t c memo united_states tax_court randon j scholet petitioner v commissioner of internal revenue respondent docket no filed date r lawrence heinkel for petitioner michael d zima for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for and additions to tax under sec_6651 for failure to timely file of dollar_figure and under sec_6654 for failure to pay estimated_tax of dollar_figure after concessions the issues for decision are whether the notice_of_deficiency was arbitrary we hold that it was not whether petitioner’s capital_gain from the sale of stock in was dollar_figure we hold that it was whether petitioner may carry forward to a capital_loss from we hold that he may not whether petitioner may deduct charitable_contributions of dollar_figure for we hold that he may not whether petitioner’s filing_status is married_filing_separately for we hold that it is whether petitioner is liable for additions to tax for failure to timely file his income_tax return under sec_6651 and for failure to pay estimated_tax under sec_6654 for we hold that he is findings_of_fact some of the facts have been stipulated and are so found a petitioner petitioner lived in clearwater florida when he filed his petition petitioner was married throughout petitioner has a bachelor’s degree in computer science and mathematics in petitioner earned wages from ibm of dollar_figure petitioner section references are to the internal_revenue_code in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure took an income_tax return preparation course at h_r block at a time not specified in the record b petitioner’s stock sales in petitioner’s ibm stock transactions a purchases of ibm stock petitioner participated in the ibm employees stock purchase plan espp from date through date he typically bought shares of ibm stock each quarter at a price of percent below the market price and withdrew the stock certificates from the plan petitioner’s bases in certain shares of ibm stock were as follows stock certificate no no of shares cost_basis total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner also acquired shares of ibm stock under an ibm investor services program the program petitioner made quarterly purchases of ibm stock under that program from date to date he bought shares of ibm stock through the program for a total cost of dollar_figure on date petitioner sold shares of ibm stock held through the program on date the ibm stock in the program split and shares of petitioner’s ibm stock became shares petitioner bought an additional shares through the program for a total cost of dollar_figure after selling shares petitioner had shares of ibm stock represented by stock certificate no for which he had a basis of dollar_figure dollar_figure paid minus dollar_figure basis in the and shares sold petitioner maintained an investment account at charles schwab co schwab account on date petitioner held shares of ibm stock in that account petitioner’s basis in those shares is not in the record petitioner bought ibm stock in and as follows date no of shares total price xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner acquired these shares with reinvested dividends the following shares of ibm stock were transferred to petitioner’s schwab account date no of shares petitioner’s shares of ibm stock transferred to his schwab account on date were purchased through the espp his basis in those shares was dollar_figure the record does not indicate petitioner’s basis in the shares shares shares of ibm stock transferred to his schwab account on date petitioner’s shares of ibm stock received by his schwab account on may l8 were those he had acquired under the ibm investors program and for which he had a basis of dollar_figure b sales of ibm stock petitioner sold shares of ibm stock held in his schwab account in and as follows date no of shares proceeds big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner’s merck stock transactions a purchases of merck stock on date petitioner held big_number shares of merck stock in his schwab account the record contains no information from which to compute petitioner’s basis in that stock petitioner bought additional shares of merck stock in and as follows date xx no of shares total price dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner acquired these shares with reinvested dividends on date big_number shares of merck stock were transferred to petitioner’s schwab account petitioner’s basis in that stock is not in the record b sales of merck stock on date petitioner sold shares of merck stock for dollar_figure5 per share his net_proceeds were dollar_figure these shares were part of the big_number shares he held on date for which the record contains no evidence of his basis after the sale petitioner had big_number shares of merck stock with a basis not established in the record and a total of big_number shares of merck stock petitioner sold other shares of merck stock in as follows date no of shares proceeds big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure other sales of stock petitioner received the following amounts from the sale of stocks or bonds in dollar_figure from the vanguard group inc vanguard dollar_figure from the first chicago trust co of new york first chicago dollar_figure from schwab and dollar_figure from schwab separate from the amount described above petitioner had the following amounts of capital_gains on sales of certain stocks in stock amount_realized ascend communications inc apple computer co medical manager corp excel communications vitesse semiconductor dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner had capital losses in of dollar_figure on the sale of ucarb international inc stock and of dollar_figure on the sale of boston chicken inc stock petitioner received cash of dollar_figure in lieu of stock in cisco inc in petitioner had net capital losses of dollar_figure in from sales or other_disposition of stocks other than ibm and merck he had net_capital_gain of dollar_figure in c petitioner’s dividends and interest in petitioner had dividends of dollar_figure and interest of dollar_figure in d petitioner’s failure_to_file a tax_return petitioner filed income_tax returns for through he claimed a dollar_figure net_operating_loss_carryover on schedule d capital_gains_and_losses attached to his return but he did not state from which year or years he was carrying the loss he did not file an income_tax return for on date petitioner mailed a letter to the internal_revenue_service irs stating that he and his wife were seeking legal advice as to whether they were required to file a return for on date petitioner wrote to the irs stating that he and his wife have chosen to follow the instructions in your booklet and file our annual response in the form of a statement in accordance with the new privacy_act notice for they stated that they were not filing a tax_return for because we still sincerely believe that we are not a person liable or required to file a u s individual_income_tax_return for federal_income_tax of dollar_figure was withheld from petitioner’s wages in petitioner paid home mortgage interest of dollar_figure real_estate_taxes of dollar_figure and investment_interest of dollar_figure in in the notice_of_deficiency respondent determined that petitioner had capital_gain of dollar_figure consisting of dollar_figure from vanguard dollar_figure from first chicago dollar_figure from schwab and an additional dollar_figure from schwab respondent determined that petitioner’s gain on the sale of stocks was equal to the net sale price of those stocks e posttrial procedures at trial petitioner lacked substantiation of his bases in some of his ibm and merck stock respondent agreed to our holding the record open for days to receive a supplemental stipulation from the parties relating to petitioner’s bases in certain ibm and merck stock the amount of petitioner’s charitable_contributions and the capital_loss carryforward issue the court later granted both parties’ motions to hold the record open the record was held open more weeks during which time the parties filed a supplemental stipulation of facts opinion a whether the notice_of_deficiency was arbitrary petitioner contend sec_2 that the notice_of_deficiency was arbitrary we disagree respondent’s determination of the amount of petitioner’s capital_gain was based on the amounts of petitioner’s proceeds from sales of capital assets in as reported to respondent on forms 1099-b proceeds from broker and barter_exchange transactions petitioner does not dispute those amounts petitioner failed to file a tax_return for and thus failed to report the capital_transactions at issue it was not arbitrary for respondent to determine a deficiency based on sale prices under these circumstances at trial we ordered the parties to file posttrial briefs respondent complied with this order petitioner did not under these circumstances we may default petitioner on all issues for which he bears the burden_of_proof see 84_tc_693 affd without published opinion 789_f2d_917 4th cir furniss v commissioner tcmemo_2001_137 mcgee v commissioner tcmemo_2000_308 pace v commissioner tcmemo_2000_300 hartman v commissioner tcmemo_1999_176 however we decide this case on the record as it stands our understanding of petitioner’s position is based on his petition opening statement and trial testimony respondent’s determination is presumed to be correct and petitioner bears the burden_of_proof see rule a 290_us_111 b whether petitioner’s capital_gain from the sale of stock in was dollar_figure respondent determined that petitioner had capital_gain of dollar_figure from the sale of stock in but now contends that he had capital_gain of dollar_figure respondent concedes that petitioner had capital losses of dollar_figure in and that he had substantial bases in his ibm and merck stock instead of zero as determined in the notice_of_deficiency petitioner did not establish his basis in the first shares of ibm stock he sold in or in the shares of ibm stock transferred to his schwab account on date similarly petitioner did not prove his basis in the big_number shares of merck stock held in his schwab account on date or in the big_number shares of merck stock transferred to his schwab account on date petitioner does not dispute respondent’s calculation of gain on his sales of ibm and merck stock thus we hold that petitioner had capital_gain of dollar_figure in petitioner bears the burden_of_proof on the basis capital_loss carryforward charitable_contributions and filing_status issues see rule a 290_us_111 the burden_of_proof for a factual issue may shift to the commissioner under certain circumstances sec_7491 petitioner does not contend that sec_7491 applies in this case c whether petitioner may carry forward a capital_loss from to petitioner contends that he may carry forward to a dollar_figure capital_loss from we disagree petitioner reported on his return that he had a