department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c contact person identification_number contact number fax number e mail address t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n number release date se t eo ra t1 date date uil index legend l m n a b date date date date date date employer_identification_number we have considered your application_for recognition of exemption from federal dear ------------- income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below facts profit corporation law your sole member is l an organization recognized by the you were incorporated on date as a nonprofit corporation under the a not-for- you have described your purpose as enabling employees of small_employer small_employer groups obtain health insurance for their employees through your internal_revenue_service as described in sec_501 of the code according to your articles of incorporation your principal purpose is to improve the health and welfare of the population of a by reducing the number of uninsured workers in a to help small businesses gain access to quality health insurance for their employees and to provide counseling and education about the quality and value of health benefit plans groups engaged in business in the b metropolitan area to obtain health insurance that they would otherwise be unable to afford you have defined the term small_employer groups as employers who employ between -- and --- employees you accomplish this by contracting with four insurance_companies to enable employer groups that participate in your programs to purchase health insurance from these insurance_companies for the benefit of their employees you do not sell or provide insurance either directly or as a broker your activities are described generally as follows organization by participating in your health insurance programs you collect the premiums from your participating employers and in turn you pay a portion of these premiums to your four contracting insurance_companies you also pay a portion of these premiums on behalf of these insurance_companies as fees and or commissions to various licensed insurance agents and brokers agents and brokers and your participating small employers and their employees you facilitate access to health insurance by small employers and their employees by contracting with each of these insurance_companies to provide them with certain administrative services under an administrative services agreement under these agreements the services you provide to the insurance_companies include billing participating employers for premiums collecting these premiums and remitting the collected premiums to the appropriate insurance_company you also are responsible for recruiting training and educating the insurance companies’ agents and brokers regarding your health insurance program in addition from the premiums you receive from your participating employers you pay the sales commissions the insurance_companies owe to their agents and brokers as compensation_for selling each insurance company’s respective insurance product you provide these various services to and on behalf of the four insurance_companies in return for their payment to you of certain administrative service fees entity to administer your health insurance programs you have entered into an administration agreement dated date amended on date with n a wholly-owned for-profit corporation to serve as third-party administrator for these programs under this agreement n provides you with various administrative and management services you have formed the m as a component of your organization not as a separate you describe yourself as a facilitator between four insurance_companies their you state that by virtue of the large number of employers who participate in your relating to your health insurance programs in return you pay n the fees described in the agreement programs you are able to negotiate with insurance_companies for the benefit of your participating employers and their employees lower more affordable premium rates for health insurance than these employers would otherwise be able to obtain on their own you state that without your programs these employers would be unable to afford to provide health insurance for their employees you state that since these employees cannot afford to purchase health insurance on their own were it not for your programs they would be unable to obtain health insurance for themselves and their families were and are expected to be as follows for the years ending date through date your actual and estimated revenues administrative services fees b funding agreement a funding total for the years ending date and date you collected the following premiums from your participating employers and paid the following amounts as premiums to your four contracting insurance_companies and as commissions to their agents and brokers premiums_paid to insurance_companies commissions paid to their agents total premiums received you also engage in sales and marketing advertising programs to promote your health insurance programs for the years ending date through date your actual and estimated expenses for this purpose are expected to be percent of your total expenses sales support marketing total total expenses percent law sec_1_501_c_4_-1 of the income_tax regulations states that a civic sec_501 of the code provides that an organization described in subsection c is exempt from income_taxation social welfare sec_501 of the code provides for the exemption from federal_income_tax of civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare league or organization may be exempt as an organization described in sec_501 if it is not organized or operated for profit and it is operated exclusively for the promotion of social welfare operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements in revrul_54_394 1954_2_cb_131 an organization’s sole activity was to provide television reception for its members on a cooperative basis in an area not readily adaptable to ordinary reception members were required to contract for and to pay services and installation fees in concluding that this organization did not qualify for exemption under sec_501 of the code this revenue_ruling stated sec_1_501_c_4_-1 of the regulations provides that an organization is when an organization’s only activity is to provide television reception on a cooperative basis to its members who contract and pay for such services such organization is held to operate for the benefit of its members rather than for the promotion of the welfare of mankind in revrul_55_311 1955_1_cb_72 the members of a local association of employees consisted solely of the employees of a particular corporation the association operated a bus for the convenience of its members the association’s income was derived from bus fares used to pay for the operation of the bus since the bus operated primarily for the benefit of the association’s members this revenue_ruling concluded that the association did not qualify for exemption under sec_501 of the code in revrul_62_167 1962_2_cb_142 an organization’s purpose was to construct and maintain a reflector-type television station capable of receiving signals of television stations and reproducing these signals so that satisfactory television would be available to the community in general membership was available to all persons in the area and the organization’s income was derived from membership fees and donations the reflector-type equipment received signals from three television stations and retransmitted these signals into the community the signals retransmitted by the reflector-type apparatus were available to any television in the community this revenue_ruling distinguished revrul_54_394 supra because in that revenue_ruling the television services were available only to members of the organization and only pursuant to a contract requiring the payment of membership fees and monthly maintenance charges however in this revenue_ruling the organization operated its system for the benefit of all television owners in the community it retransmitted television signals for the benefit of the entire community and it obtained memberships and contributions on a voluntary basis therefore the organization qualified for exemption under sec_501 of the code in revrul_73_349 1973_2_cb_179 an organization was formed to purchase groceries for its membership at the lowest possible prices it received orders from its members consolidated them and purchased the food in quantity each member paid for the cost of his or her food and each member was assessed an equal monthly service charge for the monthly operating costs membership was open to all individuals in a particular community this revenue_ruling stated that the organization was a private cooperative enterprise for the economic benefit or convenience of its members similar to the organization in 305_f2d_814 4th cir the organization in this revenue_ruling was operated primarily for the private benefit of members and any benefits to the community were not sufficient to meet the requirement of the regulations that the organization be operated primarily for the common good and general welfare of the people of the community accordingly it did not qualify for exemption under sec_501 of the code in revrul_75_199 1975_1_cb_160 an organization provided sick benefits for its members and paid death_benefits to the beneficiaries of members membership in the organization was restricted to individuals of good moral character and health who belonged to a particular ethnic group and resided in a stated geographical area the organization’s activities consisted of holding monthly meetings and maintaining an established system for the payment of sick and death_benefits its income was derived primarily from membership dues and was used to pay benefits to members and for miscellaneous operating_expenses in concluding that this organization did not qualify for exemption under sec_501 of the code this revenue_ruling found that it was essentially a mutual self-interest organization its income was used to provide direct and economic benefits to members and any benefit to the larger community was minor and incidental this revenue_ruling stated where the benefit from an organization is limited to that organization’s members except for some minor and incidental benefit to the community as a whole the organization is not operated exclusively for the promotion of social welfare within the meaning of sec_501 of the code revrul_75_199 pointed out the distinction between revrul_54_394 supra and revrul_62_167 supra stating the first activity is designed to benefit only the organization’s members who have contracted to pay membership fees and monthly maintenance charges while the second is made available to everyone in the area accordingly since the benefit from the organization in question is for its members and there is only minor and incidental benefit to the community as a whole the organization does not qualify for exemption from federal_income_tax under sec_501 of the code in revrul_75_286 1975_2_cb_210 the residents of a city block formed an in addition revrul_75_199 modified revrul_55_495 1955_2_cb_259 by removing the conclusion that the organization in that revenue ruing was exempt under sec_501 of the code that ruling involved an association providing life sick accident or other_benefits to members or their dependents where membership was restricted to individuals who subscribe to a designated religious creed are of good character and health and have the ability to earn a livelihood organization to preserve and beautify that block to improve all public facilities within the block and to prevent physical deterioration of the block much of the public area improved by the organization is part of the public roadway lying between the sidewalk and the street in front of private property owned by members of the organization this revenue_ruling concluded that since the organization’s activities promote social welfare because they beautify and preserve public property although they are limited to a particular block the community as a whole benefits thus the organization qualifies for exemption under sec_501 of the code a suburban community to provide bus transportation during rush hours between the community and the major employment centers in the metropolitan area during that time regular bus service was inadequate the organization contracted for buses and drivers planned their routes and schedules and arranged for volunteers to collect the fares on each trip although everyone may ride the organization’s buses for the established fare almost all riders live in the community since revenue from fares was not always sufficient to meet the organization’s expenses the organization sought and received financial assistance from different governmental units this revenue_ruling in revrul_78_69 1978_1_cb_156 an organization was formed by residents of in revrul_78_429 1978_2_cb_178 an organization operated an airport on found that the organization was providing a useful service to all members of the community the bus service provided was not commercially available and was subsidized by governmental financial assistance participation in the organization’s activities was open to all community residents and volunteers carried out its activities this method of operation indicated that it was not carrying on a b usiness with the general_public in a manner similar to organizations that are operated for profit as a result since it promoted the common good and general welfare of the people of the community it qualified for exemption under sec_501 of the code land owned by a municipality under a contract with the municipality’s city council the municipality supervises the overall operation of the airport through a special committee appointed by the city council the airport serves a four-county rural_area that has no other airport facilities although any member of the community may use the airport most of the planes stored at the airport are owned by key local businesses that are essential the area’s economy the airport is used predominantly by executives employees and clients of the local companies hangers are available for rent to any aircraft_owner in the community the f a a provides grant aid to the organization this revenue_ruling concluded that by operating an airport not otherwise available to the people of a rural_area the organization meets a community need the overall supervision and control exercised by the city council ensures that the organization is responsible to the community therefore the organization qualifies for exemption under sec_501 of the code in revrul_80_205 1980_2_cb_184 the irs announced that it will not follow the decision in 389_fsupp_858 w d pa which held that an organization providing recreational facilities to the employees of selected corporations qualifies for exemption under sec_501 of the code in this case the organization had a board_of trustees consisting of three employees of a certain corporation the organization’s activities consisted of maintaining and operating guest and recreational facilities on a farm near the community where the corporation was located the organization’s facilities were available principally to employees of the corporation and also to their guests and the employees of other selected corporations and their guests this revenue_ruling concluded that by restricting use of the facilities to employees of selected corporations a nd their guests the organization was primarily benefiting a private group rather than primarily benefiting the common good and general welfare of the community department in a community promoted the professional development of its members educated the public to recognize and appreciate the value of the service of the members and provided a lump-sum payment to each member upon retirement or a lump-sum payment to beneficiaries upon the member’s death its primary sources of income were from contributions by the general_public and through public fund -raising in revrul_81_58 1981_1_cb_331 an association of officers of a police events upon joining the organization members are required to pay a nominal one- time membership fee in concluding that the organization did not qualify for exemption under sec_501 of the code this revenue_ruling described the organization as essentially a mutual self-interest type organization its income was used to provide direct economic benefits to members in relying on revrul_75_199 supra the ruling stated although the class of employees benefited by the organization consist of police officers engaged in the performance of essential and hazardous public services and there is an incidental benefit provided by the organization to the larger community the fact remains that the primary benefits from the organization are limited to its members revrul_86_98 1986_2_cb_74 held that an individual practice association that provides health services through written agreements with health maintenance organizations hmos does not qualify for exemption under sec_501 of the code the organization negotiates contracts on behalf of its members with various hmos administers the claims received from its members and pays them according to its reimbursement agreement this ruling concluded that the organization is akin to a billing and collection service and a collective bargaining representative negotiating on behalf of its member-physicians with hmos in addition the organization does not provide to hmo patients access to medical_care which would not have been available but for the establishment of the organization this ruling also concluded that the organization operates in a manner similar to organizations carried on for profit and its primary beneficiaries are its member-physicians rather than the community as a whole citing rev ruls and both supra in 305_f2d_814 4th cir lake forest was organized as a nonprofit membership corporation it purchased from the federal government two defense housing projects for use as cooperative nonprofit homes for its members the number of members in the corporation was limited to the number of dwellings available preference in membership was given to war veterans having inadequate housing and then to other eligible persons a member was entitled to purchase the right to perpetually use a dwelling_unit at a specific price a member would pay monthly principal and interest and a monthly operating fee a member could transfer his perpetual use only to a member of his family if a member desired to leave the residence lake forest had a right to purchase the perpetual use but if it did not the member could sell the use to anyone acceptable to lake forest not qualify for exemption under sec_501 of the code civic stating in reversing the tax_court the court_of_appeals concluded that lake forest did the court first concluded that lake forest did not meet the dictionary definition of while the advantages offered by lake forest are available to all citizens eligible for membership the benefits are not municipal or public in their nature nor are they bestowed upon the commonalty as such 158_f2d_272 cir lake forest is not a movement of the citizenry or of the community rather at most it is a venture - - unquestionably praiseworthy - - for securing its members living quarters f 2d pincite the court also concluded that lake forest did not meet the dictionary definition of social or welfare stating it does not propose to offer a service or program for the direct betterment or improvement of the community as a whole citations omitted it is not a charitable corporation in law or equity for its contribution is neither to the public at large nor of a public character citations omitted lake forest does of course furnish housing to a certain group of citizens but it does not do so on a community basis it is a public-spirited but privately-devoted endeavor its work in part incidentally redounds to society but this is not the social welfare of the tax statute than members it is a circumstance too insubstantial to qualify the entire activity of the corporation as in the social welfare size of membership in ratio to local population is not controlling on whether an organization is civic’ or social the number affected is not the criterion a private project may touch an appreciable segment of the people of a large physical area and yet for want of the considerations mentioned not be converted into a civic or social undertaking classification as civic or social depends on the character - - as public or private - - of the benefits bestowed of the beneficiary and of the benefactor emphasis added the court_of_appeals concluded whatever the nature of the rights or privileges thus afforded persons other t he property has been sold to a private corporation having no civic community or public status and permitted - - though as a last classification - - to sell shelter not only to veterans but even generally to other eligible persons without delimitation unless each preceding class exercises its preference in days while the occupancy preferences may contribute to the promotion of social welfare they do not overbalance the private nature of the project the court distinguished u s v pickwick electric membership corp 158_f2d_272 6th cir by stating pickwick dealt with a situation embraced by the statute the taxpayer was a public_utility corporation organized and run to provide electric energy for several counties under a program authorized and encouraged by the state of tennessee one of its purposes was to bring electricity to many communities which had none as well as to speed the improvement of rural electrification of the area generally the service and membership could be enjoyed by the public at large and on a nonprofit basis although a commercial benefit it was available to citizens as citizens and promotive of social welfare for the fiscal years ended date through percent of f 2d pincite - in 39_tc_756 a nonprofit membership corporation that was created in purchased nearly big_number acres of land in the pocono mountains of pennsylvania to carry on studies and continue the development of certain liberal and progressive social programs this facility is referred to as tamiment its membership was limited to persons in the organization was recognized as tax-exempt under the predecessor of sec_501 of the code and in it was recognized as exempt under sec_501 except for to tamiment never received any contributions through tamiment earned substantial profits so that its accumulated surplus grew from about dollar_figure in to about dollar_figure million in tamiment’s total revenues were derived from operating the