out based on the application of closely-crafted definitions as discussed above attribute is specifically defined within those regulations as all of the intercompany or corresponding item’s characteristics except amount location and timing necessary to determine the item’s effect on taxable_income and tax_liability thus the regulations expressly exclude timing from the definition of an attribute although the taxpayer argues for an exception from this definition to be made in the case of a special status entity the regulation’s specific use of the term attribute in defining the exemption from application of the matching_rule indicates an see protest p protest p posts-107229-08 adoption of the precise definition contained in the regulations further sec_1 c the special status rule on which the taxpayer relies specifically operates to turn off application of sec_1_1502-13 the provision governing the matching of attributes defined in sec_1_1502-13 the special status rule_of sec_1_1502-13 has no applicability to sec_1_1502-13 the rule that applies matching principles to govern the timing of the reporting of member’s items further the drafters of the regulations clearly understood how to wholly exempt from the matching_rule certain transactions of special status entities they did so with regard to a number of transactions involving special status entities but not all see eg sec_1_1502-13 providing for bank and thrift members of a group to increase or reduce their reserves on a separate_entity basis sec_1_1502-13 providing for separate_entity reporting of intercompany direct insurance transactions under these provisions members are authorized to report the specifically-identified transactions on a separate_entity basis there is no equivalent rule for cooperatives also noteworthy is sec_1_1502-13 which provides that although direct insurance transactions between insurance_companies and other consolidated_group members are exempted from the matching_rule intercompany reinsurance transactions by those same insurance_companies are subject_to the matching_rule those member insurance_companies are clearly special status entities for which congress created specialized and highly complex rules however sec_1_1502-13 makes clear that the matching_rule is applicable to insurance_companies except with respect to the direct insurance transactions specified in sec_1_1502-13 b legislative intent all of taxpayer’s technical arguments appear to be fueled by its position that the legislative intent behind the subchapter_t rules may not be overridden by application of the intercompany_transaction regulations taxpayer notes congress specifically sanctioned the timing mismatch provided under subchapter_t taxpayer concludes that the matching_rule should only be used to prevent a taxpayer from using intercompany taxpayer challenges whether the regulation’s exclusion of timing from the definition of attribute is absolute to this end taxpayer notes that the special status rule_of sec_1_1502-13 names the sec_1503 limitation on absorption of certain losses as a special status issue see protest p the reference to the sec_1503 limitation does not call into question whether timing is excluded from the definition of attribute sec_1503 does not affect the timing under which a member takes items into account essentially causing the income deduction gain and loss items to be reported by the group on its consolidated_return rather it has impact only after a member’s item have been taken into account and have resulted in the reporting of a loss sec_1503 then limits the group’s ability to offset certain losses against income of certain other members and is somewhat analogous to a sec_382 limitation posts-107229-08 transactions to gain an impermissible tax advantage not available to non-consolidated parties the taxpayer is wrong although congress sanctioned a timing mismatch between cooperatives and their patrons as discussed above through sec_1502 congress specifically charged the secretary with promulgating regulations to ensure clear_reflection_of_income of members of a group and the group as a whole congress gave the secretary explicit and retroactive permission to prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns as discussed in detail above application of the matching_rule to achieve single entity treatment of cooperative and patrons ensures clear_reflection_of_income and is clearly sanctioned by congress under sec_1502 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information is determined to be necessary please contact this office for our views if disclosure please call if you have any further questions protest p


tcmemo_2006_181 united_states tax_court barry shrier petitioner v commissioner of internal revenue respondent docket no 8725-05l filed date cheryl r frank and gerald w kelly jr for petitioner vivian n rodriguez for respondent memorandum findings_of_fact and opinion foley judge the issue for decision is whether respondent abused his discretion in proceeding with collection of petitioner’s income_tax liabilities relating to through findings_of_fact on date respondent issued petitioner a final notice_of_intent_to_levy and notice of your right to a hearing relating to through the years in issue in the notice respondent determined that petitioner was liable for taxes and additions to tax totaling dollar_figure and dollar_figure respectively relating to the years in issue on date petitioner timely filed a form request for a collection_due_process_hearing request and stated that he did not have sufficient assets to cover the assessed liabilities on date petitioner sent respondent a form 433-a collection information statement for wage earners and self-employed individuals on date petitioner supplemented his form 433-a with copies of statements relating to petitioner’s checking credit card and telephone accounts petitioner also attached a copy of a statement relating to a car lease in the name of leo shrier petitioner’s father on date respondent conducted a telephone conference with petitioner during the conference petitioner requested that his account be placed in currently not collectible status because he was unemployed on date petitioner’s counsel informed respondent that petitioner was employed and would submit an offer-in-compromise