dollar_figure net_operating_loss_carryover he did not identify on the return or testify about the year or years from which he was carrying that loss to carry forward or carry back net operating losses the taxpayer must prove the amount of the net_operating_loss carryforward or carryback and that his or her gross_income in other years did not offset that loss sec_172 25_tc_1100 revd and remanded on other grounds 259_f2d_300 5th cir a tax_return is not evidence of the truth of the facts stated in it 103_tc_428 71_tc_633 62_tc_834 petitioner did not establish the amount of his net_operating_loss or that his income in the carryback years before did not fully offset any net_operating_loss we conclude that petitioner may not carry forward a net_operating_loss from to d whether petitioner may deduct charitable_contributions for petitioner contends that he may deduct charitable_contributions of dollar_figure for more specifically petitioner testified that he made weekly donations of dollar_figure to a church that his wife made similar weekly contributions and that his son and daughter each made weekly contributions of dollar_figure respondent contends that he may not deduct any of those amounts we agree because petitioner has not substantiated the contributions as required see sec_170 taxpayer must verify claimed contribution under regulations prescribed by the secretary the court gave petitioner every opportunity at trial to offer evidence of his contributions and held the record open for months to receive evidence but he provided no evidence of them petitioner did not identify the church to which contributions were made see id under 39_f2d_540 2d cir we may estimate the amount of a deductible expense if a taxpayer establishes that he or she paid the expense but cannot substantiate the precise amount petitioner’s uncorroborated testimony is the only evidence supporting his claim he did not give us an adequate basis to estimate the amount of his contributions under cohan more than half of the charitable_contributions petitioner claims were attributable to family members and thus are not deductible by petitioner we conclude that petitioner may not deduct any of these claimed contributions for e whether petitioner’s filing_status was married_filing_separately for respondent determined petitioner’s filing_status to be married_filing_separately petitioner was married throughout he did not file a return for joint or otherwise to elect the benefit of the joint_return rates taxpayers must file a joint_return 78_tc_558 thus petitioner’s filing_status for is married_filing_separately sec_1 f whether petitioner is liable for additions to tax burden of production in court proceedings arising in connection with examinations beginning after date sec_7491 places on the commissioner the burden of producing evidence that it is appropriate to impose the addition_to_tax under sec_6651 petitioner did not file an income_tax return for even though he had wages from ibm interest and dividend income and capital_gains from sales of stock in federal_income_tax of dollar_figure was withheld from petitioner’s wages in however petitioner made no payments of estimated_tax relating to the interest dividends and capital_gain income he received in respondent has met the burden of production under sec_7491 as to the additions to tax under sec_6651 for failure_to_file and under sec_6654 for failure to pay estimated_tax for failure_to_file under sec_6651 a taxpayer is liable for an addition_to_tax of up to percent for failure_to_file a federal_income_tax return unless the failure was due to reasonable_cause and not willful neglect sec_6651 469_us_241 petitioner contends that the statement he and his wife submitted to the irs satisfies his obligation to file a return or other statement under the code we disagree petitioner’s statement was not made in accordance with the forms and regulations prescribed by the secretary as required by sec_6011 and did not include the dollar amounts or any other information needed to determine tax_liability see 82_tc_766 affd 793_f2d_139 6th cir petitioner was well aware of his responsibility to file returns as evidenced by his timely filing of returns for through his claim that the filing of an income_tax return is voluntary is frivolous petitioner wrote to the irs stating his belief that filing a return is voluntary and purporting to give the ir sec_30 days to refute his conclusion or he would proceed accordingly petitioner’s claim that the irs is collaterally estopped by its failure to respond within days to his letter from arguing that he is liable for income_tax is also frivolous and does not excuse his failure_to_file his return we conclude that petitioner is liable for the addition_to_tax under sec_6651 for failure_to_file for failure to pay estimated_tax under sec_6654 respondent determined that petitioner is liable for the addition_to_tax under sec_6654 for failure to pay estimated_tax for we have jurisdiction to review this determination because petitioner did not file a return for sec_6665 meyer v commissioner 97_tc_555 to be liable for the addition_to_tax under sec_6654 a taxpayer must have underpaid or failed to pay estimated_tax for the year in issue sec_6654 a taxpayer is liable for the addition_to_tax for failure to pay estimated_tax unless he or she meets one of the exceptions provided in sec_6654 none of which applies here petitioner alleged in the petition that all of respondent’s adjustments were wrong but he offered no evidence and made no argument directed specifically to his liability for the sec_6654 addition_to_tax we conclude that petitioner is liable for the addition_to_tax under sec_6654 for failure to pay estimated_tax for to reflect concessions and the foregoing decision will be entered under rule


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b5 postn-136627-11 uilc date december third party communication none date of communication not applicable to charles e buxbaum domestic_production_deduction issue counsel large business international washington dc john f eiman petroleum industry counsel large business international houston tx from paul handleman chief branch office of the associate chief_counsel passthroughs special industries cc psi b5 subject sec_199 treatment of proceeds from the sale of leasehold rights in natural_gas properties this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether taxpayer’s gross_receipts derived from the sale of leasehold rights are domestic_production_gross_receipts dpgr under sec_199 conclusion taxpayer’s gross_receipts derived from the sale of leasehold rights are not dpgr under sec_199 facts corporation x taxpayer is an independent natural_gas exploration and production company during taxpayer entered into an oil gas and mineral lease lease with individual y the terms of the lease give taxpayer certain rights taxpayer can enter individual y’s land for a period of time to investigate explore prospect drill for postn-136627-11 unsevered oil natural_gas and or minerals if taxpayer finds oil natural_gas and or minerals on the land then taxpayer is entitled to the oil natural_gas and or mineral production subject_to an in-kind or cash_equivalent royalty based on the amount of oil natural_gas and or mineral produced taxpayer may exercise an option to continue the lease beyond the initial term additionally taxpayer may assign the lease to another party the above rights are considered taxpayer’s interest in the lease and are collectively referred to as leasehold rights taxpayer bears all expenses associated with producing the oil natural_gas and or minerals such as for oil and natural_gas constructing a well or wells pipeline and processing plant in taxpayer drilled a natural_gas well on individual y’s property the well consisted of a borehole the steel casing and the well head collectively the well’ there are various pipes to transfer the natural_gas from the well to measuring and separating equipment that corporation x placed near the well head taxpayer expensed all of its intangible_drilling_and_development_costs idc related to drilling the well the well produced natural_gas into for purposes of sec_199 taxpayer treated its share of the gross_receipts derived from the sale of the produced natural_gas as dpgr during taxpayer sold its leasehold rights and the well to corporation z an unrelated corporation for a lump sum taxpayer sold other_property in this sale but this advice does not address whether gross_receipts from the sale of such other_property are dpgr law and analysis sec_199 under sec_199 the domestic_production_activities_deduction is determined by applying a percentage to the lesser_of the taxpayer's qualified_production_activities_income qpai or taxable_income determined without regard to the sec_199 deduction the applicable_percentage i sec_3 for taxable years beginning in and for taxable years beginning in through and for taxable years beginning after under sec_199 qpai is determined by taking dpgr for the taxable_year less cost_of_goods_sold cgs allocable to such dpgr less other expenses losses or deductions which are properly allocable to such dpgr sec_199 provides dpgr means the gross_receipts of the taxpayer which are derived from in the case of a taxpayer engaged in the active_conduct of a construction trade_or_business construction of real_property performed in the united_states by the taxpayer in the ordinary course of such trade_or_business sec_1_199-3 provides the term construction means activities and services postn-136627-11 relating to the construction or erection of real_property as defined in sec_1_199-3 in the united_states by a taxpayer that at the time the taxpayer constructs the real_property is engaged in a trade_or_business but not necessarily its primary or only trade_or_business that is considered construction for purposes of the north american industry classification system naics on a regular and ongoing basis a trade_or_business that is considered construction under the naics means a construction activity under the two-digit naics code of and any other construction activity in any other naics code provided the construction activity relates to the construction of real_property such as naics code drilling oil_and_gas wells and support activities for oil_and_gas operations for purposes of sec_1_199-3 the term construction_project means the construction activities and services treated as the item under sec_1_199-3 tangible_personal_property for example appliances furniture and fixtures that is sold as part of a construction_project is not considered real_property for purposes of sec_1_199-3 in determining whether property is real_property the fact that property is real_property under local law is not controlling conversely property may be real_property for purposes of this sec_1_199-3 even though under local law the property is considered tangible_personal_property sec_1_199-3 provides that activities constituting construction are activities performed in connection with a project to erect or substantially renovate real_property including activities performed by a general contractor or that constitute activities typically performed by a general contractor for example activities relating to management and oversight of the construction process such as approvals periodic inspection of the progress of the construction_project and required job modifications sec_1_199-3 provides that construction activities also include activities relating to drilling an oil or gas well and mining and include any activities the cost of which are idc within the meaning of sec_1_612-4 or development_expenditures for a mine or natural_deposit under sec_616 sec_1_199-3 defines real_property to mean buildings items that are structural_components of buildings inherently permanent structures as defined in sec_1 263a- c other than machinery as defined in sec_1_263a-8 including items that are structural_components of inherently permanent structures inherently permanent land improvements oil_and_gas wells and infrastructure sec_1_199-3 provides assuming all requirements of sec_1_199-3 are met dpgr derived from the construction of real_property performed in the united_states includes the proceeds from the sale exchange or other_disposition of real_property constructed by the taxpayer in the united_states whether or not the property is sold immediately after construction is completed and whether or not the construction_project is completed dpgr derived from the construction of real_property includes compensation_for the performance of construction services by the taxpayer in the united_states dpgr derived from the construction of real_property includes gross_receipts derived from materials_and_supplies consumed in the construction_project or that postn-136627-11 become part of the constructed real_property assuming all requirements of sec_1 m are met sec_1_199-3 provides that dpgr from the construction of real_property does not include except as provided in sec_1_199-3 gross_receipts derived from the sale_or_other_disposition of land including zoning planning entitlement costs and other costs capitalized to the land sec_1_199-8 provides that sec_1_199-3 is applicable for taxable years beginning on or after date idc under sec_1_612-4 sec_263 provides that no deduction is allowed for capital expenditures however notwithstanding the provisions of sec_263 sec_263 allows a taxpayer an election under regulations prescribed by the secretary to deduct idc those regulations are set forth in sec_1_612-4 sec_1_612-4 provides that idc incurred by an operator in the development of oil_and_gas_properties may at his option be chargeable to capital or to expense if the taxpayer chooses to expense idc the taxpayer also has an option to elect to amortize the idc over months sec_59 under sec_1_612-4 idc are expenditures made by an operator for wages fuel repairs hauling supplies etc incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas they include the cost to operators of any drilling or development work excluding amounts payable only out of production or gross or net_proceeds from production if such amounts are depletable income to the recipient and amounts properly allocable to cost of depreciable_property done for them by contractors under any form of contract including turnkey contracts examples of idc are all amounts paid for labor fuel repairs hauling and supplies or any of them which are used in the drilling shooting and cleaning of wells in such clearing of ground draining road making surveying and geological works as are necessary in preparation for the drilling of wells and in the construction of such derricks tanks pipelines and other physical structures as are necessary for the drilling of wells and the preparation of wells for the production of oil or gas sec_1_612-4 provides that the expenditures_for clearing ground draining road making surveying geological work excavation grading and the drilling shooting and cleaning of wells are considered not to be represented by physical property and when charged to capital_account are returnable through depletion however amounts paid for wages fuel repairs hauling supplies etc used in the installation of casing and equipment and in the construction on the premises of derricks and other physical structures are considered to be represented by physical property postn-136627-11 under sec_1_612-4 a taxpayer may exercise the election to expense idc by claiming idc as a deduction on the taxpayer's return for the first taxable_year in which the taxpayer pays or incurs such costs no formal statement is necessary but if the taxpayer fails to deduct the idc the taxpayer is deemed to have elected to recover such costs through depletion to the extent that they are not represented by physical property and through depreciation to the extent that they are represented by physical property once an election is made the taxpayer is bound by such election in future years in your request you asked our office whether taxpayer’s gross_receipts derived from the sale of the leasehold rights are dpgr your request agrees that taxpayer’s gross_receipts attributable to the sale of the well qualify as dpgr sec_199 provides dpgr means the gross_receipts of the taxpayer which are derived from in the case of a taxpayer engaged in the active_conduct of a construction trade_or_business construction of real_property performed in the united_states by the taxpayer in the ordinary course of such trade_or_business taxpayer constructed the well in the ordinary course of its business the well is considered real_property under sec_1 m and taxpayer meets the other requirements of sec_199 thus taxpayer’s gross_receipts from the sale of the well are dpgr however you question whether the gross_receipts derived from taxpayer’s sale of the leasehold rights qualify as dpgr our office concludes that the gross_receipts from the sale of the leasehold rights do not qualify as dpgr the leasehold rights are not part of the real_property that taxpayer constructed ie the well among the requirements of sec_199 for gross_receipts to qualify as derived from the construction of real_property a taxpayer must construct property and that property must be real_property taxpayer did not construct the leasehold rights the leasehold rights that taxpayer sold to corporation z are the same leasehold rights that taxpayer acquired by entering into the lease with individual y the costs of acquiring the leasehold rights are not idc under sec_1_612-4 and thus are not part of taxpayer’s construction activities with respect to the well under sec_1_199-3 taxpayer’s construction of the well does not transform the leasehold rights into real_property constructed by the taxpayer our office also notes that any gross_receipts attributable to unsevered oil natural_gas and minerals relate to the leasehold rights and not to the well the leasehold right sec_1 although it was not a fact provided in the advice request our office assumes that taxpayer’s activities with respect to the well are considered construction for purposes of naics as required by sec_1 m i taxpayer’s gross_receipts derived from the sale of the well should include any gross_receipts that are derived from activities constituting construction activities for purposes of sec_199 these activities include activities relating to drilling an oil or gas well and include any activities the cost of which are idc within the meaning of sec_1_612-4 or development_expenditures for a mine or natural_deposit under sec_616 as provided in sec_1_199-3 postn-136627-11 give taxpayer and now corporation z permission to produce and ownership rights in the oil natural_gas and or minerals the well only provides the means to produce the unsevered natural_gas not any production or ownership rights in the natural_gas under sec_199 a qualifying disposition of natural_gas only occurs after a taxpayer produces natural_gas our office notes that if taxpayer did not expense its idc then some of taxpayer’s basis in the lease and therefore the leasehold rights may be attributable to idc of the constructed well for example if a taxpayer does not elect to expense idc then that taxpayer may charge the costs that are not represented by physical property to its lease and recover the costs through depletion upon production of oil or gas therefore a taxpayer’s adjusted_basis in its lease for purposes of calculating gain_or_loss upon disposition may include idc that were capitalized by the taxpayer and not yet recovered through depletion if taxpayer capitalized idc to the basis in its lease then those amounts should be considered costs related to the construction of the well and an amount of the gross_receipts derived from the sale allocable to the capitalized idc qualifies as dpgr however the dpgr amount should not exceed the amount of capitalized idc your advice also seeks clarification on whether sec_1_263a-8 is relevant for determining what real_property taxpayer constructed under sec_199 sec_1_263a-8 defines real_property in general to include land unsevered natural products of land buildings and inherently permanent structures sec_1 263a- c provides that unsevered natural products of land include mines wells and other natural deposits taxpayer’s sale occurred in so sec_1_199-3 is applicable sec_1_199-3 defines real_property and includes buildings oil_and_gas wells and references sec_1_263a-8 inherently permanent structures and sec_1_263a-8 c machinery for exclusion purposes but does not cross reference sec_1 263a- c or this is because sec_1_199-3 describes construction of real_property and so sec_1_199-3 describes real_property that can be constructed and includes oil_and_gas wells without reference to sec_1_263a-8 our office concludes that taxpayer’s well is separate from the unsevered oil natural_gas and minerals under sec_199 the construction of a well does not transform the unsevered oil natural_gas and minerals into real_property constructed by the taxpayer therefore sec_1_263a-8 is not relevant in determining the real_property taxpayer constructed under sec_199 based on this analysis our office concludes that taxpayer’s gross_receipts derived from the sale of the leasehold rights are not dpgr under sec_199 case development hazards and other considerations our office does not believe that there are significant hazards with respect to the conclusion that the leasehold rights are not part of the real_property that taxpayer constructed in the ordinary course of its business while leasehold rights may be postn-136627-11 considered real_property which some taxpayers have argued means that gross_receipts from the sale should qualify as dpgr it is clear under the facts provided that the leasehold rights were not constructed by taxpayer this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call james holmes at if you have any further questions


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date uil dear contact person identification_number contact number employer_identification_number form required to be filed tax years this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice action if you agree with our deletions you do not need to take any further if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely holly o paz director rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number tax_exempt_and_government_entities_division date date uil legend n a t w d t t b t w e t n a o o u ' n d t e w d u h dear director director director facts we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code’ based on the information provided we have concluded that you do not qualify for exemption under sec_501 of the code the basis for our conclusion is set forth below you state that you are a non-denominational christian organization and that your purpose is to help christians struggling to provide for their spiritual fellowship or financial needs you state that your mission is to insure that every person has a relationship with jesus christ which they utilize on a daily basis and that you strive to make an impact in the lives of at least one person each day while displaying a christ-like manner and exemplifying biblical principles organization you filed your articles of incorporation the articles on date pursuant to the nonprofit corporation statute of state your articles do not contain a statement limiting your purposes and activities to those described under sec_501 but you state that you will amend your articles to include such a provision if your application_for tax exemption is approved your articles also do not contain a clause stating that your assets are irrevocably dedicated to exempt purposes but you state that you will amend your articles to include such a provision if your application_for tax exemption is approved operations your operations are divided into three divisions you state that these divisions are separately managed and engage in different activities but that each division furthers your religious beliefs and organizational purpose the divisions of your organization are the ministry division the consulting division and the merchandising division ministry division you state that the ministry division is the center of the entire organization your activities related to the ministry-division are carried out primarily through church and website you made no mention of church in your original application but in subsequent correspondence you told us that you planted church on date you state that church is not an independently organized entity instead you state that church is a ministry element under your corporate structure and that it is intended to permanently exist as a part of your ministry efforts you state that w hile church is subordinate to you there is a corporate business relationship and spiritual partnership that helps the two work together church has its own constitution which states that church is autonomous and is not subject_to the contro of any external ecclesiastical body or board you state that the spiritual development of the church day-to-day business is determined by its pastors elders and body of believers you also state that you have no control_over church and or its board_of directors that there is nothing in writing giving you ‘authority’ over church and that you fully understand that church could completely break-away from ylour corporation become incorporated itself and there’s nothing you can do about that despite your lack of formal contro over church you state that church is prohibited from acting in a manner that would compromise or be in violation of your tax exempt_purpose and you fefel that church leadership membership wi ill support any corporate requirements levied upon them by you church's board_of elders functions as overseers of church and evaluates its effectiveness and direction the elders have final say in any and all matters concerning the overall direction of church church's senior pastor is a permanent member of the board_of elders the senior pastor is the leader of church the board_of elders may not terminate the senior pastor the senior pastor is accountable to the pastor accountability team a group of individuals selected by the senior pastor and approved by the board_of elders members of the pastor accountability team serve for an indefinite term but must be reaffirmed annually by the board_of elders currently pastor serves as senior pastor of church you state that there is a lay-leader within church that’s being mentored to assume the role of pastor at a later date but you did not specify who that individual is who is mentoring that individual or the timeline for such a transition you also operate website as a part of the ministry division website is under development but completed portions provide links to the bible and specific selected passages therein list a daily devotional message tell stories of encouragement provide links to blogs and allow the user to submit a prayer request among other content you further state that church sermons will be uploaded to website for broadcast and access by the general_public website serves as the platform for program your internet-based religious education program you state that program is under development and that program-specific information and or content are not currently available you state that program will provide online learning courses and weekly lessons roughly similar to a sunday school or small_group bible studies you state that program will utilize discussion boards and real-time group chats to deliver coursework online to students program will be administered by volunteers and will be open to the public program is offered at no charge to students but you state that outside third-party organizations may be charged a small fee dollar_figure state that any profits or proceeds from program will be used to further your overall ministry purpose initial setup charge anddollar_figure__ per year thereafter you consulting and merchandising divisions the consulting division and the merchandising division will be managed separately from the ministry division you state that the targeted audience is private christian organizations both for-profit and non-profit specifically churches however you state that the goal would be to expand into the secular marketplace the consulting division has three branches the education branch provides seminars and classes about team building conflict resolution and process improvement all incorporating biblical principles into the corporate or church workplace the coaching branch provides executive and life-coaching services that incorporate biblical truths the recruitment branch which is in a conceptual phase would connect christian job- seekers with christian organizations and you also would use this service to reach non- christian’s with your ministry outreach the merchandising division is for public awareness and advertising your overall ministry efforts to accomplish this goal it focuses on producing and or selling items that promote the brands of you website and church including pens shirts crosses hats etc these items are affixed with logos and names as well as bible verses you believe that the public’s primary purpose for buying these items would be to help generate funds to promote and support the ministry the merchandising division has three branches the marketing branch seeks to promote your organization and website using traditional advertising mediums the sales branch is responsible for physically moving merchandise from production to the consumer and sells merchandise at trade shows craft shows and local fairs among other places the productions branch is responsible for determining the most efficient manner in which to produce merchandise that promotes you website and christian awareness in general you intend to generate income from both your merchandising division and your consulting division activities you state that all income from these activities will be used for the overall organization that exists for a ministry purpose governance your bylaws state that the organization will have a board_of directors collectively the board and individually the directors the board currently has four members pastor director director and director directors are appointed for life but may be removed with or without cause by a two-thirds vote of disinterested directors the organization has three officers the president the secretary and the treasurer only directors are eligible to serve as officers pastor serves as your chief_executive_officer and president and is responsible for all ministry aspects of your organization pastor serves as pastor of both you and church to insure that both remain committed and focused on god's work per biblical principies in a spiritual role you state that neither you nor your board ha s any control_over pastor in his role as senior pastor of church you further state that t here are no corporate controls neither built into the design nor captured in writing anywhere that would enable you to govern pastor’s conduct in his capacity as senior pastor of church director serves as your director of education and is responsible for the educational is married to pastor director serves as your aspects of your operations director director of administration and is responsible for administrative duties such as scheduling and recording meetings and maintaining your records director is the great-nephew of director and pastor director serves as your director of marketing you did not indicate that director is related to the other directors you adopted a conflict of interest policy to protect the organization's tax-exempt interests when engaging in transactions or arrangements that may benefit the private interest of an officer or director or result in an excess_benefit_transaction members you state that your members consist of individuals no longer active in a church as well as people who are actively involved within a church but who seek to enhance or to supplement their worship by way of their involvement with you you did not provide information about your membership but you state that church has members you state that website and program further expand the membership of church but you were not able to provide specific details about the roles of website and program in growing church you state that your operations are funded by donations from members of church you state that you intend to generate additional funding through donations made on website funding and from the proceeds derived from program but to date neither source has generated more than nominal income you also will generate revenue from the consulting and merchandising divisions law sec_501 exempts from federal income_taxation organizations described in sec_501 sec_501 describes organizations organized and operated exclusively for charitable religious and other specified exempt purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_509 provides that the term private_foundation does not include an organization described in sec_170 other than in clauses vii and viii sec_170 describes a church_or_convention_or_association_of_churches sec_1_501_c_3_-1 of the income_tax regulations the regulations states that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in that section operational_test it is not exempt if an organization fails to meet either the organizational_test or the sec_1_501_c_3_-1 states that an organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of the organization to one or more exempt purposes and do not expressly empower the organization to engage other than as an insubstantial part of its activities in activities which are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 states that an organization is not organized exclusively for one or more exempt purposes if its articles of organization expressly empower it to carry on as more than an insubstantial part of its activities activities which are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 further provides that in no case shall an organization be considered to be organized exclusively for one or more exempt purposes if by the terms of its articles the purposes for which such organization is created are broader than the purposes specified in sec_501 sec_1_501_c_3_-1 states that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization’s assets will be considered dedicated to an exempt_purpose for example if upon dissolution such assets would by reason of a provision in the organization's articles or by operation of law be distributed for one or more exempt purposes or to the federal government or to a state_or_local_government for a public purpose or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if accomplish one or more of such exempt purposes specified in sec_501 of the code it engages primarily in activities that an organization will not be regarded as exempt 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 who are defined in sec_1_501_a_-1 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 thus an organization must 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 revproc_2012_9 2012_2_irb_261 sec_4 states that a favorable determination_letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal_income_tax is claimed section dollar_figure states that exempt status may be recognized in advance of the organization’s operations if the proposed activities are described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements for exemption pursuant to the section of the code under which exemption is claimed the organization must fully describe all of the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures_for an organization claiming the benefits of sec_501 t ax exemptions are matters of legislative grace and taxpayers have the burden of establishing their entitlement to exemptions 470_f2d_849 10th cir cert_denied 414_us_864 the applicant for tax exempt status under sec_501 has the burden of showing it comes squarely within the terms of the law conferring the benefit sought 30_tc_1151 70_fedclaims_782 involved an organization operating a donor_advised_fund the service determined that the organization was operated for personal rather than public benefit based on a review of the organization’s promotional materials operations finances and records of activities the court upheld the service's denial of sec_501 status emphasizing that the taxpayer carries the burden of demonstrating entitlement to tax exemption and that ijt gaps in the administrative record is well-accepted that in initial qualification cases are resolved against the applicant taxpayer seeking exempt status where the taxpayer fails to provide evidence concerning its operations or where the evidence is vague or inconclusive id pincite citations omitted and ‘courts can draw inferences adverse to a ohio disability association v commissioner t c memo involved an organization that operated a pooled trust one individual served as the organization's sole director officer employee and member and thus was vested with all of the organization’s decision making power the organization’s bylaws included meeting and voting procedures however it had only one member the organization had a stated conflict of interest policy and its articles of incorporation contained a prohibition against private_inurement however there were no procedures in place to enforce the conflict of interest policy and there were no personnel in place to ensure that private_inurement would not occur and although the organization stated that the sole member would not receive compensation its articles of incorporation expressly authorized payment for services rendered to the corporation the service denied exemption to the organization based on these factors as well as the organization's failure to adequately respond to various requests for additional information the tax_court upheld the service's determination finding that the organization provided only generalizations and conclusory statements in response to repeated requests proposed activities id at the court stated that such responses d id not provide sufficient detail to determine that the organization would be operated exclusively for charitable purposes and that the record d id not demonstrate that there was oversight to prevent the organization from being operated to benefit its sole member id at for more detail regarding its in 74_tc_531 aff'd 670_f2d_104 9th cir the tax_court denied exemption to a small family church the court stated that meeting the taxpayer burden requires an open and candid disclosure of all facts bearing upon the applicant’s organization operations and and if such disclosure is not made the logical inference is that the facts if finances disclosed would show that the applicant fails to meet the requirements for exemption id pincite the court found that the close family relationship of the organization’s only three board members who also controlled of the entity’s voting rights put them in a position to without challenge program s and operation s prepare its budget and spend its funds and that they could continue to do so indefinitely id the court acknowledged that the presence of a small closely-related board alone was not enough to deny tax exemption however when combined with the organization’s vague and uninformative responses to questions about expenditures membership and activities denial was appropriate because the organization failed to meet its burden of showing the absence of private benefit to its individual members dictate the organization's in 82_tc_18 the tax_court held that the combination of unfavorable facts and circumstances and the applicant’s failure to provide full and complete information from which the service could make a well-informed determination was sufficient to deny exemption in so holding the court emphasized the need for open and candid disclosure by organizations applying for exemption in church by mail inc v commissioner t c memo aff'd 765_f2d_1387 9th cir an organization sought sec_501 exemption and claimed it was a church where its main activity was mailing literature that focused on the ministry of one of its reverends that reverend served as an officer of the church along with another reverend in addition the two reverends were the sole shareholders of an ad agency through which the church mailings were obtained the two reverends received commissions on each order placed through the agency the two reverends also were the sole shareholders of a computer services business which through the ad agency provided services to the church the ad agency marked up the cost of the computer finally the two reverends services and then billed the church at the increased rate operated another ministry that was very similar to but nevertheless distinct from the applicant-church the church the ministry and the ad agency all shared office space and the two reverends carried out effectively all responsibilities associated with the various entities furthermore several family members of the reverends received payments from these entities the church received over dollar_figure million in contributions in one tax_year but after taking deductions for its mailings and other expenses it reported a net_loss the tax_court held that the business relationships between the church and the outside entities facilitated the flow of private financial benefits to the two reverends their outside entities and their families the court gave particular attention to the substance of the relationships between the various entities and individuals and focused on the potential for the enablement of current as well as potential abuse through manipulation of the arrangements between those entities id at in 326_us_279 the supreme court held that a trade_association did not qualify for exemption because it had an underlying commercial motive that distinguished its educational program from the type provided by a university presence of a single non-exempt purpose if substantial in nature destroys an organization’s basis for tax exemption regardless of the number or importance of that organization’s truly exempt purposes in so holding the court ruled that the in 490_fsupp_304 d d c the court held that a religious_organization exempt under sec_501 was not a church described in sec_170 the court discussed the criteria developed by the service to aid in the evaluation of applications for church foundation status those criteria are a distinct legal existence a recognized creed and form of worship a definite and distinct ecclesiastical government a formal code of doctrine and discipline a distinct religious history a membership not associated with any other church or denomination an organization of ordained ministers a complete organization of ordained ministers ministering to their congregations ordained ministers selected after completing prescribed courses of study literature of its own established places of worship regular congregations regular religious services sunday schools_for the religious instruction of the young and schools_for the preparation of its ministers id pincite the court stated that ajt a minimum a church includes a body of believers or communicants that assembles regularly in order to worship and reasoned that certain criteria are of central importance in distinguishing a church from other forms of religious organizations -namely the existence of an established congregation served by an organized ministry the provision of regular religious services and religious education for the young and the dissemination of a doctrinal code id with respect to the existence of a regular congregation the court held that a congregation consisting of the organization’s organizer and his immediate_family members d id not constitute a ‘congregation’ within the ordinary meaning of the word id pincite in 86_tc_916 the tax_court said that although fundamental to determining whether an organization is a church religious purposes alone do not serve to establish it as a church equally important are the means by which its religious purposes are accomplished the court then defined a church for purposes of sec_170 as a coherent group of individuals and families that join together to accomplish the religious purposes of mutually held beliefs the court further stated that a church's principal means of accomplishing its religious purposes must be to assemble regularly a group of individuals related by common worship and faith id in 927_f2d_335 8th cir the eighth circuit upheld a tax_court decision denying church status to an organization because it failed to meet the factual requirements of being a church under sec_501 the court cited the criteria and gave particular emphasis to the facts that the organization did not regularly provide religious services or religious education for the young and did not disseminate a doctrinal code moreover the court found that the organization lacked an established congregation because nothing indicates that the participants considered the organization to be their church id pincite in 614_f3d_1383 fed cir cert_denied 131_sct_1676 mar the court_of_appeals_for_the_federal_circuit affirmed a decision by the court of federal claims denying an organization church status under sec_170 the court rejected the organization's argument that a religious_organization should be treated as a church under sec_170 as who long as ‘there is a body of followers beyond the scope of a family church seek the teachings of the organization and express or acknowledge an affiliation with its religious tenets id pincite the court held that more than mere affiliation by a number of people with an organization espousing a particular belief system is necessary to qualify as a church within the meaning of sec_170 id instead a religious_organization must create as part of its religious activities the opportunity for members to develop a fellowship by worshipping together id analysi sec_1 qualification as an organization described in sec_501 to qualify for exemption as an organization described in sec_501 an applicant must be both organized and operated exclusively for one or more of the purposes specified in that section sec_1_501_c_3_-1 a favorable determination_letter will not be issued to an organization unless its application and supporting documents establish that it meets the particular requirements of the section under which it claims tax exemption revproc_2012_9 supra tax exemptions are matters of legislative grace and taxpayers have the burden of establishing their entitlement to exemptions christian echoes f 2d pincite see also 505_f2d_1068 6th cir ohio ‘an exemption is an exception to the norm of taxation an organization which seeks to obtain tax exempt status therefore bears a heavy burden to prove that it satisfies all the requirements of the exemption statute the supreme court repeatedly has said that exemptions from taxation are not granted by implication the tax_court has stated consistently that ‘ a statute creating an exemption must be strictly construed and any doubt must be resolved in favor of the taxing power meeting this burden requires an open and candid disclosure of all facts bearing upon the applicant's organization operations and finances and if such disclosure is not made the logical inference is that the facts if disclosed would show that the applicant fails to meet the requirements for exemption bubbling well t c pincite you have not met your burden of proving that you qualify for tax exemption as an organization described under sec_501 because your application and your responses to our requests for additional information do not establish that you meet the particular requirements for exemption under that section see revproc_2012_9 supra christian echoes national ministry f 2d pincite nelson t c pincite you have not established that you are organized exclusively for one or more exempt purposes sec_1_501_c_3_-1 you likewise have not met your burden of proving that you will operate exclusively for one or more exempt purposes and that you will not operate for the benefit of private individuals or shareholders sec_1_501_c_3_-1 ii accordingly you do not qualify for exemption from federal_income_tax as an organization described under sec_501 a organizational_test an organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of the organization to one or more exempt purposes and do not expressly empower the organization to engage other than insubstantially in activities which are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 your articles do not contain a purpose clause that properly limits your activities to those described in sec_501 sec_1_501_c_3_-1 your articles also lack a sufficient dissolution clause sec_1_513-1 although you state that you will amend your articles to include the required purpose and dissolution clauses you have yet to make such amendments accordingly you do not satisfy the organizational_test under sec_1 c -1 b b operational_test it an organization is operated exclusively for one or more exempt purposes only if engages primarily in activities that accomplish one or more of the exempt purposes specified in sec_501 and if not more than an insubstantial part of its activities furthers a non-exempt purpose sec_1_501_c_3_-1 see also better business bureau u s pincite construing a similar provision of the social_security act such that t he presence of a single non-exempt purpose that is substantial in nature will destroy the exemption’ an organization will not be regarded as operated exclusively for exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders it serves a private rather than a public interest sec_1_501_c_3_-1 or individuals or if d ii failure to adequately describe activities that accomplish exempt purposes you have not provided clear and unambiguous descriptions of your activities sufficient to meet your burden of proving qualification for sec_501 status and we are unable to conclude that you meet the requirements for exemption under that section revproc_2012_9 supra 70_fedclaims_782 although you recently planted church you did not provide sufficient detail about the relationship between its activities and your overall operations specifically you did not explain how you will maintain adequate control_over the activities and operations of church given its general independence from you and your board and you did not demonstrate that church actually operates as a component of you -as opposed to operating as an entirely independent entity that is related to you merely because you claim that it is a part of your ministry division moreover you failed to provide sufficient explanations of your activities associated with the operation of website and your merchandising and consulting divisions you also did not explain how these aspects of your operations are related to and help to accomplish your exempt_purpose other than through the generation of income instead you merely state that all income from these activities is used for the overall organization that exists for a ministry purpose such generalizations and conclusory for more detail regarding your statements in response to our repeated requests proposed activities are not sufficient to establish qualification for tax exemption qhio disability association t c memo at thus you failed to provide full and complete information from which we could make a well-informed determination regarding your application_for tax exemption national association of american churches t c pincite as the court stated in new dynamics foundation fed cl pincite gaps in the administrative record are resolved against and inferences adverse to a taxpayer seeking exempt status can be the applicant drawn where the applicant fails to provide evidence concerning its operations or where the evidence is vague or inconclusive see also ohio disability association t c memo at we expressly stated our specific areas of concern and you had multiple opportunities to provide the information needed for us to make a determination on your application your responses to our inquiries generally were broad and uninformative and lacked the specificity needed to support an application_for tax exemption see bubbling well t c 82_tc_18 to continue proceeding in this manner would be to encourage you to play a tight-lipped form of ‘cat and mouse’ with our information requests new dynamics foundation fed cl pincite because you did not provide us with enough information to gain a complete understanding of the relationship between you and church it is unclear how church fits within your overall organizational and administrative structure as a result we cannot assess how if at all the activities of church should be evaluated in the context of your qualification for tax exempt status moreover because you did not clearly and unambiguously explain the nature and extent of your activities conducted through website the merchandising division and the consulting division we cannot determine whether these largely commercial activities will be as you suggest a minor part of your overall operations accordingly you have not satisfied your burden of proving qualification for tax exempt status under sec_501 based on the information you have provided it appears that more than an insubstantial part of your activities are or will be devoted to furthering non-exempt purposes sec_1_501_c_3_-1 substantial part of activities not in furtherance of exempt purposes your church-related activities represent the only aspect of your operations that are directed toward a clearly exempt_purpose as described above it is unclear how church fits within the overall structure of your operations and we are unable to determine whether the operation of church constitutes your primary activity and since church could completely break-away from y our corporation become incorporated itself and there’s nothing you can do about that it is possible that you would continue to function in such an event without any true exempt_purpose in addition you refer to the church brand and the taxpayer brand in a manner that suggests church could serve as a mere conduit through which to promote and expand your other more commercial activities thus we cannot conclude that you are operated exclusively for one or more of the exempt purposes described in sec_501 even if we were to assume that the operation of church constitutes a substantial part of your overall activities and that this aspect of your operations is devoted primarily to the achievement of one or more exempt purposes it nevertheless appears that more than an insubstantial part of your overall activities furthers non-exempt purposes for example your sale of pens caps shirt and so forth albeit affixed with your name and perhaps also religious themes or messages appears to be directed primarily toward advertising the brands of taxpayer church and website and the generation of income to fund your operations in fact you admitted as much in your responses to our inquiries about the relationship between these activities and the accomplishment of your exempt_purpose in addition to your frequent references to taxpayer church and website as brands you described the majority of your activities in the context of business models supply chains marketing strategies and other typically business- oriented approaches moreover you plan to engage in these activities on a continuous basis via website and even if such activities are a small part of your operations at the present time your responses suggest that they will be expanded and that more time will be devoted to them in the future specifically it appears that the merchandising and consulting divisions will be operated primarily for commercial purposes although you provided an organizational chart summarizing the operation of these divisions within the overall context of your organization you provided only general descriptions of the types of activities in which they will engage nevertheless even these vague descriptions clearly indicate the commercial character of your intended activities your consulting division would operate in both religious and corporate settings and the executive training and life-coaching services it provides closely resemble similar services offered by for-profit entities and even though the recruitment branch is in a conceptual phase the description you provided suggests that it would function similar to an online job placement service such as monster com or linkedin com this view is supported by the fact that you intend to use this service to reach non-christian’s and while you state that you would do so to enhance your ministry outreach you provided no information to explain how you will incorporate your religious message and ministry outreach into this service you state that the purpose of your merchandising division is for public awareness and advertising your overall ministry efforts but to achieve this end the division will focus on producing and or selling items that promote the brands of taxpayer website and church there is nothing inherently religious about the majority of items you described such as pens shirts and hats and you admittedly would engage in your merchandising division activities primarily as a means for generating revenue as its name would imply the activities of the merchandising division are primarily commercial in nature moreover you intend to use website to enhance these activities and to devote a greater portion of your time to the operation of this division in the future thus it appears the primary purpose of this aspect of your organization is to engage in non- exempt commercially driven activities furthermore you did not provide sufficient information to demonstrate that program is not operated primarily for commercial purposes such information is particularly important under the circumstances due to the predominantly commercial hue of your merchandising and consulting division activities the information you provided indicates that more than an insubstantial part of your operations will be devoted to non-exempt and largely commercial activities that are unrelated to the accomplishment of your stated sec_501 purpose see better business bureau u s pincite ruling that the presence of a single non-exempt purpose if substantial in nature destroys an organization's basis for tax exemption regardless of the number or importance of that organization's truly exempt purposes see also sec_513 stating in relevant part that an organization is engaged in an unrelated_trade_or_business where the conduct of such activities is not substantially related to the exercise or performance of that organization’s exempt_purpose other than from its need for income or funds or the use it will make of the profits it derives sec_1 d stating in relevant part that a trade_or_business is related to exempt purposes only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and that such trade_or_business is substantially related only if the causal relationship is a substantial one accordingly you do not satisfy the operational_test sec_1 c - c potential for inurement and private benefit based on the information you submitted we cannot conclude that no part of your earnings will inure to the benefit of private shareholders or individuals sec_1 c - c moreover you have not established that you are not operated for the benefit of private interests such as designated individuals the creator or his family or persons controlled directly or indirectly by such private interests sec_1 c -1 d ii despite the fact that you consider it to be a part of your ministry division church is authorized to operate independent of you and is structured such that nothing would prevent it from operating in a manner that is inconsistent with your exempt purposes you state that the constitution of church restricts any activities or conduct that would jeopardize your tax exempt status but since you and your board ha ve no control_over church and or its board_of directors nor over pastor in his role as senior pastor of church’ you effectively have no means for enforcing such a restriction although you state that you fe el that church leadership membership wiill support any corporate requirements levied upon them by you a mere feeling alone is not a replacement for formal structured procedures that are put in place to maintain adequate control_over an organization and to ensure that no individual or entity impermissibly benefits from its operations see qhio disability association t c memo at finding that there were no procedures in place to enforce the organization’s conflict of interest policy and that there were no personnel in place to ensure that private_inurement would not occur and thus the applicant d id not demonstrate that there was oversight to prevent the organization from being operated to benefit its sole member id at like the organization in 74_tc_531 you are controlled by a small family dominated board control of your operations is exercised by four directors three of whom are blood relatives pastor director and director neither the congregants nor the governing members of church have any control_over you or the board thus your board is in a position to without challenge dictate the organization's program s and operation s prepare its budget and spend its funds indefinitely id pincite although you adopted a conflict of interest policy your small family-controlled board severely undermines its effectiveness as such you are structured in a manner that could facilitate current as well as potential future abuse of tax exempt status church by mail t c memo at accordingly you do not qualify for tax exemption because you have not met your burden of proving that no part of your net_earnings will inure to the benefit of private shareholders or individuals as set forth in sec_1_501_c_3_-1 and that your activities will not serve to benefit private interests as set forth in sec_1_501_c_3_-1 qualification as a church under sec_170 of the code you request classification as a church under sec_509 and sec_170 to be classified as a church you must first be recognized as an organization that is organized and operated for religious purposes within the meaning of sec_501 above we determined that you do not qualify as an organization described in sec_501 but even if we had determined that you qualified as an organization described in sec_501 you still would not have qualified as a church described in sec_170 i because you do not satisfy the associational test and the criteria that guide this determination a the associational test in american guidance f_supp pincite the court stated that ajt a minimum a church includes a body of believers or communicants that assembles regularly in order to worship this associational role the court reasoned is what separates a ‘church’ from other forms of religious enterprise id pincite see also church of eternal life t c pincite a church's principal means of accomplishing its religious purposes must be to assemble regularly a group of individuals related by common worship and faith’ thus if an organization does not serve this associational role it fails to achieve the minimum characteristics of a church and instead must be viewed simply as a religious_organization subject_to the filing_requirements of sec_6033 initially you resembled the organization that was denied recognition as a church in 614_f3d_1383 because you planned to engage primarily in internet-based religious activities such activities standing alone amount to the same type of mere affiliation by a number of people with an organization espousing a particular belief system that the court in foundation of human understanding deemed insufficient for church classification under sec_170 however you immediately discovered that you would need a traditional church structure and support group to help you deliver all the products and services the online ministry requires therefore you planted church on date as explained above we cannot conclude that the activities of church should be deemed a part of your operations under these circumstances you state that church is operated as a part of your ministry division nevertheless church has its own constitution its own operational and governance procedures and its own controlling members moreover you state that taxpayer has no control_over church and or its board_of directors that the spiritual development of the church day-to-day business is determined by its pastors elders and body of believers and that you fully understand that church could completely break-away from you become incorporated itself and there’s nothing you can do about that consequently it appears that church more closely resembles a separate_entity than it does a subordinate part of your organization this is problematic under the circumstances because the activities of church represent the only aspect of your operations that physically brings people together in order to worship moreover it appears that your operation of website program and the merchandising and consulting divisions easily could overshadow the operation of member church thus trivializing its role in the context of your operations as a whole thus even with the presence of church you continue to resemble the organization in 614_f3d_1383 there the court concluded that the organization failed the associational test because its role in bringing together people to worship was incidental to its main function of disseminating its religious message through radio and internet broadcasts and written publications likewise it appears that the activities associated with church are or will be secondary to your main function of operating website and program and your activities associated with