internal_revenue_service te_ge technical_advice_memorandum release number release date date uil code eo area manager taxpayer's name taxpayer's address taxpayer's identification_number years involved date of conference legend trade_association national trade_association b sport facility x issues t l a u m o v whether trade_association which is exempt from federal_income_tax under sec_501 of the internal_revenue_code receives unrelated_business_taxable_income under sec_512 from the sale of discount certificates whether trade association's sale of discount certificates will adversely affect its tax exempt status under sec_501 facts trade_association is a business league which is recognized as exempt from federal_income_tax under sec_501 of the internal_revenue_code the code as an organization described in sec_501 trade_association is composed of persons who reside in a particular geographic region of the united_states with a business_interest in the sport of b which is played by amateurs and professionals the members of trade_association include professional athletes in the sport teachers and coaches of the sport owners and managers of sport facilities managers of food and beverage activities at sport facilities and retailers of sport equipment the amended and restated articles of trade_association state that its purpose is to promote the common business interests of the associated members promote the objectives of the national trade_association promote competitive b hold meetings and tournaments for the benefit of the members thus the relationship between trade_association and the national trade_association is that trade association’s purposes encompass the national trade association’s purposes the national trade_association charter states that its purpose is to promote interest in the game and the national constitution states that the national trade association’s purpose is to promote the enjoyment and involvement in the game and contribute to its growth by providing services to b professionals and the b industry the nature of the sport is that players generally must pay fees to play at sport facilities trade_association and participating sport facilities sell discount certificates to the general_public for a fee to play at various sport facilities during the audit years the discount certificates entitled the purchaser to play the sport at a number of participating sport facilities in the region at deep discounts most of the discount certificates were sold by participating sport facilities but a number of the discount certificates were sold directly by trade_association although the discount certificates were not available for purchase directly on the internet trade association’s brochures and web-site indicated that members of the general_public could purchase the discount certificates at participating sport facilities from trade association’s home_office or by mail the brochures and web-site described the discount program and specified which sport facilities participated in the program trade_association marketed and advertised the discount certificates trade_association decided the content format and timing of the advertising of the discount certificates additionally trade_association was responsible for setting the sale prices of the discount certificates as well as the amount to be shared with the participating sport facilities and devised the contracts with the sport facilities if the discount certificates were purchased at the participating sport facilities the participating sport facilities then sent the revenue to trade_association which retained a share of x dollars and remitted the remainder back to the sport facilities discount certificates were purchased from trade_association or by mail trade_association received all of the income if the the sales have resulted in significant revenue and substantial profits for trade_association at an annual meeting trade association’s leaders indicated that the discount certificate program revenues had become a source of funding for many of trade association’s programs and that the discount certificates benefited the sport facilities as well a number of for-profit entities in the region offer similar programs that sell discount certificates to sport facilities most of these sport facilities are different than the participating sport facilities of trade_association however participating sport facilities can also participate in for-profit discount programs conversely sport facilities participating in for-profit discount programs may also participate in trade association's program any sport facility in the area is eligible to and permitted to participate in trade association’s program simply by requesting to participate although any sport facility o b can participate not all of the area’s sport facilities do participate additionally although some participating sport facilities are members of trade_association some participating sport facilities are not members also although some trade_association members are employees of participating sport facilities there is no pre-requisite that participating sport facilities must employ trade_association members it is possible though unlikely that a participating sport facility may employ no trade_association members trade_association stated that although it is impossible to know exactly how much the sale of passes has increased playing the sport in its region or revenues to participating sports_facilities both its members and the participating sport facilities believe that the program has positively stimulated the playing of the sport by the general_public also trade_association stated that the increase in the number of sport facilities participating in the discount pass program indicates that the sport facilities believe it is worth discounting their normal fees the staff time that trade_association devotes to the discount certificates has fluctuated somewhat over the years although it has decreased over all trade_association substantiated an average of percent of the staff time during the first six years of the activity also trade association’s board spends approximately five percent of its time and approximately percent of the overall time spent by trade association's committees is spent on the discount certificate program trade_association conducts other activities including professional and amateur tournaments high school sport programs junior sport programs and events special olympics sport programs and financial support for research law sec_501 of the code provides in part that organizations described in sec_501 are exempt from federal_income_tax sec_501 of the code provides for the exemption from federal_income_tax of business_leagues chambers_of_commerce or boards_of_trade not organized for profit and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_6_-1 of the income_tax regulations the regulations provides in part that a business league is an association of persons having some common business_interest the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons an organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining is not a business league its activities over the years courts have distilled from the statute and regulations a series of requirements that an organization must meet to be described in sec_501 one common formulation quoted by the court in 69_tc_53 states the requirements as follows it must be an association of persons having a common business_interest its purpose must be to promote that common business_interest it must not be organized for profit it should not be engaged in a regular business of a kind ordinarily conducted for a profit its activities should be directed toward the improvement of business conditions of one or more lines of business as opposed to the performance of particular services for individual persons and its net_earnings if any must not inure to the benefit of any private_shareholder_or_individual sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code defines the term unrelated_business_taxable_income ubti as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less certain allowable deductions and modifications sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the functions constituting the basis for its exemption sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is with certain exceptions includable in the computation of ubti if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that the term trade_or_business has the same meaning it has in sec_162 of the code and generally includes any activity carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that in determining whether a trade_or_business is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities are conducted and the manner in which they are pursued hence for example specific business activities will ordinarily be deemed regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that gross_income is derived from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities that generate the particular income in question - the activities that is of producing or distributing the goods or performing the services involved - and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those exempt purposes whether activities contribute importantly to an organization’s exempt purposes depends in each case upon the facts and circumstances involved example of sec_1_513-1 of the regulations describes a journal of a sec_501 trade_association that carries advertising for products within the professional interests of the members of the association the advertising in question is subject_to a number of restrictions as to content however while the advertisements contain certain information the informational function of the advertising is incidental to the controlling aim of stimulating demand for the advertised products and differs in no essential respect from the informational function of any commercial advertising the example states that advertising is accepted only from those able to pay the established rates and that a prime consideration in accepting advertising is not the continuing education of the membership in the manner contemplated by the statute accordingly income derived from such advertising constitutes gross_income from an unrelated_trade_or_business sec_1_513-4 defines a qualified_sponsorship_payment as any payment to an exempt_organization by a person engaged in a trade_or_business made without expectation of a substantial_return_benefit sec_1 c v identifies advertising as a substantial_return_benefit and includes in the description of advertising material which promotes or markets any service or facility including messages that contain price information or other indications of savings or value or an inducement to use any service or facility revrul_64_315 1964_2_cb_147 held that an association of merchants in a particular shopping center whose advertising material contains the names of the individual merchants is performing particular services for members rather than an activity directed to the improvement of general business conditions revrul_65_14 1965_1_cb_236 held that an association created to attract tourists to a local area but whose principal activity is publication of a yearbook consisting largely of paid advertisements for its members is performing particular services for members rather than an activity aimed at the improvement of general business conditions revrul_68_267 1968_1_cb_284 concluded that an association of grocery stores provides particular services for individual members by collecting coupons used by customers in their stores sorting them by the wholesalers of products that had issued them counting and remitting them to the correct wholesalers for payment that is then given to the retail grocery stores revrul_70_80 1970_1_cb_130 denies exemption under sec_501 to a nonprofit trade_association of manufacturers whose principal activity is the promotion of its members' products under the association's registered trademark the ruling distinguishes am plywood ass’n below because the trade_association at issue in the ruling promotes only its members’ products under the association's registered trademark even though non-members’ products also may meet the quality standards for the trademark revrul_73_386 1973_2_cb_191 holds that an sec_501 organization’s program of securing and supplying member and non-member business concerns with job injury histories on prospective employees on an expedited basis for a fee is subject_to the unrelated_business_income_tax ubit because the program furnishes individual members of the business community with a regular commercial-type business service the fact that businesses cannot readily secure such information on an expedited basis from other commercial providers does not alter the commercial nature of the service or the fact that the service relates to individual business needs of the business concerns involved revrul_78_70 1978_1_cb_159 holds that a board_of trade that provides grain analysis laboratory services to members and nonmembers at the same charge and earns substantial profits on the activity is providing particular services to individuals and is engaged in business of a kind ordinarily carried on for profit and hence that such activity does not further exempt purposes within the meaning of sec_501 of the code see also revrul_81_175 1981_1_cb_337 holding that assuring the availability of auto insurance for high-risk customers by accepting such customers for reinsurance does not further exempt purposes under sec_501 because reinsurance is a business ordinarily carried on by commercial insurance_companies for profit revrul_81_174 1981_1_cb_335 holding that providing medical malpractice insurance to health care providers does not further exempt purposes under sec_501 because the provision of medical malpractice insurance is a business of a kind ordinarily carried on for profit’ revrul_79_31 1979_1_cb_206 contrasts two attempts by a sec_501 organization of business owners professionals and civic leaders to stimulate commerce in a downtown area by improved parking in the first activity the organization operates fringe parking facilities and shuttle buses connecting them to the downtown area no individual merchant is favored by the manner in which the facilities are operated or where the stops are located this activity stimulates and improves business conditions in the downtown area generally thereby contributing importantly to the accomplishment of the organization’s exempt_purpose however in the other activity merchants purchase parking stamps and distribute them to their customers to use at downtown lots this activity encourages persons to patronize the specific participating member merchants to obtain free parking and therefore provides services to individual members rather than furthering the organization’s exempt_purpose under sec_501 of the code accordingly this activity constitutes an unrelated_trade_or_business within the meaning of sec_513 of the code it was formed to promote interest in the sport to elevate the revrul_80_294 1980_2_cb_187 clarifying revrul_58_502 1958_2_cb_271 describes an organization exempt under sec_501 of the code of professional players of the sport standards of the sport as a profession and to sponsor and conduct tournaments for the encouragement of its members the organization conducts apprentice programs annual conventions and merchandise shows and tournaments its support is derived primarily from the sale of television broadcasting rights to its tournaments but also from membership dues penalties and apprentice fees the revenue_ruling holds that the sponsorship of tournaments and the sale of broadcasting rights directly promote the interests of those engaged in the sport by encouraging participation in the sport and by enhancing awareness of the general_public of the sport as a profession the amount of the income derived from the sale of broadcasting rights is not by itself determinative of whether the activity furthers the purposes specified in sec_501 of the code and an organization may even draw its primary support from the sale of broadcasting rights to the sports tournaments it conducts therefore income from the sale of television broadcasting rights was not ubti revrul_81_75 c b concerned a trade_association organized to promote trade relations between businesses in the united_states and the government of a particular foreign_country fairs and exchange of economic information the association provides a language translation service to member and non-member businesses for a fee the service held that the translation service was a regular business carried on for the benefit of individual businesses and therefore is unrelated in the meaning of sec_513 in addition to its primary activity of arranging trade missions revrul_82_139 1982_2_cb_108 sets forth the issue of whether publication of commercial advertising in its journal by a bar association exempt from federal_income_tax under sec_501 constitutes unrelated_trade_or_business the bar association's purpose is to promote the interests of the legal profession and to supervise the practice of law within a county of a state membership is composed of practicing attorneys within the county fees are charged for the publication of the advertisements the ruling holds that the publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical which contains editorial material related to exempt purposes further even though the advertising in this case is directed specifically to members of the legal profession it is still commercial in nature and represents an effort on the part of the advertisers to maximize sales to a particular segment of the public therefore the publication of the commercial advertisements does not contribute importantly to the exempt purposes of the bar association in 475_us_834 106_sct_1591 89_led_841 the supreme court held that advertising in the journal of the american college of physicians does not contribute importantly to the organization's educational_purposes and therefore is subject_to tax pursuant to the provisions of sections of the code in 801_f2d_987 7th cir the court found that a tax-exempt business league of independent insurance agents described in sec_501 of the code was subject_to tax on ubti on the fees it received for performing promotional and administrative services in connection with the sale of errors and omissions e o insurance to its members rather than merely informing members of the necessity for e o insurance generally the court determined that the business league endorsed a particular e o program in a manner which provided convenient marketing advertising and administrative services to the offering insurance_company generated income for the association and provided its individual members convenient coverage id pincite the court also noted that the association's activities were in competition with services provided by other taxpaying entities and that w here services and goods are available in the marketplace a trade_association need not provide it to accomplish an exempt_purpose id pincite internal quotations and citation omitted accordingly the court concluded that any exempt_function the business league’s e o program may have served was incidental to its purpose of raising revenues and the program therefore did not contribute importantly to improving conditions in a line_of_business or the industry generally see also 78_tc_246 aff'd 726_f2d_1097 6th cir holding that promotional and administrative fees received by a business league of independent