t c memo united_states tax_court william s fairey jr and susan r fairey petitioners v commissioner of internal revenue respondent docket no filed date william s fairey jr and susan r fairey pro_se michael d zima for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioners’ federal_income_tax and penalties as follows year deficiency sec_6662 dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure penalties sec_6663 -- 1dollar_figure -- respondent determined that petitioner william s fairey jr is liable for the penalty for fraud with respect to part of the underpayment and that both petitioners are liable for the negligence_penalty with respect to the remainder of the underpayment following concessions the issues for decision are whether the statute_of_limitations bars assessment and collection of petitioners’ tax for we hold that it does not whether petitioners bear the burden_of_proof relating to issues other than fraud we hold that they do whether petitioners had a greater amount of a expenses for william s fairey jr ’s petitioner consulting activity b unreimbursed employee business_expenses or c itemized_deductions than respondent allowed we hold that they did not whether petitioner is liable for the fraud_penalty under sec_6663 for we hold that he is with respect to the deficiency caused by the fact that he a deducted a purported dollar_figure payment three times on petitioners’ tax_return which they never paid and b deducted dollar_figure of loan repayments as legal and professional fees whether petitioners are liable for the accuracy-related_penalty under sec_6662 we hold that they are to the extent discussed below and as reduced by respondent’s concessions respondent conceded that petitioners may deduct dollar_figure paid to media week and dollar_figure paid to nelson hesse in and an internet expense of dollar_figure unless otherwise stated section references are to the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found petitioners are married and resided in sarasota florida in and and when they filed the petition in this case a petitioner petitioner’s employment with trugreen lawn care petitioner has a bachelor’s degree in psychology and credit hours toward a master’s degree in biology petitioner was director of human resources and marketing for trugreen lawn care trugreen in and early in until trugreen discharged him petitioner sued trugreen for wrongful discharge and received a settlement in of dollar_figure plus payment of dollar_figure in legal expenses petitioner incurred in that case the law firm of nelson hesse represented petitioner in that lawsuit petitioner’s consulting activity and volunteer work after being discharged by trugreen petitioner offered consulting services to clients relating to marketing media and public relations in petitioner’s consulting activity was a sole_proprietorship double otter inc double otter was the only client that paid petitioner for services during the years in issue petitioner obtained national television print and internet publicity for double otter double otter paid petitioner dollar_figure on date and dollar_figure in petitioner did volunteer work for the presidential_election campaign of vice president gore from august through date petitioner hoped to be appointed to government service if the campaign was successful after the election petitioner resumed his consulting activity petitioner’s loans from william h davoli and dana pekas william h davoli davoli is married to petitioner’s sister petitioner borrowed dollar_figure from davoli in petitioner repaid dollar_figure to davoli on date dana pekas pekas made two loans to petitioner in the record does not show the amount of the first loan the second loan was for dollar_figure petitioner repaid dollar_figure to pekas in special friends golf tournament petitioner traveled to council bluffs iowa in the fall of and to do volunteer work for zaring cioffi entertainment at the special friends celebration special friends golf tournament he hoped his volunteer work would lead to employment special friends raises money for breast cancer research and is tax exempt under sec_501 fred colanino colanino is the founder and executive director of special friends petitioner donated a set of golf clubs worth dollar_figure to special friends in special friends sent petitioner a letter acknowledging his donation of the golf clubs tom brune brune the treasurer of special friends signed the letter petitioner made no contributions by cash credit card or check to special friends in special friends never accepted contributions made through visa credit cards b susan fairey’s employment and employee_expenses susan fairey had been a kindergarten and first grade teacher for years as of the date of trial the sarasota county school system hired her in date to serve as a first grade teacher at philippi shores elementary_school susan fairey taught at phillippi shores elementary_school during and using a rented truck susan fairey delivered a load of materials to her classroom in date including two filing cabinets a table and chairs children’s tables easels two large book stands and room decorations during each of the years in issue susan fairey received dollar_figure from her school dollar_figure from the state of florida and dollar_figure from her parent teacher association to buy items for her classroom susan fairey received no other reimbursements in those years for her employment-related_expenses susan fairey bought items for her classroom during the years in issue from stores such as target wal-mart k-mart publix and albertsons the record does not show the costs of those items petitioners paid the following amounts in to buy items for personal_use susan fairey’s classroom and petitioner’s business activities the amounts for each are not specified in the record seller target wal-mart phar-mor sam’s wholesale club toys by nature office depot everything educational scholastic books learning depot albertson’s publix walgreen’s k-mart dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- -- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- -- dollar_figure dollar_figure austin fairey petitioners’ daughter attended phillippi shores elementary_school during the years in issue susan fairey bought various educational materials for austin during those years c petitioners’ income_tax returns petitioner prepared petitioners’ income_tax returns from through using computer spreadsheet and tax preparation software petitioner classified their checks into categories such as business_expenses employee business_expenses and itemized_deductions and entered amounts into the spreadsheet software he entered the totals from the spreadsheet software for each category into the tax_return preparation software petitioners included a schedule c profit or loss from business for petitioner’s consulting activity with their income_tax returns for and petitioners reported that petitioner had business_expenses of dollar_figure in dollar_figure in and dollar_figure in which resulted in losses of dollar_figure in dollar_figure in and dollar_figure in petitioners deducted dollar_figure that petitioners paid to nelson hesse on february and date on their income_tax return in two places on the schedule c as a legal or professional expense and on the schedule a itemized_deductions as a miscellaneous itemized_deduction for attorney’s and accountant’s fees petitioners deducted their dollar_figure charitable_contribution twice on their income_tax return as a contribution of property and as a contribution of cash petitioners deducted dollar_figure which they claim to have paid to special friends in but which they never paid in three places on their return on the schedule a as an itemized charitable deduction and on the schedule c as an advertising expense and as an office expense on their tax_return petitioners deducted dollar_figure which they never paid for legal expenses twice as a schedule c legal or professional expense and as a miscellaneous itemized_deduction for attorney’s fees petitioners deducted loan repayments of dollar_figure to davoli and dollar_figure to pekas in as legal and professional expenses on the schedule c for petitioner’s consulting activity petitioners deducted the dollar_figure cost of a computer on their income_tax return twice as a depreciation expense and as an office expense d respondent’s examination and determination examination of petitioners’ tax_return on date respondent’s revenue_agent joan hughs hughs sent a letter to petitioners in which she invited them to a conference as part of the audit of their income_tax return and requested copies of all forms w-2 they had received records of the schedule c gross_receipts a brief history of the schedule c business statements from their employers of their reimbursement policies records of all of their employee business_expenses legal and professional expenses office expenses supplies expenses other expenses repair receipts appointment books_and_records of travel meal and entertainment_expenses petitioner showed some of those documents to hughs at a meeting on date however he did not provide a history of the schedule c business or statements of employee reimbursement policies from the employers immediately after that meeting hughs asked petitioners to provide documentation of their employee business_expenses depreciation travel_expenses and telephone expenses not later than date examination of petitioners’ tax_return hughs informed petitioners that their income_tax return was being audited relating to miscellaneous_itemized_deductions cash contributions and schedule c expenses hughs received a letter on date stating that petitioner did not know when he would be available for a meeting and informing hughs that he would wait to have his income_tax return audited petitioners did not provide hughs with any of the documents she had requested petitioner and hughs rescheduled the second meeting for date petitioner called hughs to reschedule the november meeting for date petitioner later called hughs to reschedule the december meeting for date hughs agreed neither petitioner met with hughs on date hughs met with petitioner on date hughs issued another request for documents to petitioners dated date seeking substantiation of various expenses and an explanation of the purpose of petitioner’s payment of dollar_figure to pekas petitioner sent a letter received by hughs on date in which he asked her to answer questions including whether she had proof that all administrative steps required by the internal_revenue_code had been followed whether statutory authority for the audit existed which internal_revenue_code section allowed her to solicit information whether she could explain the relevance of the material she sought and whether compliance with the audit was voluntary or mandatory on date hughs requested additional documents from petitioners concerning their deduction of legal travel and employee business_expenses and job search costs for and petitioner postponed a meeting that hughs had scheduled on date petitioner asked that the audit of petitioners’ income_tax return be reassigned to someone other than hughs because petitioners believed that hughs had lost her objectivity examination of petitioners’ tax_return hughs sent a letter dated date to petitioners and a second letter to susan fairey concerning the audit of petitioners’ income_tax return in those letters hughs requested records of petitioner’s schedule c income and expenses and petitioners’ employee business_expenses and itemized_deductions hughs sent copies of a letter to each petitioner inviting them to attend a meeting on date petitioners did not receive those letters because they were out of town neither petitioner met with hughs on date petitioners never submitted any documents to hughs relating to petitioners’ conduct during the examination susan fairey did not meet with hughs at any time during the audit of petitioners’ and tax returns petitioners did not submit monthly bank statements to hughs hughs obtained those records through a summons petitioners never gave hughs a history of petitioner’s schedule c activity receipts for petitioners’ claimed employee business_expenses or receipts for or explanations of the purposes of the travel meal and entertainment_expenses or the other expenses deducted on their or income_tax return petitioner gave hughs a copy of a spreadsheet which shows check no from petitioner to davoli as substantiation of claimed legal and other professional expenses_incurred in petitioners did not give hughs any other substantiation of their legal expenses or the dimensions of their home relating to their claimed home_office deduction as hughs had requested petitioner told hughs during the audit that petitioners had paid dollar_figure to special friends in petitioner gave hughs a copy of a letter purportedly from special friends which he said supported his charitable_contribution_deduction of dollar_figure in that letter purportedly from special friends thanked petitioner for his donation of golf clubs and for an advertisement placed with the organization’s newsletter and said that the bill for the advertisement would be charged to petitioner’s visa credit card in two installments of dollar_figure that letter was not an accurate copy of any letter from special friends the letter that special friends sent to petitioner acknowledged his donation of golf clubs but did not mention any other contribution from petitioner petitioners did not contribute dollar_figure to special friends in or provide to hughs any record of visa card payments to special friends during the audit petitioner gave hughs inconsistent and incorrect explanations of the purpose of the dollar_figure payment to pekas in he told hughs that he paid dollar_figure to pekas in for investment counseling petitioner also told hughs during the audit that he paid dollar_figure to davoli in to obtain a background investigation so he could qualify for appointed government service petitioner told hughs at a different time during the audit that the dollar_figure payments were for legal fees respondent issued the notice_of_deficiency to petitioners for and on date opinion a whether the statute_of_limitations bars assessment and collection of petitioners’ tax for petitioners contend that the statute_of_limitations bars assessment and collection of their tax for because respondent issued the notice_of_deficiency on date we disagree petitioners timely filed their return on or before date generally the commissioner must assess tax within years after the due_date of a timely filed return sec_6501 and b ie in this case on or before date respondent timely issued the notice_of_deficiency on date the statute_of_limitations does not bar assessment and collection of petitioners’ tax for b whether petitioners or respondent bears the burden_of_proof for issues other than fraud respondent bears the burden of proving that petitioner is liable for fraud see sec_7454 rule b petitioners contend that respondent bears the burden_of_proof under sec_7491 for all other issues as well we disagree the burden_of_proof with respect to a factual issue shifts from the taxpayer to the commissioner if in addition to meeting other requirements the taxpayer has complied with substantiation requirements under the internal_revenue_code sec_7491 maintained all records required by the internal_revenue_code sec_7491 and cooperated with reasonable requests by the secretary for information documents and meetings id taxpayers bear the burden of proving that these requirements are met see h conf rept pincite 1998_3_cb_747 s rept pincite 1998_3_cb_537 petitioners failed to produce and thus we infer that they failed to keep records substantiating their deductions petitioners did not cooperate with hughs’s document requests or produce records during the audit petitioners contend that they submitted their bank statements to hughs we disagree hughs obtained those records through a summons petitioners contend that they did not meet with hughs on date because they did not know about the meeting we disagree petitioner scheduled that meeting petitioners understandably did not meet with hughs on date because they did not receive the letters attempting to schedule that meeting that hughs sent them on date the fact that petitioners had a good reason for missing the june meeting does not outweigh their overall pattern of noncooperation petitioners contend that hughs did not cooperate with them during the audit that allegation is unconvincing we conclude that the burden_of_proof does not shift to respondent under sec_7491 thus petitioners bear the burden_of_proof except with respect to the fraud_penalty see rule a 290_us_111 c whether petitioners may deduct more for schedule c expenses than respondent allowed advertising expenses petitioners deducted advertising expenses of dollar_figure for and dollar_figure for on the schedules c for petitioner’s consulting activity petitioner testified that the cost of printing his business cards is deductible as an advertising expense however petitioners did not show how much petitioner had paid to have business cards printed petitioners’ dollar_figure advertising expense deduction for is based on their claim which we have rejected that petitioner paid that amount to special friends we conclude that petitioners may not deduct any amount for advertising expenses for or legal and professional expenses petitioners deducted legal and professional expenses of dollar_figure for dollar_figure for and dollar_figure for on the schedules c for petitioner’s consulting activity petitioner paid dollar_figure to the nelson hesse law firm for representing him in his lawsuit against trugreen that payment was not related to petitioner’s consulting activity respondent conceded that petitioners may deduct the dollar_figure payment to the nelson hesse law firm as an itemized_deduction for petitioners contend that for they may deduct dollar_figure for legal fees paid_by trugreen to nelson hesse dollar_figure for loan repayments to davoli and pekas dollar_figure to richard weldon and dollar_figure to an unidentified person we disagree petitioners may not deduct as a business_expense trugreen’s payment of dollar_figure to nelson hesse or dollar_figure of loans repaid to davoli and pekas petitioners did not show that they paid the dollar_figure or the dollar_figure or that those amounts were business_expenses we conclude that petitioners may not deduct any amounts for legal and professional expenses for the years in issue supplies expenses petitioners claimed deductions for supplies expenses of dollar_figure for dollar_figure for and dollar_figure for on the schedules c for petitioner’s consulting activity petitioners contend that he paid dollar_figure in to buy a computer petitioner was billed dollar_figure for that computer however there is no evidence than petitioners paid that amount or to what extent he used it for his consulting activity respondent conceded that petitioners may deduct dollar_figure in for a subscription to media week magazine petitioners offered no evidence substantiating their deductions for supplies for or we conclude that petitioners may not deduct more for supplies expenses than respondent allowed office expenses petitioners deducted office expenses of dollar_figure for and dollar_figure for on the schedules c for petitioner’s consulting activity of the dollar_figure claimed for petitioner testified he may deduct dollar_figure that he paid to the local cable television company as an office expense because he watched advertisements on cable television to evaluate whether his clients could effectively use that medium to advertise petitioner conceded that he and his family watched cable television for personal pleasure petitioners contend that they may deduct dollar_figure in for the purchase of a second computer in addition to the one mentioned above there is no documentary_evidence showing how much petitioners paid for the second computer petitioners contend that they may deduct dollar_figure for consisting of payments for cable television dollar_figure allegedly paid to special friends and other unspecified expenses we disagree petitioners have not shown that they paid these amounts or that these amounts were for office expenses related to petitioner’s consulting activity we conclude that petitioners may not deduct any office expenses for the years in issue travel meals and entertainment_expenses petitioners deducted expenses for travel of dollar_figure for dollar_figure for and dollar_figure for on the schedules c for petitioner’s consulting activity they also deducted expenses for meals and entertainment of dollar_figure for dollar_figure for and dollar_figure for no deduction is allowed for expenses for travel meals entertainment or lodging unless the taxpayer substantiates by adequate_records or sufficient evidence corroborating the taxpayer’s own statement the amount time and place and business_purpose of the expense sec_274 petitioners offered no evidence showing how much they spent for petitioner’s consulting activity hughs asked petitioners to provide documentation for petitioner’s travel entertainment meals_and_lodging expenses petitioners did not give that documentation to respondent or offer it as evidence we infer that petitioner did not keep a contemporaneous log of those expenses we conclude that petitioners may not deduct expenses for travel meals or entertainment for the years in issue because they have not met the substantiation requirements of sec_274 utility expenses petitioners deducted electricity expenses of dollar_figure for and dollar_figure for for their residence on the schedules c for petitioner’s consulting activity petitioners did not offer any evidence showing that petitioner used any part of their home exclusively for his consulting activity as required to deduct home_office expenses under sec_280a petitioners contend that hughs never asked them for the dimensions of their home or of the space in their home petitioner used for business we disagree hughs did so in a letter to petitioners dated date we conclude that petitioners may not deduct any amount for utility expenses for the years in issue car and truck expenses petitioners deducted car and truck expenses of dollar_figure for and dollar_figure for on the schedules c for petitioner’s consulting activity the only evidence on this issue is petitioner’s testimony that he visited stores that he thought might carry double otter’s products we conclude that petitioners may not deduct any car or truck expenses for the years in issue depreciation petitioners deducted depreciation of dollar_figure for on the schedule c for petitioner’s consulting activity on the basis of his claimed purchase of a a computer for dollar_figure and b an internet service for dollar_figure there is no evidence that petitioner paid or is entitled to deduct these amounts we conclude that petitioners may not deduct depreciation for other expenses petitioners deducted miscellaneous expenses of dollar_figure for dollar_figure for and dollar_figure for on the schedules c for petitioner’s consulting activity these amounts include payment for telephone service respondent concedes that petitioners paid dollar_figure for telephone service in but contends that petitioners may not deduct any of this amount we agree because petitioners provided no basis to allocate between business and personal telephone use see sec_262 charge for basic telephone service to a residence is deemed personal petitioners contend that they may deduct payments for computer printing supplies we disagree because there is no evidence showing how much petitioners paid for computer printing supplies respondent concedes that petitioners paid and may deduct dollar_figure for internet service in petitioners deducted for insurance expense of dollar_figure rent or lease payments of dollar_figure and repairs and maintenance of dollar_figure respondent contends that petitioners may not deduct any of these amounts we agree because there is no evidence substantiating these deductions we conclude that petitioners may not deduct more miscellaneous expenses on the schedules c than allowed by respondent conclusion we conclude that petitioners may not deduct more schedule c expenses for petitioner’s consulting activity for the years in issue than allowed by respondent d whether petitioners are entitled to more itemized_deductions than respondent allowed susan fairey’s employee_business_expense deductions petitioners contend that they may deduct unreimbursed employee business_expenses of dollar_figure for dollar_figure for and dollar_figure for for susan fairey petitioners contend that it is reasonable for them to deduct those amounts because they equal percent of petitioners’ total expenditures_for percent for and percent for we disagree petitioners have not given any convincing justification for basing their deductions on these percentages hughs asked petitioners how much susan fairey spent for her classroom petitioners did not timely produce any records except some canceled checks payable to retailers that sell items that in light of this conclusion we need not decide whether petitioner operated his consulting activity for profit teachers may deduct up to dollar_figure for unreimbursed education expenses as above-the-line deductions for tax years beginning in or sec_62 for the years in issue those expenses were deductible only to the extent unreimbursed employee business_expenses and other itemized_deductions exceeded percent of adjusted_gross_income the total of petitioners’ business expenditures_for is not in evidence could be for personal_use petitioners have not shown how much of the payments to those stores was for school supplies if the taxpayer establishes that he or she paid a deductible expense but cannot substantiate the precise amount we may estimate the amount of a deductible expense bearing heavily on the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir the checks that were admitted in evidence bank statements and other evidence do not show how much susan fairey paid for items for her classroom and she did not testify as to the amounts of those expenses susan fairey received dollar_figure during each year in issue to buy school supplies we have no basis to estimate how much she spent each year in excess of dollar_figure petitioners contend that respondent had copies of all of petitioners’ checks and bank statements nearly years before trial and that hughs and respondent’s counsel michael zima zima made conflicting statements about those records we on the morning of trial petitioners for the first time gave respondent copies of additional canceled checks for the years in issue and what petitioner said was a summary of those checks the checks and the summary were not admitted in evidence because petitioners did not provide them to respondent days before the first day of the trial calendar as ordered by the court in granting respondent’s motion to compel production of documents and as required by the standing_pretrial_order see rule sec_104 sec_131 admission into evidence of the checks would not affect the result on this issue however because the checks do not show whether the expenditures related to susan fairey’s classroom disagree neither hughs nor zima had copies of all of petitioners’ checks and bank statements at any time zima saw about checks which he included in the stipulation of facts hughs saw to checks but petitioner did not allow her to copy or keep them those statements do not conflict we conclude that petitioners may not deduct any unreimbursed employee business_expenses for susan fairey for the years in issue petitioner’s deductions for employee business_expenses petitioners contend that petitioner may deduct unreimbursed employee business_expenses for we disagree although petitioner was an employee of trugreen for a short time in there is no evidence that he had any unreimbursed employee business_expenses in charitable_contribution deductions and other itemized_deductions petitioners have not shown that they are entitled to more charitable_contribution deductions or other itemized_deductions than respondent allowed e whether petitioner is liable for the fraud_penalty for contentions of the parties and background respondent contends that petitioner is liable for the fraud_penalty under sec_6663 for because petitioner fraudulently deducted a dollar_figure which he never paid in three places on the return and b dollar_figure for legal and professional fees which were loan repayments to davoli and pekas respondent has the burden of proving fraud by clear_and_convincing evidence see sec_7454 rule b respondent must establish that a petitioner underpaid tax for and b some part of the underpayment is due to fraud see sec_6653 if respondent shows that any part of an underpayment is due to fraud the entire underpayment is treated as due to fraud unless the taxpayer shows by a preponderance_of_the_evidence that part of the underpayment is not due to fraud see sec_6663 fraud is the intentional evasion of a tax believed to be owing 394_f2d_366 5th cir affg tcmemo_1966_81 fraud is never presumed it must be established by affirmative evidence 55_tc_85 badges_of_fraud courts have developed several objective indicators or badges_of_fraud 91_tc_874 the following badges_of_fraud are present in this case as to petitioner for a creating a false document b deducting the same item several times c giving implausible or inconsistent explanations to respondent’s examiner and in court we discuss respondent’s other contentions relating to fraud at par e-3 below about events during the years in issue d failure to cooperate with tax authorities and e having false or inadequate books_and_records a creating a false document submitting an altered document to the commissioner’s agents to obtain tax benefits is a badge of fraud 252_f2d_56 9th cir 102_tc_596 see 317_us_492 79_tc_995 affd 748_f2d_331 6th cir each party accuses the other of altering the letter from special friends and testifying falsely about it we decide whether a witness is credible on the basis of objective facts the reasonableness of the testimony and the demeanor and consistency of statements made by the witness 140_us_417 338_f2d_602 9th cir affg 41_tc_593 330_f2d_119 5th cir 89_tc_105 ndollar_figure petitioner testified and contends that he received a letter from special friends that acknowledged his purchase of an advertisement for dollar_figure we disagree first petitioner’s testimony was contradicted by the credible testimony of colanino and a letter from brune to hughs saying that the letter from special friends to petitioner referred only to the golf clubs and that special friends did not accept visa payments colanino reviewed the files of special friends and found no record that petitioner had contributed anything to special friends other than golf clubs second the program in which petitioner purportedly bought an advertisement did not include an advertisement relating to him or acknowledge his purported contribution petitioners contend that respondent should have called brune to testify instead of colanino we disagree respondent reasonably called colanino because he was the founder and executive director of special friends petitioners contend that colanino is not credible because he received compensation from special friends we disagree the fact that special friends paid annual compensation to colanino does not detract from his credibility petitioners seek to discredit a letter from omaha state bank stating that special friends did not accept credit card payments they contend that the letter is not credible because colanino did not authenticate it we disagree colanino testified that special friends had an account with omaha state bank and that special friends never used credit cards petitioners also contend that omaha state bank was not the bank for special friends because it was not mentioned in the special friends golf tournament program for we disagree whether omaha state bank was mentioned in the special friends event program is not relevant to whether special friends could process credit card payments petitioners contend that hughs admitted that the letter that she received from special friends was a forgery we disagree hughs did not admit that the letter she received from special friends was forged these circumstances leave us no alternative but to conclude that petitioner altered or caused to be altered the letter from special friends by adding a paragraph stating that he had purchased an advertisement in the program for dollar_figure payable with two charges to his visa card and misrepresented that the altered letter was a correct copy b deducting the same item several times claiming deductions for the same item more than once on the same return may be a badge of fraud see edwards v commissioner tcmemo_1995_77 petitioners contend that they did not deduct the same item in several places on their return if they did they did so because of errors in their tax preparation software and it is not a badge of fraud to deduct the same item two or more times we disagree petitioners deducted dollar_figure on schedule a as a charitable_contribution and on schedule c as an advertising expense and as an office expense petitioner testified that he merely entered data in response to questions posed by the software we believe that petitioner fraudulently entered the dollar_figure amount three times he had not paid the dollar_figure at all and thus should not have entered the dollar_figure amount even once we are not finding fraud merely because petitioner deducted the dollar_figure three times it is also significant that petitioner never paid the dollar_figure c giving implausible or inconsistent explanations implausible or inconsistent explanations of behavior by a taxpayer can show that the taxpayer had fraudulent intent 796_f2d_303 9th cir affg tcmemo_1984_601 781_f2d_1566 11th cir affg tcmemo_1985_63 363_f2d_151 9th cir affg tcmemo_1963_333 75_tc_1 petitioner’s explanations of his alleged payment of dollar_figure and dollar_figure for legal and professional expenses were implausible and inconsistent with his actions deducting his payments to pekas and davoli as legal and professional fees is inconsistent with petitioner’s testimony that the payments were loan repayments petitioner’s testimony that the computer_software is to blame for multiple deductions of the same amounts is inconsistent with his spreadsheets which show that he entered the same amounts more than once on his spreadsheets d failure to cooperate with tax authorities a taxpayer’s failure to cooperate with the commissioner’s examining agents is a badge of fraud bradford v commissioner supra petitioners did not meet with hughs as she requested or provide the substantiation she requested we conclude that petitioners did not cooperate with hughs e having false or inadequate books_and_records a taxpayer’s failure to maintain accurate records or concealment of records may be a badge of fraud id pincite 301_f2d_484 5th cir affg tcmemo_1959_172 295_f2d_336 5th cir affg 31_tc_690 grosshandler v commissioner supra as discussed above petitioners failed to produce and thus we infer that they failed to keep records substantiating their deductions whether petitioner’s deduction of dollar_figure trugreen paid to nelson hesse or dollar_figure paid to an individual not otherwise identified in the record was fraudulent respondent contends that petitioner’s deductions for of dollar_figure paid to nelson hesse for legal and professional services and dollar_figure paid to an individual not otherwise identified in the record were fraudulent for the same reasons that his deductions of dollar_figure that he claimed to have paid to special friends and dollar_figure that he paid to davoli and pekas were fraudulent we disagree petitioner’s conduct relating to the dollar_figure and dollar_figure items was materially different from that relating to the dollar_figure and dollar_figure items petitioner altered or caused to be altered a document that he gave to hughs to support his claim that he paid dollar_figure to special friends and he misrepresented to hughs that pekas and davoli provided services for which he paid dollar_figure petitioner took affirmative steps to conceal the truth with respect to those deductions in contrast with respect to petitioner’s deduction of dollar_figure that trugreen paid to nelson respondent showed only that petitioner did not make that payment there was no accompanying intentionally misleading conduct similarly respondent has failed to show that the dollar_figure deduction was fraudulent conclusion respondent has proven by clear_and_convincing evidence that petitioner is liable for the fraud_penalty under sec_6663 for with respect to the deficiency caused by the fact that petitioner a fraudulently deducted dollar_figure three times on petitioners’ tax_return although they never paid that amount to special friends and b fraudulently deducted dollar_figure of loan repayments to davoli and pekas as legal and professional fees f whether petitioners are liable for the accuracy-related_penalty for the years in issue in the alternative to fraud as to petitioner for and with respect to petitioner for and and susan fairey for respondent determined and contends that petitioners are liable for the accuracy-related_penalty under sec_6662 the commissioner bears the burden of production with respect to penalties and additions to tax sec_7491 to meet the burden of production the commissioner must produce evidence showing that it is appropriate to impose the particular penalty but need not introduce evidence of defenses such as reasonable_cause or substantial_authority 116_tc_438 h conf rept pincite 1998_3_cb_747 respondent has met the burden of production for the accuracy-related_penalty under sec_6662 because the record establishes that petitioners deducted amounts for each year in issue that they were not entitled to deduct and that petitioners failed to produce and thus we infer that they failed to keep records of claimed unreimbursed employee business_expenses and travel and entertainment_expenses petitioners did not address this issue at trial or on brief we deem it conceded see 87_tc_698 affd 832_f2d_403 7th cir 67_tc_94 n we conclude that petitioners are liable for the accuracy-related_penalty under sec_6662 for except with respect to petitioner to the extent he is liable for fraud for g whether respondent should be sanctioned petitioners assert that respondent engaged in and should be sanctioned for the following conduct hughs refused to answer written questions from petitioners hughs expanded the audit without authority hughs said petitioners are tax protesters respondent refused petitioners’ request for a different auditor petitioners did not receive a copy of the answer until respondent filed a motion for entry of order that undenied allegations in answer be deemed admitted respondent initiated formal discovery before informal_discovery was complete respondent’s counsel had records from petitioners’ bank which he denied that he had and respondent’s counsel at trial altered a document created by petitioners we disagree petitioners have not shown or argued convincingly that respondent should be sanctioned to reflect concessions and the foregoing decision will be entered under rule respondent concedes that the accuracy-related_penalty under sec_6662 does not apply to disallowed deductions for which respondent determined fraud against petitioner


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division oct elt ep raty uil no legend taxpayer a insurance_company b individual c bank w ira x account s amount a date date date dear this is in response to your request submitted by your authorized representative dated in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code as supplemented by correspondence dated the following facts and representations have been submitted under penalty of perjury in support of the ruling requested page of taxpayer a age_ represents that on date she received a distribution from ira x totaling amount a taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to an error made by bank w taxpayer a further represents that amount a has not been used for any other purpose taxpayer a received a distribution of amount a from ira x on date on in a rollover ira despite her instructions date taxpayer a went to bank w and instructed individual c to deposit the distribution check for amount a individual c placed amount a in account s a non-ira certificate of deposit taxpayer a did not become aware that the distribution from ira x had been deposited into a non-ira account until after the 60-day rollover period had expired once taxpayer a became aware of the error she contacted bank w and on date bank w issued a letter acknowledging that individual c had deposited amount a into account s in error based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount a sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property i is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 d sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such page of 2uu95 receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date under sec_408 of the code are eligible for the waiver revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover was caused by an error made by bank w therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute-amount a into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount a considered a rollover_contribution within the meaning of sec_408 of the code will be no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 page of pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t4 - id no at sincerely yours dhe shoo laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 6--plr-111202-99 date date a b c d e f g h i j k p date date date date state x a b c dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representative requesting rulings under sec_29 and sec_702 of the internal_revenue_code facts the facts as represented by p and p’s authorized representative are as follows p is a delaware limited_liability_company formed in for the purpose of constructing and operating facilities for the production of a solid synthetic_fuel from coal p is and will continue to be classified as a partnership for federal_income_tax purposes the initial members of p were a and b collectively the sellers currently the members of p are c and d collectively the new members c is a single member limited_liability_company that is wholly owned by e as such c will be disregarded for federal_income_tax purposes d is a single member limited_liability_company that is wholly owned by f as such d will be disregarded for federal_income_tax purposes both e and f join in the consolidated federal_income_tax return filed by g g is the common parent of an affiliated_group of numerous subsidiaries engaged in a variety of businesses g will guarantee certain of the financial obligations of the new members the sellers capitalized p with a certain amount of capital contributions and provided additional funds through loans for the construction of the facility and its operations the loans are evidenced by promissory notes from p to the sellers the new members acquired the sellers’ membership interests in p pursuant to the purchase and sale agreement dated date this agreement requires the new members to make payments to the sellers directly and to make capital contributions to p that should permit p to repay the loans made by the sellers on date the new members made payments to the sellers as well as capital contributions to p the new members also made available to p new financing from an affiliate of g the new members have agreed to contribute to p an amount sufficient to allow p to repay in full the notes payable to the sellers including accrued interest through the date of the payment this contribution is due within days following the later of i the date on which p has achieved a monthly average production of a certain quantity of mmbtu of qualified_fuel within certain specified periods and ii the earlier of date or the date on which all of the following requirements are satisfied a receipt of a favorable private_letter_ruling b receipt of a pre-filing determination from the relevant district_office that the facility was placed_in_service for purposes of sec_29 on or before date or the satisfactory completion of an audit of p’s federal_income_tax return and c unless waived by the new members j or its parent_corporation has contracted for used and approved for use in their electrical generating plants in state x solid synthetic_fuel made with petroleum-based binders and has not issued requirements that make p’s production ineligible for sale to their plants j and its affiliates generate more than percent of the electricity generated within the immediate vicinity of p’s facility and thus represent unusually important customers to p it is currently expected that these payments and contributions by the new members collectively the down payment will exceed the amounts paid to construct the facility in addition to the down payment the new members are required to make additional quarterly payments to the sellers the installment payments the installment payments are payable quarterly in arrears based on the energy content of synthetic_fuel produced and sold to unrelated parties during the preceding calendar_quarter adjusted to remove the energy content of the binder material the amount thus payable will be based on a schedule of rates subject_to a maximum weighted average price per mmbtu depending on the total energy content of synthetic_fuel produced and sold during the quarter these rates were based on the credit rates as announced in notice_98_28 and will be adjusted for inflation the installment payments are reduced by amounts designed to permit funding of operating and reclamation reserves for p by pre-closing obligations of p by any payments to r for use of its technology by payments on the assignments of the construction contracts and by certain specified yearly amounts not adjusted for inflation per ton of synthetic_fuel produced the installment payments are subordinated to the extent there is any cash operating deficit or required addition to reserves with respect to the synthetic_fuel facility in excess of the per ton amounts specified in the last sentence any installment_payment thus subordinated would be payable out of operating cash_flow of p in later periods thus each installment_payment will become fixed in amount in the quarter that synthetic_fuel is produced and sold but may be paid over time amounts subordinated will be represented by a promissory note and are unconditionally payable in date regardless of cash availability according to p’s authorized representative when measured on a present_value basis using an a percent discount rate the down payment amounts to approximately b percent of the purchase_price and the installment payments amount to approximately c percent of the purchase_price the sellers have an option to reacquire their interests in p at a fair_market_value price in certain limited circumstances p has entered into a number of auxiliary agreements p has entered into a site lease agreement with i for the site of the facility and land used for coal storage for an initial term equal to five years and five days p has the right to extend the term of this lease for two consecutive five year periods the lease also includes various licenses and rights of access necessary for p to carry on its business p also has entered into an agreement with e for the marketing of its production as compensation_for its marketing efforts e will receive a commission on all sales based on a percentage of net sales proceeds subject_to a minimum based on the tonnage of synthetic_fuel sold plus a bonus based on a percentage of the amount by which the sales_price exceeds an index adjusted based on changes in coal prices at three local power plants in its capacity as the exclusive sales representative for p’s output e may also arrange for transportation of the output e also has a right_of_first_refusal for it or f to broker coal-based feedstock to p p also has entered into an asphalt binder supply agreement with h a wholly- owned subsidiary of g under this agreement h will be the exclusive provider to p of the needed petroleum-based binder material consisting of asphalt cement chemicals and other additives the price for the asphalt cement component of the binder is adjusted monthly to reflect changes in the average posted price for asphalt cement at an appropriate location with agreed quality factors as reported in an industry weekly p and a have entered into a facilities operating_agreement under which a will serve as contract operator and provide manpower for the facility as contract operator a will be subject_to the direction and control of p which will have sole authority to set overall production levels and to make other strategic decisions this agreement has an initial term ending on date or if earlier the last date on which solid synthetic_fuel qualifying for tax_credits may be produced at the facility a’s compensation_for serving as contract operator will be limited to recovery_of costs plus a fixed fee adjusted for inflation following the purchase the new members own all of the membership interests in p and the sellers have no voting rights with respect to p c serves as the managing member of p and is responsible for all major operational decisions of p under the limited_liability_company agreement of p all items of income gain loss and deduction will be shared and all cash distributions made in proportion to the members’ ownership percentages in connection with the purchase the new members determined that the future operations of p could involve using feedstock from a wide variety of sources and using varying concentrations of binder adjusted over time in accordance with the demands of the marketplace for synthetic_fuel as well as the costs of the feedstock and binder p commissioned studies on various feedstock sources and binder concentrations experts have conducted numerous tests on synthetic_fuel samples produced from such types of feedstock and such binder concentrations these tests are described in detail in p’s letter_ruling request by the preponderance of the test results the experts have concluded that there was a measurable significant change in the chemical composition of the resulting fuel compared to the corresponding coal-based feedstock ruling requests and sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 based on the representations of p and p’s authorized representative including the preponderance of p’s test results we agree that the fuel to be produced in p’s facilities using the process on the coal feedstock will result from a significant chemical change in coal transforming the coal feedstock into a solid synthetic_fuel from coal because p will own the facilities and because a on behalf of p will operate and maintain the facilities we conclude that p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner’s income_tax by taking into account separately the partner’s distributive_share of the partnership’s other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner’s interest in the partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner’s distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture are not reflected by adjustments to the partners’ capital accounts except to the extent that adjustments to the adjusted tax basis of partnership sec_38 property in respect of tax_credits and tax_credit recapture give rise to capital_account adjustments under sec_1_704-1 thus these allocations cannot have economic_effect under sec_1_704-1 and the tax_credits and tax_credit recapture must be allocated in accordance with the partners’ interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners’ interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners’ respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners’ interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that assuming the solid synthetic_fuel produced qualifies for the sec_29 credit the credit will be allowed to p and the credit may be passed through to and allocated to the partners of p under the principles of sec_702 in accordance with each partner’s interest in p as of the time the tax_credit arises we express no opinion however regarding how the partners’ interests in p are determined ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in- service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer ruling_request to qualify for the sec_29 credit p’s facilities must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 when property is placed_in_service is a factual determination and we express no opinion on when p’s facilities were placed_in_service revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility’s total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 the relocation of any of p’s facilities after date will not prevent the relocated facility from continuing to be treated as originally placed_in_service prior to date for purposes of sec_29 provided the fair_market_value of the used_property is more than percent of the relocated facility’s total fair_market_value at the time of the relocation conclusions accordingly based on the representations of p and p’s authorized representative we conclude as follows p with use of the process will produce a qualified_fuel within the meaning of sec_29 p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person the credit allowed under sec_29 may be passed through to and allocated among the partners in p in accordance with the principles of sec_702 any termination of p under sec_708 arising from prior sales or exchanges of interests in p will not preclude p from taking the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person and if a facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the used_property is more than percent of the relocated facility’s total fair_market_value at the time of the relocation except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when p’s facilities were placed_in_service or how the partners' interests in p are determined this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_2000_1 2000_1_irb_4 however when the criteria in section dollar_figure of revproc_2000_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to p’s authorized representative sincerely yours charles b ramsey branch chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


department of the treasury internal_revenue_service p o box irs cincinnati oh number release date uil code dear date date employer id number contact person id number contact telephone number form you must file tax years this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we'll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter rev catalog number 47632s if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 we sent a copy of this letter to your representative as indicated in your power_of_attorney sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 c redacted letter final adverse determination under sec_501 - no protest letter rev catalog number 47632s department of the treasury internal_revenue_service cincinnati oh legend b state c date xx percent number y dollars amount dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were incorporated in b on c your articles of incorporation state you are organized exclusively for charitable religious educational and scientific purposes they also state that in the event you dissolve or terminate at any time your assets will be distributed for one or more exempt purposes as described under sec_501 of the code your purposes listed in your form_1023 consist of supporting research internationally for cures being developed for rare and infectious diseases leading research initiatives identifying best practices for streamlining drug therapy approvals worldwide providing professional thought leadership and unique networking activities for industry leaders increasing public awareness of the fight of ongoing disease cures globally to accomplish your purposes you will provide business and consulting services to the world-wide biotech and pharmaceutical industries who are developing new treatments for people who are infected with rare diseases you will help bridge the gap between rare disease cures being developed and ultimately approved for patient distribution by providing the necessary services to support efficient processing fast track approval applications for the developers of such drugs your services will be available to individuals for profit and not for profit organizations as well as other stake holders you will develop a detailed road map for each client with the necessary steps to get their drugs approved and to market including providing strategy support you also will focus on providing expert assistance to those who do not have experience or expertise in this process examples of specific services that you will provide to clients include the following e e e helping clients complete the necessary applications for more advantageous designations from regulatory agencies and in some cases completing the necessary applications and making the required submissions this may accelerate the approval process reviewing clients’ data and their scientific models to determine if they have the needed information necessary for submitting applications for approval validating clients’ research required for the application process furthermore you also provide executive search services executive coaching services and public awareness and educational programs examples of executive search services consist of connecting trained scientists and researchers with work and professional development opportunities and helping clients develop strategies and techniques in competitive hiring including developing recruiting programs and developing successful retention programs your executive coaching services will involve providing leadership development and professional growth for leaders who are scientists and researchers in the biotech and pharmaceutical industries your public awareness and educational programs will center around international conferences training events scientific meetings and symposiums with the goal of contributing to research for developing treatments for rare diseases you also have a comprehensive web site describing and promoting the services you provide and the value clients will get because you are operating as a nonprofit you are governed by a three-person board consisting of a director a board chairman and a secretary who have a wide range of experience in providing consulting services in the healthcare and pharmaceutical industries as well in in the nonprofit world you will be funded solely by fees for services when determining your individual clients’ fees you will consider hourly rates for project based factors such as salaries benefits and overhead rent equipment usage research time etc the client fees will be calculated based on the number of estimated hours to complete a request you will ensure your fees are generally in the range of x percent below market rates by collecting intelligence on competitors through various market analysis your expenses consist of salary expense occupancy expense and outlays for professional services of your total expenses and your salary expense is of your salary expense is for board members you further indicated that some work performed by your board_of directors is unpaid volunteer work furthermore the compensation you pay is determined by the board and is based on compensation_for similar positions and you indicated that your current compensation levels are below market for your senior executives your president and ceo is the husband of your founder who receives y dollars annually which is about salary expense of your letter rev catalog number 47630w finally you indicated that you will provide services to clients who may not be able to pay your fees through a variety of mechanisms which include a complete review of their clinical data and conference calls in which technical guidance is provided to position the client to move forward on their own you also offer a reduced fee for those firms which may be financially challenged law internal_revenue_code sec_501 provides for exemption for organizations organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_513 of the code describes an unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 code sec_513 of the code provides that a trade_or_business includes any activity which is carried on producing income from the sale_of_goods or the performance of services where an activity carried on for profit constitutes an unrelated_trade_or_business no part of such trade_or_business shall be excluded from such classification merely because it does not result in profit sec_1_501_c_3_-1 states that to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 states that in order to meet the operational_test 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 states 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 as defined in sec_513 of the code an organization which is organized and operated for the primary purpose of carrying on an unrelated_trade_or_business is not exempt under sec_501 of the code even if it has certain religious purposes its property is held in common and its profits do not inure to the benefit of individual members of the organization in revrul_72_369 1972_2_cb_245 an organization was formed to provide managerial and consulting services for sec_501 organizations to improve the administration of their charitable programs the organization enters into agreements with unrelated sec_501 organizations to furnish managerial and consulting services on a cost_basis this revenue_ruling stated that letter rev catalog number 47630w an organization is not exempt merely because its operations are not conducted for the purpose of producing a profit to satisfy the ‘operational test ’ the organization's resources must be devoted to purposes that qualify as exclusively charitable within the meaning of sec_501 of the code and the applicable regulations providing managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fact that the services in this case are provided at cost and solely for exempt_organizations is not sufficient to characterize this activity as charitable within the meaning of sec_501 of the code furnishing the services at cost lacks the donative element necessary to establish this activity as charitable in 326_us_279 the supreme court found that the commercial hue permeating the organization was reflected in its charter provisions which was dedicated to the securing of educational and scientific advancements of business methods so that merchants might successfully and profitably conduct their business the organization’s activities were largely animated by this commercial purpose the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 70_tc_352 the organization’s sole activity was to offer consulting services on rural-related policy and program development to limited-resource organizations for a fee the organization did not limit its clientele to organizations which were themselves organizations described under sec_501 of the code but only to organizations which were either nonprofit or exempt the fees charged were set at or close to cost but were not less than its full cost of providing its services the organization’s financing did not resemble that of the typical organization described under sec_501 of the code the organization had not solicited or 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 it failed to show it would not be in competition with commercial enterprises the and to produce a net profit provision of managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the court held that the organization’s primary purpose was not educational scientific or charitable but rather was the conduct of an ordinary commercial consulting enterprise in competition with other commercial firms the organization was not operated exclusively for tax-exempt purposes within the meaning of sec_501 of the code in easter house v united_states 846_f2d_78 fed cir aff'g cl_ct the court found an organization that operated an adoption agency was not exempt under sec_501 of the code the organization was operated for a substantial nonexempt purpose rather than for the exempt purposes of providing educational and charitable services to unwed mothers and children the court stated that adoption services do not in and of themselves constitute an exempt_purpose the court found that the adoption agency was operated in a commercial manner the agency’s operation was funded completely by the fixed fees charged to adoptive parents it relied entirely on those fees and sought no funds from federal state or local sources nor engaged in fund raising programs nor did it solicit contributions ultimately the agency was not entitled to tax exempt status on basis that it was not distinguishable from commercial adoption agency the court found that the adoption agency’s primary goal was furthering of a business_purpose rather than the advancement of an educational or a charitable purpose in 950_f2d_365 7th cir the court_of_appeals upheld a tax_court decision stating that the organization operated its restaurants and health food stores for a substantial commercial letter rev catalog number 47630w purpose and it did not qualify for exemption under sec_501 of the code the appellate court provided the factors that may indicate a substantial nonexempt commercial purpose these factors include direct competition with other for-profit businesses existence and amount of annual and accumulated_profits competitive pricing policies and lack of below-cost pricing use of promotional materials to enhance sales advertising of goods and services lack of plans to solicit charitable_contributions hours of operation that are competitive with other commercial enterprises in 283_fsupp2d_58 d d c due to the commercial manner in which the organization conducted its activities the court held that the organization was operated for a nonexempt commercial purpose rather than for a tax-exempt purpose the court found that the organization operated its conference center in a manner consistent with that of a commercial business among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations application of law you do not meet the requirements for recognition of tax exemption under sec_501 of the code because you do not operate for a tax-exempt purpose under sec_501 of the code your sole activity is the conduct_of_a_trade_or_business for the production_of_income you conduct no other activity aside from your clients are comprised of any individual or organization providing consulting services to clients for a fee whether operated on a for profit basis or a non-profit basis who are able and willing to pay your fees your fees are generally in the range of x percent below market rates fair_market_value rates comparable to other providers of similar services you even stated that you conduct research to insure these fees are set in the range of x percent below your competitors compensated employees conduct your operations on a regular and continuous basis based on sec_1_501_c_3_-1 you do not meet the requirements for recognition of tax exemption under sec_501 of the code because you are operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 of the code in addition you do not meet the operational requirements for recognition of tax exemption under sec_501 of the code and you fail the operational_test as described in sec_1_501_c_3_-1 you are not operating per sec_1_501_c_3_-1 because you operate for a substantial nonexempt purpose because more than an insubstantial part of your activities is not in furtherance of an exempt_purpose you are like the organization described in revrul_72_369 1972_2_cb_245 because you are operating in a commercial manner the organization described in the revenue_ruling was conducting commercial services only for organizations exempt under sec_501 your activities consists of the provision of consulting services primarily to any individual or organization who is able to pay your fees the fact that your consulting services may be provided in the range of x percent below market rate does not characterize your activities as charitable furthermore the fact that your clients are fighting against rare diseases by providing new cures and requesting your assistance is not sufficient to characterize the activity as charitable letter rev catalog number 47630w in better business bureau of washington d c inc the united_states supreme court provided that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes since your primary purpose is the conduct of an unrelated_trade_or_business for profit by operating as a consulting business you serve a substantial nonexempt purpose which precludes tax exemption under sec_501 of the code you are operated for a substantial nonexempt purpose similar to the organization described in airlie foundation v internal_revenue_service supra applying the factors stated in airlie foundation as demonstrating a substantial nonexempt commercial purpose your provision of consulting services to clients primarily for a fee directly competes with other providers of similar consulting services like a commercial business your services are generally available to any individual or organization willing to pay your fees furthermore you stated that when establishing your fees for your various services you take into consideration general project based factors in determining hourly rates such as salaries benefits and overhead rent equipment usage research time etc and then you ensure your fees are generally below market rates by collecting pertinent information on competitors through market research in addition like the organization in arlie you do not limit your clients to organizations that are described under sec_501 of the code another factor considered in assessing a commercial manner of operations is the extent and degree of below cost services provided you indicated that you provide services to clients who may not be able to pay your fees through a variety of methods including a complete review of their clinical data and conference calls with employees in which technical guidance is provided positioning the client to move forward on their own as well as offering a reduced fee for those firms which may be financially challenged however you still primarily operate in commercial manner moreover based on your financial data your revenues will come exclusively from consulting fees resulting from the provision of consulting services thus you meet most of the factors indicated by the courts as operating for a substantial nonexempt purpose you are like the organization described in living faith inc v commissioner supra where the court_of_appeals upheld a tax_court decision stating that the organization operated its restaurants and health food stores for a substantial commercial purpose you also meet most of the factors provided by the appellate court in living faith inc as exhibiting a substantial nonexempt commercial purpose your provision of consulting to clients for a fee is in direct competition with other for-profit providers of similar services the fact that you ensure the fees you charge through market research are less also illustrated you that you are in direct competition to similar entities you did not substantiate that you offer below-cost services to your clients the financial data you submitted showed that all of your income is from fees for services rendered you are not supported by gifts grants and charitable_contributions from the general_public you are also using your website to market and promote your services which is characteristic of a commercial business indistinguishable from a commercial enterprise by operating in the manner described you are furthering a substantial nonexempt purpose you are operated in a manner you are like the organization described in easter house v united_states supra where the court determined that the organization was not exempt because its conduct of adoption services activity was in furtherance of a nonexempt commercial purpose similar to adoption services your provision of consulting services to clients for a fee do not in and of themselves constitute an exempt_purpose your sole activity is to render consulting letter rev catalog number 47630w services to your clients in exchange for a fee your activities are not carried out to accomplish a tax-exempt purpose under sec_501 of the code you are comparable to the organization described in b s w group inc v commissioner supra where the court indicated that the provision of managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit your activities constitute the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit like a for-profit business all your revenues are from fees paid_by your clients for consulting services while charitable institutions often do provide services to individuals the cost is generally subsidized by contributors who do not receive anything in return your fees however are set high enough to recoup all projected costs and to produce a profit thus based on the totality of the facts and circumstances you are operated for the substantial nonexempt purpose conclusion based on the facts we conclude that you are not in compliance with the above stated laws and precedence you do not meet the operational_test under sec_501 of the code because the manner in which you operate is commercial accordingly you do not qualify for exemption as an organization described in sec_501 of the code contributions to you are not deductible under sec_170 of the code if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete letter rev catalog number 47630w your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we'll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter letter rev catalog number 47630w we sent a copy of this letter to your representative as indicated in your power_of_attorney enclosure publication ce sincerely stephen a martin director exempt_organizations rulings and agreements letter rev catalog number 47630w