legend org organi zation xx date address address release number release date date uil code org address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court dear this is a final adverse determination_letter as to org’ s exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons the org has not been operating exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 you are also not a charitable_organization within the meaning of sec_1_501_c_3_-1 you are not an organization which operates exclusively for one or more of the exempt purposes which would qualify it as an exempt_organization you operate substantially for a non-exempt purpose for private benefit and its earnings inure to the benefit of the founders of the organization based upon these reasons your sec_501 tax exempt status is revoked effective march 20xx you have signed form_6018 consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file form_1041 us income_tax return for estates and trusts for all open years with the appropriate service_center indicated in the instructions for the return processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to internal_revenue_service taxpayer advocates office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours sunita b lough director eo examinations tax_exempt_and_government_entities_division org address defartment of the treasury internal_revenue_service capitol av ste stop oma omaha ne taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear of our report of examination explaining why we believe we have enclosed a copy revocation of your exempt status under sec_501 code is necessary if you accept our findings take no further action we will issue a final revocation letter of the internal_revenue_code with our proposed revocation you must submit to us a written if you do not agree request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f lf we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is no he taxpayer_advocate cannot reverse a legally correct_tax appeals process t a united determination or extend the time fixed by law that you have to file a petition in 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 a substitute for established irs procedures such as the formal t if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely sunita lough director eo examinations enclosures publication publication report of examination letter catalog number 34809f nore 886a department of the ‘i'reasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20x x legend org - organization name founder thru co-16 ihe oe 16t companies board members xx aes pee founder family founder family founders founders - date fdn-1 founder fdn-2 5th eae ett bm-1 thru bm-7 gth gth oa iho ee 5th ed executive director co-1 hae 6th g primary issue whether the org organization tax exempt status as an organization described in sec_501 of the internal_revenue_code code should be retroactively revoked because it is not operated exclusively for tax exempt purposes and because its net_earnings inured to the private benefit of fdn-1 a trustee founder board member and substantial_contributor and to fdn-2 a founder board member and substantial_contributor facts organizing document the org the organization was created with a declaration of trust declaration by fdn-1 and fdn-2 each being a founder on march 19xx the trustee was fdn-1 ‘trustee’ the declaration provides that the organization was created for the purpose of establishing an organization which is described in code sec_501 and sec_509 the declaration provides that the founder renounces any power to determine or control by alteration amendment revocation termination or otherwise the income or principal of the trust estate and renounces any interest either vested or contingent including any reversionary_interest or possibility of reverter in the income or principal of the trust estate the declaration further requires that each year the trustee shall distribute of the net_income of the organization to the co-1 the named primary supported_organization in addition to this distribution each year the trustee shall distribute a total of of the net_income to one or more of the organizations listed on schedule a organizations should receive grants within days prior to april of the year after the income is earned the trustee shall determine the grant recipients if the board has not directed the trustee as to which per the declaration distributions in excess of of the organization’s net_income must be authorized by at least three board members in writing further the primary supported_organization can only be changed if the specified primary charity is not an organization to which supporting organizations can make distributions form 886-a cev department of the treasury - internal_revenue_service page -1- lean 886a department of the freasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org december 20xx 20xx december there are organizations listed on schedule a some of the organizations include affiliated organizations such as co-2 and affiliated organizations the declaration provides that the board shall be the governing body of the organization and that the members of the board shall be determined as follows - - one board member shall be appointed by the co-1 or its designated agent two board members shall be from the class consisting of fnd-1 and fnd-2 and their descendants the founder family the other members of the board shall be appointed by a majority vote of the board the initial remaining board members were bm-1 and bm-2 the founders appointed successor other members of the board and they were bm-3 and bm-4 to replace bm-1 and bm-2 - - the declaration provides that upon winding up and dissolution of the organization the assets shall be distributed to a non-profit fund foundation or corporation which is organized and operated exclusively for charitable educational religious and or scientific purposes and which has established its tax exempt status under sec_501 the declaration provides that if the trustee determines the trust fund is too small to economically administer the trustee shall distribute the trust fund in its entirety outright and free of trust to such organizations described in sec_170 as the trustee shall determine by letter dated march 19xx the organization was recognized by the service as exempt from federal_income_tax under sec_501 as an organization described in sec_501 and classified as a supporting_organization described in sec_509 the service’s determination_letter was based on the organization’s representations concerning its proposed operation and the supporting documents it submitted during the application process the organization did not disclose during the application process that it would lend virtually all of its assets to disqualified persons and would not enforce the loan terms on july 20xx the declaration of trust was amended to provide that references to co-1 are to be deleted and in its place co-3 an organization affiliated with co-4 is to be substituted it was signed by the following board_of directors fdn-1 fdn-2 and bm-2 bm-5 the person purportedly appointed by co-1 did not sign the amended declaration of trust there are no board minutes that reflect the board voted on the amendment at the time of the amendment the co-1 was recognized as a public charity it appears that the organization could have continued to provide support to co-1 despite the july 20xx amendment the organization continued to list the supported_organization as the co-1 on its forms form 886-a rev department of the treasury - internal_revenue_service page -2- form 886a department of the ‘i'reasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx an april 20xx letter from co-3 is addressed to the founders personally and not to the organization the letter states that the donation upgraded the founders’ membership to co-5 dollar_figure and they would receive exclusive benefits as a legacy member a june 20xx letter from the organization's cpa firm states that all contributions to the organization were made by fdn-1 and fdn-2 although its governing instrument and its application representations indicated that the organization would not be controlled by disqualified persons the organization appears to have held only two board meetings through november 20xx no known board meetings were held after november 20xx income and grants the following income and grants were reported on the organization's forms 20xx 20xx 20xx 20xx income_interest contributions total grants co-1 received dollar_figure and dollar_figure in 19xx and 19xx respectively co-2 co-6 co-3 received dollar_figure in 19xx co-7 co-8 co-9 co-10 co-11 co-12 co-13 total no grants were given in 20xx to the primary supported_organization co-1 the organization's 20xx trial balance shows dollar_figure in grants not listed above paid to other form 886-acrev department of the treasury - internal_revenue_service page -3- een 886a department of the ‘t'rcasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org december december 20xx 20xx more than of the organization’s net_income was granted to charities without approval of three members of the board_of directors in writing the organization does not conduct any independent charitable activities it only provides grants in 20xx the organization started giving grants to organizations that were not listed on schedule a of its declaration as supported organizations it gave a total of dollar_figure to co-9 co-11 co-10 co-12 and co-14 dollar_figure in 20xx not listed above organizations not listed on the schedule a from inception the organization gave grants to co-6 part of the co-2 co-2 co-2 is listed on schedule a the memo line on the checks for the grants frequently showed the grants were actually tithes balance_sheet end of year the following are the organization’s assets per its forms 20xx 20xx 20xx 20xx cash other notes and loans receivable loans the organization's forms show three loans per the forms all three loans were made to fdn-1 and fdn-2 there is written documentation to support the loans loans ‘per exam form_990 20xx 20xx 20xx 20xxx 20xx a first loan dollar_figure promissory note stated interest rate form 886-a rev department of the treasury - internal_revenue_service page -4- oom 886a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx loan date march 20xx interest only until march 20xx loan term all principal and interest due in full on march 20xx borrowers fdn-1 and fdn-2 lender org no signature for the organization security march 20xx trust deed on real_property no evidence of recording signed by fdn-1i and fdn-2 as trustees of the fnd-1 and fdn-2 trust not signed on behalf of the organization and march 20xx quit-claim deed no evidence of recording not signed on behalf of the organization promissory note replaced with revised promissory note revolving line of credit signed by fdn-1 