the merchandising and consulting divisions separate from and incidental to your other functions see also 195_fsupp_891 d c cal finding that the organization's and that t he tail operation of chapels wals incidental to its principal activities cannot be permitted to wag the dog the incidental activities of an organization cannot make it a church’ in other words the operation of church appears to be as the court stated in 614_f3d_1383 the associational test is the minimum standard an organization must satisfy to obtain status as a church under sec_170 you do not satisfy this minimum standard accordingly you are not a church within the meaning of sec_170 b the criteria if an organization satisfies the associational test the analysis then moves to the total facts and circumstances embodied within the criteria see 490_fsupp_304 927_f2d_335 even if the activities carried out by church were sufficient to satisfy the associational test the balance of the criteria weighs against classification as a church under these circumstances you have a distinct and independent legal existence under the laws of state and you have a written creed statement of faith or summary of beliefs as well as a formal code of doctrine and discipline however you state that you do not have a distinct religious history you also state that you do not have schools_for the preparation of ordained ministers or religious leaders and that you do not ordain commission or license such individuals moreover you state that you do not have any literature of your own other than the posting of devotionals and messages on website at least some of which is the republication of religious text available from or through other sources for example if church is justifiably considered a part of you furthermore our inability to determine whether church should be considered a part of your operations or instead viewed as a separate and independent entity clouds the analysis of the criteria then you would satisfy the criterion of an established place of worship however if church is as it appears a separate and distinct entity from you then you would not satisfy this important factor likewise if church is not a part of you you would not have regular congregations or regular religious services and although church has a definite and distinct ecclesiastical government your board operates using a more business-like governance structure thus you do not satisfy the majority of the criteria used by the service to determine qualification for church status under sec_170 conclusion in light of the foregoing we have determined that you do not qualify for exemption from federal_income_tax under sec_501 as an organization described in sec_501 and that you do not qualify for classification as a church under sec_170 you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service if you want representation during the conference procedures you may represent you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service will consider the failure to protest as a failure to exhaust available administrative remedies sec_7428 of the code provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the internal_revenue_service if you do not intend to protest this determination you do not need to take any further action determination_letter that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a final adverse please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service attn constitution ave nw washington dc you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations


internal_revenue_service number release date index number ------------------------------------------- ---------------------------------- ---------------------------------------------------- -------------------------- - --------------------------------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-162582-05 date december ----------------------------------------------------- ------------------------------------------------------- -------------------- -------------------- ---------------------- ----------------------- -------------------------------------- ------------------------------------------------------------------- ---------------------------------------------------------------- legend h w son son daughter stepson family_trust trust trust ----------------------------------------------------------- date date date date date year year year year year year year year year attorneys accountant accountant -------------------------- ---------------------- ------------------ ---------------- ------------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------------------------------- -------------------------------- ------------------------------ plr-162582-05 dear ------------ this is in response to your letter dated date and prior correspondence requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate h’s and w’s gst_exemption to certain transfers to trusts the facts and representations submitted are summarized as follows during their lives h and w established different trusts to benefit their children and their issue h and w were survived by four children son son daughter and stepson the trusts established by h and w exclude son and his issue as beneficiaries because h and w made other lifetime gifts to son on date in year h and w created trust an irrevocable_trust for the benefit of daughter her three children and their issue and son 2’s child and his issue in year and year sec_3 through year h made cash gifts to trust and in year and year sec_3 through year w made cash gifts to trust in year h and w’s accountant accountant prepared and filed form sec_709 united_states gift and generation-skipping_transfer_tax return to make a late allocation of h and w’s gst exemptions to h’s and w’s year gifts to trust accountant prepared and filed timely form sec_709 to allocate h’s gst_exemption to the year sec_3 through gifts to trust and to allocate w’s gst_exemption to the year sec_3 through gifts to trust however on the form sec_709 filed to h’s years and gifts to trust accountant failed to allocate h’s gst_exemption to the gifts to trust on the form_709 filed for w’s year gift to trust accountant failed to allocate w’s gst_exemption to the gift to trust on the form sec_709 filed for w’s years and gifts to trust accountant made only a partial allocation of w’s gst_exemption to the gifts to trust on date h and w created family_trust a revocable_living_trust as amended h died on date upon h’s death family_trust was divided into survivor’s trust bypass_trust and qtip_trust qtip_trust was created to benefit the surviving_spouse w and son daughter stepson and their issue qtip_trust was further divided into qtip exempt trust and qtip non-exempt trust return h’s estate made a reverse_qtip_election under sec_2652 to treat h as the transferor of the property passing to the qtip exempt trust for purposes of sec_2601 and on schedule r h’s estate allocated h’s available gst_exemption to qtip exempt trust on form_706 united_states estate and generation-skipping_transfer_tax plr-162582-05 on date in year w created trust an irrevocable_trust for the benefit of son daughter stepson and their issue w made cash gifts to trust in year sec_11 sec_12 and accountant prepared and filed form sec_709 to report w’s year sec_11 through gifts to trust however accountant failed to allocate w’s gst_exemption to the year gift to trust and only made partial allocations of w’s gst_exemption to the year sec_12 and gifts to trust w died on date family_trust provides that upon the surviving trustor’s death survivor’s trust qtip non-exempt trust and qtip exempt trust would be consolidated to form the trust estate and then distributed to son daughter and stepson if living and if not to their living issue either outright or in trust as provided in the instrument stepson disclaimed his interest in the trust estate and his share passed to his children in trust son 2’s interest was divided into an exempt trust and non-exempt trust on schedule r of form_706 filed for w’s estate w’s available gst_exemption was allocated to the trust for stepson’s issue and son 2’s exempt trust the trusts created under family_trust to skip persons it is represented that no distributions have been made from trust trust or you have requested an extension of time under sec_2642 and sec_301_9100-1 and sec_301_9100-3 to allocate i h’s gst exemptions to the years and gifts made to trust ii w’s gst_exemption to the years and gifts made to trust iii w’s gst_exemption to the year sec_11 sec_12 and gifts made to trust iv that such allocations will be effective as of the respective dates for the transfers to such trusts and v that the gift_tax values of the transfers to trust and trust will be used in determining the amount of the gst_exemption to be allocated to such trusts sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the gst tax every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed plr-162582-05 sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides in relevant part that if the allocation of the gst_exemption to any transfers of property is made on a timely filed gift_tax_return or is deemed to be made under sec_2632 or c a the value of such property for purposes of determining the inclusion_ratio shall be its value as finally determined for purposes of chapter and b such allocation shall be effective on and after the date of such transfer sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers plr-162582-05 may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore you are granted an an extension of time of days under sec_2642 and sec_301_9100-1 and sec_301_9100-3 to allocate i h’s gst_exemption to the years and gifts made to trust ii w’s gst_exemption to years and gifts made to trust iii w’s gst_exemption to the year sec_11 sec_12 and gifts made to trust iv that such allocations will be effective as of the respective dates for the transfers to such trusts and v that the gift_tax values of the transfers to trust and trust will be used in determining the amount of the gst_exemption to be allocated to such trusts the relief granted is deemed to proceed the subsequent allocation of h’s gst_exemption to qtip exempt trust accordingly it would be appropriate to reduce the gst_exemption allocated to that trust to the amount of h’s gst_exemption actually available to allocate to that trust after the relief given and make the appropriate changes to funding allocations of h’s and w’s gst exemptions should be reported made on supplemental form sec_709 united_states gift and generation-skipping_transfer_tax return and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the supplemental form sec_709 a copy is enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter under the cited provisions or under any other provisions of the code plr-162582-05 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely william p o’shea associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter