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 corp b01 plr-130598-12 date date legend distributing --------------------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------- controlled -------------------------------------------------------------- -------------------------------------------------------------------------- operating predecessor shareholder a shareholder b_trust a -------------------------------------------------------- ------------------------------------------------- ------------------------------ ----------------------------- ----------------------------------------------------------------------- ---------------------------------------------------- trust b --------------------------------------------------- ------------------------------------------------------------------------ business a ----------------------------------------------------------------- aa bb ------------------ ------------------ plr-130598-12 cc dd state a date date dear -------------- ------------------ ------------------ ---------------------------- -------------------------- ---------------------------------- this letter responds to a letter dated date requesting rulings as to certain federal_income_tax consequences to the proposed transaction described below the proposed transaction the information submitted in that request and in subsequent correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process moreover no information provided by the taxpayer has been reviewed and no determination has been made regarding whether the distribution defined in step iii below i satisfies the business_purpose requirement of sec_1_355-2 ii is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is a state a entity that was formed on date as a successor entity to predecessor and has elected to be treated as a subchapter_s_corporation for federal_income_tax purposes since its formation distributing is closely held and owned by shareholder a an individual trust a a grantor_trust with shareholder a as its grantor shareholder b an individual and trust b a grantor_trust with shareholder b as its grantor together shareholder a and trust a own aa of the stock of distributing together shareholder b and trust b own bb of the stock of distributing operating is a state a limited_liability_company that was formed on date and is treated as a plr-130598-12 partnership for federal_income_tax purposes distributing owns cc of the membership interests in operating other investors unrelated to distributing’s shareholders own the remaining membership interests in operating the taxpayer has submitted financial information indicating that business a as conducted by distributing through operating has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the five years preceding the proposed transaction proposed transaction for what are represented to be valid business reasons the taxpayer proposes to undertake the following proposed transaction i ii iii distributing will form controlled as a state a corporation that will elect to be treated as a subchapter_s_corporation for federal_income_tax purposes distributing will own all of the stock of controlled distributing will contribute dd of the membership interests in operating to controlled the contribution distributing will distribute all of the stock of controlled to individual b and trust b in complete redemption of their interests in distributing the distribution representations the following representations have been made with respect to the proposed transaction a no part of the consideration to be distributed by distributing in the distribution will be received by individual b or trust b as a creditor employee or in any capacity other than a shareholder of distributing b no part of the consideration to be distributed by distributing in the distribution will be received by a security holder as an employee or in any capacity other than that of a security holder of distributing c the five years of financial information submitted for business a conducted by distributing through operating is representative of the present operations and there have been no substantial operational changes since the date of the last financial statements submitted plr-130598-12 d neither business a of distributing or controlled in each case conducted through operating nor control of any entity conducting such business will have been acquired during the five year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five year period ending on the date of the distribution operating will have been the principal_owner of the goodwill and significant assets of the business conducted by distributing and controlled through operating and operating will continue to be the principal_owner of such goodwill and significant assets following the distribution e following the contribution and distribution each of distributing and controlled will continue through its ownership of a significant interest in the membership interests of operating the active_conduct of its respective share of all of the integrated activities of business a conducted by distributing through operating prior to the consummation of the contribution and distribution f the distribution will be carried out for the corporate business_purpose of promoting management stability and resolving differences in business philosophies the distribution is motivated in whole or substantial part by this corporate business_purpose g the distribution will not be used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both h the fair_market_value of controlled stock and any other consideration to be received by founder b and trust b in the distribution will be approximately equal to the fair_market_value of distributing stock surrendered by such shareholders in the distribution i the total fair_market_value of the assets transferred to controlled by distributing in the contribution will exceed the sum of i the amount of any liabilities assumed within the meaning of sec_357 by controlled in connection with the contribution ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the contribution and iii the amount of any cash and the fair_market_value of any other_property other than stock_or_securities permitted to be received under sec_361 without recognition of gain received by distributing from controlled in connection with the contribution the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the contribution j the total adjusted_basis of the assets to be transferred to controlled by distributing will equal or exceed the sum of the liabilities assumed as plr-130598-12 determined under sec_357 by controlled plus any liabilities to which the transferred assets are subject the liabilities assumed if any as determined under sec_357 by controlled will be incurred in the ordinary course of business and will be associated with the assets transferred k the aggregate fair_market_value of the assets contributed to controlled in the contribution will exceed the aggregate adjusted_basis of those assets l no property will be transferred by distributing to controlled for which an investment_credit allowed under sec_46 has been or will be claimed m no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution n distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction o payments made in connection with all continuing transactions if any following the proposed transaction between distributing and controlled will be made for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length p no two parties to the proposed transaction are investment companies as defined in sec_368 and iv q distributing and controlled each will pay its own expenses if any incurred in connection with the contribution and the distribution r for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution s for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five year plr-130598-12 period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing’s stock_or_securities that were acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution t the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor to any such corporation u immediately after the distribution neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 rulings based solely on the information submitted and the representations made we rule as follows on the proposed transaction the contribution together with the distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled each will be a_party_to_a_reorganization within the meaning of sec_368 distributing will not recognize any gain_or_loss on the contribution sec_361 and sec_357 controlled will not recognize any gain_or_loss on the contribution sec_1032 controlled’s basis in each asset received from distributing in the contribution will equal the basis of such asset in the hands of distributing immediately before its transfer sec_362 controlled’s holding_period in each asset received from distributing in the contribution will include the period during which distributing held that asset sec_1223 distributing will not recognize any gain_or_loss upon the distribution of controlled stock in the distribution sec_361 plr-130598-12 no gain_or_loss will be recognized by and no amount otherwise will be included in the income of shareholder b and trust b upon the receipt of shares of controlled stock in the distribution sec_355 the basis of the controlled stock in the hands of shareholder b and trust b immediately after the distribution will in each instance be the same as shareholder b and trust b’s basis in his or its distributing stock held immediately before the distribution allocated in the manner described in sec_1_358-2 in accordance with sec_358 through c each of shareholder b and trust b’s respective holding_period for the controlled stock received in the distribution will include shareholder b and trust b’s respective holding_period for the distributing stock with respect to which the distribution was made provided that shareholder b and trust b hold the distributing stock as a capital_asset on the date of the distribution sec_1223 distributing’s momentary ownership of the stock of controlled as part of the reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 revrul_72_320 1972_1_cb_270 caveats except as expressly provided herein no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the proposed transaction satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of distributing controlled or both see sec_355 and sec_1 d iii whether the proposed transaction is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in either distributing or controlled see sec_355 and sec_1_355-7 and iv any non-arm’s length transactions between any of the parties to the proposed transaction procedural statements 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 plr-130598-12 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 ____________________________________ leah m thompson assistant to the branch chief branch office of associate chief_counsel corporate


internal_revenue_service number release date index number --------------------- ------------------------- ---------------------------- 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-118041-16 date date legend decedent spouse date date ----------------------------------------------------- --------------------- ------------------ ---------------------- dear ---------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during his lifetime plr-118041-16 you request an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 plr-118041-16 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may 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 no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means 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_9100-3 provides the standards the commissioner will use 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 a request for relief under sec_301_9100-3 will be granted when the taxpayer provides 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 the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 plr-118041-16 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-118041-16 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 associate chief_counsel passthroughs special industries by lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


ra fo ‘department of the treasury ‘ taxpayer_identification_number person to contact be employee fax contact hours tax period s ended ul sol zfoy i te internal_revenue_service appeals_office s market st ste ‘san jose ca release number ’ release date date date certified mail dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code’ it is determined that you do not qualify as exempt from federal_income_tax - under sec_501 of the code effective date the revocation of your exempt status was made for the following reason s e e you are not operated exclusively for exempt purposes as described in sec_501 of the code you operate for the substantial non-exempt purpose of acting as a tool to enhance the sales of health products of a for-profit entity most of your membership fees are returned to a for-profit entity for products the for-profit entity sends to your members you operate for the substantial non-exempt purpose of investing in for-profit entities you have made distributions to for-profit entities without exercising the requisite discretion and controt to ensure that the funds were spent for exempt purposes contributions to your organization are not deductible under sec_170 of the code to file federal_income_tax returns on forms for the tax periods stated in the you are required heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov if you were a private_foundation as of the effective date of revocation you are considered to be taxable ’ private_foundation until you terminate your private_foundation_status under sec_507 of the code in ’ addition to your income_tax return you must also continue to file form_990-pf by the 15th day of the fifth month after the end of your annual_accounting_period processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax couft write to the united_states tax_court second street n w washington d c see also publication you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matters that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this fetter sincerely yours appeals team manager enclosure publication ce internal_revenue_service tax_exempt_and_government_entities_division elizabeth ave independence mo department of the treasury date date legend org - organization name xx - date address - address org address ‘ certified mail - return receipt requested dear taxpayer_identification_number form tax_year s ended person to contact id number contact telephone number contact fax number - we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under- sec_501 of the internal_revenue_code a is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal i is available to you within the irs regarding the issue that was the subject of the technical-advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has -exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code letter rev catalog number 34809f you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate _ cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter contact you if you write please provide a telephone number and the most convenient time to call if we need to thank you for your cooperation sincerely nanette m downing director eo examination enclosures publication publication report of examination _ ae ee letter rev catalog number 34809f form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xxk org 20xx legend org - organization name state - state dir-1 through dir-6 - through co-14 - through companie sec_1 through 6‘ dir motto -- motto org-1 - org-1 ein - bin country - country xx - date book - book director - director cco-1 ra-1 - ra issues whether org is operated exclusively for exempt purposes within the meaning sec_501 of internal_revenue_code facts org foundation employer_identification_number ein incorporated in the state of state on march the internal_revenue_service irs recognized the co-1 foundation a sec_501 19xx of the internal_revenue_code by letter dated january a tax-exempt_organization described in section 19xx as cco-1 was now the the foundation states its mission on its form_990 for 20xx as to educate the public about and to support and fund follows scientific research to develop new methods of motto on its form_990 for 20xx the extension of the motto supports groundbreaking research on therapies to extend the motto by seeking methods to in achieving its goals org the foundation states its goal is on its form_990 for 20xx dedicated to finding new scientific methods for eradicating old age disease and death its exempt_purpose includes groundbreaking research on therapies to extend the motto by seeking methods to the foundation states that it is in a letter dated november its primary activity is research in the field of to provide grants for scientific -biological research 20xx the foundation states that the foundation reported no compensation to any of its directors dir-1 dir-2 dir-3 dir-4 dir-5 and dir-6 on its form_990 for 20xx highest paid employees other than officers directors and in addition it reported no compensation of the five form 886-acev ‘ oo department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx org 2020x further it reported no salaries and wages of trustees and no compensation of the five highest paid independent contractors for other than professional services during 20xx employees not included in the above categories on part ii line form_990 for 20xx director in-the amount of of the foundation did report salary-executive dollar_figure and payroll_taxes in the amount in statement attached to its of its form_990 for 20xx dollar_figures the foundation also states in its form_990 for 20xx that it funded through grants in excess of facilities to the following research co-5 dollar_figure co-3 co-4 and co-6 co-2 when asked to provide a copy of the grant application used by the foundation it responded in its letter dated november 20xx in the same letter decisions as follows the foundation does not have a formal grant application it described its criteria for grant award -biological research initially the funding decisions were made based upon the types of research already being conducted by the recipient entities and scientists the world of is conducted by a limited number of scientists and so the scientists on the board_of directors were generally familiar with the organizations and scientists who were best positioned to conduct the types of research that the foundation wished to fund in furtherance of its exempt_purpose ongoing process of oral discussions board meetings review of scientific results and laboratory site visits by board members these decisions were made through an it reported revenue on its form_990 the foundation is funded primarily by amounts it terms as membership dues and assessments and royalty income -- co-9 in the amount of for 20xx it in part line also reported other revenue in the amount of line amount of reports no key employees and no salaries paid to directors in part vii line 103b dollar_figuredollar_figure from membership dues and assessments as royalty income - co-9 it reported the source of the as noted above in part l dollar_figuredollar_figure it dollar_figure department of the treasury - internal_revenue_service page -2- form 886-a rev form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx 20kx in part vii of its form_990 for 20xx the foundation explains how each activity for which income is reported in column e of part vii contributed importantly to the accomplishment of the organization's exempt_purpose other than by providing funds for such purposes as follows to support scientific and medical_research and gather and publish information relating to motto in one brochure co-7 members during the on-site examination the foundation provided brochures used by the foundation are encouraged to sign up for org membership and receive on a 6-month subscription to the co-8 all org products knowledgeable health advisors who can help you personalize a unique org program comprehensive listing of products and therapies from around the world many available only from blood testing kits that can help you identify correctable disease risk factors and direct access via toll-free numbers to o ne bottle of org’s vitamin a org product directory a discounts of access to mail-order org to dollar_figure all these benefits are provided for a six-month membership fee the brochure also states that org is the world’s largest of non-profit organization dedicated to ongoing research in motto and that org offers you the most advanced org therapies in the world as they are developed another brochure offer sec_12 issues of co-8 and a free one-year the brochure states that the offer expires membership for dollar_figure february 20xx a third brochure states that org is the world’s premier organization dedicated to investigating scientific therapies to promote motto it also states the following the org financially supports innovative research projects seeking to motto org maintains contact with leading medical and obtain the latest a renowned leader in developing pharmaceutical grade and pharmaceutical quality supplements researchers around the world to breakthroughs the org is form 886-acev department of the treasury - internal_revenue_service page -3- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx 20xx this brochure provided a brief description of some of the most popular products org members take to stay healthy a letter to former members provides a brochure describing only a few of the pharmaceutical quality supplements available to foundation members at near wholesale prices offers renewal of membership for dollar_figure and up to dollar_figure worth of any products offered by the org absolutely free the letter states that the offer expires october the letter retail value 20xx the activities of the foundation and co-9 are intertwined royalty fees paid to the foundation are likely included in deductions taken by the co-9 as are salary expenses the magazines sent to members contain many advertisements for nutritional supplements sold by co-9 and include co-9 order forms for the products advertised further an advertisement for a particular product often follows an article touting its benefits in a letter dated november 20xx the foundation stated that the co-9 provides the magazines free of charge to the foundation and its members foundation stated the co-9 does not have any members in the same letter the 20xx members the annual the top inside cover of january of 20xx issue of the org magazine states the following at the end of each year prices are discounted on all products offered by the org sale enables members to obtain pharmaceutical-grade supplements at prices substantially below what commercial companies charge at the bottom of the inside cover the same issue states the following the sale extends to january traditionally take advantage of the sale to stock up on a year’s supply of their favorite supplements to place your order call or visit website the us country and country the same issue of the magazine contains a 12-page order form in the back that lists over big_number different supplements books and different blood tests that can be ordered the name org was used by another organization until june 20xx when co-1 and the former org agreed that co-1 would sale pricing available only to members in department of the treasury - internal_revenue_service form 886-a cev page -4- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20kxk 20xx change its name to org and the former org would change its name to org-1 see exhibit i the directors of the society formerly org stated that its involvement in exhibit iii page sec_4 and states in 19xx org-1 health product sales was interfering with its charitable and educational activities the society directors also determined that co-1 now the foundation was in a better position to sell the health nutrients and health supplements activities to a for- profit entity sales operation to co-1 december supplements sales operation to for-profit corporation org co-9 include ownership rights to director goodwill membership list or non-operating assets or liabilities the transfer of the society’s health products 19xx the foundation then sold the health please also refer to exhibit ii now the foundation occurred on 19xx the transaction did not on the same day dec including associated 19xx 19xx on see exhibit vii it purchased inventory licensing rights the co-9 was incorporated in state on december december customer mailing lists and certain other intangibles from the foundation for dollar_figure valuation report the co-9 employed people in 20xx its corporate headquarters are located in it also maintains a distribution center in state id the co-9 had big_number active members and big_number subscribers to its monthly magazine id report’s statement concerning the number of members of the co-9 contrasts with the response by the foundation that the co-9 had no members we note that the co-9 stock valuation of co-9 stock in 20xx state p accounting and trust agreement exhibit it 19xx on december transferred from the original org foundation a for-profit entity accounting and trust agreement exhibit ii the health product business was now society to co-1 now the health product business was then sold to co-9 see the recitals section of the the accounting and trust agreement recites the following org now society co-1 now foundation and the co-9 engaged in two transactions on dec transferred certain assets and liabilities to the co-1 now society 19xx org now form 886-a mev a department of the treasury - internal_revenue_service page -5- department of the treasury - internal_revenue_service form_8 a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20kx 20xx foundation the assets included its mailing list inventory of certain vitamins health supplements and related items its name logo trademarks tradenames and certain other intangible assets transferred to the co-9 certain assets and liabilities assets transferred nutrients and health supplements business the granting of licensing rights by co-1 the mailing list in the second transaction co-1 now foundation the consisted generally of the sale the health now foundation and the licensing of 19xx effective december according to the recitals in the accounting and trust agreement on may parties executed a contract of sale and assignment of lease to document the transfer of inventory_items and a royalties agreement to document the granting of licensing rights and mailing list license agreement this formal agreement was not executed until july took place on dec agreements were in place before the accounting and trust agreement was formalized in writing other agreements including oral 19xx even though the transfer of assets 19xx 19xx the a percent is now owned business valuation report exhibit iii _ percent shareholder trustees dir-3 and dir-2 co-10 is percent shareholder trustee dir-2 and by the foundation the accounting and trust agreement affirms the health product business was not conducted by the foundation but was initially conducted by the society the society transferred its health product business to the foundation the health product business was then purchased from the foundation by the cooo-9 the fair_market_value of the health products business transferred to co-1 determined in an appraisal dated january the business was described as mail-order vitamins vitamin supplements and retail outlets the fair_market_value of the business transferred to the foundation by the society was determined to be now foundation by the society was department of the treasury - internal_revenue_service 20xx the nature of as of december form 886-a rev page -6- 19xx dollar_figure form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20kx org 20xx the fair_market_value of the business sold to the co-9 by the foundation was determined to be dollar_figure business transferred to the co-9 specifically excluded the name logos trademarks trade names service marks and related goodwill the membership list and the non-operating assets and liabilities as of dec 19xx the amended royalties and license agreement exhibit iv the parties have agreed that co-9 shall pay foundation a the amended royalties and license agreement between the foundation and the co-9 dated march 20xx states at recital b royalty as specified herein based upon co-9’s sales for co-9's use of foundation’s name tradenames trade dress and other intangible assets collectively director all of which are owned by foundation royalties in the amounts of on its forms the foundation reported receipt of yearly logo trademarks service marks in 20xx and dollar_figure in 20xx in 20xxx dollar_figuredollar_figure dollar_figure product expense agreement exhibit v 20xx the renewal notices to the co-9 for each the foundation entered into a product expense agreement with the co-9 on february in the product expense agreement the foundation agrees to distribute annual renewal notices to individuals who are currently members encourage members to pay annual dues to the foundation in order to receive educational material discounts on health products sold by the co-9 and other_benefits the foundation and the co-9 agreed that the foundation will pay dollar_figure renewing member for the cost of health products shipped to each renewing member the product expense agreement states that the approximate retail value of the health products offered to each renewing member is dollar_figure and that the dollar_figure valuation was determined as of january the foundation reported receipt of total membership fees for the years 20xx and dollar_figure co-9 the amounts of for membership fees of these amounts the foundation reported paying to the and dollar_figure for products offered to members expense agreement exhibit vi in the respective amounts of department of the treasury - internal_revenue_service form 886-a rev and 20xx page -7- 20xxx 20xx sdollar_figure dollar_figure dollar_figure form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx 20xx the foundation also entered into an expense agreement with the co-9 the expense agreement states the following the parties agree that expenses shall be shared between the parties in the following percentages co-9 shall pay of said expenses and foundation shall pay of said expenditures based upon the parties’ relative interests in said mailings the parties’ relative interests reflect the historical relationship of the parties and the historical pattern of payments for the above-defined expenses after an arm’s length negotiation the expense agreement addresses the sharing of expenses for the distribution of educational materials materials distributed to attract new members and printing and postage expenses related to the membership drives s dollar_figure and 20xx exhibit vit the foundation provided a percent common_stock interest convertible debentures and co-9 stock valuation promissory note payments received exhibits viii-a and viii-b the foundation purchased two convertible debentures one each from the dir-3 revocable_trust and the co-10 issued by the co-9 on september 20xx each debenture was valued at reported as an investment on the 20xx form_990 balance_sheet unless paid earlier all accrued interest and the unpaid amount will be due on september valuation opinion of co-9 stock as of december prepared by co-11 which valued a in the co-9 at when the co-9 initially purchased the health product business the venture was financed through the foundation years 20xx to the foundation by the co-9 note the note had a before days from the date of the note provision for interest and the amount due was paid to the 20xx and 20xx various amounts were due to be paid in january 20xx a promissory to the foundation on demand or department of the treasury - internal_revenue_service _ the co-9 promised to pay dollar_figure during the tax form 886-a mev page -8- 20xx bc form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx 20xx foundation loans and notes between the foundation and the co-9 were generally unsecured loans the co-9 made payments of principal and interest to the foundation in the total amount of total amount due to the foundation from the co-9 was dollar_figure exhibit viii-b at the end of 20xx the see exhibit viii-a during 20xxx see dollar_figure grants the foundation’s primary expenditures were in the form of grants provided to sec_501 organizations and for-profit organizations that were conducting research relating to extending human life during the 20xx tax_year grants in the amount of organizations research organizations during 20xx co-13 and dollar_figure dollar_figure were provided to both exempt and for-profit research the following grants were provided to for-profit to to co-08 dollar_figure to co-12 dollar_figure to co-14 dollar_figure the foundation provided research grants in the total amount of in 20xx generally to for-profit organizations the total amount of to coo- dollar_figure was provided to the following for-profit entities dollar_figure to co-13 and dollar_figure to co-14 to co-12 dollar_figure dollar_figure the foundation provided research grants in the total amount of in 20xx the total amount of organizations dollar_figure to co-08 dollar_figure dollar_figure was provided to for-profit to co-12 dollar_figure to co-13 and dollar_figure to coo- shares out of more than in 20xx ra-1 also a member of the foundation’s board and dir-3 the foundation’s board member and part owner of the co-9 though his trust serves on the board_of directors of the four for-profit research organizations that were provided with grants dir-3 was also acting as chief_executive_officer of co- part owner of the co-9 serves on the board for co-14 owns or less than of the shares in co-08 the majority of the shares of stock in co- and co-08 are owned by the foundation foundation publicizes the grants that it awards in scientific trade journals it has no formal grant application process foundation states that its directors continually reviewed the progress of its funded research and awards grants based upon that progress the funding decisions were based upon the type of research see letter dated november 20xx initially although the ra-1 the form 886-aev page -9- department of the treasury - internal_revenue_service department of the treasury - internal_revenue_service form_886 a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx 20xx already being conducted by the recipient entities and scientists the world of conducted by a limited number of scientists and the scientists on the foundation board who were familiar with the scientists would provide insight to who should be funded -biological research was being the foundation stated that funding decisions were made through ongoing discussions board meetings review of scientific results and laboratory site visits by the board members the supported for-profit organizations did not provide any financial reports regarding how the funds were used but did provide reports regarding the research that is being conducted provided an operating budget for 20xx with financial information the intellectual_property funded by the grants is owned by the research facilities that are conducting the research to avoid any appearance of private benefit flowing to these research facilities as the foundation has required that the for-profit research facilities issue stock to the foundation so that if any of the products are successful as foundation will also benefit a result of the funded research a result of the research the co0o-08 employees donated services generally the foundation does not have any employees and the services that are provided to operate the organization are provided by the co-9 during 20xx the foundation had an executive director but the foundation determined that it was more cost efficient to operate the foundation with the co-9's employees the foundation reports that donated services are generally provided by the co-9 the foundation stated that the following donated services were provided in 20xx by the co-9 executive allocation in the amount of the amount of shipping in the amount of donated services are of a volunteer nature and consist of bookkeeping services legal services mailing and postage services and medical consulting services to the foundation’s members dollar_figure marketing services in the amount of dollar_figure the foundation indicated that the dollar_figure accounting services in and dollar_figure website form 886-a rev oe page -10- department of the treasury - internal_revenue_service department of the treasury - internal_revenue_service form_8 a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xxk 20xx the membership information is posted on the co-9's website the foundation stated that this website is the property of the co-9 the website was purchased by the co-9 and is now maintained by the co-9 the royalties agreement entered into between the parties in december of 19xx provided for a payment to the foundation from the co-9 for use of the foundation’s name on the website the co-9 website is used to sell health products nutrients and health supplements for the co-9 the membership information on the website applied to the foundation when a membership is purchased the following benefits are generally available to the foundation’s members dollar_figure but is sent -page reference book to new org members without additional_charge the cover price is called book co-8 an over 100-page monthly publication filled with medical_research findings scientific reports and practical guidance about using nutritional supplements and hormones to the magazine is produced by the co- and is the property of the co-9 it contains articles and advertising that promotes health products sales access to a toll-free phone line where members can speak with health advisors and medical doctors about their nutrition and health concerns these advisors can also help members design a personalized health maintenance program that includes nutritional supplements and hormones the org product directory a comprehensive listing of vitamins a order blood testing services discount on nutritional supplements vitamins and mail- ---s-s-s - s-ss- s c supplements and hormones see exhibits ix and xx membership mailings the foundation has various mailings to attract members the mailings generally offer the following to its members 6_month subscription to coo-8 a discounts of throughout the year enable members to receive higher discounts on these products to on all co-9’s products special sales form 886-a fev a _ page -11- ____ department of the treasury - internal_revenue_service _ form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx 20xx direct access via a special toll-free-phone number to health advisors who can help personalize a org program and provide answers to health questions org product directory - from around the world many available only from the coo-9 access to mail-order blood testing kits to help identify correctable disease risk factors free product such as a listing of products and therapies a bottle of vitamin see exhibit xi membership expenditures the following membership expenditures are stated on the foundation’s forms included postage and shipping in the amount of and publications costs of expenditures included postage and shipping in the amount of dollar_figure dollar_figure and printing and publications costs of membership expenditures included printing and postage in the amount of for 20xx membership expenditures dollar_figure and printing for 20xx membership for 20xxx and dollar_figure s dollar_figure law is exempt from of the code exempts from federal exclusively for charitable educational and other specified purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual sec_501 of the internal_revenue_code provides that an organization described in sec_501 income_tax sec_501 income_tax corporations that are organized and operated sec_1 organization will be regarded as operated exclusively for one or more exempt purposes only if activities that accomplish one or more of such exempt purposes specified in sec_501 regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test inc better business bureau of washington d c c -1 c provides that an an organization will not be so v united_states u s it engages primarily in the existence of a department of the treasury - internal_revenue_service form 886-a cev page -12- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xxk 20xx is necessary for an organization to establish is not organized or operated for the benefit of private sec_1 c -1 d ii provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subsection it that it interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests private interests include those of unrelated third parties as well as insiders commissioner t c commissioner t c advantage profit privilege gain teachers legal fund v commissioner t c american campaign academy v private benefits include an christian stewardship assistance inc retired or interest prohibited v sec_1 c -1 d provides that the term ‘educational’ as used in sec_501 relates to the following bo a a substantial part the instruction or training of the individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community sec_1 c -1 e provides that an organization may meet the requirements of sec_501 c although it operates a trade_or_business as of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated_trade_or_business in better business bureau of washington d c states u s trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 302_f2d_934 an organization that provided analyses of securities and the court considered the status of the supreme court found that the department of the treasury - internal_revenue_service _ inc v united form 886-aev _ ce page -13- ct_cl oe form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xk org 20xx industries and of the economic climate in general it sold subscriptions to various periodicals and services providing advice for purchases of individual securities the court noted a broad concept and assumed for the sake of that education is argument that the organization had an educational purpose the court concluded however that the totality of the organization's activities which included the sale of many publications as well as the sale of advice for a fee to a business than that of an individuals was more indicative of educational_organization the court held that the organization had a significant non-exempt commercial purpose that was not incidental to the educational purpose and that the organization was not entitled to be regarded as exempt cl held that an organization that provided health the claims_court in easter house v united_states services to unmarried mothers and their children as its adoption service did not operate exclusively for an exempt a part purpose since the health services were provided only as of the adoption services that were similar to those provided by commercial businesses a part of ct cir provided v united_states 477_f2d_344 in old dominion box co the court held that operating for the benefit of private parties constitutes a substantial non-exempt purpose leon a beeghly v commissioner t c that where an exempt_organization engages in a transaction with a related interest with the intent to benefit the private interest rather than the organization exemption may be lost even though the transaction ultimately proves profitable for the exempt_organization the in basic bible church v commissioner t c court found that although the organization did serve religious and charitable purposes it existed to serve the private benefit of its founders and thus failed the operational_test of sec_501 control_over financial affairs by the founder created an opportunity for abuse and the need to be open and candid about financial matters the applicant failed to provide information concerning financial affairs of the treasury - internal_revenue_service department form 886-a cev page -14- _ a form_8 a department of the treasury - interna revenue service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xk 20xx in united_states v american bar endowment ct the supreme court held that an c organization’s insurance program constituted both the sale_of_goods and performance of services and therefore constituted a trade_or_business for purposes of the computation of tax on unrelated_business_income the court determined that the manner in which the american bar endowment conducted the activity was like that of a for-profit insurance broker payments for_the_use_of trademarks trade names service marks or copyrights whether or not payment is based on the use made of such property are ordinarily classified as royalties for federal tax purposes enterprises inc wodehouse 337_us_61 2d cir royalties are excluded from the computation of unrelated_business_income of exempt_organizations b cir commissioner v rohmer v commissioner f 2d 2d cir and sabatini v commissioner f 2d see 123_f2d_665 i r c the service in revrul_68_489 c b determined that a sec_501 organization will not jeopardize its exemption even though it distributes funds to organizations that are not themselves charities if the exempt_organization ensure s that the funds are used for permitted purposes by limiting distributions to specific projects that further its own purposes the exempt_organization must also retain control and discretion as to the use of the funds and maintain records establishing that the funds were used for sec_501 purposes taxpayer's position the foundation states that it works to further its charitable purpose through promoting the healthy extension of life through publications that are provided to its members such as the co-8 website the book book and articles and information posted on the the foundation also states that its primary activity is to provide grants for scientific research in the field of biological research it states further that the grants provided to the for-profit organizations are charitable in nature even - form 886-a eev page -15- department of the treasury - internal_revenue_service a form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xxk org 20xx in addition the foundation states though formal grant applications and financial_accounting are not required specific specialized nature of the scientific research it primarily conducted by a small number of research facilities in addition to scientists at certain universities it adds that the research facilities equipped to conduct this type of research are well aware of the foundation as source for -biological research a potential funding due to the is the foundation also indicated that the board_of directors in particular dir-3 closely supervises the scientific research and serves on the board_of directors of the supported for-profit organizations the foundation stated that it makes the research results available to the general_public and that the foundation has required the for-profit organizations to issue stock to the foundation so that the foundation will benefit if any products are successful as a result of this research the foundation’s position concerning the agreements such as the accounting and trust agreement royalties agreements product expense agreement expense agreement debentures and promissory notes to the co-9 is that they are arm’s-length transactions the foundation obtained appraisals or used historical information to determine reasonable interest rates and compensation to be paid_by the co-9 the foundation also maintains that the original purchase agreement with the co-9 was at arm’s-length the foundation states that it did not find it necessary to require securitization of the co-9’s debt the foundation stated that the website is the property of the co-9 and that the co-9 entered into a royalties agreement for in addition to being used to the use of the foundation’s name solicit sales of the co-9’s products the website is also used to provide the results of the scientific research to both members and to the general_public and to solicit membership in the foundation the co-9 does not have any members it agreement’s provision for payments from the foundation to the co-9 for the products provided to the foundation’s members provides reimbursement for products provided to the foundation's members paid to the foundation co-9 first receives the membership dues is the foundation’s position that the product expense rather than percent of the membership dues being department of the treasury - internal_revenue_service form 886-a crev page -16- oo oo department of the treasury - internal_revenue_service form_886 a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xxk 20xx and then divides the money pursuant to the product expense agreement the foundation states that the product expense agreement is an arm’s-length transaction government’s position the foundation appears to have provided some funding for research and the magazines and additional information sent to its members appear to provide some educational information on nutrition and health nevertheless the foundation operates to a more than insubstantial extent for the non-exempt purpose of aiding in the sale of nutritional supplements publications and blood testing services by a for-profit entity in addition much of the funding for research aids for-profit research organizations with which the founders of the foundation are associated the foundation has no written grant application form and no published criteria for grant selection no financial reports were provided to ensure that the funds were spent for exempt purposes see revrul_68_489 1968_2_cb_210 since the foundation receives stock from the research organizations to which it awards grants the grant funding could be viewed as the purchase of stock rather than distribution of grant funds the selection committee for the grants consists of the foundation’s board_of which dir-3 and dir-2 are members dir-3 serves on the board_of directors of the four for-profit organizations co-08 co-13 co-14 and received yearly grants dir-3 was also acting as chief_executive_officer of co-14 in 20xx directors served on co-14 board_of that the sale of the health product business to the co-9 may not have been an arm’s-length transaction the health product business was sold to the co-9 of which the shareholders were the dir-3 revocable_trust and of the co-9 health product business was sold on december official appraisal regarding the value of the health product business was not obtained until january ii and iii and dir-2’s co-10 although the 20xx see exhibits 19xx the the product expense agreement requires the foundation to distribute annual renewal notices to individuals who are form 886-a crev - _ a department of the treasury - internal_revenue_service a - page -17- department of the treasury - internal_revenue_service form_8 a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xk 20xx currently members the members pay annual dues to the foundation to receive educational material discounts on health products sold by the co-9 and other_benefits relating to improving and extending life the foundation and the co-9 agreed that the foundation will pay dollar_figure to the co-9 for each renewing member for the cost of health products shipped to each renewing member the publications received by the renewing members are marketing tools for the sale of the co-9’s products total membership fees reported for the years 20xx 20xx and 20xx respectively were dollar_figure respectively the amounts of and dollar_figure during the years 20xx 20xx and 20xx dollar_figure and dollar_figure were paid to the coo-9 dollar_figure dollar_figure ' for products based on the product expense agreement the website is owned by co-9 and the royalties agreement allows for_the_use_of the foundation’s name on the website of the amount_paid by each renewing member dollar_figure the cost of health products shipped to each during the years 20xx 20xx 20xx respectively the amounts of dollar_figure dollar_figure and of the renewing membership dues were paid to the co- for products based the product expense agreement a large portion of the membership dues ostensibly paid to the foundation is actually paid to the co-9 for the health product sales is paid to the co-9 for as noted above the touted membership benefits of the foundation such as the magazine subscription book website information co-9 discounts personal health_plans all help to increase the sale of the co-9’s products although the magazines books website and personal plan information have provided some educational information to the foundation’s members on nutrition and good health like the organization in 302_f2d_934 insubstantial purpose of the foundation appears to be the sale of co-9's products exempt_activities appear to be provided as a part of its activities to further marketing of products in a manner similar to those provided by commercial businesses rather than as the exclusive purpose association in better business bureau supra in that its educational materials appear to have an underlying commercial motive similarly like easter house supra its the foundation also resembles the trade cl a more than ct form 886-a cev department of the treasury - internal_revenue_service _ eee page -18-- form_88 6a department of the treasury - internal_revenue_service name of taxpayer explanation of items org 20xx schedule no or exhibit year period ended 20xx 20xx conclusion the foundation is not operated exclusively for exempt purposes within the meaning sec_501 of internal_revenue_code the marketing of health products to the benefit of a for-profit business is a more than insubstantial purpose of the foundation the foundation’s tax-exempt status under internal_revenue_code c should be revoked as of january 20xx if you agree please sign the attached form_6018 and return it to the contact person if you agree please submit forms u s_corporation income_tax return for the tax years 20xx 20xx 20xx and 20xxx form 886-a eev department of the treasury - internal_revenue_service page -19-


significant index number department of the treasury internal_revenue_service washington d c tax exempt and government entities riiviston jan set ep ras az re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning january bases established as of date which result in a net unfunded_liability of dollar_figure this extension applies to the eligible amortization charge as of that date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph 3a has been provided we have sent a copy of this letter to the _ to the and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours la ff david m ziegler manager ep actuarial group


t c memo united_states tax_court bdward clasby and c t garrahan insurance agency inc petitioners v commissioner of internal revenue respondent docket no filed date paul f markham for petitioners mark l hulse and gary w bornholdt for respondent memorandum findings_of_fact and opinion colvin judge respondent determined that petitioners are liable for deficiencies in the excise_tax imposed on prohibited_transactions between retirement plans and disqualified persons by sec_4975 and b and additions to tax as follows deficiencies additions to tax sec sec sec sec year a b a a dollar_figure -o- dollar_figure dollar_figure big_number --o- big_number big_number big_number -o- big_number big_number -o- big_number big_number big_number -o- big_number big_number big_number -o- big_number big_number big_number -o- big_number big_number big_number -o- big_number big_number big_number -o- big_number big_number -o- big_number big_number big_number -o- big_number big_number big_number dollar_figure big_number big_number after concessions the issues for decision are whether petitioners are disqualified persons as described in sec_4975 we hold that they are and that they are jointly and severally liable for the 5-percent excise_tax on prohibited_transactions under sec_4975 for to whether petitioners are liable for additions to tax under sec_6651 for to we hold that they are to the extent discussed below at trial respondent conceded that petitioners are not liable for the 100-percent excise_tax under sec_4975 for or the additions to tax under sec_6651 for to respondent also conceded that the addition_to_tax under sec_665l1 a for does not exceed dollar_figure references to petitioner are to edward clasby references to the garrahan agency are to the c t garrahan insurance agency inc section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure i findings_of_fact some of the facts have been stipulated and are so found a petitioner clasby petitioner lived in framingham massachusetts when he filed his petition in this case petitioner graduated from boston college he was quarterback of the football team and is a member of the boston college hall of fame after college he taught at a preparatory school in massachusetts for years in he obtained a master's degree in biology from boston college he coached football at boston college while attending graduate school he then attended harvard business school for year petitioner married mary garrahan in he worked for the travelers insurance co travelers from around to or he left travelers to work for the c t garrahan insurance agency inc the garrahan agency which was owned by his father-in-law b petitioner garrahan agency the garrahan agency is a massachusetts corporation the principal_place_of_business of which was in framingham massachusetts during the years in issue and when it filed its petition in this case the garrahan agency sold insurance to individuals and businesses petitioner was president of the garrahan agency during the years at issue petitioner was a licensed insurance broker for the garrahan agency he solicited and acquired casualty insurance_business petitioner and his wife each received a salary from the garrahan agency from to during the years in issue petitioner owned a one-third interest his wife owned a one-third interest and they jointly owned a one-third interest in the garrahan agency travelers authorized the garrahan agency to solicit applications or proposals for insurance on behalf of travelers in travelers authorized the garrahan agency to solicit life_insurance contracts for travelers during the years in issue cc framingham union hospital inc during the years in issue framingham union hospital inc fuh was a not-for-profit hospital in framingham massachusetts petitioner's father-in-law had been involved with hospital activities since the 1940's or 1950's petitioner began his association with fuh in the late 1960's or early 1970's at the encouragement of his father-in-law petitioner initially helped fuh with fundraising he became a member of the executive committee of fuh in the early 1970's petitioner was a vice president of fuh from to in he was a member of fuh's board_of trustees executive committee and finance_committee the board_of trustees made policy for fuh and the executive committee implemented it fuh had to trustees in salaried officers of fuh reported to its executive committee and attended executive committee meetings fuh committees reported to the executive committee james walckner walckner was chief_executive_officer and executive vice president of fuh when petitioner became a trustee petitioner was elected president of fuh in and began reporting to the board_of trustees as president of fuh petitioner became a member of each fuh committee including the pension committee petitioner was president or vice president a trustee and a member of the executive committee of fuh from to d the fuh retirement_plan fuh pension_plan during the years at issue fuh maintained a qualified_pension plan for its employees the fuh plan the fuh plan was administered by the fuh pension committee which consisted of members of the board_of trustees of fuh and the fuh administration use of life_insurance to fund the fuh plan in petitioner and glenn talbot talbot then chief financial officer of fuh and a member of itss pension committee discussed an alternative program for funding the fuh plan under the program the plan would buy insurance policies on the lives of fuh employees and the plan would be named the beneficiary david player player had been an insurance agent for connecticut mutual life_insurance co since player first heard of the concept of a pension_plan buying life_insurance on its participants from petitioner ebdgar murray iii murray was a representative of travelers from january to date murray and the pension committee met several times to discuss the program petitioner introduced player to murray in the spring of andrew fantasia fantasia was the certified_public_accountant for the fuh plan in on the basis of conversations between petitioner and murray fantasia promoted the program to fuh in the summer of petitioner asked fantasia to do preliminary tax research regarding the program the date presentation to fuh on date murray player and fantasia presented to the fuh pension committee a proposal to invest fuh plan assets in the program petitioner did not attend the july presentation because he wanted to avoid the appearance of a conflict of interest however petitioner frequently met with murray and player at petitioner's offices to discuss the july presentation petitioner helped to prepare a document describing the program dated date which was given to fuh at the july presentation the document contained information that was discussed in the meetings with petitioner murray and player petitioner did not discuss the document with any representative of fuh after the date presentation player and petitioner had many meetings at the garrahan agency to discuss the program murray attended some of these meetings player used the garrahan agency's letterhead in correspondence sent to fuh about the program petitioner did not tell walckner or talbot that he met with murray and player before and after the july presentation in date murray told petitioner that the garrahan agency would receive commissions because fuh approved the program petitioner was not surprised that the garrahan agency was to receive the commissions investment in the program by the fuh plan on date walckner sent a memorandum to the fuh finance_committee of which petitioner was a member endorsing the program fuh bought whole_life_insurance from travelers for about participants in the fuh plan fuh was named as the beneficiary on date fuh assigned the insurance policies to the fuh plan the garrahan agency signed the applications and underwrote e assumed the risk of and issued the policies for the travelers whole_life_insurance contracts purchased for the fuh plan participants petitioner signed the fuh plan's insurance policies ie he accepted the policies for fuh in the fuh plan converted its insurance policies from whole life to universal_life_insurance the garrahan agency serviced and processed the universal_life_insurance contracts with the fuh plan participants and received additional commissions after the fuh plan converted its insurance policies fuh's payments to travelers for the life_insurance policies the fuh pension committee paid the following amounts to travelers for the whole_life_insurance policies date payments dollar_figure big_number big_number the fuh plan paid travelers the following amounts for renewal premiums date premiums dollar_figure big_number big_number big_number big_number commissions paid_by travelers to the garrahan agency during the years at issue the garrahan agency received the following amounts as commissions from travelers for the purchase by the fuh plan of life_insurance contracts year commissions dollar_figure big_number big_number big_number big_number big_number big_number total big_number player received about dollar_figure-dollar_figure in from petitioner and the garrahan agency for his role in promoting the program to fuh eb petitioner's activities as fuh president and fuh plan trustee as president of fuh from to petitioner presided over meetings of the executive committee at which it approved revisions to the fuh plan these meetings included date date and date at which the committee approved the fuh plan and date at which the committee agreed to use dollar_figure received from travelers for the first death under the plan to buy six or seven additional policies as fuh president petitioner signed various fuh plan documents and documents on behalf of the plan such as the fuh pension_trust agreement’ on date an amendment to the fuh plan effective date a form_2848 power_of_attorney and declaration of representative authorizing fantasia to represent fuh before the internal_revenue_service irs for tax matters relating to the fuh plan on date an amendment to the fuh plan effective date and a revision of the fuh plan on date petitioner became president of the fuh pension committee in as a member of the pension committee he was also a plan trustee he resigned from the pension committee in date because the garrahan agency was writing insurance policies for the fuh plan petitioner chose robert simmler to replace him ' petitioner also signed the fuh pension_trust agreement in his capacity as fuh plan trustee on the committee neither petitioner nor the garrahan agency filed a form_5330 return of excise_tax related to employee benefit plans for any of the years at issue f notices of deficiency respondent issued notices of deficiency determining that petitioners are liable for excise_tax deficiencies under sec_4975 and b and additions to tax under sec_6651 for through respondent determined that petitioners were disqualified persons and that they had participated in prohibited_transactions under sec_4975 il opinion a excise_tax on prohibited_transactions sec_4975 imposes an excise_tax on prohibited_transactions between retirement plans and disqualified persons sec_4975 imposes a 5-percent tax on the amount_involved as defined by sec_4975 for each prohibited_transaction any disqualified_person who participates ina prohibited_transaction is liable for the tax sec_4975 a disqualified_person includes an owner of percent or more sec_4975 provides sec_4975 definitions -- disgualified person ---for purposes of this section the term disqualified_person means a person who is--- a a fiduciary b a person providing services to the plan c an employer any of whose employees are covered by the plan d an employee_organization any of whose members are covered by the plan fe an owner direct or indirect of percent or more of-- the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation the capital interest or the profits interest of a partnership or the beneficial_interest of a_trust or unincorporated enterprise which is an employer or an employee_organization described in subparagraph c or d g a corporation partnership or trust or estate of which or in which percent or more of-- the combined voting power of continued of the stock of a corporation which is an employer any of whose employees are covered by the plan sec_4975 c e petitioners contend that they were not disqualified persons and did not engage in prohibited_transactions b whether petitioner was a disqualified_person petitioner is a disqualified_person if he was a fiduciary of the fuh plan sec_4975 a or if he was an officer or director of fuh or person having similar powers sec_4975 h whether petitioner was a fiduciary of the fuh plan petitioner argues that he was not a fiduciary of the fuh plan under sec_4975 a and thus was not a disqualified_person because he did not exercise discretionary authority or continued all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation the capital interest or profits interest of such partnership or i111 the beneficial_interest of such trust or estate is owned directly or indirectly or held by persons described in subparagraph a b c d or e h an officer director or an individual having powers or responsibilities similar to those of officers or directors a percent or more shareholder or a highly_compensated_employee earning percent or more of the yearly wages of an employer of a person described in subparagraph c d be or g control regarding the management or disposition of fuh plan assets and because his involvement in the daily operations of fuh was minimal petitioner points out that he resigned from the pension committee shortly after it was formed and argues that the committee had exclusive authority and control_over the fuh plan we disagree petitioner had discretionary authority and control_over the management of the fuh plan over the disposition of fuh plan assets and in the administration of the fuh plan when the prohibited_transactions occurred he need not have exercised that authority to be a fiduciary of the fuh plan sec_4975 a c during the years at issue petitioner was at various times vice president or president of fuh a member of the executive and finance committees of fuh a trustee of the fuh plan and briefly president of the pension committee of fuh the pension committee reported directly to the executive committee when fuh decided to invest plan assets in the program he was alsoa member of the finance_committee when on date walckner sent a memorandum to members of that committee advising them that unless they opposed the program within days the fuh plan would go ahead with the investment in the program petitioner thus had a direct role in deciding whether fuh would adopt the program he exercised discretionary authority and control regarding management of the fuh plan or disposition of its assets sec_4975 a petitioner exercised authority over the fuh plan as president of fuh petitioner presided over four meetings of the executive committee of fuh where the committee approved revisions to the fuh plan and agreed to use fuh plan assets to buy additional policies under the program from to as president of fuh petitioner signed various fuh plan documents including the fuh plan pension_trust agreement ’ several amendments to the fuh plan a revision of the fuh plan anda form_2848 authorizing fantasia to represent fuh before the irs for tax matters relating to the fuh plan petitioner was a fiduciary of the fuh plan because he exercised discretionary authority and control regarding the management of the fuh plan and the management and disposition of its assets sec_4975 a whether petitioner was an officer or director or individual having similar powers petitioner argues that he is not a disqualified_person under sec_4975 h because as president of fuh he did not have or exercise powers or responsibilities similar to those of petitioner also signed the fuh plan pension_trust agreement as a trustee of the fuh plan sec_4975 a provides fiduciary for purposes of this section the term fiduciary means any person who-- a exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets an officer or director we disagree any individual who is an officer or director or any individual who has powers or responsibilities similar to those of officers or directors of an employer any of whose employees are covered by the plan is a disqualified_person sec_4975 h 89_tc_1137 petitioner was vice president of fuh and a member of its board_of trustees and its executive committee from to date when fuh bought the insurance policies from travelers and was an officer of fuh from to see eg 97_tc_385 the taxpayer was a disqualified_person under sec_4975 h because he was an officer of the corporation whose employees participated in the plan affd in part and revd in part on another ground 7_f3d_774 8th cir kadivar v commissioner tcmemo_1989_404 the taxpayer was held to be a disqualified_person under sec_4975 h because he was the president of the corporation sponsoring the plan petitioners argue that a person's actions and not his or her job title determine whether that person is a fiduciary or other disqualified_person under sec_4975 petitioners rely on two district_court cases involving petitioners and others at fuh in 721_fsupp_1478 d mass fuh alleged that walckner petitioner the garrahan agency and others violated the prohibitions of the employee_retirement_income_security_act_of_1974 erisa publaw_93_406 88_stat_833 u s c section a against self-dealing by fiduciaries the complaint against walckner for breach of fiduciary duties was dismissed because it contained no factual allegations that he was a fiduciary the district_court made no finding as to walckner's status as a fiduciary rather it noted that the complaint alleged no facts to support the assertion that walckner possessed or exercised fiduciary powers id pincite the complaints against petitioner and the garrahan agency for breach of fiduciary duty were not dismissed the district_court held that fuh and the fuh plan could sue petitioner and the garrahan agency among others under erisa for breach of fiduciary duty petitioners rely on this case to show that petitioner was not a disqualified_person we disagree walckner's relationship to the fuh plan is irrelevant here petitioner was a fiduciary within the meaning of sec_4975 a because he exercised authority and control regarding management of the fuh plan or disposition of its assets further as an officer of fuh and trustee of the fuh plan petitioner was a disqualified_person under sec_4975 h in 744_fsupp_29 d mass the secretary of labor alleged that petitioner and the garrahan agency knowingly participated in prohibited_transactions and other breaches of fiduciary duty the complaint was dismissed because it did not allege that petitioner or the garrahan agency was a fiduciary the district_court held that nonfiduciaries are not liable for knowingly participating ina breach of fiduciary duty id pincite petitioners' reliance on that case is misplaced because the basis for liability of a disqualified_person for the sec_4975 excise_tax differs from the basis for liability of a fiduciary under erisa sec_406 88_stat_879 see o'malley v commissi96_tc_644 affd 972_f2d_150 7th cir a fiduciary is liable under erisa sec_406 if he or she knowingly caused the plan to engage in a transaction described in erisa sec_406 a fiduciary need not participate in the transaction to be liable under erisa sec_406 in contrast a disqualified_person is liable for the sec_4975 excise_tax if he or she participates in the transaction even if that person may have acted innocently or in good_faith or otherwise did not know or understand the nature of the transaction o'malley v commissioner supra pincite 89_tc_1137 we have found above at paragraphs ii-b-1 and ii-b-2 that petitioner was a disqualified_person because he participated in a prohibited_transaction conclusion we conclude that petitioner was a disqualified_person under sec_4975 and that he is liable for the 5-percent excise_tax imposed by sec_4975 cc whether the garrahan agency was a disqualified_person the garrahan agency is a disqualified_person if it provided services to the plan sec_4975 b or if percent or more of its voting_stock was owned directly or indirectly by persons described in sec_4975 a b c d or be sec_4975 g whether the garrahan agency provided services to the plan petitioners contend that the garrahan agency was not a disqualified_person under sec_4975 b because it did not provide services to the plan petitioners claim that travelers provided services to the plan we disagree the garrahan agency serviced and processed the life_insurance policies purchased by the fuh plan the garrahan agency is thus a disqualified_person under sec_4975 b whether petitioner owned percent or more of the garrahan agency petitioners argue that the garrahan agency is not a disqualified_person under sec_4975 g because percent or more of its voting_stock was not owned by a disqualified_person described in sec_4975 a b c d or eb we disagree a disqualified_person includes any corporation percent or more of which is owned directly or indirectly by persons described in sec_4975 a b c d or eb sec_4975 g for purposes of sec_4975 g an individual is deemed to own stock owned directly or indirectly by or for his family sec_267 sec_4975 for purposes of sec_4975 the term family includes the individual's spouse sec_4975 thus any interest in the garrahan agency owned by petitioner's wife is attributed to petitioner for purposes of sec_4975 g since petitioner and his wife owned percent of the garrahan agency and since petitioner is a disqualified_person under sec_4975 a the garrahan agency is a disqualified_person under sec_4975 g conclusion the garrahan agency is a disqualified_person under sec_4975 and thus it and petitioner are jointly and severally liable for the 5-percent excise_tax imposed by sec_4975 d whether petitioners are liable for additions to tax under sec_6651 a disqualified persons liable for the tax under sec_4975 must file an annual return on form_5330 for each prohibited_transaction sec_6011 sec_54_6011-1 pension excise_tax regs neither petitioner filed forms for the years at issue petitioners' failure_to_file forms renders each petitioner liable for the addition_to_tax under sec_6651 see 102_tc_499 petitioners do not contend that they are not liable for the additions to tax under sec_665l1 a we treat this as petitioners' concession of this issue see 90_tc_488 respondent concedes that petitioner stated at trial that he and the garrahan agency had paid dollar_figure to settle a civil suit brought in the u s district_court in boston against petitioners and others by the department of labor fuh and the fuh plan petitioners did not argue in their posttrial brief that this affects their liability for tax under sec_4975 - - petitioners are not liable for the additions to tax under sec_6651 and that the addition_to_tax under sec_6651 a for is not larger than dollar_figure we sustain respondent's determination that petitioners are liable for additions to tax under sec_6651 except as conceded by respondent decision will be entered under rule