tamiment resort percent of total revenues were used for operating_expenses percent of total revenues was expended for social welfare activities and percent of total revenues consisted of contributions and donations to other organizations from date through date tamiment’s accumulated surplus grew from dollar_figure million to dollar_figure million the tax_court sustained this revocation finding that tamiment was primarily engaged in the operation of the resort at tamiment and that its activities in operating said resort did not in themselves constitute and were not merely incident to the promotion of social welfare t c pincite the tax_court concluded that tamiment’s operation of this resort when considered in relation to its activities as a whole precluded it from qualifying for exemption under sec_501 of the code for several reasons principally or primarily for the promotion of social welfare within the meaning of the statute citing lake forest inc supra the tax_court stated first tamiment’s activities in operating the resort were not exclusively or even the irs revoked tamiment’s tax-exemption under sec_501 of the code p etitioner’s activities in maintaining and operating the large resort at tamiment were not directed to and did not result in providing benefits either for the public at large or for any community as a whole rather the facilities and activities at said resort were devoted principally and primarily to providing living accommodations meals and a variety of recreational and cultural programs for the personal benefit of paying guests who were attracted to the resort because it was an enjoyable and luxurious place for summer vacations and who were willing and able to pay the substantial daily or weekly overall rates which petitioner charged true it is that both the recreational and cultural activities provided did benefit those who participated in them but when the same are considered in light of the facts that they were furnished for financial consideration and were paid for by the guests as part of the package rates charged therefor we think it would be overstretching the meaning and intent of the tax exemption statute to include them within the ambit of promotion of social welfare t c pincite - second the tax_court was convinced that the operation of tamiment was its primary activity and not merely incidental to those social welfare activities that it carried on in this regard the tax_court stated what is even more significant is the fact that petitioner’s total revenues from all sources were disposed of principally in handling the operating_expenses of said resort in enlarging and improving the resorts’ facilities and in making additions to petitioner’s accumulated surplus and that by comparison only a relatively insignificant portion of such total revenues was expended in the promotion of social welfare activities ibid in addition the tax_court compared tamiment’s revenues and social welfare activities to its accumulated surplus for each of the years ended date to the tax_court concluded by stating aspect of plaintiff’s work looms so large as to overshadow all else we find that the crucial factor in light of the evidence is that the sale sec_39 t c pincite commerciality not operated primarily for the promotion of social welfare if its primary activity is carrying sec_1_501_c_4_-1 of the regulations provides that an organization is in 759_f2d_792 on a business with the general_public in a manner similar to organizations which are operated for profit 10th cir mutual aid the organization provided property and casualty insurance only to members of the church and their dependents if a member left the church the insurance would be cancelled the court_of_appeals determined that the church did not promote social welfare because it sold insurance it operated as a mutual_insurance_company not as a church congregation it engaged in underwriting practices consistent with those of the industry in general it required premium payments and it paid on claims when it received supporting documentation the court_of_appeals concluded that the presence of a substantial non-exempt purpose ie insurance for its members in return for premiums precluded the organization’s exempt status as an organization primarily engaged in the promotion of social welfare under sec_501 of the code association welfare plan trust v u s 850_f2d_1510 11th cir american association the american association of christian schools inc a tax-exempt association of churches formed a_trust to provide health hospital disability life accidental death and dismemberment dental and prescription drug insurance to employees of members’ schools and their dependents and beneficiaries citing mutual aid supra the court_of_appeals held that since the trust had a substantial private purpose providing insurance in return for premiums to its members it was not an organization exclusively engaged in the promotion of social welfare under sec_501 of the code in american association of christian schools voluntary employees beneficiary rationale organizations described in sec_501 of the code include civic leagues or social welfare organizations not organized for profit but operated exclusively for the promotion of social welfare in order to meet the requirements under sec_501 an organization must be operated exclusively for the promotion of social welfare see sec_1_501_c_4_-1 of the regulations an organization will meet this requirement if it is primarily engaged in promoting the common good and general welfare of the people of the community these regulations also state that an organization is embraced within this provision if it is operated primarily for the purpose of bringing about civic betterments and social improvements in accordance with sec_1_501_c_4_-1 of the regulations a nonprofit corporation whose activities benefit primarily its enrollees rather than the general_public does not promote the common good and general welfare of the people of the community depending on how different organizations operate the same activities may cause different results under sec_501 of the code rev ruls and both supra involved the provision of television services but since the organization in the latter ruling provided services to the entire community rather than just to its members it qualified for exemption as a social_welfare_organization revrul_75_199 supra made this distinction clear by holding that an association providing life sick accident or other_benefits to members or their dependents where membership was restricted to individuals who subscribe to a designated religious creed are of good character and health and have the ability to earn a livelihood does not qualify for exemption under sec_501 similarly rev ruls and both supra involved the provision of bus transportation in the former ruling the bus service benefited the organization’s members but in the latter ruling the community as a whole benefited from the bus service and thus the organization qualified for exemption as a social_welfare_organization in revrul_73_349 supra the service held that an organization that purchased groceries at the lowest possible prices but only for its members did not qualify as a social_welfare_organization under sec_501 of the code even though its membership was open to all individuals in the community also in revrul_81_58 supra an organization that provided a lump-sum payment to each retired police officer or his or her beneficiaries in the event of their death did not qualify for exemption under sec_501 because it was a mutual self-interest type organization services and collective bargaining negotiation only for its members did not qualify for exemption under sec_501 of the code because its primary beneficiaries were its members rather than the community as a whole and in revrul_86_98 supra an organization that provided billing and collection consistent with these revenue rulings are the decisions in people’s educational camp society inc v commissioner and commissioner v lake forest inc both supra these cases hold that organizations engaged in otherwise commendable activities the benefits of which are limited to the members of the organization rather than available to the community as a whole are not operated primarily for the purpose of bringing about civic betterments and social improvements within the meaning of sec_1_501_c_4_-1 of the regulations your operations are similar to the revenue rulings and judicial decisions which deny recognition of exemption under sec_501 of the code in that your health insurance programs benefit only your members ie your participating employers and their employees your activities making health insurance programs available to small employers who enter into participating trust agreements benefit only these employers and their employees rather than the community as a whole your health insurance programs are not available to non-participating employers or to the employees of non- participating employers your activities are distinguishable from the organization described in revrul_75_286 supra in that unlike the organization described in that ruling whose activities resulted in preserving and beautifying a public street your activities benefit only your participating employers and their employees your activities are also distinguishable from the activities carried on by the organization described in revrul_78_429 supra which operated an airport that was available to all members of the community your activities which limit the availability of health insurance only to your participating employers are similar to the activities of the organization described in eden hall farm supra a decision which the irs announced in revrul_80_205 supra it would not follow which restricted the use of its facilities to employees of selected corporations and their guests if a small_business in your community does not offer health insurance to its employees and has not entered into a participating trust agreement an employee of the small_business who cannot afford to purchase health insurance independently may not purchase health insurance under your health insurance programs because you restrict your health insurance programs to employers who participate in your programs and their employees affordable health insurance is available only to limited persons in the community in addition individuals who are unemployed may not take adva ntage of your health insurance programs similar to the revenue rulings discussed above and the decisions in commissioner v lake forest inc and people’s educational camp society inc both supra where the organizations’ benefits were limited to its members since the beneficiaries of your activities are restricted to participating employers and their employees rather than the community as a whole you are not operated exclusively for the promotion of social welfare by primarily engaging in promoting the common good and general welfare of the people of the community as required by sec_1_501_c_4_-1 of the regulations finally you have not established that any benefit that the community as a whole may derive from your health insurance programs for participating employers and their employees such as relieving the community of the financial burden of providing healthcare services to uninsured members of the community is more than incidental remote and tenuous rather than the community as a whole you do not operate primarily for the purpose of bringing about civic betterments and social improvements under sec_1 c - a i of the regulations commerciality consequently since your activities benefit only your participating employers sec_1_501_c_4_-1 of the regulations states that an organization is not operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general_public in a manner similar to organizations which are operated for profit you operate as a facilitator between four insurance_companies their agents and brokers and your participating small employers and their employees you facilitate access to health insurance by small employers and their employees by contracting with these insurance_companies to provide them with certain administrative services these services include billing and collecting the premiums from your participating employers and remitting the appropriate premiums to your four contracting insurance_companies and paying on their behalf the sales commissions they owe to their agents and brokers as compensation_for selling each insurance company’s respective insurance product you also recruit train and educate agents and brokers as to your health insurance program you provide these various services for these insurance_companies in return for certain administrative fees which represent percent of your total revenues you contract with your own third-party administrator to provide various administrative and management services in connection with these activities you also engage in extensive marketing and advertising programs in fiscal years ------- and ------- you collected premiums from your participating employers of dollar_figure-------million and dollar_figure-------million respectively remitted premiums to your four contracting insurance_companies of dollar_figure-------million and dollar_figure-------million respectively and paid on their behalf the sales commissions they owe to their agents and brokers of almost dollar_figure--million and dollar_figure-----million respectively in addition your marketing and advertising programs represent --- percent of your total expenses by operating as a facilitator for the sale of health insurance by your contracting insurance_companies to your participating employers and by providing various commercial services for your contracting insurance_companies in return for a fee you operate in a commercial manner similar to the organizations described in revrul_86_98 mutual aid and american association all supra thus your activities are not significantly distinguishable from the same activities carried on by similar for-profit organizations that arrange for the sale of insurance to participating employers similar to organizations which are operated for profit within the meaning of sec_1_501_c_4_-1 of the regulations thus you are not operated primarily for the promotion of social welfare under sec_501 of the code conclusions therefore you are carrying on a business with the general_public in a manner based on all the facts and circumstances you have not established that you operate primarily for the purpose of bringing about civic betterments and social you have the right to protest this ruling if you believe it is incorrect to protest improvements as required by sec_1_501_c_4_-1 of the regulations in addition you have not established that your activities are significantly distinguishable from the same activities carried on by a business operated for profit as required in sec_1_501_c_4_-1 thus you are not primarily engaged in promoting the common good and general welfare of the people of the community as a result you are not operated exclusively for the promotion of social welfare as required by sec_1_501_c_4_-1 consequently you do not qualify for recognition of exemption under sec_501 of the code as an organization described in sec_501 you should submit a statement of your views to this office with a full explanation of your reasoning this statement signed by one of your officers must be submitted within thirty days from the date of this letter you also have a right to a conference in this office after your statement is submitted you must request the conference if you want one when you file your protest statement if you are to be represented by someone who is not one of your officers that person will need to file a proper power_of_attorney and otherwise qualify under our conference and practices requirements will be forwarded to the ohio tax exempt and government entities te_ge office thereafter any questions about your federal_income_tax status should be directed to that office either by calling a toll free number or sending correspondence to internal_revenue_service te_ge customer service p o box cincinnati oh the appropriate state officials will be notified of this action in accordance with code sec_6104 under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions and do not intend to protest our denial of exempt status you should follow the instructions in notice if you decide to protest this ruling your protest statement should be sent to the address shown below if you also disagree with o ur proposed deletions you should send your comments on the deletions with your protest statement and not to the address shown in notice in the event this ruling becomes final it will be made available for public inspection if we do not hear from you within days this ruling will become final and a copy internal_revenue_service ------------------------- ----------- constitution ave n w washington d c in accordance with the power_of_attorney currently on file with the internal if you do not intend to protest this ruling and if you agree with our proposed if you have any questions please contact the person whose name and telephone deletions as shown in the letter attached to notice you do not need to take any further action number are shown in the heading of this letter revenue service we are sending a copy of this letter to your authorized representative enclosure notice charles p barrett lois g lerner director exempt_organizations rulings agreements sincerely


internal_revenue_service number release date index number ------------------------------ ---------------------------------------------------------- ------------------------------------------ --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number -------------------- refer reply to cc psi b03 plr-101590-18 date february x ------------------------------------------------------------------------------------------------- ---------------------------------- legend state ------------ a --- date ------------------ date --------------------- date -------------------------- dear ------------ this letter responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_7704 of the internal_revenue_code code facts the information submitted states that x was organized on date as a limited_partnership under the laws of state and is classified as a partnership for federal_income_tax purposes x is a publicly_traded_partnership on date x acquired a substantial but non-controlling indirect equity_interest in an entity organized under the laws of a foreign_country that is treated as a partnership for u s federal_income_tax purposes the foreign_partnership foreign_partnership owns operates develops and acquires terminal and storage facilities and related plr-101590-18 assets with respect to refined petroleum products liquefied petroleum gas crude_oil natural_gas liquefied natural_gas and similar products the business foreign_partnership owns many of the assets related to the business indirectly through other wholly and partially owned entities collectively with foreign_partnership the foreign entities certain foreign entities are classified as corporations for u s federal tax purposes x represents recent changes to sec_965 discussed below could cause a one time subpart_f_income inclusion for x’s taxable_year ending date that may cause x to fail to satisfy the percent qualifying_income test in sec_7704 x further represents that without regard to any potential income inclusions pursuant to sec_965 over a of x’s income is considered qualifying_income under sec_7704 law and analysis sec_951 provides in pertinent part that if a foreign_corporation is a controlled_foreign_corporation for an uninterrupted period of days or more during any taxable_year every person who is a united_states_shareholder as defined in sec_951 of such corporation and who owns within the meaning of sec_958 stock in such corporation on the last day in such year on which such corporation is a controlled_foreign_corporation shall include in his gross_income for his taxable_year in which or with which such taxable_year of the corporation ends his pro-rata share of the corporation’s subpart_f_income on date sec_965 was amended by an act to provide for reconciliation pursuant to titles ii and v of the concurrent resolution on the budget for fiscal_year p l to provide that for the last taxable_year of a deferred_foreign_income_corporation that begins before date the subpart_f_income of the corporation as otherwise determined for such taxable_year under sec_952 shall be increased by the greater of the accumulated_post-1986_deferred_foreign_income of such corporation determined as of date or the accumulated_post-1986_deferred_foreign_income of such corporation determined as of date sec_7704 provides that except as provided in sec_7704 a publicly_traded_partnership will be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in that partnership are traded on an established_securities_market or interests in that partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_7704 provides that sec_7704 does not apply to a publicly_traded_partnership for any taxable_year if such partnership meets the gross_income requirements of sec_7704 for the taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence plr-101590-18 sec_7704 provides in relevant part that a partnership meets the gross_income requirements of sec_7704 for any taxable_year if percent or more of the gross_income of the partnership for the taxable_year consists of qualifying_income sec_7704 provides that if a partnership fails to meet the gross_income requirements of sec_7704 the secretary determines that such failure was inadvertent no later than a reasonable_time after the discovery of such failure steps are taken so that such partnership once more meets such gross_income requirements and such partnership agrees to make such adjustments including adjustments with respect to the partners or to pay such amounts as may be required by the secretary with respect to such period then notwithstanding such failure such entity shall be treated as continuing to meet such gross_income requirements for such period conclusion based on the facts submitted and the representations made we conclude that if x failed to meet the gross_income requirements of sec_7704 for its period ending date then such failure was inadvertent within the meaning of sec_7704 therefore pursuant to sec_7704 x will be treated as continuing to meet such gross_income requirements for the period ending date and thereafter provided x otherwise does not fail the requirements of sec_7704 except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed as to whether x otherwise meets the percent gross_income requirement