and fdn-2 but not by the organization for dollar_figure pincite effective january 20xx no maturity_date a_trust deed note dated march 20xx is signed by fdn-1 and fdn-2 as trustees of the fnd-1 and fdn-2 trust as borrower the lender is the fdn-1 and fdn-2 for a line of credit in the amount of dollar_figure with interest per annum and monthly interest-only payments until march 20xx when all principal and interest becomes due the document sets forth that it is secured_by a deed_of_trust of even date this document is not recorded a_trust deed dated march 20xx was signed by fdn-1 and fdn-2 trustees of the fnd-1 and fdn-2 trust the trust deed names the fnd-1 and fdn-2 trust as trustor bm-2 a member of the co-15 as trustee and the org as beneficiary the trust deed purports to secure real_property for the trust deed note the founders’ signatures were notarized on march 20xx there is no evidence that the trust deed was recorded a quit-claim deed from fdn-1 and fdn-2 individually to the fnd-1 and fdn-2 trust is dated march 20xx the quit-claim deed is signed by fdn-1 and fdn-2 individually there is no evidence that the quit-claim deed was recorded a memorandum of a org board meeting apparently held on april 20xx reflects that the board members present fdn-1 fdn-2 bm-5 by conference call and bm-2 bm-2 unanimously approved the dollar_figure loan to fdn-1 and fdn-2 as a line of credit secured_by a second trust deed on the founders residence although the memorandum contains signature lines for fdn-1 as trustee and for all five board members there is no evidence of any signature on the memorandum per the organization the loan was orally extended each year so long as all interest payments were made thus the funds were not repaid second loan form 886-a rev department of the treasury - internal_revenue_service page -5- oer 886a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx dollar_figure promissory note stated per annum interest rate loan date may 20xx interest only payments of dollar_figure starting june 20xx and every 15th day of each month thereafter until may 20xx loan term all principal and interest due in full on may 20k x borrowers fdn-1 and fdn-2 both signed security trust deed on real_property no evidence of recording signed by fdn-1 and fdn-2 as trustees of the fnd-1 and fdn-2 trust promissory note replaced with revised promissory note revolving line of credit signed by fdn-1 and fdn-2 but not by the organization for dollar_figure pincite effective january 20xx no maturity_date a_trust deed note dated may 20xx is signed by fdn-1 and fdn-2 as trustees of the fnd-1 and fdn-2 trust as borrower the lender is the fdn-1 and fdn-2 for a line of credit in the amount of dollar_figure with interest per annum and monthly interest-only payments in the amount of dollar_figure until may 20xx when all principal and interest becomes due the document sets forth that it is secured_by a deed_of_trust of even date this document is not recorded per the organization the loan was orally extended each year so long as the interest was paid the note reflects that the loan is secured_by a_trust deed no trust deed secured this note third loan dollar_figure promissory note stated per annum interest rate loan date october 20xx interest only payments of dollar_figure due on or before the 15th day of each month until may 20xx lender may demand repayment of all or a portion of the principal_amount at any time the entire amount outstanding shall become fully due and payable on the death of seller the org explained in a june 20xx response that the word seller was mistakenly left in the document from a form document and that the word would be interpreted to mean the foundation as lender no prepayment penalty loan term all principal and interest due in full on may 20xx borrowers fdn-1 and fdn-2 both signed no signature for the organization security trust deed on real_property no evidence of recording signed by fdn-1 and fdn-2 as trustees of the fnd-1 and fdn-2 trust promissory note no evidence of recording signed by fdn-1 and fdn-2 but not by the form 886-a crev department of the treasury - internal_revenue_service page -6- layan 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the ‘i'rcasury - internal_revenue_service org december 20xx december 20xx organization replaced with revised promissory note revolving line of credit no evidence of recording for dollar_figure pincite effective january 20xx and no maturity_date per the organization the loan was orally extended each year so long as the interest was paid each of the dollar_figure dollar_figure and dollar_figure promissory notes includes a footnote stating that they replace original promissory note referenced in the trust deed recorded september 20xx as entry no and respectively with the co-16 which is now unable to be located it is unclear whether the document s which cannot be located is the purportedly recorded trust deed or the original promissory notes the trust deed referenced only encompasses the dollar_figure note the spaces into which the maturity_date and the due_date for principal and interest are to be written are left blank all three revised promissory notes state they are effective january 20xx but there is no indication when they were actually signed all three revised promissory notes are signed by fdn-1 and fdn-2 as borrowers none of the three includes a signature on behalf of the fdn-1 and fdn-2 the forms for 20xx through 20xx did not provide any information about the loans the form_990 for 20xx reported the interest rate for all three notes to be the prime interest rate at the time wa sec_5 the mortgage interest rate at the time wa sec_5 the loans were secured_by the real_property for which the loans were taken however signatures proper authorization from the organization and recording are in question the loans were reported on the forms as loans receivable rather than as receivables from officers directors etc based on the documentation described above it appears that the organization will continue to loan money to the founders because they now have revolving lines of credit without maturity dates correspondence from the founders dated march 20xx noted that all the notes were secured with a_trust deed only one trust deed was provided as discussed above it only secures the dollar_figure loan there is no evidence that any of the loan documents were recorded based on a review of the organization’s bank_deposits none of the loans were being repaid on a regular basis it appears that several months go by without any payments the organization does not receive any penalty payments for late payments of loan amounts due the correct amount of interest was paid without consideration of late payments by the end of the year but regular monthly interest payments were never made for the 20xx and 20xx time periods the form_990 for 20xx did not report any interest_income instead it showed the interest payment as a principal payment of dollar_figure and decreased the loan balance the form_990 for 20xx showed dollar_figure for interest_income and dollar_figure was shown as a principal payment again decreasing the form 886-a rev department of the treasury - internal_revenue_service page -7- foe 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org december 20xx 20xx december loan balance on june 20xx correspondence received from the organization explained its error in 20xx and 20xx in applying interest payments to the principal the organization corrected the loan balance to the original amount of dollar_figuredollar_figure the correspondence also stated the correct interest payments for both 20xx and 20xx was and respectively furthermore the founders made payments totaling dollar_figure for 20xx and dollar_figure for 20xx the organization had been advised by letter dated january 20xx that it was under examination during the application process the organization did not disclose that organization funds were going to be loaned to fdn-1 and fdn- or their trust there is no evidence that any of the loan documents were recorded or that the organization properly authorized the loans at a minimum the organization transferred purportedly as loans dollar_figuredollar_figure of its funds to fdn-1 and fdn-2 or their trust in 20xx to be repaid in 20xx interest was paid annually but not in accordance with the loan terms the loans were orally extended each year the organization erroneously applied interest payments to the principal balance in 20xx and in 20xx the organization entered into new loan agreements with the founders dated january 20xx and reduced the interest rate on all three loans it was represented that all three loans were secured but only the smallest loan was secured and recording of that secured interest is not established proper authorization of the loans by the organization has not been established the foundation's trial balances for each of the years 20xx through 20xx show the same amount in receivables dollar_figuredollar_figure this amount is the total principal_amount of the three loans to the founders minutes the organization has minutes of the first meeting of the board held on march 19xx these minutes pertain to how the organization would operate item says that this trust need not have any employees in the sense that no one will be carried on a payroll as such that is to say that this trust need not withhold state or federal income taxes or social_security_taxes all its executives agents or other employees will be remunerated as consultants receiving consultant fees on a contract basis and any and all remuneration paid to them will be reported by this trust at the year end on irs form_1099 a memorandum of a org board april 20xx meeting reflects that the board members present fdn-1 fdn-2 bm-5 by conference call and bm-2 bm-2 unanimously approved the dollar_figure loan to fdn-1 and fdn-2 although the memorandum contains signature lines for fdn-1 as trustee and for all five board members there is no evidence of any signature on the memorandum form 886-a rev department of the treasury - internal_revenue_service page -8- reyer 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the ‘i'reasury - internal_revenue_service org december december 20xx 20xx a november 20xx document which appears to be in the nature of minutes of aorg board meeting states that by majority vote bm-6 and bm-7 were instated as board members the document states that bm-2 resigned from the board as a trustee in spring 20xx and that bm-1 was removed as a trustee by majority vote effective july 20xx those signing the document are fdn-1 fdn-2 and ed the three remaining board members were fnd-1 and fdn-2 and ed ed is the executive director of the co-3 no minutes of 20xx meetings were provided to explain or contemporaneously document the referenced spring 20xx or july 20xx actions a february 20xx document on organization letterhead states that bm-6 and bm-7 were appointed to the board in november 20xx because we needed to replace bm-1 and bm-2 the document states that wwe changed our financial management services from co-17 to co- the document states that bm-6 and bm-7 are trusted business friends and that they are not affiliated with the new financial management services from co-18 however the organization on its forms for 20xx and 20xx continued to reflect that its board was composed of fdn-1 and fdn-2 bm-2 bm-2 bm-1 and bm-s these were the only minutes provided by the organization tithing the organization's 20xx general ledger reflects entries for tithing as follows date 2-15-20kk 12-12-20xx 12-12-20xx total amount dollar_figure dollar_figure checks for the above payments were written to co-6 which is part of co-2 the organization asserts that these amounts were grants to the co-3 in 20xx law - primary issue sec_501 of the internal_revenue_code code exempts from federal_income_tax organizations organized and operated exclusively for charitable educational and other exempt purposes provided that no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual form 886-a crev department of the treasury - internal_revenue_service page -9- for 886a department of the ‘t’reasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in code sec_501 the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in code sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization the term private_shareholder_or_individual is defined in sec_1_501_a_-1 sec_1_501_a_-1 defines private_shareholder_or_individual for purposes of sec_501 as persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests an organization does not serve a public rather than a private interest within the meaning of sec_1_501_c_3_-1 if any of its assets or earnings inure to the benefit of any insiders or disqualified persons sec_1_6033-2 provides that e very organization which is exempt from tax whether or not it is required to file an annual information_return shall submit such additional information as may be required by the internal_revenue_service for the purpose in inquiring into its exempt status and administering the provisions of subchapter_f sec_501 and following chapter of subtitle a of the code in 326_us_279 the supreme court stated that an organization is considered to be operated exclusively for exempt purposes if it engages primarily in activities which accomplish one or more exempt purposes the presence of a single noncharitable purpose if more than insubstantial in nature will preclude exemption under form 886-a rev department of the treasury - internal_revenue_service page -10- ecm 886a department of the ‘treasury - internal_revenue_service schedule no or name of taxpayer exhibit year period ended explanation of items org december 20xx 20xx december sec_501 of the code regardless of the number or importance of the charitable purposes see also 765_f2d_1387 9th cir 79_tc_793 whether an organization satisfies the operational_test is a question of fact to be resolved on the basis of all the evidence presented by the record 83_tc_381 affd 823_f2d_1310 9th cir leon a beeghly fund v commissioner 35_tc_473 when an organization operates for the benefit of private interests such as designated individuals the creator or his family or persons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes 92_tc_1053 in church of world peace inc v commissioner t c memo aff'd a f t r 2d dio cir the tax_court held that a church did not operate exclusively for religious purposes because the church facilitated a circular tax-avoidance scheme the facts showed that individuals made tax-deductible contributions to the church the court found that the church then returned the money to the individuals without substantiating that the payments furthered any purpose described in sec_501 in 412_f2d_1197 ct_cl the court stated that loans to an organization’s founder or substantial_contributor can constitute inurement that is prohibited under sec_501 the church made loans to its founder and his family and failed to produce documentation that demonstrated that the loans were advantageous to the church the church also failed to produce documentation to show that the loans were repaid significantly the court stated that the very existence of private source of loan credit from an organization’s earnings may itself amount to inurement of benefit in 28_tc_1128 an organization operated bingo_games its charitable function consisted of contributions to charitable institutions of amounts that were insubstantial when compared to gross_receipts from the bingo_games the court held that the organization did not qualify for exemption under code sec_501 because it did not operate any charitable institutions and its principal activity was the profitable operation of bingo_games on a business or commercial basis in revrul_67_5 1967_1_cb_123 it was held that a foundation controlled by the creator’s family was operated to enable the creator and his family to engage in financial activities which were beneficial to them but detrimental to the foundation it was further held that the form 886-a rev department of the treasury - internal_revenue_service page -11- eo 886a department of the ‘i'reasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of ‘taxpayer org december 20xx december 20xx foundation did not operate a charitable program commensurate in scope with its financial resources rather the foundation was only able to carry out minimal charitable activities the revenue_ruling stated that the foundation was operated for a substantial non-exempt purpose and served the private interests of the creator and his family therefore the foundation was not entitled to tax exemption under sec_501 in revrul_64_182 cb a corporation organized exclusively for charitable purposes derived 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 the governing body through contributions and grants to such organizations for charitable purposes the revenue_ruling deemed the corporation to meet the primary purpose test of sec_1_501_c_3_-1 and to be entitled to tax exemption as a corporation organized and operated exclusively for charitable purposes within the meaning of code sec_501 because the organization through such contributions and grants carried on a charitable program commensurate in scope with its financial resources effective date of revocation an organization may ordinarily rely on a favorable determination of exempt status under code sec_501 or the corresponding provision of prior_law received from the internal_revenue_service sec_1_501_a_-1 a determination_letter or ruling recognizing exemption may not be relied upon if there is a material_change inconsistent with exemption in the character the purpose or the method of operation of the organization a determination_letter or ruling may be revoked retroactively if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented where there is a material_change inconsistent with exemption in the character the purpose or the method of operation of an organization revocation or modification will ordinarily take effect as of the date of such material_change sec_1_501_a_-1 revproc_2008_9 2008_2_irb_258 sec_12 government position - primary issue analysis the organization was not operated exclusively for charitable purposes within the meaning of code sec_501 the organization violated sec_1_501_c_3_-1 c and c -1 d gi by allowing fdn-1 and fdn-2 founders board members and substantial form 886-arev department of the treasury p ry - internal_revenue_service page -12- eo 886a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20x x december 20xx contributors to borrow a substantial amount of organization assets without requiring repayment with forgiveness of missed interest payments and with slightly below market rates even though the organization did make grants which furthered its exempt_purpose the amounts were insubstantial in comparison to the private use of the organization's assets the organization was operated primarily to serve the private interests of fdn-1 and fdn-2 by allowing them to personally use more than an insubstantial amount of its assets for non-exempt purposes over a period of years the organization provided non-incidental benefits to fdn-1 and fdn- that served their private interests as opposed to charity the organization's assets inured to fdn-1 and fdn-2's benefit the organization's income and grants totals from 20xx through 20xx are as follows 20xx 20xx 20xx 20xx income total grants total during this same time period the organization continued loaning fdn-1 and fdn-2 dollar_figure year to year the organization has not established that the loans were properly authorized it appears that the loans were authorized if at all by a vote for which fdn-1 and fdn-2 constituted a majority the loan documents do not appear to have been recorded the loans were not repaid but rather were extended seriatim and orally until the loans were redrafted in 20xx at a reduced interest rate when the organization came under audit in 20xx some loan repayment was made for the first time approximately five years after the original loan dates the founders are not members of a charitable_class and are not permissible beneficiaries of the organization the loans to fdn-1 and fdn-2 as evidenced by the inconsistent interest payments put organization assets at risk there is no evidence that the loans were secured the documents that purport to represent security on the loans were not recorded further the organization was not paid late fees when the founders failed to make timely payments of interest the loans benefited the founders because it enabled them to claim a charitable_contribution_deduction and retain complete access to the funds that supported the deduction moreover no evidence was supplied to show that the founders could have secured similar loans on similar terms from an independent lender the organization engaged in operations which were beneficial to its founders and detrimental to it fdn-1 and fdn-2 were able to claim a charitable_contribution_deduction and subsequently use the funds for their personal benefit the loans were made at a slightly below market interest rate however even if the interest rate was reasonable private benefit does not require that payments for goods or services be form 886-acrev department of the treasury - internal_revenue_service page -13- oom 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org december 20xx december 20xx unreasonable or exceed fair_market_value where a private_shareholder_or_individual benefits in 71_tc_1067 the tax_court stated rlegardless of whether the payments made by petitioner to international were excessive international and est inc benefited substantially from the operations of petitioner similarly in 765_f2d_1387 cir aff’g tcmemo_1984_349 the tax_court found it unnecessary to consider the reasonableness of payments made by the applicant to a business owned by its officers the ninth circuit_court of appeals affirming the tax court’s decision stated t he critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the private party benefits substantially from the operations of the church although the inurement prohibition is stated in terms of net_earnings it applies to any of a charity’s assets that serve the interests of its private shareholders 505_f2d_1068 cir even if the transaction is characterized as an investment when a charity’s investments are decided in part by the needs of private interests the charity is not operating exclusively for exempt purposes 73_tc_196 aff'd 631_f2d_736 cir the court in 893_f2d_529 2d cir found private_inurement and private benefit when an exempt_organization loaned money to a for-profit organization controlled by the exempt organization's largest shareholders although some loans were repaid the total amount was not repaid in easter house v united_states cl_ct affd without opinion 846_f2d_78 fed cir the court found that the organization was not exempt because it provided a source of loans to other organizations that were non-exempt and all the organizations were controlled by the same person in john marshall law school v united_states ct_cl the court upheld the revocation of an organization's tax exempt status based in part on interest-free loans from the organization to a founder the court noted that the lost interest provided benefit to the founder but provided no financial benefit to the organization and that the unsecured notes subjected the organization to uncompensated risks for no business_purpose the court also noted that the founder could not have received such interest-free unsecured loans from banks or other lending institutions form 886-a rev department of the treasury - internal_revenue_service page -14- 886a fey name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org december 20xx december 20xx a charity’s assets are required to be irrevocably dedicated to charitable purposes sec_1_501_c_3_-1 the inurement prohibition serves to prevent the individuals who operate the charity from siphoning off any of a charity’s income or assets for personal_use the organization's loans to fdn-1 and fdn-2 were not enforced this breaches the requirement that the organization’s assets be dedicated to charitable use and instead allowed its assets to inure to the benefit of founders fdn-1 and fdn- further the founders may have been taking a charitable_contribution_deduction personally for grants made by the organization as indicated by the april 20xx letter from co-3 addressed to the founders personally relating to the organizaiton’s grant this appears to be further use of charitable funds for private benefit effective date of revocation while revocation of a determination_letter is generally not retroactive revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented in cases where the organization omitted or misstated a material fact revocation may be retroactive to all open years under the statute exempt status in the character the purpose or the method of operation revocation will ordinarily take effect as of the date of the material_change in any event revocation will ordinarily take effect no later than the time at which the organization received written notice that its exemption ruling or determination_letter might be revoked revproc_2008_9 2008_2_irb_258 in cases where revocation is due to a material_change inconsistent with in its application the organization did not disclose that it would loan substantial amounts of its assets to its founders the organization began entering into loans with its founders on march 20xx this constituted a change in its operations as represented in the organization’s application_for exemption the change in operations was material to its exemption because if disclosed the service could have determined that a substantial part of the organization’s activities would serve its founders private interests and that its assets would inure to the benefit of its founders therefore retroactive revocation to the date the organization's assets were first returned to its donors is appropriate this determination is effective march 20xx taxpayer's position - primary issue power_of_attorney wants to read the revenue’s agent report form 886-a rev department of the treasury - internal_revenue_service page -15- roo 886a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20x x december 20xx conclusion - primary issue the org tax exempt status under code sec_501 as an organization described in code sec_501 should be retroactively revoked to march 20xx because the organization was not operated exclusively for charitable purposes the organization served the private interests of fdn-1 and fdn-2 and its assets inured to their benefit form_1041 u s income_tax return for estates and trusts should be filed for all prior open tax years subsequent returns are due no later than the day of the month following the close of the trust’s accounting_period returns should be sent to the following mailing address internal_revenue_service alternate issue in the alternative whether the org should be reclassified as a private_foundation because it is not a supporting_organization as defined in sec_509 law - alternate issue code sec_509 provides that organizations described in sec_501 are private_foundations unless they are described in sec_509 - code sec_509 excepts from private_foundation classification organizations that are a organized and at all times thereafter operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one ore more specified organizations described in sub sec_509 or sec_509 b operated supervised or controlled by or in connection with one or more organizations described in sub sec_509 or sec_509 and c not controlled directly or indirectly by one or more disqualified persons other than foundation managers and other than organizations described in sub sec_509 or sec_509 sec_1_509_a_-4 regarding the organizational_test a code sec_509 organization must meet provides in general -an organization is organized exclusively for one or more of the purposes specified in sec_509 only if its articles of organization as defined in sec_1_501_c_3_-1 form 886-a rev department of the treasury - internal_revenue_service page -16- reyqan 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org december 20xx 20xx december i limit the purposes of such organization to one or more of the purposes set forth in sec_509 ii do not expressly empower the organization to engage in activities which are not in furtherance of the purposes referred to in subdivision of this subparagraph iii state the specified publicly supported organizations on whose behalf such organization is to be operated within the meaning of paragraph d of this section and iv do not expressly empower the organization to operate to support or benefit any organization other than the specified publicly supported organizations referred to in subdivision iii of this subparagraph sec_1_509_a_-4 regarding the operational_test a code sec_509 organization must meet provides permissible beneficiaries -a supporting_organization will be regarded as operated exclusively to support one or more specified publicly supported organizations hereinafter referred to as the operational_test only if it engages solely in activities which support or benefit the specified publicly supported organizations such activities may include making payments to or for_the_use_of or providing services or facilities for individual members of the charitable_class benefited by the specified publicly_supported_organization a supporting_organization may also for example make a payment indirectly through another unrelated organization to a member of a charitable_class benefited by a specified publicly_supported_organization but only if such a payment constitutes a grant to an individual rather than a grant to an organization in determining whether a grant is indirectly to an individual rather than to an organization the same standard shall be applied as in sec_53_4945-4 of this chapter similarly an organization will be regarded as operated exclusively to support or benefit one or more specified publicly supported organizations even if it supports or benefits an organization other than a private_foundation which is described in sec_501 and is operated supervised or controlled directly by or in connection with such publicly supported organizations or which is described in sec_511 however an organization will not be regarded as operated exclusively if any part of its activities is in furtherance of a purpose other than supporting or benefiting one or more specified publicly supported organizations permissible activities -a supporting_organization is not required to pay over its income to the publicly supported organizations in order to meet the operational_test it may satisfy the test by using its income to carry on an independent activity or program which form 886-arev department of the treasury - internal_revenue_service page -17- een 886a department of the ‘l'reasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx supports or benefits the specified publicly supported organizations all such support must however be limited to permissible beneficiaries in accordance with subparagraph of this paragraph the supporting_organization may also engage in fund raising activities such as solicitations fund raising dinners and unrelated_trade_or_business to raise funds for the publicly supported organizations or for the permissible beneficiaries sec_1_509_a_-4 regarding the nature of relationships required for code sec_509 organizations provides jn general - sec_509 describes the nature of the relationship required between a sec_501 organization and one or more publicly supported organizations in order for such sec_501 organization to qualify under the provisions of sec_509 to meet the requirements of sec_509 an organization must be operated supervised or controlled by or in connection with one or more publicly supported organizations if an organization does not stand in one of such relationships as provided in this paragraph to one or more publicly supported organizations it is not an organization described in sec_509 types of relationships - sec_509 sets forth three different types of relationships one of which must be met in order to meet the requirements of subparagraph of this paragraph thus a supporting_organization may be i operated supervised or controlled by ii supervised or controlled in connection with or iii operated in connection with one or more publicly supported organizations requirements of relationships -although more than one type of relationship may exist in any one case any relationship described in sec_509 must insure that i the supporting_organization will be responsive to the needs or demands of one or more publicly supported organizations and ii the supporting_organization will constitute an integral part of or maintain a significant involvement in the operations of one or more publicly supported organizations general description of relationships -in the case of supporting organizations which are operated supervised or controlled by one or more publicly supported organizations the distinguishing feature of this type of relationship is the presence of a form 886-a crev department of the treasury - internal_revenue_service page -18- schedule no or exhibit year period ended earn 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org december 20xx december 20xx substantial degree of direction by the publicly supported organizations over the conduct of the supporting_organization as described in paragraph g of this section in the case of supporting organizations which are supervised or controlled in connection with one or more publicly supported organizations the distinguishing feature is the presence of common supervision or control among the governing bodies of all organizations involved such as the presence of common directors as described in paragraph h of this section in the case of a supporting_organization which is operated in connection with one or more publicly supported organizations the distinguishing feature is that the supporting_organization is responsive to and significantly involved in the operations of the publicly_supported_organization as described in paragraph of this section sec_1_509_a_-4 provides guidance on the meaning of operated in connection with as follows general_rule i except as provided in subdivisions ii and ii1 of this subparagraph and subparagraph of this paragraph a supporting_organization will be considered as being operated in connection with one or more publicly supported organizations only if it meets the responsiveness test which is defined in subparagraph of this paragraph and the integral part test which is defined in subparagraph of this paragraph responsiveness test i for purposes of this paragraph a supporting_organization will be considered to meet the responsiveness test if the organization is responsive to the needs or demands of the publicly supported organizations within the meaning of this subparagraph in order to meet this test either subdivision ii or subdivision iii of this subparagraph must be satisfied ii a one or more officers directors or trustees of the supporting_organization are elected or appointed by the officers directors trustees or membership of the publicly supported organizations b one or more members of the governing bodies of the publicly supported organizations are also officers directors or trustees of or hold other important offices in the supporting organizations or form 886-a rev department of the treasury - internal_revenue_service page -19- ayaa 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org december 20xx 20xx december c the officers directors or trustees of the supporting_organization maintain a close and continuous working relationship with the officers directors or trustees of the publicly supported organizations and b or c of this subdivision the officers directors or d by reason of a trustees of the publicly supported organizations have a significant voice in the investment policies of the supporting_organization the timing of grants the manner of making them and the selection of recipients of such supporting_organization and in otherwise directing the use of the income or assets of such supporting_organization iii a the supporting_organization is a charitable_trust under state law b each specified publicly_supported_organization is a named beneficiary under such charitable trust's governing instrument and c the beneficiary organization has the power to enforce the trust and compel an accounting under state law integral part test general_rule for purposes of this paragraph a supporting_organization will be considered to meet the integral part test if it maintains a significant involvement in the operations of one or more publicly supported organizations and such publicly supported organizations are in turn dependent upon the supporting_organization for the type of support which it provides in order to meet this test either subdivision ii or subdivision iii of this subparagraph must be satisfied ii the activities engaged in for or on behalf of the publicly supported organizations are activities to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves a the supporting_organization makes payments of substantially_all of its income to or for_the_use_of one or more publicly supported organizations and the amount of support received by one or more of such publicly supported organizations is sufficient to insure the attentiveness of such organizations to the operations of the supporting_organization in addition a substantial amount of the total support of the supporting_organization must go to those publicly supported organizations form 886-a crev department of the treasury - internal_revenue_service page -20- leave 886a department of the ‘l'reasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx which meet the attentiveness requirement of this subdivision with respect to such supporting_organization except as provided in of this subdivision the amount of support received by a publicly_supported_organization must represent a sufficient part of the organization's total support so as to insure such attentiveness in applying the preceding sentence if such supporting_organization makes payments to or for_the_use_of a particular department or school of a university hospital or church the total support of the department or school shall be substituted for the total support of the beneficiary organization b even where the amount of support received by a publicly supported beneficiary organization does not represent a sufficient part of the beneficiary organization's total support the amount of support received from a supporting_organization may be sufficient to meet the requirements of this subdivision if it can be demonstrated that in order to avoid the interruption of the carrying on of a particular function or activity the beneficiary organization will be sufficiently attentive to the operations of the supporting_organization this may be the case where either the supporting_organization or the beneficiary organization earmarks the support received from the supporting_organization for a particular program or activity even if such program or activity is not the beneficiary organization's primary program or activity so long as such program or activity is a substantial one d all pertinent factors including the number of beneficiaries the length and nature of the relationship between the beneficiary and supporting_organization and the purpose to which the funds are put as illustrated by subdivision iii and c of this subparagraph will be considered in determining whether the amount of support received by a publicly supported beneficiary organization 1s sufficient to insure the attentiveness of such organization to the operations of the supporting_organization normally the attentiveness of a beneficiary organization is motivated by reason of the amounts received from the supporting_organization thus the more substantial the amount_involved in terms of a percentage of the publicly supported organization's total support the greater the likelihood that the required degree of attentiveness will be present however in determining whether the amount received from the supporting_organization is sufficient to insure the attentiveness of the beneficiary organization to the operations of the supporting_organization including attentiveness to the nature and yield of such supporting organization's investments evidence of actual attentiveness by the beneficiary organization is of almost equal importance an example of acceptable evidence of form 886-a rev department of the treasury - internal_revenue_service page -21- eom 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the ‘treasury - internal_revenue_service org december 20xx december 20x x actual attentiveness is the imposition of a requirement that the supporting_organization furnish reports at least annually for taxable years beginning after date to the beneficiary organization to assist such beneficiary organization in insuring that the supporting_organization has invested its endowment in assets productive of a reasonable rate of return taking appreciation into account and has not engaged in any activity which would give rise to liability for a tax imposed under sec_4941 sec_4943 sec_4944 or sec_4945 if such organization were a private_foundation the imposition of such requirement within days after date will be deemed to have retroactive effect to date for purposes of determining whether a supporting_organization has met the requirements of this subdivision for its first two taxable years beginning after date the imposition of such requirement is however merely one of the factors in determining whether a supporting_organization is complying with this subdivision and the absence of such requirement will not preclude an organization from classification as a supporting_organization based on other factors e however where none of the beneficiary organizations is dependent upon the supporting_organization for a sufficient amount of the beneficiary organization's support within the meaning of this subdivision the requirements of this subparagraph will not be satisfied even though such beneficiary organizations have enforceable rights against such organization under state law revrul_76_208 1976_1_cb_161 held that a charitable_trust described in code sec_501 did not satisfy the substantially_all requirement of the integral part test set forth in sec_1_509_a_-4 and was therefore not a supporting_organization the trust instrument provided that percent of the trust income was to be distributed annually to a specified church with the remaining percent to accumulate until the original corpus doubled at which time the entire annual income was to be distributed to the church the service also stated that for purposes of the integral part test the term substantially_all mean sec_85 percent or more sec_1_509_a_-4 regarding control by disqualified persons provides jn general -under the provisions of sec_509 a supporting_organization may not be 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 publicly supported organizations if a person who is a disqualified_person with respect to a supporting_organization such as a substantial_contributor to form 886-a rev department of the treasury - internal_revenue_service page -22- schedule no or exhibit year period ended ieveyaenn 886a department of the ‘treasury - internal_revenue_service explanation of items name of taxpayer org december 20xx december 20xx the supporting_organization is appointed or designated as a foundation_manager of the supporting_organization by a publicly supported beneficiary organization to serve as the representative of such publicly_supported_organization then for purposes of this paragraph such person will be regarded as a disqualified_person rather than as a representative of the publicly_supported_organization an organization will be considered controlled for purposes of sec_509 if the disqualified persons by aggregating their votes or positions of authority may require such organization to perform any act which significantly affects its operations or may prevent such organization from performing such act this includes but is not limited to the right of any substantial_contributor or his spouse to designate annually the recipients from among the publicly supported organizations of the income attributable to his contribution to the supporting_organization except as provided in subparagraph of this paragraph a supporting_organization will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of such persons i sec_50 percent or more of the total voting power of the organization's governing body or if one or more of the total voting power of the organization's governing body or if one or more of such persons have the right to exercise veto power over the actions of the organization thus if the governing body of a foundation is composed of five trustees none of whom has a veto power over the actions of the foundation and no more than two trustees are at any time disqualified persons such foundation will not be considered to be controlled directly or indirectly by one or more disqualified persons by reason of this fact alone however all pertinent facts and circumstances including the nature diversity and income yield of an organization's holdings the length of time particular stocks securities or other assets are retained and its manner of exercising its voting rights with respect to stocks in which members of its governing body also have some interest will be taken into consideration in determining whether a disqualified_person does in fact indirectly control an organization code sec_4946 states that the term disqualified_person means with respect to a private_foundation a person who is a substantial_contributor to the foundation code sec_4946 states that disqualified_person includes the family_member of another disqualified_person date of reclassification the revocation or modification of a determination_letter or ruling recognizing exemption may be retroactive if the organization omitted or misstated a material fact operated in a manner materially different from that originally represented where there is a material_change form 886-a rev department of the treasury - internal_revenue_service page -23- oon 886a department of the ‘i'rcasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx inconsistent with exemption in the character the purpose or the method of operation of an organization revocation or modification will ordinarily take effect as of the date of such material_change revproc_2008_9 2008_2_irb_258 sec_12 government’s position - alternate issue it is the government’s position that if the organization's exempt status is not revoked then the org should be reclassified from a supporting_organization to a private_foundation in general private_foundations receive their funding from one or just a few donors and their operations are controlled by those donors private_foundations are subject_to a regulatory scheme in chapter not applicable to public_charities that was added to the internal_revenue_code by the tax reform act of the definition of a private_foundation is intentionally inclusive so that all organizations exempted from tax by code sec_501 are private_foundations except for those specified in sec_509 through roe foundation charitable_trust v commissioner tcmemo_1989_566 603_f2d_1274 cir the organization is currently classified as an organization described in sec_509 which defines supporting organizations rather than a private_foundation code sec_509 provides an exception from private_foundation_status for organizations that support one or more sec_509 or organizations public_charities charities organizations described in code sec_501 that meet the requirement of sec_509 or were excepted from the regulatory scheme that applies to private_foundations on the theory that their exposure to public scrutiny and their dependence on public support keep them from the abuses to which private_foundations were prone supporting organizations were excepted from the private_foundation regulatory scheme on the theory that their close relationships with public_charities would keep them from the potential abuses to which private_foundations were prone in other words the regulatory scheme applicable to private_foundations was not needed for supporting organizations because their relationships with public_charities were supposed to provide sufficient oversight to keep supporting organizations from the types of abuses to which private_foundations are prone quarrie charitable fund f 2d pincite public to be classified as a code sec_509 supporting_organization the organization must meet all of the following tests organizational and operational tests under code sec_509 relationship_test under code sec_509 lack of disqualified_person control test under section code a c form 886-arev department of the treasury - internal_revenue_service page -24- oe 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org december 20xx 20xx december overall these tests are meant to ensure that a supporting_organization is responsive to the needs of a public charity and intimately involved in its operations and that the public charity or publicly_supported_organization is motivated to be attentive to the operations of the supporting_organization and that it is not controlled directly or indirectly by disqualified persons the organization has not established that it has met any of these tests organizational and operational tests the organization is not organized to benefit one or more specified publicly supported organizations pursuant to sec_1_509_a_-4 ii1 and iv an organization’s governing instrument must state the specified publicly_supported_organization s on whose behalf the organization is to be operated and cannot expressly empower the organization to support or benefit any organizations other than the specified publicly_supported_organization s the organization’s dissolution clause allows distributions to organizations other than the specified publicly supported organizations upon termination of the organization the possible beneficiaries are not limited to the co-1 or co-3 or to the organizations specified on schedule a of the organization’s declaration of trust furthermore the trustee has the power to determine when the trust corpus is too small to economically administer and distribute the assets to any sec_170 organization that he chooses in 603_f2d_1274 7th cir the court held that substitution of a supporting organization’s beneficiaries is permissible only if it is conditioned upon the occurrence of an event which is beyond the control of the supporting_organization further the declaration permits distributions to affiliated organizations of some of the public_charities these affiliated organizations may not be public_charities therefore the organizational_test is not met moreover the operational_test set forth in sec_1_509_a_-4 is not satisfied a supporting_organization will be regarded as operated exclusively to support a specified publicly_supported_organization s only if it engages in activities which support or benefit the specified publicly supported organizations s on july 20xx there was an amendment to the declaration of trust and a new primary charity to be supported was specified at he time of the amendment the co-1 was recognized as a public charity and it could be supported by a supporting_organization therefore the primary charity was changed without a showing that the change occurred for reasons that were beyond the organization’s control this violated the operational_test the organization has served the private interests of the founders by giving them loans lines of credit not requiring them to make interest payments in accordance with the terms thereof and form 886-a rev department of the treasury - internal_revenue_service page -25- ee 886a department of the vreasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 20xx not requiring principal repayment therefore the organization has not established that it operated exclusively for the benefit of the publicly supported organizations in addition the operational_test is not satisfied because the organization made distributions to organizations that were not specified in the original or the amended declaration of trust these distributions are in violation of sec_1_509_a_-4 total grants of dollar_figure to co-14 co-9 co-10 co-11 and the co-12 from the years 20xx to 20xkx none of these organizations are listed on schedule a of the declaration one of these organizations the co-12 is not a public charity the organization gave relationship_test as set forth in sec_1_509_a_-4 there are three permissible relationships a operated supervised or controlled by b supervised or controlled in connection with and c operated in connection with one or more publicly supported organizations the relationships operated supervised or controlled by and supervised or controlled in connection with presuppose a substantial degree of direction over the policies programs and activities of the supporting_organization by a publicly_supported_organization the operated supervised or controlled by relationship is established by the fact that a majority of the officers directors or trustees of the supporting_organization are appointed or elected by the governing body members of the governing body officers acting in their official capacity or the membership of the publicly_supported_organization the supervised or controlled in connection with relationship is established by the fact that there is common supervision or control by the persons supervising or controlling both the supporting and the publicly supported organizations e that control or management of the supporting_organization is vested in the same persons that control or manage the publicly_supported_organization in the present case only one of the five members of the board is appointed by the supported_organization the organization cannot meet the requirements to satisfy one of the first two types of relationships because a majority of its control and supervisory personnel are not appointed by a supported_organization nor is there common supervision and control by the same persons over the supporting and supported organizations thus the only relationship_test the organization can possibly meet to be a supporting_organization is the operated in connection with test this test requires that the organization satisfy both a responsiveness test and an integral part test neither test has been met in this case form 886-a rev department of the treasury - internal_revenue_service page -26- een 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the ‘i'reasury - internal_revenue_service org december december 20xx 20xx in order to meet the responsiveness test either sec_1_509_a_-4 or must be satisfied treas reg section a -4 i i1 requires that the board member appointed by the supported_organization have a significant voice in the operations of the supporting_organization the organization has established only two instances of board meetings from inception through november 20xx there were no board minutes after november 20xx there are five members of the board two are from the family two are trusted business associates of the founder and one is appointed by the supported_organization in the absence of any board meetings after november 20xx there is no indication that the member appointed by the supported_organization had a voice in the organization’s investment policies the timing of its grants or the selection of grant recipients see roe foundation charitable_trust v commissioner t c memo prior to the enactment of the pension_protection_act on august 20xx there was an alternative responsiveness test for charitable trusts under sec_1 a - i iii the supporting_organization that was a charitable_trust under state law could meet the responsiveness test if each of its publicly supported organizations were named as beneficiaries under the charitable trust’s governing instrument and the beneficiary organizations had the power to enforce the trust and compel an accounting under state law sec_1 a - iii sec_2 of the declaration states that the trustee shall distribute of the net_income of this trust to the primary charity sec_2 states a total of of the net_income shall be distributed to one or more of the organizations listed on schedule a there are organizations listed on schedule a including the primary charity only the primary charity is specifically named as entitled to receive a portion of the organization’s net_income the organization is not required to make any payments to any specific charity among the other organizations there is no other evidence to establish that each publicly_supported_organization has the power to enforce the trust therefore the organization does not meet either of the responsiveness tests while the responsiveness test guarantees that the publicly_supported_organization can influence the activities of the supporting_organization the integral part test ensures that the publicly_supported_organization will be motivated to attend to the operations of the supporting_organization the integral part test is considered to have been satisfied if the supporting_organization maintains a significant involvement in the operations of one or more publicly supported organizations and the publicly supported organizations are in turn dependent upon the supporting_organization for the type of support which it provides sec_1_509_a_-4 there are two ways to meet the integral part test one is based on the nature of the activities form 886-a rev department of the treasury - internal_revenue_service page -27- oom 886a department of the treasury - internal_revenue_service name of taxpayet explanation of items schedule no or exhibit year period ended org december 20xx december 20xx the supporting_organization engages in to support the supported_organization the alternate is based on the financial support the supporting_organization provides the supported_organization sec_1_509_a_-4 provides that the activities engaged in for or on behalf of the publicly supported organizations must be activities to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves thus this part of the integral part test applies in those situations in which the supporting_organization actually engages in activities which benefit the publicly supported organizations as opposed to simply making grants to the publicly supported organizations in contrast sec_1_509_a_-4 i1 sets forth the integral part test rules applicable to supporting organizations that make payments to or for_the_use_of publicly supported organizations see also roe foundation tcmemo_1989_566 cuddeback memorial fund v commissioner tcmemo_2002_300 the organization does not meet the integral part test because while it made some grants to publicly supported organizations it did not perform any activities for or on behalf of the publicly supported organizations because the organization did not perform any activities for or on behalf of publicly supported organizations aside from grants the applicable rules for satisfying the integral part test are in sec_1_509_a_-4 which has the following three basic requirements payment of substantially_all of its income to publicly supported organizations the amount received by one publicly_supported_organization must be sufficient to motivate it to pay attention to the operations of the supporting_organization and a substantial amount of the total support of the organization must go to those publicly supported organizations that meet the attentiveness requirement in the present situation the organization does not meet the second requirement so it cannot meet the third requirement except as provided in sec_1_509_a_-1 the amount of support received by a publicly_supported_organization must represent a sufficient part of the organization's total support so as to ensure its attentiveness to the operations of the supporting_organization sec_1_509_a_-4 i11 a the regulations do not specify what percentage of a supported organization's support must be received from a supporting_organization to meet the integral part test the requirement is that facts and circumstances show that the support is sufficient to ensure that the supported_organization is attentive to the operations of the supporting_organization sec_1_509_a_-4 sec_1_509_a_-4 provides that a supporting_organization can meet the attentiveness requirement even where the amount of support received by the publicly_supported_organization does not represent a sufficient part of the publicly supported organization’s total support if it can be demonstrated that support form 886-a cev department of the treasury - internal_revenue_service page -28- evar 886a department of the ‘l’reasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org december 20xx december 203x is earmarked for a substantial program of the publicly_supported_organization that would be interrupted without the supporting organization’s support sec_1_509_a_-4 provides that ‘ ‘ a ll pertinent factors will be considered in determining whether the amount of support received by a publicly_supported_organization is sufficient to insure the attentiveness of such organization to the operations of the supporting_organization the regulation notes the importance of the percentage of the income received from the supporting_organization in determining if the publicly_supported_organization will have the requisite degree of attentiveness and concludes that evidence of actual attentiveness is almost as important 19xx was the first year that the primary supported charity was the co-1 co-1 received dollar_figure dollar_figure and dollar_figure in 19xx 19xx and 20xx respectively in violation of its terms the declaration was amended on july 20xx to change the primary charity to co-3 the grants to the co-3 were dollar_figure dollar_figure and dollar_figure in 19xx 20xx and 20xx respectively the organization was asked to provide the total amount of support for the 20xx and 20xx years of the co-3 organization replied that it had no access to co-3’s records because it is a large organization this demonstrates that the supported_organization co-3 is not attentive to the operations of the organization because the organization was unable to procure information required to maintain its classification as a supporting_organization further a large organization implies a large amount of outside support as well failure to provide this requested information is indicative that it would be harmful to the organization’s position see 6_tc_1158 aff'd 162_f2d_513 cir organization stated in its application that the co-1’s income in 19xx was the amounts the organization granted to it are insufficient to cause the primary supported_organization to be attentive to the organization’s operations the the the fact that those there is no evidence that either of the primary beneficiaries--co-1 or the co-3-- was attentive to the operations of the fdn-1 and fdn-2 primary supported organizations did not object to virtually all of the organization’s assets being loaned to disqualified persons and that neither of them made any attempt to have the loan terms complied with when payments were not made in conformity with the loan terms demonstrates that the primary supported organizations were not attentive to the operations of the organization further there is no evidence the change in the primary supported_organization was considered or properly approved by the board or that the co-1 objected to the change or questioned why it was not receiving grants grants to it as if they came directly from the founders rather than from the organization further there were no board meetings meaning the supported organizations could not have been attentive to the organization’s operations acknowledged the control test form 886-a crev department of the treasury - internal_revenue_service page -29- room 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org december 20xx 20xx december fdn-1 and fdn-2 as the only contributors to the organization are substantial contributors and or the spouse of a substantial_contributor as such both fdn-1 and fdn-2 are disqualified persons pursuant to code sec_4946 and d and sec_1_509_a_-4 fdn-1 and fdn-2 as disqualified persons control the organization when the primary supported_organization was changed only three board members voted two of those board members voting were fdn-1 and fdn-2 in addition when two new board members were instated in 20xx only three board members voted two of those board members voting to add new board members were fdn-1 and fdn-2 pursuant to sec_1_509_a_-4 disqualified persons impermissibly controlled the organization because fdn-1 and fdn-2 both disqualified persons by aggregating their votes or positions of authority could require such organization to perform any act which significantly affects its operation or may prevent such organization from performing such act further control by a disqualified_person includes but is not limited to the right of any substantial_contributor or his spouse to designate annually the recipients from among the publicly supported organizations of the income attributable to his contribution to the supporting_organization the declaration provides that if the board has not directed the trustee as to which organizations should receive grants within days prior to april of the year after the income is earned the trustee shall determine the grant recipients there is no evidence that the board directed the trustee as to which organizations should receive grants further in violation of the terms of the declaration grants in excess of of the organization’s net_income were made to charities without written approval by three board members thus the right to determine recipients of the organization's funds was with disqualified_person fdn-1 as trustee contrary to the requirements of sec_1_509_a_-4g almost all of the organization's assets have been transferred to disqualified persons fdn-1 and fdn-2 their loans have not been paid in accordance with their terms were orally extended and interest payments were applied to the principal balance sec_1_509_a_-4q states that among the pertinent facts and circumstances to be considered are the nature of the organization’s assets where almost all of the organization’s assets were under the control of disqualified persons there is evidence of indirect control the declaration provides that if the trustee determines the trust fund is too small to economically administer the trustee shall distribute the trust fund in its entirety outright and free of trust to such organizations described in sec_170 as the trustee shall determine trustee fdn-1 is a disqualified_person and this provision therefore allows a disqualified_person an impermissible level of control because fdn-1 can determine the trust is too small to economically administer and he can control the final distribution of trust assets form 886-a cev department of the treasury - internal_revenue_service page -30- een 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org december 20xx 20xx december based on the lack of minutes of the organization's board meetings there is no indication that any representatives of any of the organizations named in the declaration have had any input into the organization's operations since november 20xx the org is not a supporting_organization under code sec_509 because it is controlled directly or indirectly by one or more disqualified persons effective date of reclassification revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented revproc_2008_9 2008_2_irb_258 sec_12 in its application the organization did not state that it would make grants to organizations not specified in its declaration that it would not have a sufficient relationship with a supported_organization and that a disqualified_person would control it or borrow substantial amounts of its funds therefore retroactive reclassification is appropriate this determination is effective july 20xx the date the declaration was amended to substitute the primary charity taxpayer’s position - alternate issue unknown conclusion - alternate issue accordingly the org should be reclassified as a private_foundation retroactive to july 20xx because it does not qualify as a supporting_organization under the requirements set forth in sec_1_509_a_-4 through j form_990 pf return of private_foundation should be filed for all open tax years subsequent returns are due no later than the day of the month following the close of the organization’s accounting_period for tax_year ending december 20xx form_990-pf is due may 20xx send your returns for open years prior to 20xx to the following mailing address form 886-a crev department of the treasury - internal_revenue_service page -31- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org december december 20xx 20xx internal_revenue_service note form_990-pf is required for each tax_year until private_foundation_status is terminated under sec_507 form 886-acev department of the treasury - internal_revenue_service page -32-


t c memo united_states tax_court debra anne banderas petitioner v commissioner of internal revenue respondent docket no filed date held petition for determination of relief from joint_and_several_liability under sec_6015 i r c dismissed for lack of jurisdiction 127_tc_7 followed james r monroe for petitioner miriam c dillard for respondent memorandum opinion wherry judge this case arises from a petition for judicial review filed in response to a determination concerning relief from joint_and_several_liability under sec_6015 the court has sua sponte raised the question of whether the case should be dismissed for lack of jurisdiction background some of the facts have been stipulated and are so found the stipulations of the parties with accompanying exhibits are incorporated herein by this reference at the time the petition in this case was filed petitioner resided in cape coral florida prior to his death on date petitioner was married to julio c banderas dr banderas petitioner and dr banderas filed a joint form_1040 u s individual_income_tax_return for petitioner also filed a joint form_1040 for as a surviving_spouse both returns reflected a balance due and were not accompanied by full payment in june of petitioner submitted to the internal_revenue_service irs a form_8857 request for innocent spouse relief petitioner sought relief for underpayments of tax for and under sec_6015 on date the irs issued to petitioner a notice_of_determination denying her request for sec_6015 relief petitioner filed a timely unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended petition with this court contesting the adverse determination and a trial was held in november of after posttrial briefs were filed two courts of appeals those for the eighth and ninth circuits ruled that the tax_court lacked jurisdiction to consider denials of relief under sec_6015 in proceedings where no deficiency had been asserted see 446_f3d_785 8th cir affg in part and vacating in part tcmemo_2004_93 439_f3d_1009 9th cir revg 118_tc_494 vacating 122_tc_32 this court subsequently reached the same conclusion in 127_tc_7 given these developments the court on date issued an order directing the parties to show cause why this case should not be dismissed for lack of jurisdiction both parties responded respondent noting specifically that no deficiency had been asserted against petitioner for the years in issue agreed that the court lacked jurisdiction here petitioner objected to dismissal broadly referencing concerns of equity due process and equal protection discussion the tax_court is a court of limited jurisdiction and may exercise only the power conferred by statute e g 119_tc_191 85_tc_527 see also sec_7442 it likewise is well recognized as a corollary to the foregoing principle that the court lacks equitable powers to expand its statutorily prescribed jurisdiction e g 484_us_3 992_f2d_1136 11th cir affg tcmemo_1990_21 92_tc_776 moreover the existence of jurisdiction in a particular case is fundamental and may be raised at any point in the proceeding either by a party or by the court sua sponte e g 124_tc_36 raymond v commissioner supra pincite naftel v commissioner supra pincite for the reasons set forth in billings v commissioner supra the court has concluded that our jurisdiction under the laws governing joint_and_several_liability does not extend to review of the commissioner’s denials of requests for relief pursuant to sec_6015 where no deficiency has been asserted nor can equitable or policy concerns expand this jurisdiction in disregard of the express provisions of the statute enacted by congress accordingly we are constrained to dismiss this case for lack of jurisdiction to reflect the foregoing an order of dismissal for lack of jurisdiction will be entered


significant index no department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division may tilp iat in re request for a minimum_funding waiver for the the plan’ dear this letter constitutes notice that a conditional waiver of the minimum_funding_standard has been granted for the above-named pension_plan for the plan_year ending date this conditional waiver has been granted in accordance with sec_412 of the internal_revenue_code the code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the amount for which the conditional waiver has been granted is the contribution that would otherwise be required to reduce the balance in the funding_standard_account of the plan to zero as of the end of the plan_year for which the waiver has been granted after the dollar_figure contribution made on date and the additional contributions listed in conditions and below and its subsidiaries collectively the company’ has - experienced temporary substantial business hardship as evidenced by pre-tax losses in income for the fiscal years ended date and operating cash_flow was further impacted due to capital_expenditure commitments made during and in an effort to increase revenues and profits the company has made a shift in its business strategy by contracting their services out to other companies the company has also reduced costs by closing unprofitable operations terminating employment of a higher paid manager implementing no pay increases for all of their officers regional managers managers and supervisors and implementing a limit on pay raises for all other employees additionally effective date benefit accruals under the plan were frozen_plan assets as of date were with a funding ratio of and current liabilities were it has been determined that an application of the full minimum_funding_standard would be adverse to the interests of plan participants in the aggregate accordingly this waiver has been granted subject_to the following conditions which you have agreed to the company will make a dollar_figure contribution to the plan by date to be credited to the plan_year ending date in addition to the contribution listed in above the company will make a dollar_figure contribution to the plan by date to be credited to the plan_year ending date if the company fails to meet the above conditions this waiver is retroactively null and void your attention is called to sec_412 of the code and sec_304 of erisa which describes the consequences which result in the event the plan is amended to increase benefits to change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived amount remains unamortized 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 as others as precedent when filing form_5500 for the plan_year ending date the date of this letter should be entered on schedule b actuarial information we have sent a copy of this letter to the and to the authorized representative listed on the power_of_attorney form on file with this office if you have any questions concerning this matter please contact _ sincerely ae martin l pippins manager employee_plans actuarial group