insurance agents for promoting group_insurance programs for its members constituted ubt because the taxpayer could not demonstrate that such activities contributed directly and importantly to the improvement of conditions in a particular line_of_business la credit_union leaque v united_states 693_f2d_525 5th cir holding that business league’s active support and endorsement of insurance policies sold by a particular insurance_company in return for commissions on insurance_policy purchases and renewals made by its member credit unions constituted an unrelated_trade_or_business the activity did little more than generate revenue for the league and provide the insurance_company with convenient services in the marketing and administration of its programs and the relationship between it and the league’s exempt_purpose was at best tangential and therefore was statutorily insufficient to qualify as substantial prof ins agents of wash v comm’r 875_f2d_870 9th cir unpublished 734_f2d_71 1st cir held that an association of life_insurance_companies that maintains a computerized system for gathering confidential underwriting information available to its members was rendering particular services for individual member companies notwithstanding some indirect benefits that accrued to the industry and public generally in 46_bta_64 acq 1942_1_cb_17 the court held that an association of apple growers that engaged in advertising and promoting the sale of washington apples but whose advertising did not mention any specific brand or grower was exempt under a predecessor code section because its purpose was to promote an industry as a whole and improve a line_of_business rather than individual businesses similarly in american plywood association v united_states a f t r 2d w d wash the court held that the advertising conducted by the trade_association of plywood manufacturers that did not identify individual manufacturers but promoted plywood as a generic building material promoted the industry as a whole by contrast in 168_f2d_366 6th cir the court found that an association that published and sold catalogues to members and non-members was performing particular services for individual persons when the catalogue listed only products manufactured by the members even though there may have been incidental benefit to the relevant industry in 320_f2d_375 ct_cl the court held that an organization’s operation of a multiple listing service constituted the performance of a particular service for the individual real_estate broker members and generated benefits for them in proportion to the fees that they paid for the service and that therefore the listing system could not be regarded as directed to the improvement of business conditions in the real_estate market noting that an organization whose principal purpose and activity is such as to justify exemption does not lose its exempt status by engaging in incidental activity which standing alone would be subject_to taxation the court then examined the extent of the organization’s multiple listing service activities to determine whether the evanston-north shore board could maintain its exempt status id pincite the court found that of the board’s revenues were derived from the operation of the listing service and that of its costs were directly allocable to the service as well as an additional substantial portion of its salaries expense the court also found it reasonable to infer that the organization had increased its number of employees from one to five because of the listing service as a result the court concluded that the listing service was the dominant rather than an incidental activity of the organization and thus upheld the revocation of its exempt status see also ind retail hardware ass'n inc v united_states 366_f2d_998 ct_cl acknowledging that a n organization which by its principal purpose and activity is entitled to exempt status does not lose that status by engaging in incidental activities which standing alone would deprive it of the exemption but concluding that hardware dealers’ association was not entitled to business league exemption where over of its total income was derived from its performing particular services for individuals and from its other income-producing activities and about of time of employees was devoted to such income-producing activities am plywood ass'n a f t r 2d pincite supra noting that t he rule is well established that a trade_association whose main purpose justifies exemption from income_tax will not forfeit tax exempt status by engaging in incidental activities which standing alone would be subject_to taxation and that the ultimate fact as to which activities of a business league are primary and which are incidental must be determined in each case upon the particular circumstances involved revrul_78_70 supra although organization engages in other exempt_activities its operation of a grain analysis laboratory as a business of a kind ordinarily carried on for profit and in manner that performs particular services for individuals results in revocation of its exempt status under sec_501 when the laboratory has become the principal activity of the organization accounting for virtually all of its income and two-thirds of its expenses in the most recent year in 128_f2d_424 7th cir the court concluded that a business league that received as much a sec_34 to of its revenues per year from its engagement in a regular business of a kind ordinarily carried on for profit or in return for individual services rendered to individual members was nevertheless entitled to exemption because such services were only incidental_or_subordinate to the main or principal purposes required of a business league under the predecessor to code sec_501 commerce v united_states 72_fsupp_310 e d wis recognizing that an organization formed to advance the commercial interests of a city was exempt under the predecessor of sec_501 notwithstanding the fact that it also conducted a commercial credit bureau where the bureau was one of departments of the organization and generated less than a quarter of its total revenue see also milwaukee ass'n of analysis issue ubit in determining that an income-producing activity is an unrelated_trade_or_business it is necessary to show that there is a trade_or_business the trade_or_business is regularly carried on and the conduct of the trade_or_business is not substantially related to the organization's exempt_purpose or function see sec_1_513-1 of the regulations trade_association has agreed that the first and second prongs of the test set forth in sec_1_513-1 of the regulations are met for the activity discussed herein therefore the sole issue with respect to whether trade association’s sale of discount certificates is an unrelated_trade_or_business is whether that activity is substantially related to the organization’s performance of its exempt functions determination of the substantial relationship issue requires an examination of the relationship between the business activities that generate the particular income in question and the accomplishment of the organization’s exempt purposes sec_1_513-1 of the regulations the regulations further state that for the conduct of the trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 of the regulations see also prof ins agents of mich supra holding that for the conduct of a trade to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services must contribute directly and importantly to the accomplishment of those purposes la credit_union league supra holding that the league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue and at best was only tangentially related to the furtherance of the credit_union movement and therefore finding the requisite substantial relationship lacking for income earned on the trade association’s discount certificate activities to escape taxation as ubti the activities must contribute directly and importantly to the accomplishment of one or more of trade association’s exempt purposes see prof'l ins agents of mich ill ass’n of prof'l ins agents supra revrul_82_139 supra trade_association composed of members with a business_interest in the sport of b is organized and operated as a trade_association within the meaning of sec_501 of the code trade_association promotes enjoyment of and involvement in the sport and thereby the common business interests of its members by organizing professional and amateur tournaments and events for students young people and disabled people under the regulations an exempt business league must direct its activities to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons whether or not members of the organization sec_1_501_c_6_-1 of the regulations and eg mib inc revrul_65_14 and revrul_70_80 supra accordingly only activities directed at improving business conditions can be considered substantially related to a business league’s exempt purposes under the ubit provisions while the performance of particular services for individuals cannot be considered substantially related to such purposes see eg prof'l ins agents of mich supra revrul_73_386 and revrul_79_31 supra thus the issue here is whether the sale of discount certificates improves the line_of_business of trade_association which is to promote interest and involvement in the recreational and professional playing of the sport or rather whether it constitutes the performance of particular services for individual persons trade_association states that its purpose is generally to promote the sport of b and argues that the sale of discount certificates furthers that purpose however the facts do not show how the sale of discount certificates contributes directly and importantly to trade association’s exempt purposes rather the sale of discount certificates primarily benefits the participating sport facilities while also generating revenue for trade_association trade association’s materials specifically name each of the participating sport facilities the materials offer inducements to patronize the named facilities in the form of the publicized reduced fees which also constitute an indication of savings or value trade_association designed the program and set the price for the certificates and the corresponding discount the purchaser receives it decided the content format and timing for the promotion of the certificates in paper brochures and on the internet also marketed and advertised the discount certificates and used its stature to promote their sale to the public thus the advertising activities are commercial services for individual businesses similar to the processing and remittance of manufacturers’ coupons in revrul_68_267 supra it the marketing and publicity by trade_association of the discount certificates benefits participating sport facilities over non-participating sport facilities purchasers of the certificates will be more likely to play at a sport facility that charges a reduced fee than a non-participating sport facility that charges a full fee additionally the promotion of discount certificates increases the general public’s awareness of the named participating sport facilities making it more likely that a player of the sport will patronize a participating sport facility even if the player has not purchased a discount certificate the fact that any sport facility may participate in the program is not dispositive rather the fact that only the sport facilities that choose to participate receive the benefits and services of trade_association undermines the argument that the activity furthers the sport as a whole see eg revrul_79_31 supra ruling that a business league’s operation of a park and shop plan is an unrelated_trade_or_business because the plan only encourages persons to patronize the limited number of merchants choosing to participate in the plan by offering free parking only to the patrons of these merchants thus the service that trade_association performs when it prepares promotes and sells discount certificates is advertising for the participating sport facilities rather than for the industry as a whole see eg sec_1_513-4 of the regulations recognizing that messages containing indications of savings or value or inducements to patronize specific businesses constitute advertising advertising campaigns such as trade association's sale of discount certificates that name and promote specific businesses rather than the industry as a whole constitute the performance of particular services for individual persons see eg auto elec ass'n supra revrul_64_315 revrul_65_14 and revrul_70_80 supra compare wash state apples and am plywood ass'n supra accordingly this activity constitutes an unrelated_trade_or_business within the meaning of sec_513 of the code see eg am coll of physicians ill ass’n of prof'l ins agents la credit_union leaque and_prof'l ins agents of mich supra sec_1_513-1 of the regulations example revrul_73_386 revrul_79_31 revrul_81_75 and revrul_82_139 supra in addition trade_association has sold the discount certificates at a price that has generated substantial profits moreover other commercial entities in the area provide the same types of discount certificates accordingly trade_association is engaged ina regular business of a kind ordinarily carried on for profit and hence an activity that is not substantially related to its exempt purposes sec_1_501_c_6_-1 see also ill ass'n of prof ins agents supra revrul_78_70 revrul_81_174 and revrul_81_175 supfa most of the businesses promoted by the discount pass program are not themselves members of the trade_association however the service has held that providing specific services for individual persons whether to member or non-member businesses conflicts with a trade association’s purpose to promote the industry as a whole see eg revrul_73_386 revrul_78_70 and revrul_81_75 supra see also ill ass'n of prof'l ins agents supra holding that the provision of marketing services to non- member insurance_company was an unrelated_trade_or_business la credit_union league supra same trade_association argues that the sale of discount certificates is similar to the activity described in revrul_80_294 supra that ruling involved an association composed of professional players of a particular sport the association’s purpose was to promote interest in the sport to elevate the standards of the sport as a profession and to sponsor and conduct tournaments for the encouragement of its members the revenue_ruling holds that the sponsoring of tournaments and the sale of rights to broadcast the tournaments directly furthers the organization’s exempt_purpose by encouraging participation in the sport and by enhancing awareness by the general_public of the sport as a profession the national broadcasts of professional tournaments that were the subject of revrul_80_294 provided a showcase for the sport as a whole they increased the interest and knowledge of the public and enhanced the stature and earning power of the top players thereby improving both the amateur and professional aspects of the sport nationwide in contrast the discount certificates only serve to promote specific sports_facilities which does not improve the business conditions of one or more lines of business of the members of trade_association in the case at hand the discount certificate program gives members of the general_public the ability to play the sport of b at a discount at particular sport facilities that participate in the program in contrast to revrul_80_294 it is really the participating sport facilities not the sport of b as a whole that trade_association promotes to the public through the discount certificate program additionally in revrul_80_294 the organization was providing a service through broadcasting that reached a broad segment of the general population in the case of the discount certificates sales are made to a limited number of individuals albeit members of the general_public to play the sport of b in a particular geographic area therefore the sale of discount certificates in the manner described does not bear a substantial causal relationship to trade association’s exempt_function of promoting recreational interest in the sport as a whole rather the share of the sports pass received by trade_association is essentially a payment for the advertising services designed to encourage the general_public to play the sport at their facility at reduced fees any benefit to trade association’s line_of_business or nexus to its exempt purposes is only incidental to the direct service provided to these entities thus the activity is not substantially related to trade association’s exempt purposes and is therefore subject_to ubit issue exemption an organization whose principal or primary purpose and activity justifies exemption under sec_501 does not lose its exempt status by engaging in incidental_or_subordinate activity constituting a regular business of a kind ordinarily carried on for profit or the performance of particular services for individual persons see e q ind retail hardware ass'n evanston-northshore bd of realtors chi graphic arts fed'n am plywood ass'n supra the ultimate fact as to which activities of a business league are primary and which are incidental must be determined in each case upon the particular circumstances involved which can include the amount of time the organization’s employees spend on the activities am plywood ass'n ind retail hardware ass'n supra trade_association derives a substantial portion of its revenues from the sale of discount certificates and commissions earned on the sale of discount certificates by sport facilities the amount of revenue generated by an activity is not the only way to determine whether that activity is the primary activity of an exempt_organization the amount of the income derived from the sale of broadcasting rights is not by itself determinative of whether the activity furthers the purposes specified in sec_501 of the code revrul_80_294 trade_association calculated that its employees spend approximately one-quarter of their work time on these activities its board members spend approximately five percent of their time on these activities and their committee members spend percent of their time on the discount certificate program the facts do not indicate that trade_association has any other activities that are unrelated to its exempt purposes trade_association has represented that the remainder of its revenues are derived from activities that further its exempt purposes furthermore trade_association represents that most of the time of its staff board members and committee members is spent on activities that further trade association’s exempt purposes thus the sale of discount certificates is not trade association's primary purpose and the activity therefore will not adversely affect the tax exempt status of trade_association under sec_501 or the code conclusion trade association’s income from the sale of discount certificates constitutes ubt under sec_512 of the code therefore trade association’s income from this activity is subject_to ubit under sec_511 of the code trade association's sale of discount certificates will not adversely affect the tax exempt status of trade_association under sec_501


t c summary opinion united_states tax_court liudmela oksana maciujec petitioner v commissioner of internal revenue respondent docket no 18844-15s filed date liudmela oksana maciujec pro_se jeremy j eggerth miles d friedman and hans famularo for respondent summary opinion guy special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by 1unless otherwise indicated section references are to the internal revenue continued any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for and an accuracy-related_penalty under sec_6662 of dollar_figure petitioner filed a timely petition for redetermination with the court pursuant to sec_6213 at the time the petition was filed petitioner resided in california after concessions the issues remaining for decision are whether petitioner may exclude from gross_income damages of dollar_figure that she received in the settlement of a civil suit that she brought against home depot u s a inc home depot and is liable for an accuracy-related_penalty under sec_6662 continued code as amended and in effect for and rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar 2respondent conceded that petitioner was not obliged to include in gross_income dollar_figure that home depot paid to her attorney and dollar_figure characterized in the notice_of_deficiency as interest_income petitioner conceded that she received and failed to report ordinary dividend income of dollar_figure to the extent not discussed herein other issues are computational and flow from our decision in this case background some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated herein by this reference petitioner graduated from high school and has taken some college level courses in pursuit of an associate’s degree petitioner started working for home depot in she worked primarily in the garden department assisting customers and processing special orders home depot terminated petitioner’s employment in date in date michael portner petitioner’s attorney filed a civil complaint for damages against home depot in the superior court of the state of california the complaint identified causes of action and alleged that in the course of her employment at home depot petitioner was subjected to various forms of discrimination harassment and retaliation that the company failed to accommodate her physical disability an inability to stand for extended periods that a coworker had committed a battery on her unwanted touching and offensive physical contact and that she was wrongfully terminated each of the causes of action included an allegation that the conduct of home depot and its employees caused petitioner to suffer emotional distress the complaint did not allege that petitioner suffered any physical injury or sickness as a result of the conduct of home depot or its employees the complaint requested general damages an award for loss of earning the costs of the lawsuit attorney’s fees and punitive_damages on date petitioner and home depot entered into a settlement agreement and general release settlement agreement to fully and finally resolve the allegations in the complaint as well as any and all other claims or disputes whether known or unknown that have been made or could have been made by or on behalf of the employee against home depot relating to conduct or events occurring at any time prior to and including the date on which this agreement is executed the settlement agreement stated in relevant part that home depot agrees to pay the employee as payment for employee’s claims of compensatory_damages including emotional distress the sum of dollar_figure and that the settlement agreement contains the entire agreement and understanding between the employee and home depot and supersedes all other agreements between the employee and home depot finally the agreement states employee has not sought medical treatment or incurred medical costs as a result of the claims asserted in this lawsuit no portion of the settlement payment was allocated to any particular cause of action in the complaint home depot issued to petitioner a form 1099-misc miscellaneous income reporting that she had received taxable_income of dollar_figure in as a result of the settlement of the lawsuit described above petitioner hired rudy baron a certified_public_accountant to prepare her federal_income_tax return for she provided mr baron with copies of the home depot complaint and the settlement agreement and she specifically inquired whether he believed that the settlement payment constituted taxable_income mr baron prepared and filed a federal_income_tax return for petitioner reporting that she received wage income of dollar_figure from home depot the tax_return did not report as gross or taxable_income the miscellaneous income that home depot had reported on form 1099-misc instead mr baron included with petitioner’s tax_return a schedule indicating that she had received other income of dollar_figure from home depot and a separate statement that she had sustained sexual abuse injuries at home depot and therefore she considered the settlement payment to be nontaxable under sec_104 discussion as a general_rule the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 under certain circumstances the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 inasmuch as the facts that are relevant to the disposition of this matter are not in dispute we conclude that the placement of the burden_of_proof is immaterial unless a specific income exclusion applies a taxpayer is required to include in gross_income all income from whatever sources derived see sec_61 126_tc_89 aff’d 473_f3d_790 7th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id pincite sec_104 provides the general_rule that gross_income does not include the amount of any damages received on account of a personal physical injury or physical sickness the so-called flush language of sec_104 provides in pertinent part for purposes of paragraph emotional distress shall not be treated as a physical injury or physical sickness the preceding sentence shall not apply to an amount of damages not in excess of the amount_paid for medical_care described in subparagraph a or b of sec_213 attributable to emotional distress as explained in related regulations although emotional distress is not considered a physical injury or physical sickness damages for emotional distress attributable to a physical injury or sickness are excluded from gross_income under sec_104 sec_1_104-1 income_tax regs where damages are received pursuant to a settlement agreement the nature and character of the underlying claim guides the court’s decision whether the payment is excludable from income under sec_104 see 504_us_229 141_tc_331 aff’d 668_fedappx_241 9th cir in short petitioner must show that the home depot settlement payment was in lieu of damages for a physical injury or physical sickness see ahmed v commissioner tcmemo_2011_295 aff’d 498_fedappx_919 11th cir petitioner contends that the damages that she received for emotional distress are attributable to a physical injury battery arising during her employment at home depot we disagree the complaint that petitioner filed against home depot does not include an allegation that she suffered any physical injury or physical sickness as a result of the conduct of home depot or its employees the complaint states that as a proximate result of the actions underlying the complaint petitioner suffered loss of income wages and other pecuniary losses and mental anguish embarrassment humiliation and emotional distress although petitioner may have suffered physically as a result of the battery described in the complaint there is no indication in the settlement agreement or in the record as a whole that she was compensated for a physical injury or physical sickness or emotional distress attributable thereto petitioner does not claim that any portion of the settlement payment served to reimburse her for amounts paid for medical_care attributable to emotional distress see sec_104 flush language sanford v commissioner tcmemo_2008_158 damages received on account of emotional distress and resultant symptoms are not excludable from income under sec_104 hawkins v commissioner tcmemo_2005_ in sum we conclude that petitioner did not receive damages for emotional distress that were attributable to a physical injury or physical sickness and 3in fact the settlement agreement states that e mployee has not sought medical treatment or incurred medical costs as a result of the claims asserted in this lawsuit accordingly the portion of the settlement payment remaining in dispute is not subject_to exclusion_from_gross_income under sec_104 see sanford v commissioner tcmemo_2008_158 shaltz v commissioner tcmemo_2003_173 we also redetermine respondent’s determination that petitioner is liable for an accuracy-related_penalty pursuant to sec_6662 sec_6662 and b and imposes a penalty equal to of any underpayment due to negligence or intentional_disregard_of_rules_and_regulations or a substantial_understatement_of_income_tax negligence is a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 an understatement of income_tax is substantial if the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 respondent bears the burden of production with respect to the penalty sec_7491 however sec_6664 provides that no penalty shall be imposed with respect to any portion of an underpayment if it is shown that there was reasonable 4respondent has satisfied his burden of production inasmuch as the record shows that the understatement exceeds of the tax required to be shown on the return which is greater than dollar_figure cause for such portion and that the taxpayer acted in good_faith with respect to such portion swihart v commissioner tcmemo_1998_407 the court must consider all the facts and circumstances in determining whether the taxpayer acted with reasonable_cause and in good_faith sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess her proper tax_liability id a taxpayer may establish good-faith reliance on a professional tax adviser by showing that she gave the adviser complete and accurate information an incorrect return was the result of the adviser’s mistake and she believed in good_faith that she was relying on a competent adviser’s advice see eg 112_tc_317 aff’d without published opinion sub nom schutter v commissioner 242_f3d_390 10th cir considering all the facts and circumstances including petitioner’s lack of sophistication regarding tax matters we conclude that petitioner has shown reasonable_cause for the entire underpayment and that she acted in good_faith in relying on mr baron’s advice see eg 469_us_241 holding that it is reasonable for a taxpayer to rely on the advice of an attorney or accountant because m ost taxpayers are not competent to discern error in the substantive advice of an accountant or attorney consequently we do not sustain respondent’s determination of an accuracy-related_penalty in this case to reflect the foregoing decision will be entered under rule


------------------------------------ ---- department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date uil legend university llc dear we have considered your ruling_request dated date and as amended on date requesting rulings under internal_revenue_code i r c sec_501 c and facts you have been recognized by the internal_revenue_service as tax-exempt under sec_501 c and classified as a supporting_organization under sec_509 your tax-exempt purpose has been to provide a broad range of financial support ie fundraising asset administration investment activities etc for university which is a college recognized as tax-exempt under sec_501 c and classified as an educational_organization under sec_170 a ii in addition your board members also help mentor university students llc is a limited_liability_company you are the sole member of llc you state that llc is considered as a disregarded_entity for federal tax purposes under sec_301_7701-3 with llc's activities attributed to you llc purchased land and commercial property hereafter retail center adjacent to university's campus from an unrelated third party utilizing a commercial loan and a cash contribution from you you did not receive any financing from the seller any person related to the seller any qualified_trust or any person related to a qualified_trust the retail center buildings are leased to tenants and which leases llc assumed the rights and obligations of the landlord lessor at closing the business reasons for your purchase through llc include the unique opportunity to enhance university's community by investing in property adjacent to university's campus the opportunity to acquire the property at a favorable price from a distressed seller and the opportunity to realize a significant return on your investment in the form of both rental revenues and long-term appreciation in the property's value each lease provides for the tenanuiessee to make rental payments to the landlord lessor for_the_use_of the retail center you affirm that the rents payable under the leases are for occupancy of the retail_space with no portion of the rents being attributable to the use of personal_property the rent for each lease is a fixed amount specified in the applicable lease except that one lease provides for additional rental payments based on gross_receipts from the leased premise furthermore none of the leases provide for payments based on net_income or profits derived from the leased property finally you state that retail center will not be leased to the seller or any affiliate of the seller under the leases llc is required to provide certain property management and maintenance services with respect to the retail center the maintenance services include the maintenance of structural portions of the retail center underground utility and sewer pipes areas of the retail center grounds surrounding the retail center and common areas of the retail center management services include collecting rents ensuring lease provisions are enforced negotiating new leases and ensuring that common electricity gas sewer and other standard utility_services are supplied to the retail center collectively these activities comprise llc's rental activities you state that llc contracts with a third-party property management company to conduct the rental activities you state that neither you nor llc will engage in the rental activities directly you affirm that the acquisition of the retail center did not diminish the size and scope or alter the nature of your charitable program other than the debt service expenditures and management service fees paid you expect your expenditures after the acquisition to be substantially_similar to your expenditures prior to the acquisition review of your financial statements including your filed form 990s shows that prior to the acquisition you conducted a robust charitable program in regard to your annual support of university you further affirmed that ultimately one hundred percent of the net profits from the retail center will be contributed to university its endowment or otherwise expended on university's behalf rulings requested the ownership of the retail center by llc and the conduct of rental activities on behalf of llc will not provide a basis for the revocation of your tax-exempt status under sec_501 c rental payments to llc by tenants in accordance with the terms of the leases will not be treated as unrelated_business_taxable_income to you under sec_512 the conduct of the rental activities on behalf of llc and the payment of rent to llc under the leases will not cause you to be classified as a feeder_organization under sec_502 law sec_170 ii provides for a charitable deduction for an educational_organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on sec_501 c provides for the exemption from federal_income_tax of organizations which are organized and operated exclusively for charitable purposes and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_502 provides that an organization operated for the primary purpose of carrying_on_a_trade_or_business for profit shall not be exempt from taxation under sec_501 on the ground that all of its profits are payable to one or more organizations_exempt_from_taxation under sec_501 sec_502 provides that the term trade_or_business shall not include the deriving of rents which would be excluded under sec_512 if sec_512 applied to the organization sec_509 defines a supporting_organization as a an organization that is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in paragraph or of sec_509 b is i operated supervised or controlled by one or more organizations described in paragraph or of sec_509 a ii supervised or controlled in connection with one or more such organizations or iii operated in connection with one or more such organizations and c is not controlled directly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more organizations described in paragraph or of sec_509 sec_511 a imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal income_taxation under sec_501 sec_512 defines unrelated_business_taxable_income ubti as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions directly connected with the carrying on of such trade_or_business sec_512 excludes certain rents from the calculation of ubti specifically in the case of rents- a except as provided in subparagraph b there shall be excluded- i all rents_from_real_property including property described in sec_1245 and ii all rents from personal_property including for purposes of this paragraph as personal_property any property described in sec_1245 leased with such real_property if the rents attributable to such personal_property are an incidental amount of the total rents received or accrued under the lease determined at the time the personal_property is placed_in_service b subparagraph a shall not apply- i if more than percent of the total rent received or accrued under the lease is attributable to personal_property described in subparagraph a ii or ii if the determination of the amount of such rent depends in whole or in part on the income or profits derived by any person from the property leased other than an amount based on a fixed percentage or percentages of receipts or sales c there shall be excluded all deductions directly connected with rents excluded under subparagraph a sec_513 defines unrelated_trade_or_business to mean any trade_or_business the conduct of which is not substantially related aside from the need for income to the exercise or performance of the organization's exempt_purpose or function that constitutes the basis for its exemption under sec_501 sec_514 for purposes of this section the term debt-financed_property means any property which is held to produce income and with respect to which there is an acquisition_indebtedness as defined in subsection c at any time during the taxable_year or if the property was disposed of during the taxable_year with respect to which there was an acquisition_indebtedness at any time during the 12-month_period ending with the date of such disposition sec_514 provides that except as provided in subparagraph b the term acquisition_indebtedness does not for purposes of this section include indebtedness incurred by a qualified_organization in acquiring or improving any real_property sec_514 provides that for purposes of this paragraph the term qualified_organization means i an organization described in sec_170 b a ii and its affiliated support organizations described in sec_509 sec_1 c -1 e provides that an organization may meet the requirements of sec_501 c although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 in determining the existence or nonexistence of such primary purpose all the circumstances must be considered including the size and extent of the trade_or_business and the size and extent of the activities which are in furtherance of one or more exempt purposes an organization which