of sec_7704 in any taxable_year for which this ruling may apply furthermore no opinion is expressed as to whether the sec_965 subpart_f_income inclusion is qualifying_income under sec_7704 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that this letter may not be used or cited as precedent plr-101590-18 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely ______________________________ bradford r poston special counsel office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service te_ge eo examination fulton street room brooklyn ny tax_exempt_and_government_entities_division date date number release date uil org ------------------------ --- ---------------- num date ----------------- date2 ----------------- ------------------------------------ contact numbers taxpayer_identification_number ----- num form_990 tax_year s ended date person to contact id number -------------------------------------- ------------------------------------------------------------------------------------------------------------- certified mail - return receipt requested dear ------------------ this is a final_determination regarding your exempt status under sec_501 of the internal_revenue_code irc recognition of your exemption from federal_income_tax as an organization described in sec_501 is retroactively revoked to date because it is determined that you have not established that you are observing the conditions required for the continuation of an exempt status we previously mailed you a report explaining our proposed revocation of your tax-exempt status in that correspondence we requested that you respond to the report within days from the date of the letter accompanying the report because we did not hear from you within that day period we will process your case on the basis of the recommendations shown in the report we have determined that you fail to qualify for exempt status under any other subsection of sec_501 you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for all years beginning date you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service local office if you have any questions please call the contact person at the telephone number shown in the heading of this letter thank you for your cooperation r c johnson director eo examinations sincerely


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-129689-00 date date legend x a d1 year dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code x was incorporated on d1 a the sole shareholder of x intended x to be an s_corporation effective for the year taxable_year and filed a form_1120s u s income_tax return for an s_corporation for year but form_2553 election by a small_business_corporation was not filed timely accordingly x requests a ruling that it will be treated as an s_corporation effective d1 sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a plr-129689-00 copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours jeanne m sullivan assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ----------------------------------------------- ------------------------------------- -------------------------------------- attention ---------------------- -------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number --------------------- refer reply to cc ita b06 plr-131215-07 date date ---------------------------------------------------------- --------------------------------------- ------------------------------------------ ----------------------------------------------------- ------------------------- legend taxpayer -------------------------------------------------------------------- s -------------------------------------------------------------------- a -------------------------------------------------------------------- b c year year year date date date tax professional ---------------------- ------- ------- ------- -------------------------- -------------------------- -------------------------- plr-131215-07 tax professional dear ------------- this ruling is in reply to a request submitted by the taxpayer requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to file the required form_970 application to use lifo inventory_method on behalf of its affiliated entity s this request is made in accordance with sec_301_9100-3 ---------------------- facts in year a purchased all of the assets of a business unit of c through b a single member limited_liability_company that was a disregarded_entity for federal_income_tax purposes these assets included inventory and a filed form_970 electing the lifo inventory_method for the inventory for the taxable_year ended date b subsequently elected to be treated as a corporation under sec_301_7701-3 of the income_tax regulations effective on date the conversion from disregarded_entity to corporation was treated as if a contributed all of b’s assets and liabilities including its inventory to s a subsidiary of the taxpayer in exchange for stock in s in accordance with sec_301_7701-3 the taxpayer failed to file a form_970 on behalf of s effective on date tax professional advised the taxpayer regarding the restructuring but did not advise the taxpayer that it was required to file form_970 on behalf of s effective the date of the conversion for s to be able to use the lifo inventory_method in june year the taxpayer engaged tax professional to review the taxpayer’s inventory methods for federal_income_tax purposes during the review tax professional determined that the taxpayer had not filed the required form_970 on behalf of s pursuant to tax professional 2’s recommendation the taxpayer filed this request for an extension of time to file form_970 on behalf of s effective on date the taxpayer filed its consolidated federal_income_tax returns for the taxable_year of the conversion and subsequent years consistent with its having made a timely lifo election on behalf of s in that the inventory held by s was accounted for under the lifo inventory_method on those returns the statute_of_limitations under sec_6501 of the internal_revenue_code is open for year and all subsequent taxable years law and analysis sec_1_1502-77 provides generally that the common parent of a group filing a consolidated_income_tax_return for a given year is the sole agent for the group regarding plr-131215-07 all matters relating to the tax_liability for that consolidated_return_year for each member of the group sec_1_1502-77 expressly includes a subsidiary’s election to change its method_of_accounting or to amend an election or choice previously made by the subsidiary in a list of examples of matters for which a parent is its subsidiary’s sole agent sec_472 provides that a taxpayer may use the lifo_method in inventorying goods specified in an application to use such method filed at such time and in such manner as the secretary may prescribe sec_1_472-3 provides that the lifo inventory_method may be adopted and used only if the taxpayer files with its income_tax return for the tax_year as of the close of which the method is first to be used a statement of its election to use such inventory_method the statement is to be made on form_970 under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election under all subtitles of the code except subtitles e g h and i provided that the taxpayer acted reasonably and in good_faith and provided that granting relief will not prejudice the interests of the government sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin an election is defined to include a request to adopt change or retain an accounting_method sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections if the provisions of sec_301_9100-2 do not apply to a taxpayer’s situation the provisions of sec_301_9100-3 may apply instead sec_301_9100-3 sets forth the standards that the commissioner will use in determining whether to grant an extension of time to make a regulatory election it also sets forth information and representations that must be furnished by the taxpayer to enable the internal_revenue_service to determine whether the taxpayer has satisfied these standards the standards to be applied in this case are whether the taxpayer acted reasonably and in good_faith and whether granting relief would prejudice the interests of the government under sec_301_9100-3 a taxpayer applying for relief for failure to make an election before the failure is discovered by the service ordinarily will be deemed to have acted reasonably and in good_faith however pursuant to sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested or if the taxpayer plr-131215-07 was informed in all material respects of the required election and related tax consequences but chose not to file the election furthermore a taxpayer ordinarily will not be considered to have acted reasonably and in good_faith if the taxpayer uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all tax years affected by the regulatory election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money if the tax consequences of more than one taxpayer are affected by the election the government’s interests are prejudiced if extending the time for making the election may result in the affected taxpayers in the aggregate having a lower tax_liability than if the election had been timely made further sec_301_9100-3 provides that the interests of the government are ordinarily prejudiced if the tax_year in which the regulatory election should have been made or any_tax years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under sec_301_9100-3 ruling the information and representations furnished by the taxpayer establish that it has acted reasonably and in good_faith in this request furthermore granting an extension will not prejudice the interests of the government accordingly an extension of time is hereby granted to file the necessary form_970 for s for the taxable_year ended date this extension shall be for a period of days from the date of this ruling please attach a copy of this ruling to the form_970 when it is filed the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination no opinion is expressed as to the application of any other provisions of the code or regulations that may be applicable to the transaction specifically no opinion is expressed regarding the year restructuring this ruling addresses only the request to extend the time period for filing form_970 and does not directly or indirectly approve the overall use of the lifo inventory_method used by s such a determination is to be made by the field in connection with an examination of the taxpayer’s consolidated federal_income_tax returns plr-131215-07 this ruling is directed only to the taxpayer sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office copies of this letter are being sent to the taxpayer’s two designated representatives sincerely jeffery g mitchell branch chief branch income_tax accounting


t c memo united_states tax_court impact research corporation joan c benz tax_matters_person petitioner v commissioner of internal revenue respondent research impact corporation joan c benz tax_matters_person petitioner v commissioner of internal revenue respondent docket nos filed date s-1 and s-2 were s_corporations formed to finance the research_and_development activities of a a nonpublicly traded c_corporation engaged in the business of developing educational videodiscs in a series of written agreements between s-1 s-2 and a s-1 and s-2 acquired proprietary rights in the results of the research which a was to perform on their behalf a was obligated to pay royalties to s-l1 and s-2 and a was given the option to ‘the petition in each docket was filed by frank colenda the tax_matters_person of each of the named corporations after trial and the filing of all briefs the court was notified that frank colenda died after appropriate representations we granted petitioners’ counsel’s motion in both dockets to substitute joan c benz for frank colenda as tax_matters_person and change captions to reflect this substitution -- - buy all the assets of s-1l and s-2 in exchange for stock in a s-1l and s-2 each deducted under sec_174 i r c the amounts each assertedly paid to a to conduct the research_and_development activities held neither s-1l nor s-2 is entitled to a deduction under sec_174 i r c because the amounts s-1 and s-2 allegedly paid to a were not paid in connection with s-l1's and s-2's respective trades_or_businesses cheryl r frank and gerald w kelly jr for petitioners lindsey d stellwagen for respondent memorandum findings_of_fact and opinion chabot judge by separate notices of final s_corporation administrative adjustment hereinafter sometimes referred to as fsaa respondent determined adjustments to the s_corporation income_tax returns of impact research corporation hereinafter sometimes referred to as irc and research impact corporation hereinafter sometimes referred to as ric for irc respondent this method of resolving disputes regarding subchapter_s items was enacted by sec_4 of the subchapter_s_revision_act_of_1982 publaw_97_354 96_stat_1669 effective for taxable years beginning after date it was repealed by sec c of the small_business job protection act of publaw_104_188 110_stat_1755 effective for taxable years beginning after date the year in issue in the instant cases is a year to which this method continues to apply thus even though both of the fsaas here involved were issued after the repeal we concur with the parties’ position that this court has jurisdiction to resolve the parties’ disputes in the instant cases see 117_tc_152 n - - determined a dollar_figure adjustment resulting from the disallowance of a deduction for research or experimental expenditures under sec_174 and an dollar_figure adjustment eliminating irc’s reported short-term_capital_gain petitioner in docket no does not dispute the dollar_figure adjustment for ric respondent determined a dollar_figure adjustment resulting from the disallowance of a deduction for research or experimental expenditures under sec_174 sunder the heading of detail of adjustments to ordinary_income the fsaa for irc shows a dollar_figure adjustment to research_and_development expense under the heading of other adjustments the fsaa shows a dollar_figure adjustment to research_and_development expense and a dollar_figure adjustment to qualified_investment_expenses paralleling the treatment on schedule k shareholders’ share of income credits deductions etc of irc’s s_corporation tax_return the sum of these adjustments is dollar_figure on brief the parties treat this as one dollar_figure adjustment for convenience we follow the parties’ one- adjustment terminology this does not affect our substantive analysis or our conclusions unless indicated otherwise all section references are to sections of the internal_revenue_code of as in effect for under the heading of detail of adjustments to ordinary_income the fsaa for ric shows a dollar_figure adjustment to research_and_development expense under the heading of other adjustments the fsaa shows a dollar_figure adjustment to research_and_development expense and a dollar_figure adjustment to qualified_investment_expenses paralleling the treatment on schedule k shareholders’ share of income credits deductions etc of ric’s s_corporation tax_return the sum of these adjustments is dollar_figure however on a statement i of ric’s s_corporation tax_return the deduction is broken down as follows research-development exp --big_number and other exp --- the parties do not appear to focus on the differences between these two breakdowns of the dollar_figure total because the continued q4e- these cases have been consolidated for trial briefs and opinion after a concession by respondent the issues for decision as to each of the s_corporations are as follows whether the s_corporation made research or experimental expenditures within the meaning of sec_174 in and if so then in what amount whether any such expenditures by the s_corporation were made in connection with that corporation’s trade_or_business findings_of_fact some of the facts have been stipulated the stipulations and the stipulated exhibits are incorporated herein by this reference ’ continued differences between these breakdowns do not affect our substantive analysis or our conclusions for convenience we treat respondent’s determinations as one adjustment shortly before trial respondent raised the question of whether irc had a valid s_corporation_election under sec_1362 a in effect for two months after the trial the parties stipulated the document that constituted the election form and showed on its face that it had been timely received and accepted by respondent respondent thereupon conceded that irc had a valid s_corporation_election in effect for ‘six of the stipulated exhibits were offered for limited purposes only and as was made clear in the trial transcript were received subject_to those limitations we have carefully observed those limitations in making our findings and arriving at our conclusions see fed r evid - - irc and ric had their respective principal places of business in sterling virginia when the respective petitions were filed in the instant cases both irc and ric were cash_basis taxpayers each reported on its respective information_return that it had no income but claimed a deduction for research_and_development expenses irc--dollar_figure ric---dollar_figure ric claimed a dollar_figure deduction for other expenses a systems impact inc in systems impact inc hereinafter sometimes referred to as systems was a nonpublicly traded c_corporation seeking to develop interactive educational videodiscs a relatively new technology at the time videodiscs are discs which contain information which users may access with a videodisc player the videodisc player transmits the information contained in the videodisc to a computer monitor for display systems sought to exploit the videodisc technology as an educational aid systems’ videodiscs were about the size of a 78-rpm phonograph record they contained information about various subjects including fractions algebra and earth science as used in an educational setting teachers could monitor student learning while the videodiscs presented the information to the students based on their observations teachers could tailor the presentation of the information to what they perceived to be the needs of the students for instance if the class did not appear -- - to grasp a portion of a lesson then the teacher could replay the unclear portion of the lesson in a step-by-step process to reinforce or clarify key principles conversely if the class appeared to understand the lesson then the teacher could continue with the lesson the videodiscs also enabled teachers to present the information contained in the videodiscs in more than one manner by systems had developed early prototypes of the videodiscs but it needed an additional dollar_figure-8 million to bring them to market b creation and operation of irc and ric in gordon gould hereinafter sometimes referred to as gould was the president of heritage financial corp hereinafter sometimes referred to as heritage financial heritage financial was a securities firm a broker-dealer it sold stocks bonds and other forms of investments in gould met with systems’ representatives about raising the financial support systems needed in order to expand its research_and_development activities gould considered the videodisc technology to be a valid potential product for investors after consulting with securities attorneys gould and systems agreed that the formation of two s_corporations represented the best way to provide to systems the additional financing it needed and secure an equity_investment in the videodisc technology for shareholders in the to-be-formed s_corporations once gould and systems agreed to form the two s_corporations gould began to locate potential shareholders in what would become irc and ric gould tried to locate shareholders who would qualify under the private_placement rules of the securities act of to ensure qualification prospective shareholders completed investor qualification forms which solicited the information necessary to determine whether potential shareholders satisfied the securities and exchange commission’s rules regarding private_placement offerings the investor qualification forms provided information about the potential shareholder’s balance sheets income statements tax returns and experience with investing in private placements potential shareholders in irc and ric had to have a minimum net_worth of dollar_figure gould reviewed the investor qualification form of each potential shareholder shareholders in the s_corporations were not selected on the basis of education and experience in manufacturing or in marketing a majority of the shareholders of irc and ric were professionals and had some managerial and business expertise frank colenda supra note participated in the u s navy’s development of the sparrow missile program among the shareholders of ric were the following joan c benz a ph d --- - who later became a high school principal francis e rundell a retired u s air force colonel who managed missile research_and_development programs for the u s air force and william a fleming a former supervisor in the lunar lander program of the national aeronautics and space administration and former supervisor in the federal aviation administration on date irc was incorporated in delaware irc elected s_corporation status for its first taxable_year the short_period from mar through date it reported its income using the cash_method_of_accounting on date irc opened a checking account with maryland national bank irc wrote four checks on that account two checks totaling dollar_figure for legal fees and two checks totaling dollar_figure to heritage financial for fees and commissions associated with the private_placement of irc stock on date ric was incorporated in delaware ric elected s_corporation status for its first taxable_year the short_period from june through date it reported its income using the cash_method_of_accounting in june of ric opened a checking account with maryland national bank ric wrote eight checks on that account two checks totaling dollar_figure for legal fees one dollar_figure check for the repayment of a loan two checks totaling dollar_figure for refunds of investments in ric stock one dollar_figure - check to systems as a transfer of funds and two checks totaling dollar_figure to heritage financial for sales commissions and legal fees associated with the private_placement of ric stock ric transferred an additional dollar_figure to systems by debit memorandum and systems transferred dollar_figure to ric ric also transferred to systems dollar_figure by means of seven debit memoranda ric closed its checking account with maryland national bank and transferred the remaining balance of the account dollar_figure to systems by debit memorandum on or about date ric transferred a net of dollar_figure to systems from its maryland national bank checking account dollar_figure big_number - big_number big_number big_number on or about date ric opened a checking account with mclachlen national bank ric did not write any checks on the account ric closed the account and transferred the remaining balance dollar_figure to systems on date ric transferred dollar_figure to systems from its two checking accounts dollar_figure maryland national account dollar_figure mclachlen national account neither irc nor ric performed educational videodisc research or development activities through its own employees for that matter neither s_corporation had any employees irc and ric did not prepare any written marketing or business plans neither irc nor ric held corporate board meetings owned physical assets -- - owned or leased physical premises or maintained inventory neither irc nor ric was adequately capitalized to market and license products nor did either corporation make any provisions to raise additional capital there are not any written documents reflecting that either irc or ric intended to enter the market for educational videodiscs c agreements among systems irc and ric irc entered into three agreements with systems a research_and_development agreement hereinafter sometimes referred to as the r d agreement an exclusive license agreement and an option agreement on date irc and systems amended the r d agreement to make ric a party thereto ’ at some point irc and systems also amended the exclusive license agreement to make ric a party thereto see supra note also at some point ric became a party to an option agreement with systems but the record does not indicate in many instances the entire agreements are physically in the record nevertheless as explained supra note our findings with respect to these agreements do not go beyond the stipulated limitations on the purposes for which the agreements were offered and received in evidence except to the extent the findings are based on other evidence of record or on the parties’ unobjected-to proposed findings so stipulated however neither the parties’ stipulations nor any other evidence in the record herein shows what ric’s obligations and benefits were under the r d agreement as so amended for example we cannot tell from the record whether it is more_likely_than_not that ric shared all or any of irc’s obligations and benefits under the r d agreement but see infra note whether this was accomplished by an irc-systems amendment to the original option agreement or a separate ric-systems agreement research_and_development aqreement the r d agreement obligated irc to pay to systems a fixed fee of dollar_figure in consideration of systems’ performance of research activities in this connection section dollar_figure of the r d agreement provides as follows payments in consideration for the performance of the funded research effort sii systems shall receive a fixed fee of dollar_figure such fee shall be paid in seven installments in accordance with the payment schedule set forth on exhibit b which hereby is incorporated herein and made a part hereof the obligation of irc to make payments to sii pursuant to this section dollar_figure shall be contingent upon the delivery to irc by sii of the monthly reports required pursuant to section dollar_figure hereof and the absence of any default under section dollar_figure hereof in consideration of such fixed fee sii shall complete the entire funded research effort irrespective of the actual cost thereof regardless of whether a commercially marketable technology or product results from the funded research effort no part of any we note that the fsaas disallowed research or experimental expenditures deductions in the amounts of dollar_figure irc and dollar_figure ric for a total of dollar_figure this is very close to the dollar_figure fixed fee provided for in the r d agreement also this is almost exactly the dollar_figure that petitioners ask us to find as irc’s and ric’ss payment obligation under the r d agreement however the parties have not enlightened us as to whether this is an indication that the date amendment involved ric’s taking over some specified portion of irc’s original obligations under the r d agreement in light of the lack of record evidence as to what was involved in the date amendment to the r d agreement we cannot tell whether petitioners intend to suggest that the date amendment slightly reduced the contractual fee obligation or the dollar_figure statement is merely petitioners’ typographical error that went unnoticed by respondent such fixed fee shall be refundable to irc except as provided in section hereof the exhibit b payment schedule referred to in section dollar_figure of the r d agreement provides as follows exhibit b to research_and_development agreement impact research corporation shall make payments to systems impact inc pursuant to the research_and_development agreement according to the following schedule date amount of payment no later than date dollar_figure date big_number date big_number date big_number date big_number date big_number date big_number total big_number any payments that irc made to systems were not made in accordance with the exhibit b payment schedule ’ systems did not provide to irc the monthly reports referenced in par dollar_figure of the r d agreement or any other written periodic reports nor ‘so stipulated see supra note as to our lack of information as to ric’s obligations also the record does not indicate whether ric made payments in accordance with any such obligations did systems provide written periodic reports to ric however systems did provide a final report to both irc and ric systems conducted frequent meetings with gould and invited shareholders of irc and ric to discuss the progress of the research none of irc’s or ric’s shareholders became actively involved in or monitored the substance of systems’ research however one shareholder paul smith traveled once to utah where the actual research was being performed the r d agreement further provides that irc and ric acquired proprietary rights in the results of systems’ research activities as follows ownership in irc and ric irc and ric shall have the full exclusive right title and interest in and to all knowledge developments techniques processes discoveries inventions improvements devices designs apparatuses practices methods products and trade secrets of whatever nature whether or not patentable that are perfected devised conceived developed acquired or reduced_to_practice in performance of the r d agreement provided however irc’s and ric’s rights in preexisting research shall be as provided in sec_3 hereof the research under the r d agreement was not intended to and did not result in any commercially viable product sec_3 of the r d agreement was not offered and received into evidence 3petitioners ask us to make this finding respondent does not object we treat this as the equivalent of a supplemental stipulation -- the r d agreement provides that it would terminate at the later of the passage of year or when systems delivered a final report acceptable to irc exclusive license agreement under the exclusive license agreement irc transferred to systems certain rights in exchange for a royalty interest the exclusive license agreement obligated systems to remit to irc royalty payments equal to percent of the gross revenues systems derived from the sale of demonstration discs and core concepts in science and mathematics for the term of the exclusive license agreement discussed below systems was further obligated to remit to irc royalties of percent of the gross revenues systems derived from the sale of any other products based upon or embodying the demonstration discs for a period of years at some point ric became a party to the exclusive license agreement the term of the exclusive license agreement is set forth in section dollar_figure thereof which provides as follows duration a the exclusive license shall continue in effect until such date the date of termination as it is terminated in whole or in part in accordance with the following provisions royalty payments as the record herein does not indicate whether the final report was acceptable to irc or for that matter to ric supra note or even whether systems’ delivery was late enough so that the r d agreement lasted longer than year -- - hereinafter defined in sec_5 accrued as of the date of termination shall remain due and payable notwithstanding termination b subject_to the provisions of paragraph c of this sec_2 the exclusive license shall terminate as to the demonstration discs upon the occurrence of any of the following events i systems or an assignee pursuant to the terms hereof is adjudicated a bankrupt and ceases operations there shall be a failure to make a royalty payment in accordance with sec_5 hereof for a period of at least twenty days after the date on which the same is due and payable i111 systems fails to complete the funded research effort as defined in the r d agreement within one year from the date hereof iv systems fails to complete the development of and to offer for sale to the public at least five of the courses to be included in the core concepts in science and mathematics series on or before date or v systems fails to develop and maintain in good_faith policies and a program to protect the confidentiality of the demonstration discs and the technology relating thereto pursuant to section hereof c if the exclusive license has not terminated pursuant to the preceding provisions of this sec_2 it shall terminate on date the date of termination systems did not remit to either irc or ric any royalties in option agreement on or about date irc and systems entered into an agreement under which systems had the option to buy irc’s assets in exchange for systems’ stock but only if all of certain specified conditions were met one of these specified conditions was that systems’ notice of election to exercise the option shall provide for the consummation of the sale of the assets of -- - irc to systems on or before date at some point ric became a party to an option agreement with systems under an agreement dated date among irc and its shareholders if systems satisfied each of certain specified conditions then irc’s shareholders were obligated to vote their shares to approve the proposed merger or assets acquisition the specified conditions in the date irc shareholders agreement are almost exactly the same as the specified conditions in the above-described option agreement if systems did not satisfy the foregoing conditions then the terms of any agreement to merge or sell assets would be subject_to negotiations on or about date systems’ president asked that the option expiration date be extended from date to date on or about date the boards of directors of irc and ric refused the request for extension d mergers of irc and ric into systems contentious merger negotiations between systems irc and ric ensued after systems’ option to buy the stock of irc and ric expired on date the negotiations ultimately proved successful and a merger occurred both irc and ric were formed and operated primarily to furnish investment capital to systems neither irc nor ric spent money in for the purpose of research or development ina - - trade_or_business that the respective s_corporation was conducting in or that the respective s_corporation expected or intended to conduct at any time after opinion respondent contends that neither irc nor ric is entitled to the sec_174 deduction each claimed because petitioners have failed to carry their burdens of proving the following bither irc or ric paid research expenses in any expenses paid for by irc or ric in constitute research or experimental expenditures under sec_174 and any such expenditures were paid in connection with the respective s corporation’s trade_or_business respondent contends that to meet the in connection with requirement petitioners must establish that the s_corporations had realistic prospects of going into business and they must do so by demonstrating both an objective intent and the current ability to enter the marketplace respondent views petitioners’ burdens as a series of hurdles every one of which must be surmounted by a petitioner in order for that petitioner to establish that that petitioner’s s_corporation is entitled to any part of its claimed deduction petitioners contend that the work that systems performed on behalf of irc and ric qualifies under sec_174 and should at one point on brief respondent seems to contend that the failure of proof of expenditures applies to both irc and ric at another point respondent applies this contention only to irc -- - be treated as having been performed by irc and ric irc and ric could have and would have entered the marketplace with the technology so developed but for systems’ acquisition of irc and ric and irc and ric spent the necessary funds in we agree with respondent that irc and ric did not pay the research expenses in connection with their respective trades_or_businesses and so neither s_corporation is entitled to its claimed sec_174 deduction see supra note sec_3 and sec_174 permits a taxpayer to currently deduct research or experimental expenditures which the taxpayer pays or incurs during the taxable_year in connection with the taxpayer’s trade_or_business for these purposes the taxpayers in the instant cases are irc and ric even though they are pass-through entities for irc and ric to be entitled to their claimed sec_174 deductions the record must show that irc and ric made payments to systems these payments were made in order to sec_174 provides as follows sec_174 research_and_experimental_expenditures a treatment as expenses ---- in general --a taxpayer may treat research or experimental expenditures which are paid_or_incurred by him during the taxable_year in connection with his trade_or_business as expenses which are not chargeable to capital_account the expenditures so treated shall be allowed as a deduction have systems conduct research or experiments on behalf of irc and ric and this research or these experiments are in connection with irc’s or ric’s trade_or_business failure to satisfy any of these requirements would lead to a conclusion that irc and ric are not entitled to their claimed sec_174 deductions see 83_tc_667 we consider first the question of whether the expenditures were paid_or_incurred in connection with irc’s or ric’s trade_or_business sec_174 in 416_us_500 the supreme court contrasted the in connection with language of sec_174 with the in carrying on language of sec_162 the supreme court concluded that the difference in language meant that the requirements of sec_174 were different from the requirements of sec_162 the supreme court examined the legislative_history of sec_174 in order to determine what were the relevant differences between sec_174 and sec_162 id pincite the supreme court then concluded that the different statutory language meant that deductions under sec_174 are to be available to companies that are upcoming and about to reach the market as well as to ongoing companies id pincite although the taxpayer need not be conducting a trade_or_business at the time of the research or experimental expenditure - - in order to satisfy the trade_or_business requirement of sec_174 the record must demonstrate that the taxpayer’s prospects of entering that trade_or_business are realistic 929_f2d_1015 5th cir 845_f2d_148 7th cir affg tcmemo_1986_403 demonstrating a realistic prospect of entering a trade_or_business requires proof of the objective intent to enter such trade_or_business and the capability of doing so 998_f2d_1514 9th cir and cases cited therein affg on this issue and revg on another issue tcmemo_1990_380 in order to qualify for the sec_174 deduction a taxpayer’s existing or prospective business must be its own and not that of another entity id pincite putting it differently the record must show that the taxpayer is not merely an investor in someone else’s trade_or_business but is or is to be the conductor of its own trade_or_business 16_f3d_75 5th cir affg tcmemo_1990_80 930_f2d_372 4th cir affg 92_tc_423 green v commissioner t c pincite see travers v commissioner 21_f3d_424 aftr 2d 4th cir affg without published opinion harris v commissioner tcmemo_1990_80 --- - we view the record in the instant case in light of the foregoing as began systems existed irc and ric had not yet been created systems was developing interactive educational videodiscs and seeking to exploit the technology systems needed an additional dollar_figure-8 million to bring its videodiscs to market irc and ric were created in through the efforts of systems and gould systems’ financial adviser these efforts were motivated by systems’ need for additional financing gould’s testimony makes it plain that irc and ric were created to meet systems’ need for financing research that systems wanted to do so that systems could exploit interactive videodisc technology gould selected irc’s and ric’s potential shareholders in order to have these individuals contribute funds to irc and ric in order to have irc and ric satisfy a portion of systems’ financial needs gould was petitioners’ witness gould’s testimony completely negates any thought that irc and ric had the trade_or_business ideas and merely sought out systems to do research in order to enable irc and ric to exploit new technology a date letter from john p clark hereinafter sometimes referred to as clark to systems’ president shows that clark too understood that systems was looking for a source of funds that systems could use to advance -- - systems’ prospects to enter the videodisc instructional systems market clark understood that funds are to be raised ina tax advantaged subchapter_s investment vehicle and these funds would be used by systems to further systems’ business efforts in this letter clark as vice president of scott stringfellow inc was offering the services of his firm to act as investment bankers for systems systems and irc entered into three agreements ric got folded into these agreements in some manner not clearly disclosed in the record the r d agreement required irc and ric to make payments to systems on a specified schedule in consideration of systems’ performing research and required systems to provide monthly reports to irc and ric the r d agreement was respected only in part by the parties thereto the parties herein have stipulated that the payments were not made in accordance with the r d agreement schedule the parties herein have stipulated that systems did not provide any written periodic reports to irc or ric much less the monthly reports mandated by the r d agreement the r d agreement gave to irc and ric exclusive ownership of whatever systems’ research developed however the parties herein agree that the research under the r d agreement was not intended to and did not result in any commercially viable product although systems failed to provide written monthly reports it did conduct frequent meetings with - - gould and invited shareholders of irc and ric to discuss the progress of the research however the parties herein have stipulated that no shareholder of irc or ric monitored the substance of the research being performed by systems the record does not disclose how many if any of the shareholders attended the meetings of systems and gould under the exclusive license agreement irc transferred to systems certain rights in exchange for royalty payments because of the limitations on use of various stipulated documents supra note we cannot determine on the basis of the record herein whether these rights are the rights given to irc and ric under the r d agreement systems did not remit to either irc or ric any royalties in in light of the parties’ herein agreeing that the research under the r d agreement was not intended to and did not result in any commercially viable product it is not clear whether the parties to the exclusive license agreement contemplated that systems would ever be obligated ina real- world sense to make any royalty payments under the exclusive license agreement under the option agreement systems had the option to buy all of irc’s and ric’s assets in exchange for systems’ common_stock which would be worth at least twice the aggregate contributed capital of irc and ric and at least percent of systems’ outstanding common_stock immediately after the -- - transaction the option expired there were negotiations the exchange of stock for assets occurred apparently in and perhaps on terms more favorable to irc’s and ric’s shareholders than were provided for in the option agreement from the foregoing it is clear that the upcoming business was systems’ irc and ric were created to provide investment capital for systems’ trade_or_business and if things worked well then irc and ric would end up with systems stock and not with their own trade_or_business although the r d agreement appeared to provide irc and ric with rights that theoretically they might be able to exploit in their own trades_or_businesses neither party to the r d agreement bothered to comply with some of the agreement’s specific obligations and if the rights really turned out to be valuable then systems had an absolute right to acquire them in fact even though systems let the option agreement expire that merely resulted in a negotiated merger into systems and not trades_or_businesses for irc and ric thus although the events deviated from the option agreement the events confirmed ’ that element of the option agreement that controls for our purposes----systems bought out irc’s and ric’s see 832_f2d_403 n 7th cir affg 87_tc_698 116_tc_308 n on appeal 1st cir date - - assets so that if trade_or_business use would be made of any research or experimental expenditures then it would be made in systems’ trade_or_business and not in irc’s or ric’s because of our determination based on our findings_of_fact see 832_f2d_403 7th cir affg 87_tc_698 that any research or experimental expenditures by irc and ric were not paid in connection with irc’s or ric’ss trade_or_business within the meaning of sec_174 it is unnecessary for us to determine whether irc or ric made relevant expenditures in in at least the amounts of their respective claimed deductions or in any amounts and whether the expenditures that irc or ric made qualify as research or experimental expenditures green v commissioner t c pincite decisions will be entered for respondent