vi department of the treasury internal_revenue_service appeals_office irs capitol street ms fresno ca number release date pate apr a person to contact name employee id number telephone fax se employer id number uniform issue list uil uil ‘ certified mail dear this is a final adverse determination that you do not qualify for exemption from federal_income_tax under - internal_revenue_code the code sec_501 as an organization described in sec_501 of the code we made the adverse determination for the following reasons organizations described in sec_501 and exempt under sec_501 must be both organized and operated exclusively for exempt purposes you have not demonstrated you are organized and operated exclusively for exempt purposes as required by sec_1_501_c_3_-1 you're required to file federal_income_tax returns on forms u s_corporation income_tax return mail your form to the appropriate internal_revenue_service center per the form's instructions you can get forms and instructions by visiting our website at www irs gov forms-pubs or by calling 800-tax-form we'll make this letter and the proposed adverse determination_letter available for public inspection under sec_6110 of the code after deleting certain identifying information we provided to you ina separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you decide to contest this determination you can file an action for declaratory_judgment under the provisions of sec_7428 of the code in either the united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia letter rev catalog number 40683r you must file a petition or complaint in one of these three courts within days from the date we mailed this determination_letter to you contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment you can write to the courts at the following addresses united_states tax_court second street nw washington dc us court of federal claims us district_court for the district of columbia madison place nw washington dc constitution avenue nw washington dc note we will not delay processing income_tax returns and assessing any taxes due even if you file a petition for declaratory_judgment under sec_7428 of the code please refer to the enclosed publication how to appeal an irs determination on tax-exempt status for more information about the appeals process you also have the right to contact the taxpayer_advocate_service tas tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call tas assistance is not a substitute for established irs procedures such as the formal appeals process tas cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court if you have questions contact the person at the top of this letter sincerely appeals team manager enclosures publication ce letter rev catalog number 40683r department of the treasury internal_revenue_service irs p o box cincinnati oh legend b date c ethnicity d continent dear date date employer id number contact person id number contact telephone number contact fax number uil we 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 determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you submitted form 1023-ez streamline application_for recognition of exemption under sec_501 of the internal_revenue_code on x you listed your date of incorporation as b you attested that you have a necessary organizing document that limits your purposes to one or more exempt purposes within the meaning of sec_501 that your organizing document does not expressly empower’ you to engage in activities other than an insubstantial part that are not in furtherance of one or more exempt purposes and that your organizing document contains the dissolution provision required under sec_501 you attested that you are organized and operated exclusively to further charitable purposes and that you have not conducted and will not conduct prohibited activities under sec_501 specifically you attested you will e e refrain from supporting or opposing candidates in political campaigns in any way ensure that your net_earnings do not inure in whole or in part to the benefit of private shareholders or individuals not further non-exempt purposes such as purposes that benefit private interests more than insubstantially not be organized or operated for the primary purpose of conducting a trade_or_business that is not related to your exempt_purpose s not devote more than an insubstantial part of your activities attempting to influence legislation or if you made a sec_501 election not normally make expenditures in excess of expenditure limitations outlined in sec_501 not provide commercial-type_insurance as a substantial part of your activities detailed information was requested supplemental to the above attestations we provided you a copy of your organizing document and prints from your website that you verified as accurate your organizing document does not contain a purpose or dissolution clause you were asked to provide a description of your activities and actual and projected revenues and expenses information on your website indicates you have been operational prior to your incorporation as a nonprofit corporation your mission states you are formed to foster the growth creation and development of successful business enterprises owned operated and managed by c and people of d descent you seek to provide empowerment and business development opportunities for c and people of d descent through your city you will serve as a voice for small businesses using their collective power to influence events politically and socially at all levels your long-term goal is to end disfranchisement of c residing in your city your primary focus is seeing minority and women-owned businesses in your city succeed you also want to expose young adults to entrepreneurship you hold workshops conferences and events to provide networking opportunities for your members and other minority-owned business owners you plan to provide financial assistance to entrepreneurs to help with the costs associated with starting businesses your activities are aimed at women and c-owned businesses you keep your members informed of policies and legislation that impact their businesses and the community you will contact local state and federal representatives to advise them of issues and challenges affecting businesses in your area you will also invite them to speak at your various events to discuss policies and political issues that impact your members you do not endorse any candidates nor influence your members to vote for any candidate but you do encourage your members to vote you are the central organization which minority-owned businesses can use to network share resources and empower each other you have conducted extensive research into surveying minority business owners and tracking trends to create benefits that will help them grow their businesses you offer several levels of membership that are guaranteed to help members reach their business goals benefits to the student and young professional members age sec_30 years and below include a t-shirt career mentoring job shadowing opportunities complementary resume review and mock interview sessions your basic membership benefits include unlimited networking opportunities promotions on your facebook page marketing and vending opportunities at all your events discounts on all your sponsored events and seminars and classes and eligibility for industry awards higher level of membership benefits includes complimentary business consultation and mentoring health insurance benefits including medical dental and life_insurance discounts on advertising in the magazine complimentary branding advertising and marketing consultation business spotlights placement on your business referral list prime vending and marketing opportunities at your events unlimited networking opportunities opportunities to be include in listings for business opportunities contacts and information to grow their businesses letter rev catalog number 47630w your anticipated income sources include membership dues events seminar workshops and grants your expenses include facilitators contract fees administrative costs printing and reproduction marketing professional development travel and miscellaneous law sec_501 of the code describes corporations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 provides that for an organization to be exempt under sec_501 of the code it must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational or operational_test it is not exempt sec_1_501_c_3_-1 provides that in no case shall an organization be considered 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 of the code sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose revrul_59_3 1959_1_cb_121 describes a professional association that was not entitled to exemption under sec_501 of the code because its educational program was only an incidental part of its total activities it had as its principal purpose the professional advancement of its membership revrul_71_504 1971_2_cb_231 describes an organization exempt under sec_501 of the code that primarily directed its activities to the promotion of the common business purposes of its members the organization could not be reclassified as an organization described in sec_501 it activities included providing patient referral services maintaining a grievance committee establishing a legislative committee holding meetings concerned with matters affecting the promotion and protection of the practice of medicine and conducting a public relations program to enhance and improve the public image of the medical profession the activities were directed primarily at the promotion of the medical profession and thus further the common business_purpose of its members it was held that the presence of a single noncharitable or noneducational purpose if substantial in nature precluded exemption under sec_501 regardless of the number or importance of truly charitable or educational_purposes in better business bureau v united_states 326_us_278 the court held that an organization is not operated exclusively for charitable purposes and thus will not qualify for exemption under sec_501 of the code if it has a single non-charitable purpose that is substantial in nature this is true regardless of the number or importance of the organization's charitable purposes application of law you are not described in sec_501 of the code because you are not organized and operated exclusively for charitable or educational_purposes you fail to meet the organizational and operational tests and therefore do not qualify for exemption per sec_1_501_c_3_-1 letter rev catalog number 47630w your organizing document does not contain the required purpose and dissolution provisions necessary to meet the organizational_test under sec_501 of the code and sec_1_501_c_3_-1 although you offer seminars workshops forums and conferences geared towards women and minorities in business and provide education for people who wish to enter business and entrepreneurship discussed in your recent correspondence you also offer various benefits to your members benefits include unlimited networking opportunities marketing and vending opportunities contacts and information to grow businesses discounts on advertising in a magazine and directory listing facebook promotions prime placement on your business referral list business spotlight on facebook and on a radio station complimentary marketing branding and advertising and consultation to your members health insurance benefits including medical dental and life_insurance and featured articles in the magazine and business directory while certain incidental_benefits are allowable to either organizational members or the public in terms of what could be considered private benefit the benefits derived from your members exceed this level more than an insubstantial part of your activities is devoted to promoting your members’ businesses and providing them with services therefore you are not operated exclusively for purposes described in sec_501 of the code because you are not described on sec_1 c - c similar to the organizations described in revrul_59_6 and your activities are not limited to being exclusively educational your purpose is aligned more towards professional advancement of your members than being exclusively educational your activities are directed more towards helping your member businesses succeed through their promotion instead of merely educating members on business practices as you engage in a substantial amount of nonexempt activities this precludes you from being described as an organization in sec_501 of the code further like the organization described in better business bureau v united_states because you have a substantial amount of non-exempt activities you do not qualify under sec_501 conclusion based on the above we find that you are not organized and operated for exempt purposes within the meaning of sec_501 of the code specifically you do not meet the organizational and operational_test for exemption under sec_501 if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative letter rev catalog number 47630w e one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury j declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we’ll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements letter rev catalog number 47630w you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47630w


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 b01 plr-124623-16 date september legend x ------------------------------------------------------- ------------------------------------------------------------------------ country d -------- ------------------ dear --------------- this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was organized under the laws of country on d x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity x failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d x represents that it acted reasonably and in good_faith x also represents that granting the relief requested will not prejudice the interests of the government law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity plr-124623-16 can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owners of x filing within days of this letter all required returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms plr-124623-16 return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the code 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 x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by david r haglund david r haglund chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


number release date id office uilc cca_2009042110555542 ---------------------------- from ---------------------- sent tuesday date am to --------------------- cc ---------------- subject re further question on ------------ -- the following definition of contract_price for pcm purposes is taken from notice_89_15 1989_1_cb_634 q a all amounts that the taxpayer is or will be entitled to receive from the customer under the contract or any other rule_of law including for example the contract law rule_of quantum meruit or other quasi- contractual remedies must be included in total expected contract revenues including amounts such as retainages that the customer has contracted to pay only upon satisfactory completion of the contract emphasis supplied nothing in the sec_460 regulations subsequently published was intended to or did change the rule providing that contract_price is what the customer pays for the performance of the taxpayer's obligations under a long-term_contract if the taxpayer has a claim against the customer for these cost overruns that raises a separate issue which we can discuss if you like hope this helps -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------


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 b3 plr-110362-15 date date legend x a state date date period dear ---------------- ---------------------------------------------------------------- ----------------------- --------------------------- -------- ------------------------- ---------------------- ------------------------------------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1361 of the internal_revenue_code code facts the information submitted states that x was incorporated in state on date and elected to be treated as an s_corporation effective date from period x employed a who was also a shareholder of x during that time x may have paid excessive_compensation to a a was an at will employee without a written compensation agreement x’s board reviewed and approved the compensation of all of x’s employees annually x represents that its governing provisions including its articles of association its bylaws and its shareholder agreements confer identical rights to plr-110362-15 distribution and liquidation proceeds with respect to x’s outstanding shares of stock x also represents that it was not a principal purpose to circumvent the one class of stock requirement through compensation paid to a law sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which among other prohibitions does not have more than one class of stock sec_1_1361-1 of the income_tax regulations provides in part that a corporation that has more than one class of stock does not qualify as a small_business_corporation except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides in part that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement related to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances in sec_1_1361-1 example treatment of excessive_compensation s a corporation has two equal shareholders c and d who are each employed by s and have binding employment agreements with s the compensation paid_by s to c under c’s employment agreement is reasonable the compensation paid_by s to d under d’s employment agreement however is found to be excessive the facts and plr-110362-15 circumstances do not reflect that a principal purpose of d’s employment agreement is to circumvent the one class of stock requirement of section sec_1361 and sec_1 l under sec_1_1361-1 the employment agreements are not governing provisions accordingly s is not treated as having more than one class of stock by reason of the employment agreements even though s is not allowed a deduction for the excessive_compensation paid to d conclusion based solely on the facts submitted and representations made we conclude that because x’s governing provisions provide for identical distribution and liquidation rights and because x represents that it was not a principal purpose to circumvent the one class of stock requirement through compensation paid to a any excessive_compensation paid to a does not cause x to be treated as having more than one class of stock for purposes of sec_1361 under these circumstances we conclude that x's s_corporation_election did not terminate as a result of the compensation paid to a except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provisions of the code specifically we express or imply no opinion regarding x's eligibility to be an s_corporation or whether x paid excessive_compensation to a the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely holly porter branch chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------------------------- ------------------------ ---------------------------- in re --------------------------------------------- ----------------------- 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 b04 plr-152815-07 date march legend legend decedent spouse family_trust date date date child child child child state state statute state statute a b c d dear -------------- ------------------------------------------------ ------------------------------------------------ --------------------------------------------------------------------- ------------------ ----------------------- ------------------ ------------------------------------------------- -------------------------------------------- ------------------------------------------------ -------------------------------------------------- ---------- ----------------------------------------- ---------------------------------------- -------------- ----------- --------- -------------- this is in response to your date letter and other correspondence requesting a ruling regarding the income gift estate and generation-skipping_transfer gst tax consequences of the proposed division and modification of the family_trust the facts submitted are as follows decedent died on date in state survived by his wife spouse and four adult children children spouse and children are currently still alive plr-152815-07 item iii paragraph of decedent’s will created a family_trust children are co-trustees of the family_trust trustees the family_trust provides that during the life of spouse the trustees may pay to her all or any portion of the net_income of family_trust at least quarter-annually the family_trust further provides that the trustees may also pay for her benefit so much of the corpus of the family_trust as the trustees deem necessary for her health maintenance and support taking into consideration other income and assets available to her and also taking into consideration the standard of living which she enjoyed during decedent’s lifetime additionally at the end of each fiscal_year during spouse’s lifetime and subject_to the discretion of the trustees children may receive a distribution of income for their reasonable support maintenance and comfort taking into consideration their income from all sources known to the trustees item iii paragraph of decedent’s will further provides in relevant part that upon the death of spouse the trustees shall continue the family_trust as then constituted for the benefit of children as follows the income shall be divided equally amongst children and paid not less often than quarter-annually in addition the trustees shall pay to children or for their use and benefit so much of the principal of family_trust as the trustees determine to be necessary or advisable for their reasonable support maintenance and comfort taking into consideration their income from all sources known to the trustees should any of children die leaving descendants such descendants of such deceased child shall be entitled to such income the family_trust shall terminate one day prior to years after the death of the last survivor of spouse and decedent’s descendants who are living at the time of decedent’s death at termination if the trustees are not otherwise able to give effect to the provisions of this instrument each remaining portion of family_trust property shall be distributed to the beneficiaries of the then current family_trust income in the proportions in which they are beneficiaries item iii paragraph c authorizes the trustees to divide or distribute property at such time as distributions are to be made wholly or partly in_kind at such valuations as the trustees deem fair and without regard to income_tax basis of the property and to sell property without court approval item iii paragraph d authorizes the trustees to perform any and all acts in the trustees’ judgment necessary or appropriate for the proper and advantageous management investment and distribution of the trust property on date spouse in her capacity as executor of decedent’s estate timely filed the decedent’s estate_tax_return family_trust was funded with dollar_figurea after the payment of dollar_figureb for the federal estate_tax and dollar_figurec for state’s estate_tax dollar_figured in assets remained in plr-152815-07 the family_trust on schedule r spouse allocated dollar_figured of decedent’s gst_exemption to the family_trust from the date of decedent’s death until date the entire corpus of the family_trust consisted of stock in a closely_held_business and all of the trust’s income consisted of dividends from the stock all of the stock held by the family_trust has now been sold the sale of the closely_held_business was not anticipated at the time of decedent’s death not all of the family members favored the sale of the stock as a result the trustees represent that the investment goals and needs of the beneficiaries have become divergent continuing the family_trust as a single trust could impair the trust administration and or could involve lengthy and expensive litigation which would result in a wasting of trust assets the trustees have determined that it is in the best interests of all beneficiaries to modify and divide the family_trust in a qualified_severance into four separate trusts one for each of the decedent’s four children each of the four resulting trusts would be funded pro-rata with one-fourth of each of the assets held by the family_trust based on the fair_market_value of the assets on the date of severance each of the four resulting trusts would have identical terms to the family_trust except that the current beneficiaries of each of the resulting trusts will be the particular beneficiary for whom the separate trust is established and spouse following the death of spouse or any beneficiary whichever is later the successor beneficiary of the resulting trusts will be determined in the same manner and with the same effect as if family_trust had not been divided into separate trusts one variation from the terms of the family_trust would be regarding the filling of a trustee vacancy each of the four resulting trusts would provide that a trustee may resign or be removed as trustee of one trust while at the same time continuing to serve as trustee to any of the other trusts in appointing a successor trustee a court would not be required to appoint the same person or entity as a successor trustee for each of the other trusts state statute authorizes trustees to modify the administrative or dispositive terms of a_trust if because of circumstances not anticipated by the settler modification or termination will further the purposes of the trust state statute authorizes a state court to direct or permit the trustee to deviate from the terms of the trust if owning to circumstances not known to the settler and not anticipated by him compliance would defeat or substantially impair the accomplishment of the purposes of the trust you have requested the following rulings plr-152815-07 the proposed division will constitute a qualified_severance as described in sec_26_2642-6 of the generation-skipping_transfer_tax regulations and will not affect the gst tax inclusion_ratio of the family_trust the proposed division will constitute a qualified_severance as described in sec_26_2642-6 and will not cause any distributions from or termination of any interest in the family_trust or in any of the four resulting trusts to be subject_to the gst tax the proposed division will not result in a taxable gift_for federal gift_tax purposes by any beneficiary of the family_trust the proposed division will not cause any of the value of the family_trust or any of the value of any of the four resulting trusts to be includible in the estate of spouse or includible in the estate of any of decedent’s named children under sec_2033 sec_2036 sec_2037 or sec_2038 of the internal_revenue_code the proposed division will result in each of the resulting trusts being treated as a separate taxpayer under sec_643 the proposed division will not result in any amount of trust property in family_trust or in any of the resulting trusts having been deemed to be paid credited or distributed to any beneficiary under sec_661 or sec_1_661_a_-2 of the income_tax regulations the proposed division will not result in the realization by the family_trust or any beneficiary of any income gain_or_loss under sec_61 or sec_1001 the proposed division will result in the assets in each of the four resulting trusts having the same basis under sec_1015 and the same holding_period under sec_1223 as the assets have in the family_trust law and analysis ruling sec_1 and sec_2601 of the internal_revenue_code imposes a tax on every generation skipping transfer gst the term generation skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip sec_2642 provides that the inclusion_ratio with respect to any transferred in a generation-skipping_transfer is the excess if any of one over the applicable_fraction determined for the trust from which the transfer is made sec_2642 provides that the applicable_fraction is a fraction the plr-152815-07 numerator of which is the amount of gst_exemption allocated to the trust and the denominator of which is the value of the transferred to the trust reduced by the sum of the federal estate_tax or state death_tax actually recovered from the trust attributable to such and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption which may be allocated by such individual or his executor to any 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 gst_exemption under sec_2631 a 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 sec_2642 provides that if a_trust is severed in a qualified_severance the trusts resulting from such severance shall be treated as separate trusts thereafter for purposes of the gst tax sec_2642 provides that the term qualified_severance means the partition of a single trust and the creation by any means available under the governing instrument or under local law of two or more trusts if the single trust was divided on a fractional basis and the terms of the new trusts in the aggregate provide for the same succession of interests of beneficiaries as are provided in the original trust sec_2642 provides that a severance pursuant to sec_2642 may be made at any time sec_26_2642-6 of the generation-skipping_transfer_tax regulations provides in relevant part that a qualified_severance must satisfy each of the following requirements the single trust is severed pursuant to the terms of the governing instrument or pursuant to applicable local law the severance is effective under local law the date of severance is either the date selected by the trustee as of which the trust assets are to be valued in order to determine the funding of the resulting trusts or the court-imposed date of funding in the case of an order of the local court with jurisdiction over the trust ordering the trustee to fund the resulting trusts on or as of a specific date for a date to satisfy the definition plr-152815-07 in the preceding sentence however the funding must be commenced immediately upon and funding must occur within a reasonable_time but in no event more than days after the selected valuation_date the single trust original trust is severed on a fractional basis such that each new trust resulting trust is funded with a fraction or percentage of the original trust and the sum of those fractions or percentages is one or one hundred percent respectively for this purpose the fraction or percentage may be determined by means of a formula for example that fraction of the trust the numerator of which is equal to the transferor's unused gst_exemption and the denominator of which is the fair_market_value of the original trust's assets on the date of severance the severance of a_trust based on a pecuniary amount does not satisfy this requirement for example the severance of a_trust is not a qualified_severance if the trust is divided into two trusts with one trust to be funded with dollar_figure and the other trust to be funded with the balance of the original trust's assets with respect to the particular assets to be distributed to each resulting trust each resulting trust may be funded with the appropriate fraction or percentage pro_rata portion of each asset held by the original trust alternatively the assets may be divided among the resulting trusts on a non pro_rata basis based on the fair_market_value of the assets on the date of severance however if funded on a non pro_rata basis each resulting trust must be funded by applying the appropriate fraction or percentage to the total fair_market_value of the trust assets as of the date of severance the terms of the resulting trusts must provide in the aggregate for the same succession of interests of beneficiaries as are provided in the original trust this requirement is satisfied if the beneficiaries of the separate resulting trusts and the interests of the beneficiaries with respect to the separate trusts when the separate trusts are viewed collectively are the same as the beneficiaries and their respective beneficial interests with respect to the original trust before severance with respect to trusts from which discretionary distributions may be made to any one or more beneficiaries on a non-pro rata basis this requirement is satisfied if- i the terms of each of the resulting trusts are the same as the terms of the original trust even though each permissible distributee of the original trust is not a beneficiary of all of the resulting trusts ii each beneficiary's interest in the resulting trusts collectively equals the beneficiary's interest in the original trust determined by the terms of the trust instrument or if none on a per-capita basis for example in the case of the severance of a discretionary_trust established for the benefit of a b and c and their descendants with the remainder to be divided plr-152815-07 equally among those three families this requirement is satisfied if the trust is divided into three separate trusts of equal value with one trust established for the benefit of a and a's descendants one trust for the benefit of b and b's descendants and one trust for the benefit of c and c's descendants iii the severance does not shift a beneficial_interest in the trust to any beneficiary in a lower generation as determined under sec_2651 than the person or persons who held the beneficial_interest in the original trust and iv the severance does not extend the time for the vesting of any beneficial_interest in the trust beyond the period provided for in or applicable to the original trust in the case of a qualified_severance of a_trust with an inclusion_ratio as defined in sec_26_2642-1 of either one or zero each trust resulting from the severance will have an inclusion_ratio equal to the inclusion_ratio of the original trust in this case dollar_figured of decedent’s gst_exemption was allocated to the family_trust which had dollar_figured in assets as of date after payment of federal and state estate_taxes thus family_trust has an inclusion_ratio of zero furthermore it is represented that family_trust will be severed in accordance with applicable state law the resulting trusts will provide for the same succession of interests and beneficiaries as are provided in family_trust family_trust will be severed on a fractional basis and each resulting trust will be funded pro-rata with one-fourth of each of the assets held by the family_trust the resulting trusts will be treated as separate trusts for purposes of the gst tax accordingly based on the facts presented and the representations made the proposed division will constitute a qualified_severance as described in sec_26_2642-6 furthermore since family_trust has an inclusion_ratio of zero each resulting trust will also have an inclusion_ratio of zero in accordance with sec_26_2642-6 accordingly based on the facts presented and the representations made the proposed division will not cause any distributions from or termination of any interest in the family_trust or in any of the four resulting trusts to be subject_to the gst tax ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during the calendar_year by any individual plr-152815-07 sec_2511 provides that subject_to certain limitations the gift_tax applies whether the transfer is in trust or otherwise direct or indirect and whether the property transferred is real or personal tangible or intangible following the division of family_trust into the resulting trusts each beneficiary will have the same rights to the same property as the beneficiary did prior to the division of family_trust and no other individual will have any additional rights with respect to the income or corpus of family_trust therefore no transfer of property will be deemed to occur as a result of the division of family_trust into the resulting trusts accordingly the proposed division will not result in a taxable gift_for federal gift_tax purposes by any beneficiary of the family_trust ruling sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceeds five percent of the value of such property sec_2038 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what plr-152815-07 source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death in order for to apply the decedent must have made a transfer of property of any interest therein except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property in the present case the proposed division of family_trust as required in the trust instrument does not constitute a transfer within the meaning of the beneficiaries of the trusts will have the same interest after the division as they had prior to the division we therefore conclude that the division will not cause any of the value of the family_trust or any of the value of any of the four resulting trusts to be includible in the estate of spouse or includible in the estate of any of children under sec_2033 sec_2036 sec_2037 or sec_2038 ruling sec_5 and sec_643 provides that two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of the trusts is the avoidance of federal_income_tax sec_661 provides that in any taxable_year a deduction is allowed in computing the taxable_income of a_trust other than a_trust to which subpart b applies for the sum of the amount of income for such taxable_year required to be distributed currently and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year but such deduction shall not exceed the distributable_net_income dni of the estate_or_trust sec_1_661_a_-2 of the income_tax regulations provides that gain_or_loss is realized by the trust or estate or the other beneficiaries by reason of a distribution_of_property in_kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount of specific property other than that distributed or of income as defined under sec_643 and the applicable regulations if income is required to be distributed currently sec_662 provides that there shall be included in the gross_income of a beneficiary to whom an amount specified in sec_661 is paid credited or required to be distributed by an estate_or_trust described in sec_661 the sum of the following amounts the amount of income_for_the_taxable_year_required_to_be_distributed_currently to such beneficiary whether distributed or not and all other_amounts properly paid credited or required to be distributed to such beneficiary for the taxable_year plr-152815-07 accordingly based on the facts submitted and the representations made we conclude as follows while resulting trusts have the same grantor they will have different primary beneficiaries therefore based on the facts and representations submitted we conclude that resulting trusts will be treated as separate trusts for federal_income_tax purposes under sec_643 additionally because the creation of the resulting trusts is a modification of family_trust for federal_income_tax purposes the resulting trusts are treated as a continuation of family_trust therefore the transfer of assets from family_trust to the resulting trusts will not be treated as a distribution or termination under sec_661 and will not result in the realization by family_trust resulting trusts or by any beneficiary of family_trust or resulting trusts of any income gain_or_loss ruling sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained revrul_56_437 1956_2_cb_507 holds that the division of a joint_tenancy in stock under a partition action provided for by state law to compel the issuance of separate stock certificates is not a sale_or_exchange likewise the conversion of a joint_tenancy in stock into a tenancy_in_common in order to extinguish the survivorship feature is a nontaxable_transaction because the right of the property owners to partition is an inherent ownership right each party possessed under applicable state law plr-152815-07 in 499_us_554 a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interest in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the issue presented was whether a sale_or_exchange had taken place resulting in a realization of gain_or_loss under sec_1001 the supreme court concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different id pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite the court held that mortgage loans made to different obligors and secured_by different homes embodied distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id pincite in the present case the trust beneficiaries are severing their joint_interests in the family_trust the issue is whether the trust beneficiaries would have the same property interests and legal entitlements as a result of the proposed division the terms and conditions of each of the four resulting trusts are substantially identical to the terms and conditions of the family_trust because the property interests and legal entitlements of the beneficiaries will remain unchanged by the proposed division the division of the family_trust is not a sale_or_other_disposition of property under revrul_56_437 and does not result in a material difference in the legal entitlements enjoyed by the trust beneficiaries under cottage savings thus the proposed division would not result in the realization of any gain_or_loss or other taxable_event under sec_61 or sec_1001 of the code to the family_trust or any of the current trust beneficiaries ruling sec_1015 provides that if property is acquired by a transfer in trust other than a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer sec_1_1015-2 provides that in the case of property acquired after date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter plr-152815-07 sec_1223 provides that in determining the period for which a taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under chapter such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in the taxpayer's hands as it would have in the hands of such other person based upon the information submitted and representations made we conclude that because sec_1001 does not apply to the division of the trust assets under sec_1015 the assets in each of the four resulting trusts have the same basis under sec_1015 and the same holding_period under sec_1223 as the assets have in the family_trust in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely _________________________ lorraine gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosure copy of letter for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-143702-07 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities subject railroad_retirement_tax_act status -------------------------------------------------------------------- in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business is not a covered employer under the railroad retirement act and the railroad unemployment insurance act ----------------------------------------- --------------------------------------------- ------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that the ------------------------------------------------------------- ----------------------- is not an employer under the railroad_retirement_tax_act please take the appropriate action regarding this business cc _____________________________ janine cook


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code sec_501 as an organization described in code sec_501 we made this determination for the following reason s you do not satisfy the not organized for profit requirement under sec_501 of the code and sec_1_501_c_4_-1 of the income_tax regulations the additional information you submitted regarding your actual operations does not overcome the other facts including your form of incorporation and governing documents which demonstrate that you are organized for profit 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 with their 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 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 if you agree with our deletions you do not need to take any further action 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 lois g lerner director exempt_organizations rulings 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 vil code legend l m n oo p date year date date x dear this letter supersedes and replaces our letter to you dated date we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below facts on date you were incorporated under section x the business corporation act of the laws of the state of l as a for-profit stock corporation with your articles of incorporation state that your purpose is purposes for which corporations may be formed under the business corporation act of the state of l section y provides that upon dissolution after payment of all debts you must distribute any assets remaining to your shareholder shares of common_stock authorized to engage in any activity within the in year you received approval from the regulatory agencies in l to offer health_maintenance_organization hmo services in l since then you have operated as an hmo providing comprehensive health care services on a prepaid basis through a network of hospitals and physicians your enrollees include employees of small and large employers and medicare beneficiaries hi m is the sole shareholder of all of your outstanding_stock m is a for-profit insurance_company all of whose outstanding_stock is owned by n n is the parent of an integrated health care system and has been recognized by the internal_revenue_service as an organization described in sec_501 of the code n is also the sole shareholder of o an hmo that is organized as a for-profit stock corporation under the laws of the state of p you have not paid any dividends to your shareholder corporation your bylaws provide that you are governed by your board_of directors who are elected by your shareholder since your formation you filed federal corporate_income_tax returns as a subsidiary in the consolidated form_1120 u s_corporation income_tax return for m and subsidiaries on date you filed form_1024 requesting recognition of exemption as an organization described in sec_501 of the code effective date the date of your incorporation law entities exempt from tax under sec_501 of the code by virtue of sec_501 are in relevant part civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare emphasis added - sec_501 of the code added by taxpayer bill of right sec_2 p l sec_1311 ‘tbor states that an entity is described in sec_501 only if no part of its net_earnings inures to the benefit of any private_shareholder_or_individual this provision is effective for inurement occurring on or after date except for inurement resulting from binding contracts in effect on that date the legislative_history states that a tax-exempt social_welfare_organization described in sec_501 must be organized on a non-profit basis and must be operated exclusively for the promotion of social welfare committee on ways and means report house of representatives cong 2d sess report pincite date general explanation of tax legislation enacted in the congress joint_committee on taxation date pincite emphasis added sec_1_501_c_4_-1 of the income_tax regulations state in general - a civic_league_or_organization may be exempt as an organization described in sec_501 if i it is not organized or operated for profit and ii it is operated exclusively for the promotion of social welfare in 3_tc_949 the taxpayer originally organized as an unincorporated association was subsequently organized under the for-profit corporation laws of new york the taxpayer made profits though it was restricted by its bylaws to use profits only to improve its radio service or for its civic education and cultural purposes ‘the tax_court determined that it was not described in sec_101 of the internal_revenue_code_of_1939 now sec_501 of the code id pincite the court found that the organization failed to show that it was not organized for profit noting that the articles of incorporation did not preclude profit from among the corporation’s purposes and stating that the corporation cannot be exempt simply because it chooses to use its profits for one purpose rather than another id pincite the court did not base its decision on the fact that the entity was incorporated under the state’s for-profit business law the court instead accepted the proposition that incorporation under the new york stock corporation law is not itself preclusive of aclaim for exemption implication could arise from incorporation under a state's for-profit statute id pincite id pincite the court did however suggest that an adverse the tax court’s decision was overturned on appeal in 148_f2d_948 2d cir the appellate court determined that the corporation was not organized for profit for purposes of sec_101 the court noted that the corporation’s purposes were stated in its certificate of incorporation as broadly as those of any corporation created under the laws of new york to engage in the business of broadcasting and its by-laws as originally adopted authorized the declaration of dividends from surplus profits of the company although shares were issued the bylaws were subsequently amended to provide that no profits or surpluses of the corporation could be used for distribution as dividends the appellate court agreed with the tax_court that an adverse implication may arise from incorporation under the business corporation law but that the implication of a profit purpose can be negatived by extrinsic evidence showing the actual purpose of organizing the corporation id pincite the court determined that the implication of a profit purpose arising from incorporation under a for-profit statute was overcome by the fact that the founders’ objective was to provide free public radio and by the amendment of the by-laws to prohibit the distribution of profits to shareholders id in united_states v pickwick electric membership corporation an electric membership corporation organized by authority of the state’s electric membership corporation act automatically converted to a corporation two years later upon a change in state law cir two years later the corporation converted into a cooperative general it was a non-profit membership welfare non-profit membership corporation under state law corporation during the two subsequent tax years at issue in the case the court upheld the district court’s ruling that the entity was described in sec_101 a predecessor of sec_501 of the code f 2d as in debs memorial radio fund the court in pickwick applied a purpose test to determine whether the corporation was not organized for profit examining the purpose for which the entity was first organized even though the tax years at issue did not include the first years of organization the court stated that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business transacted but may be shown by extrinsic evidence including the by-laws and the method of operation id pincite the court found that the purpose for which the organizers created the organization was to provide electricity to rural areas to provide electricity at reasonable rates and that the organizers were not simply seeking an investment vehicle for their funds it also noted that the entity adopted new bylaws when it converted to a non-profit corporation that required it to use any excess revenue to be distributed to members as refunds or to be used to reduce rates such obligations completely negative the usually accepted meaning of profit_motive id in vision service plan v united_states a f t r 2d e d cal appeal docketed no cg cir date a corporation organized under a non-profit statute sought exempt status under sec_501 the court found that the organization did not meet the requirements of sec_501 in response to the organization’s argument that it was organized as a non-profit corporation the court stated the issue however is not whether plaintiff is a nonprofit corporation for corporation law purposes but whether it is one for federal tax purposes id in one case a school was incorporated similar issues have arisen in sec_501 cases ’ under the state’s for-profit business statute the court nonetheless found that it was exempt as an organization described in the predecessor to sec_501 4_bta_61 the court pronounced that its commercial purpose it is said that the fact that the incorporation was under the business law is indicative of this might be significant if not is not conclusive a corporation so organized otherwise explained but it is permitted thereby to engage in business is not merely because it precluded from an exclusively charitable purpose the purpose of its a question of fact and the evidence organization and operation is may be such as to show that its purpose was charitable despite the ordinary implications of the statute under which it was created still the court acknowledged that the terms of the corporation’s charter authorized it to engage lawfully in for-profit activities but because the evidence was all to the effect that this was never the purpose or intent and has not been the effect the corporation was nonetheless described in sec_501 in 96_f2d_776 2d cir an entity formed under a state’s for-profit corporation law was nonetheless found to be described in sec_501 of the code because its operations indicated it was organized and operated for charitable the sec_501 cases are instructive to the extent the courts are interpreting similar statutory ' language purposes the roche’s beach court stated that extrinsic evidence showed that the actual purpose of organizing the corporation was religious and educational despite the adverse implication arising from the statute under which it was incorporated the roche’s beach court distinguished itself from its prior decision in 73_f2d_298 2d cir in sun-herald the court stated that organized means incorporated and that organized and operated as found in several exemption provisions in the code are not interchangeable terms in a subsequent 160_f2d_475 2d cir the court further clarified that its decision in roche’s beach modified the position it took in the first sun-herald decision only to the extent that the certificate of incorporation is not the only test of whether a corporation is organized for exempt purposes in sec_501 of the code a subsequent decision by the circuit which analyzed the circuit’s decisions in sun- herald and roche’s beach determined that the 2nd circuit was still of the opinion that at the time of the organization of a corporation it must have been the intention of the organizers or incorporators to organize it for exclusively charitable or other exempt purposes and that no one could organize a business corporation for the purpose of profit and later make it exempt under sec_101 sec_501 of the code by the simple expedient of transferring its ownership to an exempt_organization 181_f2d_451 cir cf university of maryland physicians v commissioner t c memo recognizing that pursuant to treasury regulations the organizational_test of sec_501 of the code focuses on the powers of the organization as defined in its organizing documents the court nonetheless found that the corporation was described in sec_501 even though it was organized under a state’s for-profit business law the court noted that the organization had no choice under state law but to organize under that particular for-profit business law and the corporation’s general powers are not overly broad because they are limited both by state law and by its articles of incorporation as a whole rationale based on our review of the legislative_history administrative pronouncements and judicial decisions an entity incorporated under a state’s for-profit business statute is not precluded from being exempt under sec_501 of the code debs memorial radio fund pickwick electric membership corp vision service plan cf appeal of unity school of christianity incorporation not conclusive for sec_501 nonetheless the fact that you were incorporated under the state of l’s for-profit business statute creates a presumption that you were organized for profit within the meaning of sec_501 debs memorial radio fund cf roche’s beach incorporation statute created adverse implication for sec_501 based on all the facts and circumstances we conclude that you are organized for profit we base this conclusion on the following factors articles permit engaging in for-profit activities your articles of incorporation permit you to engage in any activity a for-profit corporation could engage in under the laws of the state of l there is no language in the articles limiting your activities to those permitted under sec_501 of the code debs memorial radio fund bylaws limited powers pickwick electric membership corp same cf university of maryland physicians powers limited by articles in sec_501 case we recognize that there is no absolute requirement that an entity’s organizing documents explicitly state that it was not organized for profit to be described in sec_501 of the code debs memorial radio fund supra nonetheless the fact that your articles of incorporation authorize you to engage in any activity that a for-profit business could engage in is a significant indicator that you are organized for profit you argue that you actually operate ina manner that makes you a charitable_trust under operation of state law however we found no evidence either that your articles of incorporation or state law limit your broad powers articles and bylaws permit paying dividends and state law requires dissolution distributions to for-profit parent like the entity in debs memorial radio fund you have issued shares of stock unlike you the entity in debs memorial radio fund amended its bylaws to prohibit paying dividends this factor was critical to the court’s determination that the entity was not organized for profit see pickwick electric membership corporation bylaws for distributions amended although you state that you have never paid dividends to your for-profit shareholder we have found no language in your articles or bylaws that affirmatively prohibit you from doing so you state in an attachment to your form_1023 that you have never distributed your net_earnings outside of n however this response does not address whether you may distribute net_earnings to your for-profit shareholder in the future further applicable state law provides that upon dissolution after payment of all debts you must distribute any assets remaining to your shareholder there are no apparent restrictions on what -the for-profit shareholder can do with your assets we also are not aware of any restrictions on the sale or ownership of the for-profit shareholder’s stock by its sec_501 parent cf universal oil products exemption under sec_501 of the code not determined by simple expedient of transferring ownership to an exempt_organization therefore nothing would prevent the distribution of your net_earnings or assets to a private individual or shareholder contrary to the prohibition in sec_501 intent to be organized as a for-profit corporation you state that l law does not require an hmo to be formed as a you could have been formed as a non-profit corporation that fact distinguishes your case from university of maryland physicians the fact that you could have organized under state non- for-profit corporation and that profit law but chose not to do so indicates that you intended to be a for-profit corporation debs memorial radio fund pickwick electric membership corp you also argue that your motivation for applying for exempt status is not tax_avoidance but a desire to comply with your state law fiduciary duties to operate the applicant at the lowest practical cost you argue that the savings from not paying federal_income_tax could be used to further the healthcare mission of the system in which you operate this argument is undermined by the fact that you did not apply to be or file as an organization exempt under sec_501 of the code for more than years after you incorporated under state law and became subject_to such fiduciary duties you also stated that you could have reincorporated under the state nonprofit statute at any time prior to without incurring federal_income_tax actual operations by themselves do not establish that you were not organized for profit you argue that you have operated from the beginning as an entity described in sec_501 of the code the courts have interpreted sec_501 to require an entity both to be not organized for profit and operated exclusively for the promotion of social welfare see eg debs memorial radio fund evidence that you operated as a nonprofit is a factor indicative that you are not organized for profit debs memorial radio fund pickwick electric membership corp cf roche’s beach but such evidence does not outweigh the other factors showing that you are organized for profit debs memorial radio fund pickwick electric membership corp conclusion based on all the facts and circumstances you are not not organized for profit within the meaning of sec_501 of the code our conclusions are based on the following factors you are organized under the state of l’s business corporation law neither your articles nor your bylaws limit your business powers particularly with respect to dividends your stock is held by a for-profit corporation to whom you must distribute your net assets upon dissolution and there are no apparent ownership or transfer restrictions with respect to the stock of you or your parent and you can incorporate and could have incorporated under l’s nonprofit statute therefore since date you did not qualify as an organization described in sec_501 of the code and sec_1_501_c_4_-1 of the regulations consequently you do not qualify for recognition of exemption under sec_501 of the code as an organization described in sec_501 and you must file federal_income_tax returns 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 accofhpanying 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 may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power'of attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service se t eo ra t constitution ave n w washington dc if you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax 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 rulings agreements enclosure notice