oic relating to his income_tax liabilities while petitioner was unemployed petitioner’s parents made several deposits into his checking account deposits in a letter dated date respondent requested that petitioner provide an affidavit from petitioner’s parents as to the amount of money they gave him and cancelled checks corresponding to the deposits respondent also asked petitioner to explain the car lease expense on date petitioner submitted to respondent a form_656 offer_in_compromise in the amount of dollar_figure based on doubt as to collectibility march oic petitioner attached an updated form 433-a to the march oic but did not attach any additional financial documents in a letter dated date respondent requested additional financial information in a second letter also dated date respondent requested that petitioner provide the documents specified on form 433a and an affidavit from petitioner’s parents as to the amount of money they gave him respondent warned petitioner that if the requested documents were not received by date the march oic would not be accepted on date petitioner sent respondent an amended oic in the amount of dollar_figure based on doubt as to collectibility and effective tax_administration december oic petitioner attached to the december oic an updated form 433-a statements relating to petitioner’s checking account statements relating to an employee profit-sharing_plan and wage statements from his current employer in a letter dated date respondent stated that the december oic was insufficient because petitioner did not provide the requisite documentation relating to petitioner’s ability to pay respondent also informed petitioner that his claimed living_expenses eg food housing and transportation were in excess of the allowable_amount respondent also asserted that petitioner had not disclosed that he was living with another individual on date respondent issued petitioner a notice_of_determination concerning collection action s under sec_6320 and or relating to and through on date petitioner while residing in aventura florida filed his petition with the court relating to the years in issue and on date respondent issued petitioner a decision letter concerning equivalent_hearing under sec_6320 and or of the internal_revenue_code relating to on date the court filed respondent’s motion to dismiss for lack of jurisdiction and to strike as to the taxable_year on date the court granted respondent’s motion opinion petitioner does not dispute the underlying tax_liabilities where the validity of the liability is not at issue the court reviews the commissioner’s administrative determination for abuse_of_discretion 114_tc_176 respondent’s determination will be sustained unless the determination is arbitrary capricious clearly unlawful or without sound basis in fact or law 112_tc_19 petitioner contends that respondent abused his discretion by not accepting the december oic section authorizes respondent to grant an oic as an alternative to pursuing a collection action but petitioner must provide detailed financial statements and supporting documentation sec_301_7122-1 proced admin regs respondent on numerous occasions requested supporting documentation from petitioner petitioner however failed to provide the requested information indeed respondent was unable to properly evaluate the december oic because petitioner did not provide the supporting documentation unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue relating to petitioner’s expenses ie housing food transportation and health care and certain deposits accordingly respondent did not abuse his discretion by not accepting an oic and proceeding with the proposed collection action id contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division date release number release date legend org organization name address address xx date uil org address dear person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court october this is a final revocation letter as to your exempt status under sec_501 of the internal_revenue_code the internal revenue service’s recognition of your organization as an organization described in sec_501 is hereby revoked effective january 20xx we have made this determination for the following reasons not demonstrated that you are operated exclusively you have for charitable educational or other exempt purposes within the meaning of lr c sec_501 you failed to comply with the conditions of your exemption in that you did not file forms 990-pf or respond to repeated reasonable requests to allow the internal_revenue_service to examine your books records and activities you have provided no information showing that you conduct a real and substantial charitable program organizations described in sec_501 and exempt under sec_501 a must be both organized and operated exclusively for an exempt purposes you have provided no information regarding your receipts expenditures or activities you have not established that you have operated exclusively for exempt purposes contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance advocate from the site where the tax_deficiency was determined by calling tel or write or you can contact the taxpayer taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations form 886-a aaa explanations of items schedule number or exhibit name of taxpayer tax identification_number year period ended org december 20xx legend org organization name xx date issue name tax exempt status under sec_501 per return private_foundation per exam taxable corporation issue tax exempt status under c of the internal_revenue_code issue whether exempt_organization qualifies for exemption under sec_501 of the internal_revenue_code facts exhibit a provides copies of the internal_revenue_service correspondence requesting that exempt_organization file the form 990pf for the tax period ending december 20xx- 20xx exempt_organization failed to respond to the internal_revenue_service correspondence or file the forms 990pf for the tax periods named above law sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 of the regulations in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 of the code and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service form 886-a ee anual explanations of items schedule number or exhibit name of taxpayer tax identification_number year period ended org december 20xx employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax- exempt status and to determine its liability for any unrelated_business_income_tax taxpayers response the taxpayer has been contacted and has refused to formally complete the steps necessary to end the organization conclusion it is the irs's position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under c of the internal_revenue_code accordingly the organization's exempt status is revoked effective january 20xx form_1120 returns should be filed for the tax periods ending december 20xx form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service_department of the treasury internal_revenue_service mail stop po box ogden ut tax_exempt_and_government_entities_division legend org organization name ax date org address address address date of this notice contact person id number contact telephone numbers toll free long distance employer_identification_number tax period s december 20xx form s 990pf dear based on our records your organization has been contacted upon several occasions regarding delinquent form s 990pf return of organizations exempt from income_tax that were not filed for the tax period s referenced above to date the requested returns have not been received failure_to_file a timely return can result in the assessment of a penalty imposed by sec_6652 that penalty results in the imposition of a dollar_figure per day penalty dollar_figure per day for organizations having gross_receipts exceeding dollar_figure for each tax_year that is filed late and does not include a written_statement explaining the cause for filing late an exempt organization’s failure_to_file required information returns or comply with the internal_revenue_code code and applicable regulations is grounds for termination of the organization’s tax exempt status we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code is necessary if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter revoking your exempt status if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination and this letter will become final event you will be required to file federal_income_tax returns form s for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns in that if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues if a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely jeff francis revenue_agent enclosures publication publication form_6018 report of examination f886-a


internal_revenue_service number release date index number ------------------------------------- ---------------------------------------- ---------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc corp b05 plr-152440-10 date date in re ------------------------------------------- ------------------------------------------------------------- ------------- legend parent ----------------------------------------------------------- ------------------------------------------------------- date date x -------------------------- -------------------------- -- company official ------------------------------------------------------------------------------------------ ------------------------------------------------------------- tax professional ---------------------------------------------------------- ----------------------------------- dear --------------------- this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election in particular parent is requesting an extension of time to elect an extended carryback period the election for a consolidated_net_operating_loss cnol incurred in the taxable_year ending date plr-152440-10 the year cnol the material information submitted for consideration is summarized below parent is the common parent of an affiliated_group_of_corporations that joined in filing a consolidated_return for u s federal_income_tax purposes the parent group parent seeks to carry back the year cnol x years to its taxable_year ending on date under sec_172 parent was required to file the election to carry back the year cnol to its taxable_year ending on date the election was due on the due_date with extensions of the parent group’s consolidated_income_tax_return for the tax_year ending date but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for the parent group’s consolidated_income_tax_return for the taxable_year in which the year cnol was incurred or any subsequent taxable_year sec_172 of the internal_revenue_code generally permits a taxpayer to carry back a net_operating_loss to each of the taxable years preceding the taxable_year of the nol sec_172 of the internal_revenue_code permits a taxpayer to elect to carry back an applicable net_operating_loss to each of the or taxable years preceding the taxable_year of the applicable nol in lieu of the 2-year period provided by sec_172 sec_172 provides that the term applicable net_operating_loss applicable nol means the taxpayer’s net_operating_loss for a taxable_year ending after date and beginning before date sec_172 provides that the election under sec_172 shall be made by the due_date including extension of time for filing the return for the taxpayer’s last taxable_year beginning in the election is irrevocable and in general may be made only with respect to one taxable_year sec_1502 provides that the secretary shall prescribe such regulations as he may deem necessary in order that the tax_liability of any affiliated_group_of_corporations making a consolidated_return and of each corporation in the group both during and after the period of affiliation may be returned determined computed assessed collected and adjusted in such manner as clearly to reflect the income-tax liability and the various factors necessary for the determination of such liability and in order to prevent avoidance of such tax_liability in carrying out the preceding sentence the secretary may prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns plr-152440-10 sec_1_1502-21 provides that losses taken into account in determining a cnol may be carried to other taxable years whether consolidated or separate only under paragraph b of sec_1_1502-21 sec_1_1502-21 provides that net_operating_loss_carryovers_and_carrybacks to a taxable_year are determined under the principles of sec_172 and sec_1_1502-21 sec_1_1502-21t provides that a consolidated_group can elect an extended carryback period pursuant to sec_172 with regard to a cnol arising in a taxable_year ending after date and beginning before date revproc_2009_52 2009_49_irb_744 provides when and how a taxpayer may make an election under sec_172 sec_4 of revproc_2009_52 provides that the common parent of a consolidated_group makes the election for the group sec_4 and of revproc_2009_52 permit the election to be made for consolidated taxpayers by attaching a statement to the original or amended consolidated_return for the taxable_year of the applicable cnol or by attaching a statement to a claim for a tentative_carryback_adjustment on form_1139 sec_4 b and b of revproc_2009_52 require the election regardless of the manner in which made to be filed no later than the due_date including extensions for filing the return for the taxpayer’s last taxable_year beginning in under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 the election by a consolidated_group to extend the carryback period under sec_172 for a cnol is a regulatory election therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent establishes to the satisfaction of the commissioner that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government plr-152440-10 information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the affidavits submitted and the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly provided the parent group qualifies substantively to file the election we grant an extension of time under sec_301_9100-3 until sixty days from the date on this letter for parent to file the election parent should file the election under sec_172 to carry back the year cnol to its taxable_year ending on date on form 1120x amended u s_corporation income_tax return according to the procedures set forth in revproc_2009_52 a copy of this letter must be attached to the form 1120x if parent files form 1120x electronically parent may satisfy the requirement of attaching a copy of this letter by attaching a statement to the parent group’s amended_return that provides the date and control number plr-152440-10 of this letter_ruling the above extension of time is conditioned on the parent group’s tax_liability if any not being lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money we express no opinion as to the parent group’s tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the income_tax returns involved further we express no opinion as to the federal_income_tax effect if any if it is determined that the parent group’s tax_liability is lower sec_301_9100-3 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any item discussed or referenced in this letter in particular we express no opinion with respect to whether parent qualifies substantively to make the election in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the internal_revenue_code or regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in this letter for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent company official and tax professional the director however should verify all essential facts in addition plr-152440-10 notwithstanding that an extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely _ken cohen___________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


t c memo united_states tax_court david bruce billings petitioner v commissioner of internal revenue respondent docket no filed date patrick wiesner for petitioner vicki l miller for respondent memorandum findings_of_fact and opinion holmes judge david billings the petitioner began this case to be relieved from liability for the tax owed on money that his wife embezzled from her employer without his knowledge when this case was first before us we dismissed it for lack of jurisdiction 127_tc_7 billings i billings appealed our decision and while his appeal was pending congress amended the code to give us jurisdiction over cases like his his case was remanded to us for reconsideration in light of the new law we examine first whether the new law gives us jurisdiction concluding that it does we then move on to consider the merits of his case findings_of_fact the parties submitted this case for decision on stipulated facts which means that the background section of our previous opinion can now be more properly labeled findings_of_fact the facts are set out in greater detail in billings i t c pincite- but to recapitulate briefly david billings married rosalee in he was working at general motors and she was a payroll clerk at the local electric company the billingses kept two checking accounts and while both were jointly held david and rosalee each kept almost exclusive control_over one of them in rosalee transferred money from her employer’s payroll account into the checking account that she controlled and into which she had her own pay directly deposited her embezzlement continued into but rosalee kept it secret from her husband until the company caught her she then told her husband what she had done and hired a lawyer by the time that she was caught rosalee and her husband had already filed their joint tax_return and she had left off the nearly dollar_figure that she had stolen that year her lawyer advised her to report the embezzlement income on an amended_return because he said a judge would probably be more lenient in sentencing her if she took responsibility for her actions but sec_1_6013-1 of the income_tax regulations created a problem it prohibits spouses who have already filed a joint_return for a particular year from filing amended returns changing their status to married-filing-separately once the deadline to file returns has passed the due_date for the billingses’ tax year--date--was long past and so david signed the amended_return that return showed an increase in taxable_income and an increase in tax of over dollar_figure when david signed the amended_return he knew that neither he nor his wife expected to be able to pay this increased tax in the billingses filed for bankruptcy and received a discharge which affected neither rosalee’s obligation to repay the money she’d embezzled nor her own liability for the unpaid taxes u s c secs a a david retired and began collecting a pension--although as of the date the case was originally submitted he continued to work two other jobs he and his wife have filed timely tax returns for later years as they came due unless otherwise indicated all section references are to the internal_revenue_code and regulations in effect for the year in issue david asked the irs for relief from joint liability for the unpaid tax but in date the irs denied his request based on all the facts and circumstances particularly because you failed to establish that it was reasonable for you to believe the tax_liability was paid or was going to be paid at the time you signed the amended_return david appealed and the irs issued its final_determination again denying him relief because he did not believe when he signed the amended_return that the tax would be paid david then petitioned our court to overturn the commissioner’s determination such a petition is called a nondeficiency stand-alone petition-- nondeficiency because the irs accepted his amended_return as filed and asserted no deficiency against him and stand-alone because his claim for innocent-spouse relief was made under sec_6015 and not as part of a deficiency action or in response to an irs decision to begin collecting his tax debt through liens or levies when this case was first before us our jurisdiction over such petitions was controversial we had first held that we did have jurisdiction 118_tc_494 but then the ninth circuit reversed us in 439_f3d_1009 9th cir and the eighth circuit followed in 446_f3d_785 8th cir affg in part vacating in part tcmemo_2004_93 after these two cases we revisited the question and in billings i followed those circuit courts and dismissed david’s case for a lack of jurisdiction david appealed our decision to the tenth circuit he was a resident of kansas when he filed his petition congress amended sec_6015 to give us jurisdiction over nondeficiency stand- alone cases and the tenth circuit remanded the case to us for reconsideration we then ordered the parties to report whether the billingses’ tax_liability remained unpaid and they recently filed a stipulation agreeing that it did opinion as we summarized this part of tax law in our earlier opinion billings i t c pincite a married couple who file their federal tax_return jointly are both responsible for the return’s accuracy and are both jointly and severally liable for the entire tax due sec_6013 114_tc_276 sec_6015 however directs the commissioner to relieve qualifying innocent spouses from that liability under certain circumstances sec_6015 an innocent spouse may seek relief from liability under sec_6015 if he can show that he was justifiably ignorant of unreported income or inflated deductions he may have his tax_liability allocated between himself and an estranged or former spouse under sec_6015 or like david he may look to sec_6015 for relief subsection f relief is available only to a spouse who is ineligible for relief under subsections b and c and who shows that taking into account all the facts and circumstances it is inequitable to hold him liable for any unpaid tax or any deficiency or any portion of either david and the commissioner stipulated that he did not qualify for relief under either sec_6015 or c because no deficiency was ever asserted against him and his wife they were right to do so because both those subsections require a deficiency as a condition of relief see eg 120_tc_62 that left david able to look only for equitable relief under subsection f and when the commissioner denied it to him left him with the problem of where to seek judicial review when he first came to us sec_6015's jurisdictional provision read sec_6015 petition for review by tax_court in general --in the case of an individual against whom a deficiency has been asserted and who elects to have subsection b or c apply-- emphasis added a in general --in addition to any other remedy provided by law the individual may petition the tax_court and the tax_court shall have jurisdiction to determine the appropriate relief available to the individual under this section if such petition is filed-- this was the language we construed in billings i to require petitioners like david--ie those filing stand-alone sec_6015 petitions--to have had a deficiency asserted against them but congress amended sec_6015 after we released billings i to insert or in the case of an individual who requests equitable relief under sec_6015 into sec_6015 the tax relief and health care act of trhca publaw_109_432 div c sec_408 120_stat_2922 the opening line of sec_6015 now reads sec_6015 petition for review by tax_court in general --in the case of an individual against whom a deficiency has been asserted and who elects to have subsection b or c apply or in the case of an individual who requests equitable relief under subsection f -- the amendment is effective for liabilities remaining unpaid on date trhca sec_408 120_stat_3062 no suspense here the parties’ stipulation that david’s tax_liability remains unpaid assures us that we do have jurisdiction to review the commissioner’s decision to deny him relief we are mindful that our review of that decision is for abuse_of_discretion see 114_tc_276 this standard does not ask us to decide whether in our own opinion we should grant relief but whether the commissioner in refusing to do so exercised his discretion arbitrarily capriciously or without sound basis in fact 118_tc_106 affd 353_f3d_1181 10th cir when deciding whether to grant f relief the commissioner should take into account all the facts and circumstances which means that his determination rarely depends on any one factor see sec_6015 revproc_2000_15 sec_4 c b pincite to guide irs employees in exercising their discretion the commissioner has issued revenue procedures that list the factors they should consider we also use the revenue_procedure when we determine whether the commissioner abused his discretion see eg 120_tc_137 jonson v commissioner t c pincite the revenue_procedure begins with a list of seven conditions for equitable relief that a taxpayer must meet revproc_2000_ sec_4 c b pincite both parties agree that david met all of these threshold conditions the procedure also has a safe harbor--three conditions that if met will ordinarily trigger a grant of relief revproc_2000_15 sec_4 c b pincite david does not qualify for this safe_harbor though because one of the three conditions is that a requesting spouse be divorced or separated from the nonrequesting spouse the procedure in effect when david filed his request for relief was revproc_2000_15 c b pincite it has since been replaced by revproc_2003_61 c b pincite but the new procedure applies only to requests for relief filed on or after date or those pending on date for which no preliminary determination_letter has been issued as of date revproc_2003_61 sec c b pincite revproc_2000_15 sec_4 a c b pincite and david and rosalee have remained married throughout her ordeal this leaves an eight-factor balancing test to decide whether relief would be equitable id sec_4 those factors and the circumstances under which they are to weigh for or against relief or be treated as neutral are easily summarized in a chart here we list those factors about which the parties agree in italics weighs for relief neutral no knowledge of the underpayment or item giving rise to the deficiency economic hardship no significant benefit3 later compliance with federal tax laws liability attributable to nonrequesting spouse weighs against relief knowledge no economic hardship significant benefit no later compliance with federal tax laws liability attributable to petitioner revproc_2000_15 sec_4 c b pincite does not state that the absence of a significant benefit will weigh in a petitioner’s favor but only that a significant benefit will weigh against relief nonetheless we decided in 122_tc_32 vacated 439_f2d_1009 9th cir and other cases cited that the absence of a significant benefit should be a positive factor for petitioners weighs for relief neutral nonrequesting spouse responsible for tax under divorce decree separated or divorced abuse present no divorce decree still married no abuse present weighs against relief petitioner responsible for tax under divorce decree these are not the only factors that either the commissioner or we can look at but they are where we start id in this case the parties contest only two factors knowledge and significant benefit a knowledge the basic problem in analyzing the commissioner’s decision that david flunks the knowledge factor is that the revenue_procedure is quite unclear about when a person’s knowledge should be measured the procedure tells us that the knowledge factor weighs in favor of relief when in the case of a liability that was properly reported but not paid the requesting spouse did not know and had no reason to know that the liability would not be paid in the case of a liability that arose from a deficiency the requesting spouse did not know and had no reason to know of the items giving rise to the deficiency revproc_2000_15 sec_4 d c b pincite the first sentence in the quoted section would seem to be the one that applies--since there’s no deficiency here--and it tells us to look at whether the requesting spouse did not know and had no reason to know that the liability would not be paid but what did david not know and when did he not know it the parties agree that david was ignorant of his wife’s embezzlement when he signed the original return they also agree that when he signed the amended_return he knew about the embezzled income and that the taxes on it would not be paid looking at the procedure’s description of when the knowledge factor weighs against relief doesn’t help much either that part of the procedure tells us to ask whether a requesting spouse knew or had reason to know of the item giving rise to a deficiency or that the reported liability would be unpaid at the time the return was signed revproc_2000_15 sec_4 b c b pincite neither section tells us when to measure the knowledge of a requesting spouse who signed both an original and an amended_return when the commissioner made his determination he assumed that the right time to measure the state of david’s knowledge was when david signed the amended_return but he didn’t explain his assumption the problem for us on review is that it would have been just as reasonable for the commissioner to measure david’s knowledge when he signed the original return if he had done so david’s conceded ignorance of the embezzled income when he signed the original return would have caused the commissioner to find that the knowledge factor weighed in david’s favor we thus need to look elsewhere to decide at which time the commissioner should have measured david’s knowledge the first place we look is at a case where a wife who requested relief didn’t know about an ira distribution that her husband failed to report when she signed the original return she learned about the distribution only after her husband’s death and then filed an amended_return that corrected the omission in that case the commissioner also measured her knowledge at the time she signed the amended_return we found his determination to be an abuse_of_discretion because it is unpersuasive to argue as does respondent that petitioner’s voluntary filing of an amended return and her attendant payment of the delinquent taxes attributable to the omission_of_income from the original return militate against equitable relief simply because she had to have known of the omission before she filed the amended_return and made the payment rosenthal v commissioner tcmemo_2004_89 we acknowledge that in rosenthal the requesting spouse paid the taxes she owed on the omitted income when she filed her amended_return but we find that this fact does not distinguish david’s case--in both cases the innocent spouses were ignorant of the key facts at the time they signed the original return a second place we can look to for help is in sec_6015 that section gives relief when a spouse is reasonably ignorant of an understatement_of_tax that gives rise to a deficiency indeed the commissioner argues here that instead of filing an amended_return rosalee could have contacted respondent and informed him of the unreported embezzlement income once informed respondent could have proceeded with examination procedures and rosalee could have agreed to respondent’s determination of additional tax resp br pincite this would have led to the determination_of_a_deficiency and presumably allowed david to file a successful request for relief under sec_6015 see eg haltom v commissioner tcmemo_2005_209 ignorance of embezzlement income it would seem a trap for the unwary--and an inefficient requirement from the irs’s perspective--to require spouses to go through an audit whose outcome is preordained in a situation like that faced by the widow rosenthal or mr billings rather than fess up by filing an amended_return tax law is of course filled with such traps and has never been viewed as a garden of efficiency but congress itself has directed the commissioner--at least in this area--to take a somewhat more open-ended view of the law sec_6015 directs him to consider all the facts and circumstances the revenue_procedure likewise counsels the commissioner’s employees that in weighing an application_for relief no single factor will be determinative of whether equitable relief will or will not be granted in any particular case rather all factors will be considered and weighed appropriately the list is not intended to be exhaustive revproc_2000_15 sec_4 c b pincite we conclude from this that in choosing an interpretation of the knowledge factor that was unexplained unpersuasive as we called it in rosenthal and seemingly contrary to the commissioner’s own interest in having taxpayers amend their returns when they discover their spouses’ misreporting the commissioner was acting arbitrarily and so abused his discretion we therefore find that the knowledge factor in this case weighs in favor of relief not against it b significant benefit the second contested factor is whether david significantly benefited beyond normal support from the unpaid liability or items giving rise to the deficiency revproc_2000_15 sec_4 c c b pincite a spouse’s benefit exceeds normal support when the money in question was used to pay for a child’s education jonson t c pincite or special purchases for the couple or their children 119_tc_306 affd 101_fedappx_34 6th cir or for unusually frequent travel barranco v commissioner tcmemo_2003_18 lifestyle as a whole which included several european vacations was a significant benefit we must examine whether david benefited from either the embezzlement income itself or from not paying the taxes on that income if he did significantly benefit the factor weighs against relief otherwise under our precedents it weighs in his favor see supra note the commissioner argues that david significantly benefited from his wife’s embezzlement because it allowed them to continue their free-spending lifestyle and still have the means to buy a larger house in the year the embezzlement ended he also points out that the spending did not stop after rosalee’s employer discovered the embezzlement and that the billingses even bought three new vehicles after she was discovered david counters that it wasn’t rosalee’s embezzlement that supported their lifestyle--it was the two paychecks he earned and the liberal use of his credit cards to determine whether the commissioner erred on this point we can trace the embezzlement income to see where it was spent and by whom looking first to see where the money went in rosalee deposited dollar_figure into her account and withdrew about dollar_figure of her withdrawals dollar_figure went into a savings account she shared with david dollar_figure went toward her car and dollar_figure went toward her credit cards while some of the remaining dollar_figure paid for their basic living_expenses david received little marginal benefit from his wife’s extra cash she spent most of it on small-money items that benefited only her she also gave some of the money to her children and her ex-husband of the dollar_figure she put into their joint savings account in david withdrew about dollar_figure but in their life--a life where they chose to spend nearly all their legitimate income of dollar_figure--this extra income was not significant we also ask whether david significantly benefited from not paying the tax see revproc_2000_15 sec_4 c c b pincite mellen v commissioner tcmemo_2002_280 here we think it is important that the billingses filed for bankruptcy under chapter in date chapter required them to liquidate all of their nonexempt assets and turn that money over to a trustee rosalee’s tax debt was not dischargeable however and so she will continue to owe the irs until that debt which the parties stipulated was close to dollar_figure by the end of is paid in full we therefore do not consider david to have this unpaid tax money available for his personal_use and we find that the commissioner clearly erred when he found that david significantly benefited from the partial nonpayment of the billingses’ taxes based on our findings the chart looks like this weighs for relief neutral weighs against relief no knowledge of the embezzled funds at the time the original return was filed no significant benefit liability attributable to nonrequesting spouse no economic hardship later compliance with federal tax laws no divorce decree still married no abuse present thus of the eight factors described in the revenue_procedure three weigh toward relief five are neutral and only one weighs against relief david’s mere lack of economic hardship being too thin a justification for denying him relief we conclude that the commissioner abused his discretion in denying david relief and decision will be entered for petitioner


internal_revenue_service number release date index number -------------------- ----------------------------------------------------- ---------------------------------------------------------- --------------------------------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------------ telephone number ---------------------- refer reply to cc corp b2 plr-124414-14 date date legend parent ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------- lifeco ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------- date --------------------------- a b c d -------------- ------------- ---------------- ---- dear ------------------- this letter responds to your date letter requesting a ruling as to the federal_income_tax consequences of the proposed transaction the material information submitted in that letter and subsequent correspondence is summarized below the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support plr-124414-14 of the request for rulings verification of the information representations and other data may be required as part of the audit process this letter is issued pursuant to section dollar_figure of revproc_2014_1 2014_1_irb_15 regarding one or more significant issues under sec_332 sec_351 sec_355 sec_368 or sec_1036 the rulings contained in this letter only addresses one or more discrete legal issues involved in the transaction this office expresses no opinion as to the overall tax consequences of the transactions described in this letter or as to any issue not specifically addressed by the rulings below facts parent_corporation the parent is a domestic_corporation and the common parent of an affiliated_group_of_corporations that file a consolidated federal_income_tax return the consolidated_group includes both life_insurance_companies and corporations other than life_insurance_companies during a prior year on date lifeco demutualized and became a stock company owned by parent currently parent indirectly owns lifeco which is a member of the parent consolidated_group lifeco is a domestic_corporation that is taxed as a life_insurance_company under subchapter_l of the code certain lifeco policies in force at the time of its demutualization became a closed block of contracts the closed block of contracts are entitled to receive policyholder dividends declared by the lifeco board at the board’s discretion additionally lifeco designated certain assets to support the regulatory closed block of policies the rcb the designated rcb assets are not kept in an account separate from lifeco’s other assets proposed transaction for what are represented as valid business reasons the taxpayer proposed the following transaction the proposed transaction lifeco and a subsidiary the sub will enter into a reinsurance agreement the agreement sub will either be a newly-formed wholly-owned corporation of lifeco or an existing wholly-owned corporation of lifeco that is part of the life_insurance_company subgroup of the parent consolidated_group lifeco will transfer capital and surplus of dollar_figurea as well as assets and liabilities related to the rcb to the sub plr-124414-14 the fair_market_value of the assets that will be transferred to the sub will exceed the amount of assets that lifeco would be required to pay in an arm’s-length indemnity_reinsurance transaction additionally on the effective date of the agreement the effective date the book_value of the rcb assets transferred will be approximately dollar_figureb and the total amount of tax_reserves transferred will be approximately dollar_figurec pursuant to the agreement lifeco will cede and sub will assume certain specified liabilities lifeco will transfer approximately d percent which is less than percent of the insurance risk on the rcb business to sub by conventional_coinsurance on the effective date moreover the agreement provides lifeco with recapture rights at any time lifeco may elect to recapture in full or in part the reinsurance coverage provided by the sub if lifeco elects to exercise such rights the sub is obligated to return any remaining rcb assets to lifeco rulings based solely on the information submitted and the representations set forth above we rule as follows the tax treatment of the transfer of assets and liabilities in the arm’s-length reinsurance portion of the proposed transaction will be determined in accordance with the provisions of subchapter_l applicable to indemnity_reinsurance ruling does not preclude the transfer of other assets in excess of the arm’s-length reinsurance portion of the proposed transaction from qualifying under sec_351 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax treatment of the proposed transaction under any provision of the code and regulations or the tax treatment of any condition existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed on the precise application of the provisions of subchapter_l to this transaction ie the valuation and the determination of the amount of premiums and other consideration arising out of indemnity_reinsurance and the valuation of lifeco’s decrease and sub’s increase in reserves procedural statements this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that this letter may not be used or cited as precedent plr-124414-14 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely gerald b fleming senior technician reviewer branch corporate by _________________________ gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-117336-00 date date legend x a d1 d2 dear this letter responds to a letter dated date written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code that x's s_corporation status will be effective as of the taxable_year beginning d2 facts according to the information submitted x was incorporated on d1 and it was decided that x would be an s_corporation a the sole shareholder of x relied on an attorney and an accountant to file x's form_2553 election by a small_business_corporation with an effective date of d2 due to a miscommunication between the attorney and the accountant x's form_2553 was not timely filed x requests a ruling that it will be recognized as an s_corporation effective for the taxable_year beginning d2 under sec_1362 law and analysis corporation sec_1362 provides that a small_business_corporation may elect to be an s sec_1362 provides when an s election will be effective if an s election is made for a corporation’s taxable_year and within the first two and one half months of such taxable_year then that corporation will be treated as an s_corporation beginning the year in which the election is made however if an s election is made for a corporation’s taxable_year but after the first two and one half months of the beginning of such taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made plr-117336-00 sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusions based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for not making a timely election and is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d2 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is an s_corporation for federal tax purposes the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by an appropriate penalty of perjury statement while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x sincerely yours donna m young senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes