1Cases of the following petitioners are consolidated herewith for purposes of trial, briefing and opinion: Museum of

Outdoor Arts, docket No. 6696-93; Cynthia Madden Leitner, docket

No. 6697-93; Plaza Developers Holdings, LLC, A Colorado LLC,

docket No. 6698-93; Marjorie P. Madden, docket No. 6699-93.

T.C. Memo. 1997-395

UNITED STATES TAX COURT

JOHN W. MADDEN, JR., ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 6639-93, 6696-93, Filed August 27, 1997.

 6697-93, 6698-93,

 6699-93.

Sheldon H. Smith, for petitioners.

Virginia L. Hamilton, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

FAY, Judge: Respondent determined deficiencies as follows:
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Docket No. 6639-93. John W. Madden, Jr.:

Year Deficiency First Tier Deficiency Second Tier Deficiency

 Secs. Secs. 4941(a)(1) Sec. 4941

 511-513 and (2), 4945(a)(2) (b)(1) and (2)

1983 -- $40 --

1984 -- 2,192 --

1985 -- 3,404 --

1986 -- 4,397 --

1987 -- 4,840 --

1988 -- 6,005 --

1989 -- 6,531 --

1990 -- 6,531 --

1991 -- 6,531 --

1992 -- 6,531 $159,179

Docket No. 6696-93. Museum of Outdoor Arts:

Year Deficiency First Tier Deficiency Second Tier Deficiency

 Secs. Secs. 4941(a)(1) Sec. 4941

 511-513 and (2), 4945(a)(2) (b)(1) and (2)

1984 $8,088 -- --

1985 10,679 -- --

1986 7,596 -- --

1987 47,465 -- --

1988 43,565 $300 --

Docket No. 6697-93. Cynthia Madden Leitner:

Year Deficiency First Tier Deficiency Second Tier Deficiency

 Secs. Secs. 4941(a)(1) Sec. 4941

 511-513 and (2), 4945(a)(2) (b)(1) and (2)

1983 -- $40 --

1984 -- 792 --

1985 -- 1,784 --

1986 -- 2,844 --

1987 -- 3,287 --

1988 -- 4,452 --

1989 -- 4,978 --

1990 -- 4,978 --

1991 -- 4,978 --

1992 -- 4,978 $97,055
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Docket No. 6698-93. Plaza Developers Holdings, LLC, A Colorado

Limited Liability Company: 

Year Deficiency First Tier Deficiency Second Tier Deficiency

 Secs. Secs. 4941(a)(1) Sec. 4941

 511-513 and (2), 4945(a)(2) (b)(1) and (2)

1983 -- $80 --

1984 -- 184 --

1985 -- 372 --

1986 -- 746 --

1987 -- 1,631 --

1988 -- 3,961 --

1989 -- 5,014 --

1990 -- 5,014 --

1991 -- 5,014 --

1992 -- 5,014 $200,568

Docket No. 6699-93. Marjorie P. Madden:

Year Deficiency First Tier Deficiency Second Tier Deficiency

 Secs. Secs. 4941(a)(1) Sec. 4941

 511-513 and (2), 4945(a)(2) (b)(1) and (2)

1983 -- $40 --

1984 -- 2,192 --

1985 -- 3,404 --

1986 -- 4,397 --

1987 -- 4,840 --

1988 -- 6,005 --

1989 -- 6,531 --

1990 -- 6,531 --

1991 -- 6,531 --

1992 -- 6,531 $159,179

All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.

The parties have made numerous concessions, including

respondent's concession of the second tier deficiencies

originally determined with respect to petitioner John W. Madden,
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2As of Jan. 1, 1994, Plaza Developers Holdings, LLC, assumed

the assets, liabilities, and potential liabilities of Greenwood

Maintenance Co. (GMC), and GMC ceased to exist at that time. 

Plaza Developers Holdings, LLC, is the named party in docket No.

6698-93. However, for clarity, we will refer to Plaza Developers

Holdings, LLC, as GMC.

Jr. (petitioner), Marjorie P. Madden (petitioner's wife), and

Cynthia Madden Leitner (petitioner's daughter). The issues

remaining for decision are:

(1) Whether the Museum of Outdoor Arts (the Museum) is

liable, as lessor, for unrelated business income tax (UBIT) on

amounts received from 1984 through 1988 in connection with the

leasing of office building spaces;

(2) whether the Museum is liable, as lessor, for UBIT on

amounts received in 1987 and 1988 in connection with the leasing

of Fiddler's Green Amphitheatre (FGA);

(3) whether Greenwood Maintenance Co.2 (GMC) is liable for

the excise tax under section 4941(a)(1) in connection with

payments received by it from the Museum from the years 1983

through 1989;

(4) whether petitioner, petitioner's wife, and petitioner's

daughter are liable for the excise tax under section 4941(a)(2)

in connection with payments made by the Museum to GMC from the

years 1983 through 1989;

(5) whether petitioner, petitioner's wife, and petitioner's

daughter are liable for the section 4941(a)(2) excise tax in
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3Cynthia Madden Leitner (petitioner's daughter) resided in

Littleton, Col., at the time she filed her petition. The

principal place of business of GMC and the Museum of Outdoor Arts

(the Museum) was Englewood, Col., when they filed their

petitions.

connection with three payments in the amounts of $2,304, $1,343,

and $3,000 made by the Museum.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner and petitioner's wife

resided in Englewood, Colorado, at the time he filed his

petition.3

Petitioners

Petitioner formed the John Madden Co. (the Company) in 1969. 

The Company, which develops and manages commercial office

buildings and office parks, played an integral role in developing

Greenwood Plaza, a Denver, Colorado, office complex consisting of

49 commercial office buildings spread over 200 acres of land. 

The Company, via a number of different partnerships, owned nine

of the buildings in the complex during the years at issue.

The Museum, a private foundation incorporated in the State

of Colorado, is located in the Greenwood Plaza complex. Petitioner is one of the founders of the Museum and was a foundation

manager of the Museum under section 4946(b) during the years at

issue. Petitioner's wife served as treasurer of the Museum
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during 1985 and 1986, secretary/treasurer during 1987, and 

secretary during 1988 and 1989. Petitioner's daughter served on

the board of directors of the Museum during all the years at

issue. She was the secretary of the Museum from 1983 through

1985, president of the Museum during 1986, and president/vice

president from 1987 through 1989. Both petitioner's wife and

petitioner's daughter were foundation managers of the Museum

under section 4946(b) during the years at issue.

The Museum, an "outdoor" museum which can be best described

as a "museum without walls", was granted its tax-exempt status

under section 501(c)(3) on September 3, 1982. The principal

purposes of the Museum, as set out in its Articles of Amendment,

include the "stimulation, promotion and development of the

interest of the general public in every manner of art forms

through organization and operation of outdoor and indoor museums,

the holding and sponsorship of music concerts, art exhibitions

and theatrical and dance performances, all for cultural and

educational purposes". The Museum's artwork consists primarily

of sculptures and other exhibits that are designed to withstand

the outdoor elements. Although a few pieces are located in

public atria inside some of the buildings, most of the artwork is

situated along the public thoroughfares that run throughout the

Greenwood Plaza complex. The Museum conducts tours of its artwork and also offers courses in art to members of the community.
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The Museum relies on the Company to provide most of its

management facilities. Specifically, the John Madden Co.

furnishes office space to the Museum, rent free, in one of the

buildings owned by the Company. Further, the Company allows the

Museum to use its accounting system free of charge.

The Museum also relies on the building owners (including the

Company) to provide spaces inside and outside their buildings

free of charge to display its artwork. Periodically, members of

the community hold special events, such as wedding receptions or

bar mitzvahs, in the spaces provided by the building owners. In

these instances, the Museum charges the community members a fee

for the use of the spaces furnished by the building owners. 

These special events were held at various times during the years

at issue. The Museum recorded the following amounts as leasing

revenue, and incurred the following expenses, in connection with

the leasing of the office building spaces:

Year Revenues Expenses

1985 $300 $1,913

1986 9,560 7,810

1987 12,426 10,540

1988 8,638 5,244

Except for $425 in 1988, all of the expenses listed for the years

1986, 1987, and 1988 relate to payments made by the Museum to GMC

for services furnished by GMC in connection with the special

events. Prior to 1983, GMC did not charge the Museum any fee for

its services.
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In the early 1980's, the Company hired Dr. Sherry Manning as

its new chief executive officer. Prior to being hired by the

Company, Dr. Manning had been the president of Colorado Women's

College. Dr. Manning told petitioner's daughter that GMC could

charge the Museum for the services it provided to the Museum, so

long as the charge was not higher than the fair market rate for

the services rendered. As indicated above, GMC began charging

the Museum for the services that it provided in connection with

the special events.

Greenwood Maintenance Co.

Petitioner owns a 75-percent stake in GMC, a maintenance and

janitorial company. Thus, GMC is defined as a disqualified

person under section 4946(a)(1) with respect to the Museum. 

During the years at issue, GMC performed maintenance

functions for approximately 20 of the buildings in Greenwood

Plaza, including all of the buildings owned by the Company. 

Throughout the years at issue, the Museum contracted with GMC to

perform janitorial and related services. Depending on the job

requirements, GMC would either perform the work itself or subcontract with third parties to have the work performed.

Fiddler's Green Amphitheatre

On August 26, 1986, Greenwood Plaza South, a partnership in

which petitioner was a partner, donated FGA to the Museum. Concurrent with the FGA donation, a 3-acre park contiguous to the
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amphitheater, known as Samson Park, was also donated to the

Museum. 

FGA is an outdoor amphitheater built in 1982 as an earth

sculpture. From the time of its development until it was donated

to the Museum in August 1986, the Museum used FGA approximately

five times each year for performing arts events.

On July 17, 1986, 3 weeks prior to the donation, the Museum

executed the FGA long-term facility lease agreement (the First

Lease) with MCA Concerts, Inc. (MCA), for the lease of FGA. 

After entering into the First Lease, the Museum sent a copy of

the First Lease to the New York law firm of Baer Marks & Upham

for advice regarding any issues that might affect the Museum's

tax-exempt status.

By a letter dated February 2, 1987, Baer Marks & Upham

replied to the Museum's inquiry and made a number of suggestions

for changes in the lease. Thereafter, on August 7, 1987, the

Museum executed the first amended and restated FGA long-term

facility lease agreement (the Second Lease). Pursuant to their

agreement, after entering into the First Lease, MCA installed

individual seats, constructed a sound wall, and made other

improvements to FGA. After the renovations, FGA could

accommodate an audience of 18,000 people, and many popular

performers could, and did, put on shows at FGA.

The Second Lease provides that the Museum will collect rent

from MCA based on a fixed percentage of gross receipts, but that,
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in any event, the rent will not be less than $120,000 per year. 

The Second Lease also imposes certain obligations on the Museum. 

First, the Museum is required to use its best efforts with

respect to obtaining any necessary permits. Second, the Museum

is required to maintain the property and secure it from damage. 

Third, the Museum is obligated to arrange for 5,000 parking

spaces. In order to arrange for the parking spaces, the Museum

entered into parking license agreements with building owners in

the Greenwood Plaza complex. Pursuant to these licenses, the

building owners agreed to make their buildings' parking spaces

available to concert patrons, and in return the Museum agreed to

arrange for security and cleanup of the parking areas. Finally,

the Second Lease contains a sublease clause. Under this clause,

MCA must remit 25 percent of the sublease rentals to the Museum. 

The sublease rentals are defined as the gross receipts received

by MCA from the sublessees less any out-of-pocket expenses

incurred by MCA in connection with the subleases.

Self-Dealing Transactions

Petitioner is a disqualified person, as defined by section

4946(a)(1), with respect to the Museum. Petitioner admits that

on June 5, 1985, the Museum and petitioner engaged in a selfdealing transaction. He also admits that, on July 12, 1985, he

and the Museum engaged in a self-dealing transaction. Petitioner

concedes that he owes the first tier excise tax under section

4941(a)(1) on the self-dealing transactions. 
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4For simplicity, we refer to the revenue from special events

as "leasing" revenue. We use the term "leasing" as a label only

and offer no opinion on whether this income constitutes rent from

(continued...)

The transactions involve payments made by the Museum for

repairs to artwork owned by petitioner. In each case, petitioner

was out of town when the transactions occurred. As noted supra,

employees of the Company performed accounting services for the

Museum. While petitioner was out of town, checks were issued

from the Museum's bank account for services rendered to repair

petitioner's artwork. Petitioner's daughter learned of the

transactions a day or two after they occurred and corrected them

immediately by having petitioner reimburse the Museum.

A third transaction at issue involves a $3,000 payment made

by the Museum to Form, Inc. Form, Inc., is an association of

artists who create large stone sculptures. The payment relates

to art exhibition expenditures made pursuant to a contract with

Form, Inc. However, the Company is the named party in the

contract with Form, Inc., not the Museum.

OPINION

Issue 1. Leasing of Building Spaces

The first issue for decision involves whether the income

received from the Museum's leasing of building spaces to members

of the community constitutes unrelated business taxable income

(UBTI). Respondent determined in the notice of deficiency that

the leasing4 revenues received by the Museum constitute income
- 12 -

4(...continued)

real property under sec. 512(b)(3)(A)(i).

from a trade or business, regularly carried on for profit and not

substantially related to the exempt function of the Museum. 

Therefore, respondent contends the leasing income is UBTI under

section 513. The Museum argues that making building spaces and

artwork available to the public is substantially related to its

exempt function. We agree with the Museum.

The income of organizations classified under section

501(c)(3) is generally exempt from taxation. However, section

511(a) imposes a tax on the "unrelated business taxable income"

of section 501(c)(3) organizations. UBTI is defined in section

512(a) as income derived by an organization from any "unrelated

trade or business" regularly carried on by it. Section 513(a)

defines the term "unrelated trade or business" as the conduct of

a trade or business that is not substantially related to the

organization's exempt purpose. 

The regulations and case law specify three elements necessary for income to be UBTI: (1) The activity being conducted

must rise to the level of a trade or business, (2) the trade or

business must be regularly carried on by the organization, and

(3) the conduct of the trade or business must not be substantially related to the organization's tax-exempt purpose. Ohio

Farm Bureau Fedn., Inc v. Commissioner, 106 T.C. 222 (1996); sec.

1.513-1(a), Income Tax Regs. These elements are conjunctive, and
- 13 -

each must be present for income to be UBTI. Here, we shall focus

our attention on the third element; namely, whether the leasing

of museum spaces was substantially related to the Museum's exempt

purpose.

An activity is substantially related to an organization's

exempt purposes where the performance of the activity has a

substantial causal relationship to the achievement of the exempt

purposes. Sec. 1.513-1(d)(2), Income Tax Regs. The activity

must contribute importantly to the accomplishment of those purposes. Id. This determination is based upon all of the facts

and circumstances surrounding the activity. Id.

In evaluating the substantial relationship, we focus our

inquiry on the manner in which the Museum conducts its activities. United States v. American College of Physicians, 475 U.S.

834, 848-849 (1986). Specifically, we will determine whether the

manner in which the Museum leased the building spaces to the

public manifests an intent to further its exempt purposes or

whether that manner indicates an intent to merely raise revenue. 

National League of Postmasters of the United States v. Commissioner, T.C. Memo. 1995-205, affd. 86 F.3d 59 (4th Cir. 1996). 

We begin by noting that the amount of revenue involved for each

year is not significant. More importantly, the revenues earned

by the Museum from this activity barely exceeded the related

expenses, and in some years the Museum actually suffered losses. 

This fact lends credence to the Museum's argument that the
- 14 -

leasing activity was performed mainly to expose the artwork to

people who otherwise would not have seen it, rather than as a

revenue-generating activity.

At this point, we recall the stated purposes of the Museum. 

The Museum was created to expose people to the outdoor arts and

to promote interest in outdoor objects as art forms. By offering

the building spaces for special events, the Museum argues that it

effectively exhibited the artwork to an audience who normally

would not have come to the Greenwood Plaza and viewed the

exhibits. This rationale is consistent with the Museum's stated

purposes. Accordingly, we conclude that the Museum's leasing of

building spaces to members of the public was substantially

related to its exempt purpose. Therefore, the revenue generated

by this activity is not UBTI.

Issue 2. Leasing of FGA

The second issue for decision concerns whether the Museum

realized UBTI from leasing FGA to MCA. In the notice of

deficiency, respondent determined that revenues from the lease

with MCA constitute income from a trade or business, regularly

carried on for profit and not substantially related to the exempt

function of the Museum, thereby resulting in UBTI under section

513. The Museum disputes this determination. 

The Museum contends that the leasing activity did not rise

to the level of a trade or business, and, even if it did, it was

not regularly carried on. In making this determination, the size
- 15 -

of the property and the taxpayer's activities with respect to the

property are important factors. See generally Curphey v. Commissioner, 73 T.C. 766 (1980). FGA is substantial, with a capacity

to seat 18,000 patrons. The lease was not a short-term arrangement, as it provided for a 6-year initial term. Further, the

Museum was required under the Second Lease to make arrangements

for security and parking. Prior cases make clear that leasing

activities of this nature constitute a trade or business that are

regularly carried on. See Ohio County & Indep. Agric. Societies,

Delaware County Fair v. Commissioner, T.C. Memo. 1982-210. 

Next, the Museum contends that the leasing activity is

substantially related to its exempt purpose, because the Museum

was established to promote live shows and performing arts events. 

The Museum asserts that it could have put on these productions

itself. Therefore, the Museum argues that it did not generate

UBTI by merely leasing FGA and having MCA arrange for the

performances. 

As discussed supra, an activity is substantially related to

an organization's exempt purpose where the activity has a substantial causal relationship with the achievement of the exempt

purpose. Sec. 1.513-1(d)(2), Income Tax Regs. In evaluating the

substantial relationship, we examine the manner in which the

Museum conducted its activities in order to determine whether

there was an intent to further its exempt purposes or simply make

a profit. United States v. American College of Physicians, supra
- 16 -

at 848-849. Individual seats were installed in FGA in preparation for the concert productions that MCA intended to put on. 

The Museum has offered no aesthetic reasons for installing

individual seats in FGA (a completely earthen structure which

itself can be described as a work of art), and the record

contains no evidence that the facility was upgraded for any

reasons other than commercial ones. Further, we note that the

productions put on by MCA involved popular performers and

commanded premium ticket prices. Finally, the amount of money

involved with the Second Lease was substantial. On the basis of

these facts, we conclude the Museum leased FGA primarily to make

a profit and not to substantially further its exempt purposes.

The Museum argues that, even if the lease proceeds represent

unrelated business income, they fall within the passive realestate exception to UBTI. Section 512(b)(3) specifically

excludes real property rents from UBTI. However, in order to

satisfy the passive rent exception, the leasing arrangement must

meet certain guidelines. First, the landlord may not render

substantial services under the lease for the convenience of the

tenant. Sec. 1.512(b)-1(c)(5), Income Tax Regs. Second, the

statute prescribes that the determination of rent must not

depend, in whole or in part, on the income or profits derived by

any person from the leased property (other than an amount based

on a fixed percentage of receipts or sales). Sec.

512(b)(3)(B)(ii). Respondent attacks the arrangement with MCA on
- 17 -

both fronts and concludes that the Second Lease does not qualify

for the passive rental exception under section 512(b)(3).

Respondent contends the Museum rendered substantial services

solely for the convenience of MCA. Specifically, respondent

directs our attention to three lease provisions: The requirement

that the Museum arrange for parking; the requirement that the

Museum maintain the FGA grounds and arrange for security; and the

requirement that the Museum use its best efforts with respect to

obtaining the necessary permits and licenses (e.g., a liquor

license). We will deal with each of these in turn.

Respondent argues that the parking arrangements under the

lease constitute substantial services not typically rendered to

tenants. The Museum responds that, just as the Museum is without

walls, FGA is an amphitheater without parking spaces. Therefore,

the Museum had no choice but to arrange for parking spaces,

because otherwise it would be impractical to hold concerts at

FGA.

We agree with the Museum that arranging for the parking

spaces was not an impermissible service provided to MCA. The

regulations proscribe services rendered to the tenant if they are

"primarily for his convenience and are other than those usually

or customarily rendered in connection with the rental of rooms or

other space for occupancy only." Sec. 1.512(b)-1(c)(5), Income

Tax Regs. For instance, the regulations state that maid

services, such as found at a hotel, are impermissible personal
- 18 -

services, whereas the cleaning of public areas and the collection

of trash are not considered to be services rendered primarily for

the convenience of the tenant. Id. 

Typically, a complex such as FGA is built with parking areas

surrounding the structure. Any lease of the building necessarily

contemplates that the lessee will be able to use the surrounding

parking spaces. Here, the Museum was required to undertake

unique measures in order to provide the parking necessary for MCA

to use FGA. These arrangements were necessary to put FGA on

equal footing with similar complexes and do not represent

impermissible services under the regulation. The evidence at

trial indicates that, once the spaces were made available, MCA

took on the primary responsibility of managing the parking spaces

during the concerts, although the Museum retained some responsibility for security and cleanup. In effect, instead of

building a parking garage, the Museum created parking spaces

through these license arrangements. Once the arrangements were

complete, however, the Museum turned over the primary operating

duties to MCA for the duration of the concerts. These arrangements do not constitute impermissible services.

Respondent also argues that the maintenance and security

services furnished by the Museum are impermissible services

provided to the tenant. The Second Lease requires the Museum to

maintain or provide for the maintenance of all existing structures at the outset of the Second Lease and to arrange for
- 19 -

security on days that MCA is not using FGA. MCA agreed to pay

the Museum $15,000 a year to help defray the Museum's expenses

incurred in arranging for these services. Respondent argues that

the maintenance of FGA was a service rendered for the benefit of

the lessee.

We cannot agree with respondent's contention that the

maintenance services went beyond what a landlord would normally

furnish in a lease for occupancy. In fulfilling this obligation,

the Museum simply contracted with a landscaping company to maintain the grounds surrounding the amphitheater. Further, the

evidence indicates that, after MCA took possession of the structure in 1988, the Museum did not provide, nor contract with a

third party to provide, security services for FGA. Maintaining

the grounds surrounding a building is a service customarily

rendered by lessors and is not an impermissible service for

purposes of the regulation.

Finally, respondent argues that the "best efforts" clause in

the Second Lease is an impermissible service for the benefit of

the lessee. The clause states that the Museum will use its "best

efforts" to assist MCA in obtaining any permits or licenses, such

as those necessary for the sale of beer, wine, and spirits at

FGA. Upon the advice of Baer Marks & Upham, a clause was added

to the Second Lease which specified that the Museum was required

to lend only such assistance as is usually and customarily

rendered by landlords to tenants. No evidence was adduced at
- 20 -

trial concerning what actions, if any, the Museum actually took

with regard to the "best efforts" clause.

The Museum argues that it is not obligated under this clause

to render a service primarily for the benefit of the lessee. 

Rather, the Museum asserts that this clause was inserted to

ensure that the Museum would sign any application which required

the landlord's signature. While the term "best efforts" connotes

more than merely signing an application for a license, the

evidence at trial supports petitioner's assertion. No evidence

was presented at trial to contradict the Museum's assertions in

this regard. Consequently, we find that no impermissible

services were performed pursuant to the best efforts clause. On

the basis of the foregoing discussion, we conclude that the

Museum did not render substantial services for the benefit of MCA

that go beyond those services usually rendered in connection with

the rental of real estate.

Next, we shall address respondent's argument that the rental

income was based, in part, on MCA's net income or profits. 

Section 512(b)(3)(B)(ii) specifically denies the rental income

exclusion where the amount of rent is based, in whole or in part,

on the income or profits derived by any person from the leased

property, other than an amount based on a fixed percentage or

percentages of receipts or sales. Oblinger Trust v. Commissioner, 100 T.C. 114 (1993).
- 21 -

Respondent contends that the sublease provision of the

Second Lease requires MCA to remit to the Museum 25 percent of

its profits derived from any sublease of FGA, and thus the rent

is being calculated, in part, based on a percentage of MCA's

profits from FGA. Moreover, respondent asserts that, in 1988,

amounts were remitted to the Museum as a result of a Budweisersponsored event, and those amounts were in fact calculated under

the sublease provisions of the Second Lease.

At the outset, we note that certain rules related to real

estate investment trusts are made applicable to the determination

of what amounts constitute rent from real property. 

Sec. 1.512(b)-1(c)(2)(iii)(b), Income Tax Regs. Pursuant to

section 1.856-4(b)(3), Income Tax Regs., where the rent received

under a lease consists of both a fixed amount and an amount based

on the income or profits of the lessee, then none of the amounts

received qualify as "rents from real property". However, where

the amount received under such a lease includes only the fixed

portion of the rent, then that amount qualifies as "rents from

real property". Id. The evidence indicates that the only

inclusion under the sublease clause occurred in 1988. 

Consequently, only the rent paid in 1988 may be subject to UBIT

under this theory.

As outlined supra, respondent's argument focuses on the

sublease provision of the Second Lease, which requires MCA to

remit 25 percent of the profits derived from a sublease of FGA. 
- 22 -

5In support of this assertion, the Museum cites Kentucky Bar

Found., Inc. v. Commissioner, 78 T.C. 921 (1982); Policemen's

Benevolent Association of Westchester County, Inc. v. Commissioner, T.C. Memo. 1981-679. The cases do not touch upon sec.

512 and are therefore inapposite.

Specifically, the lease contains the following sublease

provision:

MCA shall pay the Museum a lease fee equal to twentyfive percent (25%) of all Sublease Rentals. As used in

this Agreement, "Sublease Rentals" means all receipts

realized by MCA from the subletting of the Amphitheatre, less all out-of-pocket expenses (including,

but not limited to, supplies, utilities and personnel

costs) incurred by MCA as a direct result of the subletting * * *.

Further, respondent notes that, in 1988, a Budweiser-sponsored

event was held, and a portion of the profits, as calculated under

this provision, was remitted to the Museum. The Museum does not

dispute that the fees from the Budweiser-sponsored event were

paid to the Museum but contends that the total fees involved

amounted to only $836, an insubstantial amount in comparison to

the whole lease, and, therefore, this small amount should not

"taint" the whole lease.5 

The statutory language upon which respondent relies is very

clear. Section 512(b)(3)(B)(ii) provides that the exclusion of

rents from UBTI shall not apply "if the determination of the

amount of such rent depends in whole or in part on the income or

profits derived by any person from the property leased" (emphasis

added). The Museum does not argue that the amount remitted under
- 23 -

6While the result may seem inequitable, the Museum had been

put on notice that the sublease provision of the Second Lease

potentially subjected the total lease proceeds to UBIT. The

opinion letter from Baer Marks & Upham points out that the

sublease revenue provision could possibly taint all the proceeds

from the lease. The letter recommends that the Museum recast the

provision from the First Lease. In response, the Museum changed

the term "Net Sublease Revenues" to "Sublease Revenues". Aside

from deleting the word "Net", no changes were made to the

substantive portions of the sublease revenue provision in the

Second Lease.

the sublease clause did not constitute a percentage of the profit

derived from the Budweiser-sponsored event. Obviously, it did.

The Museum principally argues that we should recognize a de

minimis exception to the above-quoted language. We refuse to do

so. The statute explicitly contemplates that, as is the case

here, proscribed rental payments may constitute only a portion of

the total rents received. It is axiomatic that an unambiguous

statute should be given effect according to its plain and obvious

meaning. See Chevron U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837, 842-843 (1984); Bate Refrigerating

Co. v. Sulzberger, 157 U.S. 1, 36-37 (1895); Halpern v.

Commissioner, 96 T.C. 895 (1991). Here, a portion of the rent

paid in 1988 was determined based upon the profits that MCA

derived from the Budweiser-sponsored event. Accordingly, none of

the rent paid by MCA in 1988 qualifies under section

512(b)(3)(A)(i) as rent from real property, and it is therefore

subject to UBIT.6 
- 24 -

The Museum contends that the arrangement with Budweiser did

not amount to a sublease, and therefore the proceeds from the

event do not taint the remaining rental income under the Second

Lease. The Museum misconstrues respondent's argument. The

Museum's contention is premised on the belief that respondent is

assailing the arrangement with MCA based upon section 1.856-

4(b)(6), Income Tax Regs. That regulation covers situations

involving a lease based, at least in part, on the gross receipts

of the lessee, where the lessee has subleased the property to a

sublessee. There, the rent being calculated under the sublease

is based upon the profits of the sublessee. Respondent's

position, however, is premised on the fact that the lease

proceeds the Museum collects are based on the profits of MCA, and

respondent's argument has nothing to do with the labels attached

to MCA's arrangement with Budweiser. Thus, the Museum's attempt

to distinguish its situation from section 1.856-4(b)(6), Income

Tax Regs., fails to address respondent's contentions. We

therefore sustain respondent's determination that the rent

received in 1988 from the lease with MCA is subject to UBIT.

Issue 3. Payments to GMC

Section 4941 imposes an excise tax for acts of "selfdealing" that occur between a private foundation and a "disqualified person". Sec. 4941(a)(1). The parties agree that GMC is a

"disqualified person" with respect to the Museum, a private

foundation. For the purposes of this section, "self-dealing"
- 25 -

includes the "furnishing of goods, services, or facilities

between a private foundation and a disqualified person".

Sec. 4941(d)(1)(C). However, section 4941(d)(2) provides several

exceptions for certain arrangements that would otherwise

constitute self-dealing transactions. Specifically, section

4941(d)(2)(E) provides:

the payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a

disqualified person for personal services which are

reasonable and necessary to carrying out the exempt

purpose of the private foundation shall not be an act

of self-dealing if the compensation (or payment or

reimbursement) is not excessive * * *

Throughout the years at issue, the Museum contracted with

GMC to perform general maintenance, janitorial, and custodial

functions. Respondent maintains that payments to GMC for

services performed are self-dealing transactions within the ambit

of section 4941(d)(1)(C). Petitioner replies that these

transactions fit within the exception in section 4941(d)(2)(E) as

"personal services" which are reasonable and necessary to carry

out the Museum's exempt functions. As might be expected,

respondent disagrees.

The resolution of this issue depends solely on whether or

not the functions that GMC performed fall within the definition

of "personal services" of section 4941(d)(2)(E). Before making

this determination, a review of the legislative history of

section 4941 is helpful.
- 26 -

Prior to 1969, sections 501(a) and 503(a), (b), and (d) had

imposed severe sanctions for transactions that resulted in the

diversion of funds to a creator or substantial contributor of a

tax-exempt organization. Further, in order to prevent tax-exempt

foundations from being used to benefit their creators or

substantial contributors, Congress had established a set of

arm's-length standards for dealings between the foundations and

these disqualified individuals. H. Rept. 91-413 (Part 1), at 21

(1969), 1969-3 C.B. 200, 214.

Nevertheless, Congress noted that abuses involving taxexempt organizations continued. Congress believed the abuses

resulted from the significant enforcement problems posed by the

arm's-length standards. Id. Therefore, section 4941 was enacted

as part of subchapter A of a new chapter 42 added to the Internal

Revenue Code by the Tax Reform Act of 1969 (the 1969 Act), Pub.

L. 91-172, sec. 101(b), 83 Stat. 487, 499.

One of the stated goals of the 1969 Act was to minimize the

need for an arm's-length standard by generally prohibiting selfdealing transactions. Specifically, the 1969 Act prohibited the

following transactions between a foundation and a disqualified

person: (1) The sale, exchange or lease of property; (2) the

lending of money; (3) the furnishing of goods, services or

facilities; (4) the payment of compensation to a disqualified

person; (5) the transfer or use of foundation property by a

disqualified person; and (6) payments to Government officials. 
- 27 -

S. Rept. 91-552, at 29 (1969), 1969-3 C.B. 423, 443. If the

foundation and a disqualified person entered into a prohibited

transaction, then the 1969 Act imposed various levels of

sanctions.

The question before us is whether the functions performed by

GMC qualify as "personal services" under section 4941(d)(2)(E). 

Thus, we must construe what activities Congress intended would

qualify as personal services. At the outset, we can look to the

regulations interpreting the statute. While those regulations do

not define the term "personal services", they offer several

examples of activities that constitute "personal services". See

sec. 53.4941(d)-3(c)(2), Foundation Excise Tax Regs. The activities set out in the examples include legal services, investment

management services, and general banking services. Id. 

Respondent argues that the character of the services

performed by GMC, namely maintenance, janitorial, and security,

are different than those outlined in the regulations. We agree. 

The services in the regulations are essentially professional and

managerial in nature. These types of services contrast with the

nature of the services rendered by GMC. 

GMC contends any activity is a service where capital is not

a major factor in the production of income. Under this interpretation, as set out in the brief, "the sale of goods is not the

rendering of personal services, but certainly all other services

which assist the private foundation in carrying on its legitimate
- 28 -

7Respondent asserts that, if GMC is liable for the self-

(continued...)

business are personal services." We cannot agree with GMC's

interpretation of the statute. First, this position would

nullify the prohibition against furnishing services contained in

section 4941(d)(1)(C), because almost any service would be a

"personal service" and fall within the exception. The statute

draws an explicit distinction between a "charge" for "furnishing

of goods, services, or facilities", see sec. 4941(d)(1)(C) and

(2)(C), and the payment of "compensation" "for personal

services", see sec. 4941(d)(1)(D) and (2)(E). GMC's argument

equating a charge for services with compensation for personal

services significantly erodes this distinction.

Second, GMC's interpretation of the term "personal services"

contravenes congressional intent, as expressed in the above

legislative history. We think it is clear that Congress intended

to prohibit self-dealing. Consequently, any exceptions to the

self-dealing transactions rules should be construed narrowly. We

therefore reject GMC's broad interpretation of the term "personal

services" and conclude that the janitorial services provided by

GMC do not meet the definition of "personal services". Accordingly, we find that the payments made by the Museum to GMC

constitute "self-dealing" within the meaning of section

4941(d)(1)(C), and, as a consequence, GMC is liable for the selfdealing excise tax under section 4941(a)(1).7 
- 29 -

7(...continued)

dealer excise tax, then it is also liable for the foundation

self-dealing excise tax under sec. 4941(b)(1). GMC does not

dispute this assertion. The parties have stipulated that the

transactions at issue were not corrected within the taxable

period.

8A separate excise tax was imposed on petitioner, on

petitioner's wife, and on petitioner's daughter (the foundation

managers). However, the legal issues and relevant facts are

identical with respect to each of the foundation managers. For

brevity, we will combine our examination of each tax into a

single discussion and refer to the above-named parties collectively as the foundation managers where possible. 

Issue 4. Excise Tax on Payments Made by the Museum to GMC

We shall next turn our attention to whether petitioner,

petitioner's wife, and petitioner's daughter (the foundation

managers)8 are liable under section 4941(a)(2) for payments made

to GMC by the Museum. In general, section 4941(a)(1) imposes an

excise tax on the self-dealer for each self-dealing transaction. 

When an excise tax is imposed under section 4941(a)(1), then

section 4941(a)(2) may impose excise taxes on the management of

the foundation as well. Section 4941(a)(2) provides: 

In any case in which a tax is imposed by [section

4941(a)] paragraph (1), there is hereby imposed on the

participation of any foundation manager in an act of

self-dealing between a disqualified person and a

private foundation, knowing that it is such an act, a

tax equal to 21⁄2 percent of the amount involved with

respect to the act of self-dealing for each year (or

part thereof) in the taxable period, unless such

participation is not willful and is due to reasonable

cause. * * *

Thus, this tax is imposed only when (1) a tax is imposed under

section 4941(a)(1), (2) the participating foundation manager
- 30 -

knows that the act is an act of self-dealing, and (3) the

participation by the foundation manager is willful and is not due

to reasonable cause. Sec. 53.4941(a)-1(b)(1), Foundation Excise

Tax Regs. Respondent must prove, by clear and convincing evidence, that the foundation managers participated knowingly in the

self-dealing transaction. Sec. 7454(b); Rule 142(c). 

We first turn to the regulations to provide the initial

guidance in applying section 4941(a)(2). The regulations

interpret what the statute requires for knowing participation. 

Section 53.4941(a)-1(b)(3), Foundation Excise Tax Regs., states:

a person shall be considered to have participated in a

transaction "knowing" that it is an act of self-dealing

only if--

(i) He has actual knowledge of sufficient facts

so that, based solely upon such facts, such transaction

would be an act of self-dealing,

(ii) He is aware that such an act under these

circumstances may violate the provisions of federal tax

law governing self-dealing, and

(iii) He negligently fails to make reasonable

attempts to ascertain whether the transaction is an act

of self-dealing, or he is in fact aware that it is such

an act.

The regulations specify that the term "knowing" does not mean

"having reason to know", but evidence that shows a person has a

reason to know a fact is relevant in determining whether that

person has actual knowledge of that fact. Id. These regulations

were adopted in 1972, 3 years after the passage of the statute,

and have not been substantially modified since that time. There-
- 31 -

fore, we must give appropriate weight to the regulations in

interpreting the statute. Commissioner v. South Texas Lumber

Co., 333 U.S. 496 (1948). 

We have found no other cases that have analyzed the foundation manager excise tax under section 4941(a)(2). However, the

Tax Court analyzed the foundation manager excise tax under

section 4945(a)(2) in Thorne v. Commissioner, 99 T.C. 67 (1992). 

These statutes were both enacted as part of the chapter 42

reforms of the 1969 Act, and the statutes, as well as the

respective regulations promulgated thereunder, contain nearly

identical language. Thus, the analysis contained in Thorne v.

Commissioner, supra, is highly probative in interpreting the

excise tax of section 4941(a)(2). We concluded in Thorne v.

Commissioner, supra at 105, that the threshold determination

under the knowledge requirement is ascertaining the extent of the

taxpayer's factual knowledge concerning the expenditures and not

whether the taxpayer actually knew the expenditures were prohibited under the statute.

The parties have stipulated that the foundation managers

were aware both that GMC was a disqualified person vis-a-vis the

Museum, and that some transactions between a private foundation

and a disqualified person are considered "self-dealing" under

section 4941(d). Further, the parties have agreed that the

foundation managers were aware self-dealing is defined as, inter

alia, a direct furnishing of goods, services, or facilities
- 32 -

between a private foundation and a disqualified person. In

addition, the parties have agreed that the foundation managers

were aware the Museum was making payments to GMC, and the managers did not oppose the making of these payments. On the basis

of these facts, we conclude respondent has proven, by clear and

convincing evidence, that the foundation managers possessed

actual knowledge of sufficient facts concerning the transactions

to establish the arrangements with GMC were self-dealing transactions. 

Respondent has satisfied both the first and second requirements of section 4941(a)(2). First, we have concluded that,

under section 4941(a)(1), an excise tax should be imposed on the

payments from the Museum to GMC. Second, respondent has

established that the foundation managers possessed sufficient

"knowledge" concerning the self-dealing payments to GMC. Next,

we shall evaluate whether the foundation managers made the

payments willfully and without reasonable cause, the third

requirement under section 4941(a)(2).

The regulations define "willful" participation by the

foundation manager as conduct that is "voluntary, conscious, and

intentional." Sec. 53.4941(a)-1(b)(4), Foundation Excise Tax

Regs. On the basis of the facts, we conclude the foundation

managers voluntarily and intentionally caused the Museum to enter

into the transactions with GMC. Accordingly, we sustain
- 33 -

respondent's determination that the participation of the

foundation managers was willful. 

Additionally, the foundation managers' participation in

these transactions must not be due to reasonable cause. The

regulations explain that "A foundation manager's participation is

due to reasonable cause if he has exercised his responsibility on

behalf of the foundation with ordinary business care and prudence." Sec. 53.4941(a)-1(b)(5), Foundation Excise Tax Regs. 

The foundation managers were aware that GMC was a disqualified

person with respect to the Museum, and they were aware that tax

laws prohibited self-dealing transactions. Nevertheless, they

proceeded to contract with GMC to provide services to the Museum

without first attempting to get advice from their counsel concerning the implications of these arrangements. This

demonstrates a failure to exercise their responsibilities with

ordinary business care and prudence. 

The foundation managers argue that they acted on the advice

of Dr. Sherry Manning. Dr. Manning, a former president of a

women's college, has experience with nonprofit organizations. 

Thus, the foundation managers claim that they exercised ordinary

prudence in relying on Dr. Manning's advice. We cannot agree. 

Dr. Manning is not a lawyer, and she does not otherwise have any

special expertise in foundation tax law. Further, although she

had been the president of a college, there is no indication in

the record that Dr. Manning gained any experience in running
- 34 -

foundations. Clearly, the foundation managers were aware of the

potential problems with paying fees to GMC, as prior to the

hiring of Dr. Manning, GMC had simply rendered the services for

free. We conclude the foundation managers did not exercise

ordinary prudence by relying on the advice of Dr. Manning and not

seeking the advice of counsel regarding these payments. Accordingly, we hold that the foundation managers are liable for the

foundation manager excise tax under section 4941(a)(2) for

payments made by the Museum to GMC.

Issue 5. Excise Tax on Other Payments Made by the Museum

Respondent determined that the foundation managers are

liable for the foundation manager excise tax under section

4941(a)(2) for two payments made by the Museum that benefited

petitioner and a third payment by the Museum that benefited the

Company. Specifically, the two payments which benefited

petitioner, in the amounts of $2,304 and $1,343, were made by the

Museum for work done to petitioner's artwork. A third payment,

in the amount of $3,000, related to a financial obligation of the

Company which was actually paid by the Museum. As discussed

supra, a foundation manager excise tax under section 4941(a)(2)

may be imposed where (1) a tax should be imposed under section

4941(a)(1), (2) the participating foundation manager knows that

the act is an act of self-dealing, and (3) the participation by

the foundation manager is willful and is not due to reasonable

cause. Sec. 53.4941(a)-1(b)(1), Foundation Excise Tax Regs. 
- 35 -

Respondent must carry the burden of proving by clear and

convincing evidence that the foundation managers participated

knowingly in the transaction. Sec. 7454(b); Rule 142(c).

The foundation managers have conceded that each of these

payments constitutes self-dealing under section 4941(a)(1). 

However, respondent must still prove that the foundation managers

knew the act was an act of self-dealing. Also, the participation

by the foundation managers must be willful and not due to

reasonable cause.

As noted supra, the Company provided accounting services to

the Museum. Two invoices relating to artwork repairs were

received by the accounting department of the Company. The

accounting personnel, assuming that the work had been performed

on artwork owned by the Museum, made payments of $2,304 and

$1,343 by checks drawn upon the Museum's bank account. In fact,

the artwork belonged to petitioner, and the payments should have

been made from petitioner's personal account.

Far from having actual knowledge of sufficient facts about

the two transactions, the evidence indicates that the foundation

managers lacked any knowledge concerning these transactions. 

Immediately upon learning of the payments a few days after they

were made, petitioner's daughter corrected both of the transactions, and petitioner reimbursed the Museum for the expense. 

Under these circumstances, we conclude respondent erred in
- 36 -

9On brief, the foundation managers contend that respondent

has conceded this issue and directs our attention to the

stipulation of facts filed in this case. Particularly, the

foundation managers point to the stipulation concerning this

payment, which reads: "the parties agree that John W. Madden,

Jr. is not liable for the following [$3,000] payment made by the

Museum for the benefit of the John Madden Company as a selfdealer under I.R.C. §§ 4941(a)(1) and (b)(1)". The stipulation

makes no mention of potential liability under sec. 4941(a)(2). 

We will not read into the stipulation matters that are not

expressly covered by it. See Rakosi v. Commissioner, T.C. Memo.

1991-630. Consequently, the foundation managers' potential

liability under sec. 4941(a)(2) is still at issue in this case.

imposing the foundation manager excise tax on these two

transactions.

The record is less than complete regarding the $3,000

payment made for the benefit of the Company.9 The payment was

made by the Museum on behalf of the Company, a disqualified

person. The Company has not reimbursed the Museum. Respondent,

again, must prove by clear and convincing evidence that the

foundation managers participated knowingly in this transaction.

Sec. 7454(b); Rule 142(c). Respondent has failed to carry this

burden. First, respondent has not shown that petitioner or

petitioner's wife had any knowledge of this transaction. We

refuse to presume that, because the transaction occurred,

petitioner or petitioner's wife must have known about it. 

Consequently, we do not sustain respondent's determination with

respect to petitioner or petitioner's wife as it relates to this

transaction.
- 37 -

10This testimony is supported by the contract itself, as it

was signed by petitioner's daughter in her position as the

director of the Museum.

As for petitioner's daughter, the facts must be examined

more closely. The $3,000 payment related to a contract with

Form, Inc., for the creation of an outdoor art exhibit. The subject matter of the contract comports directly with the Museum's

exempt purpose, and the contract was signed by petitioner's

daughter as a director of the Museum. However, the John Madden

Co. is the named party in the contract, not the Museum. The

payment by the Museum for setting up the outdoor exhibit satisfied a financial obligation of the Company under the contract

with Form, Inc., and the parties agree that it is a self-dealing

payment to the Company.

Petitioner's daughter testified that she was aware of the

payment made by the Museum. As evidenced by this testimony, she

was knowledgeable about the subject matter of the contract. 

However, based on the testimony and surrounding facts, we conclude that her actions do not constitute knowing participation in

a self-dealing transaction. Petitioner's daughter testified that

the foundation managers intended to have the Museum shoulder the 

responsibility for the exhibit, not the Company.10 She believed,

at the time of the payment, that responsibility for the financial

obligation rested with the Museum. As a consequence, petitioner's daughter did not view this payment as benefiting the
- 38 -

Company. Given these circumstances, we conclude respondent has

failed to prove by clear and convincing evidence that petitioner's daughter knowingly entered into a self-dealing

transaction. Accordingly, we do not sustain respondent's

determination with respect to petitioner's daughter as it relates

to this $3,000 transaction.

To reflect the foregoing,

Decisions will be entered

under Rule 155.