is organized and operated for the primary purpose of carrying on an unrelated_trade_or_business is not exempt under sec_501 c even though it has certain religious purposes its property is held in common and its profits do not inure to the benefit of individual members of the organization emphasis added sec_1_502-1 a provides that in the case of an organization operated for the primary purpose of carrying_on_a_trade_or_business for profit exemption is not allowed under sec_501 on the ground that all the profits of such organization are payable to one or more organizations_exempt_from_taxation under sec_501 in determining the primary purpose of an organization all the circumstances must be considered including the size and extent of the trade_or_business and the size and extent of those activities of such organization which are specified in the applicable paragraph of sec_501 sec_1_512_b_-1 c defines the rendering of services for purposes of this paragraph payments for the use or occupancy of rooms and other space where services are also rendered to the occupant such as for the use or occupancy of rooms or other quarters in hotels boarding houses or apartment houses furnishing hotel services or in tourist camps or tourist homes motor courts or motels or for_the_use_of occupancy of space in parking lots warehouses or storage garages does not constitute rent from real_property generally services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only the supplying of maid service for example constitutes such service whereas the furnishing of heat and light the cleaning of public entrances exits stairways and lobbies the collection of trash etc are not considered as services rendered to the occupant payments for the use or occupancy of entire private residences or living quarters in duplex or multiple housing units of offices in any office building etc are generally treated as rent from real_property sec_1_513-1 b provides that for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 c provides that in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued sec_1_513-1 provides that gross_income derives from unrelated_trade_or_business within the meaning of sec_513 if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question--the activities that is of producing or distributing the goods or performing the services involved--and the accomplishment of the organization's exempt purposes sec_1_513-1 d defines the type of relationship required for a trade_or_business to be substantially related trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved revrul_58_547 c b provides that a lease the parties to which are both exempt from tax under sec_501 and which otherwise constitutes a business_lease within the meaning of sec_514 will not be considered as substantially related to the charitable educational etc purposes of the lessor solely because the lessee is likewise an exempt_organization the lease of property under ordinary commercial arrangements does not constitute the exercise of an educational or charitable function in and of itself the fact that the lessee may be an exempt educational_organization does not cause the rental of space thereto to become a related activity on the part of the lessor who may be organized in part for educational_purposes revrul_64_182 c b provides that a corporation organized exclusively for charitable purposes derives its income principally from the rental of space in a large commercial office building which it owns maintains and operates the charitable purposes of the corporation are carried out by aiding other charitable organizations selected in the discretion of its governing body through contributions and grants to such organizations for charitable purposes held the corporation is deemed to meet the primary purpose test of sec_1 c - e and to be entitled to exemption from federal_income_tax as a corporation organized and operated exclusively for charitable purposes within the meaning of sec_501 c where it is shown to be carrying on through such contributions and grants a charitable program commensurate in scope with its financial resources analysis the first issue that needs to be addressed is whether llc's operation of retail center is i the operation of an unrelated_trade_or_business if the operation of retail center is an unrelated_trade_or_business it may jeopardize your exempt purposes if the operation of retail center is an unrelated_trade_or_business and a significant part of your activities so then you are no longer operated for charitable purposes as required under sec_501 c sec_513 defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 the term unrelated_business_income pertains to income generated from the sale_of_goods or services as part of a regularly carried on trade_or_business that is not substantially related to the exempt_purpose of the organization see sec_511 sec_512 and sec_513 although llc is not an exempt_organization it is a disregarded_entity under sec_301_7701-3 and its activities will be attributed to you renting retail_space is an activity carried on for profit thus constituting a trade_or_business as such because llc's sole activity is to operate retail center the operation of which is a regularly carried on and is considered a business you engage in a regularly carried on trade_or_business see sec_1_513-1 b c the only issue remaining is whether operating retail center is substantially related to your exempt purposes aside for your need for the income generated by the collection of rents from the operation of retail center see sec_1 d to determine whether the operation of retail center and the collection of rents is substantially related to your exempt_purpose of supporting university other than through the production_of_income and the use of that income necessitates an examination of the relationship between the business activities that produced the income and the accomplishment of your exempt_purpose sec_1_513-1 d thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 d you have not provided facts to support a conclusion that the operation of retail center ie the leasing of commercial space to commercial tenants is substantially related to your exempt purposes other than through the use of lease income to further the financial support of university operating a trade_or_business for profit does not cause the trade_or_business to be substantially related to an exempt_purpose solely on the ground that all of the profits are payable to one or more organizations_exempt_from_taxation under sec_501 see sec_502 specifically the internal_revenue_service has held that the lease of property under ordinary commercial arrangements does not constitute the exercise of an educational or charitable function in and of itself revrul_58_547 c b as such the operation of retail center is unrelated to your exempt purposes and the income generated from the leasing of retail center generates unrelated_business_income although the leasing of retail center generates unrelated_business_income an exception exists under sec_512 sec_512 excludes from the calculation of unrelated_business_income all rents_from_real_property you stated that the income llc collects from the leasing of retail center is income from the rental of real_property you state that llc contracts with a third-party property management company to conduct the rental activities you state that neither you nor llc will engage in the rental activities directly these are routine property management and property maintenance services and are not considered the provision of personal services by a landlord to their tenants see sec_1_512_b_-1 c the exception under sec_512 for income generated from the rental of real_property does not apply if the acquisition of real_property was debt financed see sec_514 however the inclusion in unrelated_business_income for income from debt-financed_property does not apply for certain qualified organizations see sec_514 the term qualified_organization includes organizations described in sec_170 and its affiliated organizations described in sec_509 see sec_514 c because university is described in sec_170 and you are described in sec_509 both university and you are qualified organizations and the income generated from retail center will not be considered unrelated_business_income although the income from retail center is not taxable as unrelated_business_income under sec_512 it is still income from an unrelated_trade_or_business under sec_513 the second issue to be addressed is whether llc's operation of retail center an ii unrelated_trade_or_business will jeopardize your tax-exempt status sec_501 c requires tax-exempt organizations to be operated exclusively for charitable purposes you have previously received a determination that you have been recognized by the internal_revenue_service as tax-exempt under sec_501 c and classified as a supporting_organization under sec_509 for providing a broad range of financial support ie fundraising asset administration investment activities etc to university which is a college recognized as tax-exempt under sec_501 c and classified as an educational_organization under sec_170 a ii an organization will jeopardize its tax-exempt status if it is no longer organized or operated for sec_501 c purposes because you are the sole member of llc the activities of llc will be attributed to you as such you will be deemed to conduct the rental activities described above and the operation of retail center as stated above these activities are unrelated to your exempt purposes other than for your need of income and the use of this income for your charitable purposes an organization may continue to meet the requirements of sec_501 c although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business see sec_1 c -1 e the facts of revrul_64_182 are substantially_similar to those surrounding the acquisition and lease of retail center by llc the organization in revrul_64_182 derived its income principally from the rental of space in a commercial office building that the organization owned and maintained and operated the charitable purpose of the organization was carried out by aiding other charitable organitions through contributions and grants to those organizations for charitable purposes in revrul_64_182 the organization was deemed to meet the primary purpose test of sec_1 c -1 e and to be entitled to exemption under sec_501 c upon a showing that the organization's program of contributions and grants was commensurate in scope with the organization's financial resources accordingly you too should be deemed to meet the primary purpose test and continue to qualify for exemption under sec_501 c as long as your program of supporting university is commensurate in scope with your financial resources your charitable purpose is to provide a broad range of financial support ie fundraising asset administration investment activities etc for university through llc you acquired and manage retail center and perform rental activities you affirm that the acquisition of retail center did not diminish the size and scope or alter the nature of your charitable program other than the debt service expenditures and management service fees paid you expect your expenditures on behalf of university after the acquisition of retail center to be substantially_similar to your expenditures on behalf of university prior to the acquisition review of your financial statements including your filed form 990s shows that prior to the acquisition you conducted a robust charitable program in regard to your annual support of university you further affirm that ultimately one hundred percent of the net profits from the retail center will be contributed to university or its endowment or otherwise expended on university's behalf accordingly your primary purpose as used in sec_1 c -1 e is to engage in a charitable program on behalf of university and the scope of this charitable program is commensurate in scope with your financial resources therefore you are not organized and operated for the primary purpose of carrying on an unrelated_trade_or_business ill the third issue to be addressed is whether the llc's rental activities will cause you to be classified as a feeder_organization under sec_502 sec_502 provides that an organization operated for the primary purpose of carrying_on_a_trade_or_business for profit shall not be exempt from taxation under sec_501 on the ground that all of its profits are payable to one or more organizations_exempt_from_taxation under sec_501 in determining the primary purpose of an organization all circumstances must be considered including the size and extent of the trade_or_business and the size and extent of the organization's exempt_activities sec_1 a however sec_502 provides that the term trade_or_business shall not include the deriving of rents which would be excluded under sec_512 if sec_512 applied to the organization sec_512 generally excludes rents_from_real_property subject_to a couple of exceptions in this case none of those exceptions apply accordingly if sec_512 applied llc's rental income would be excluded from the calculation of unrelated_business_taxable_income under sec_512 therefore llc's rental activities are not a trade_or_business within the meaning of sec_502 meaning that you will not be classified as a feeder_organization under sec_502 conclusion based on the foregoing we rule as follows the ownership of the retail center by llc and the conduct of rental activities on behalf of llc will not provide a basis for the revocation of your tax-exempt status under sec_501 c rental payments to llc by tenants in accordance with the terms of the leases will not be treated as unrelated_business_taxable_income to you the conduct of the rental activities on behalf of llc and the payment of rent to llc under the leases will not cause you to be classified as a feeder_organization under sec_502 this ruling will be made available for public inspection 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 you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely michael seto manager eo technical enclosure notice


internal_revenue_service number release date index number -------------------------------- ------------------------------------ --------------------------- --------------------------------- - department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-125313-04 date january re -------------------------------- re -------------------------------- legend decedent -------------------- --------------------------------- executor ----------------------- date ---------------------- date ---------------------- dear ------------- requesting an extension of time under sec_301 of the procedure and administration regulations to make an alternate_valuation election under sec_2032 of the internal_revenue_code this is in response to a letter from your authorized representative dated april the facts and representations submitted are summarized as follows decedent died on date and the executor of decedent’s estate timely filed form_706 united_states estate and generation-skipping_transfer_tax return on date the executor provided accountant with the value of decedent’s assets as of the alternate_valuation_date however in preparing decedent’s form_706 accountant did not check the appropriate box to make the election under sec_2032 to value the estate as of the alternate_valuation_date and did not use the appropriate column for listing the alternate value but instead listed decedent’s assets as valued as of decedent’s date of death subsequent to the filing of decedent’s form_706 the accountant discovered the errors the value of the gross_estate and the tax imposed by chapter sec_11 and decreased as a result of making the election the executor requests an extension of time under sec_301 to make the alternate_valuation election under sec_2032 in the case of property distributed sold exchanged or otherwise sec_2032 provides that the value of the gross_estate may be determined if plr-125313-04 the executor so elects by valuing all the property included in the gross_estate as follows disposed of within months after the decedent’s death such property shall be valued as of the date of distribution sale exchange or other_disposition in the case of property not distributed sold exchanged or otherwise_disposed_of within months after the decedent’s death such property shall be valued as of the date months after the decedent’s death any interest or estate that is affected by mere_lapse_of_time shall be included at its value as of the time of death instead of the later date with adjustment for any difference in its value as of the later date not due to mere_lapse_of_time sec_2032 provides that no election may be made under sec_2032 with respect to an estate unless such election will decrease the value of the gross_estate and the sum of the tax imposed under chapter of the code and the tax imposed by chapter with respect to property includible in the decedent’s gross_estate reduced by credits allowable against such taxes sec_2032 provides that an election under sec_2032 shall be made by the executor on the return of tax imposed by sec_2001 under sec_2032 no election may be made under sec_2032 if such return is filed more than year after the time prescribed by law including extensions for filing such return time to make a regulatory election or statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i if the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer has acted reasonably and in good_faith and granting relief will not prejudice the interests of the government commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-1 the commissioner may grant a reasonable extension of sec_301_9100-2 provides automatic_extension of time for making certain sec_301_9100-1 through provide the standards the requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the plr-125313-04 taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the standards of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently the executor is granted an extension of time of sixty days from the date of this letter for making the alternate_valuation election under sec_2032 the election should be made on a supplemental form_706 a copy of this letter should be attached to the supplemental form_706 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh tax consequences of the transaction under the cited provisions or under any other provisions of the code except as specifically ruled herein we express or imply no opinion on the federal this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely enclosures copy for sec_6110 purposes copy of this letter cc heather c maloy associate chief_counsel passthroughs and special industries


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-147696-02 date date legend x date year dear this letter responds to a letter dated date requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on date the sole shareholder of x intended for x to be an s_corporation for its first taxable_year however no timely filed form_2553 election by a small_business_corporation was filed on behalf of x for year sec_1362 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 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 plr-147696-02 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 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 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to each of x’s authorized representatives sincerely yours matthew lay senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes