department of the treasury internal_revenue_service te_ge eo examinations commerce street mc dal dallas tx tax_exempt_and_government_entities_division number release date uil code date taxpayer_identification_number person to contact identification_number contact telephone number certified mail- return receipt requested dear this is a final adverse determination regarding your exempt status under sec_501 c of the internal_revenue_code the code our favorable determination_letter to you dated december 19xx is hereby revoked and you are no longer exempt under sec_501 a of the code effective january 20xx the revocation of your exempt status was made for the following reason s you are not operating exclusively for any charitable purpose educational purpose or any other exempt_purpose our examination reveals that you are not engaged primarily in activities which accomplish charitable educational or other exempt purposes as required by sec_1 c -1 c your activities including your financial transactions more than insubstantially furthered non-exempt purposes moreover you failed to establish that you were not operated for the benefit of private interest of your founder treasurer and president as required for continued recognition of exemption pursuant to sec_1 c -1 d ii your income inured to the benefit of private shareholders and individuals contributions to your organization are no longer deductible under sec_170 after january 20xx you are required to file form_1120 u s_corporation income_tax return these returns should be filed with the appropriate service_center for tax years ended december 20xx december 20xx december 20xx and for all years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under section of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the 91st day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to these courts at the following addresses united_states tax_court second street nw washington d c united_states court of federal claims madison place nw washington d c united_states district_court for the district of columbia constitution avenue nw washington d c the taxpayer_advocate_service tsa is an independent organization within the irs that can help protect your taxpayer rights we can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for our assistance which is always free we will do everything possible to help you visit taxpayeradvocate irs gov or call if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely margaret von lienen director eo examinations enclosure publication department of the treasury ttill internal_revenue_service irs tax_exempt_and_government_entities_division commerce street mc dal dallas texas date may taxpayer_identification_number form tax_year s ended person to contact number contact numbers phone number fax number manager's name number manager's contact number phone number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 ofthe internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action- sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the letter rev catalog number 34809f irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn't apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office ofthe taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance ifyou prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate phone number for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely margaret von lienen director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx issue whether code facts continues to qualify for exemption under sec_501 c of the internal revenue was granted tax-exempt status as a sec_501 c organization december 19xx and the articles of incorporation were filed with the on october 19xx an attachment to form_1 stated that the the organization conducts its operations in secretary of state for the state of institute's purposes are as follows to spread the knowledge and availability of the in countries not presently being served therapy to the public to provide routine to lead and promote the continuing study and developme t of the to document research case studies involving the to formulate a booklet of progress testimonies to develop an awareness of the and collaborate with the medical community using lectures and educational seminar workshops and to involve third-world countries in the understanding of the through education and healthcare aid the the attachment also stated that the institute is involved in the practice of the is described as a gentle eastern medicine healing method that founder brings balance to the body's own subtle energies it allows the body to function and feel better as well as heal itself more rapidly the attachment goes on to state that the body's ability to naturally heal itself is becoming more recognized and accepted by western medicine the massage manipulation of bones muscle or tissues or the use of drugs or other external substances it is practiced by holding designated subtle energy points with the fingers or the palm of hands along the body's subtle energy pathways the is derived from the physics science of does not involve created by its therapist requires extensive study and training as well as a natural ability to develop and a effectively use intuitive senses mastering this complex technical subject requires understanding the subtle energy circulation patterns of the human body the organization has two websites that explain their purpose and activities a description of the services they offer is provided on their website and nutritional consultation - a test that incorporates the use of dark field microscopy to reveal the therapy sessions - a 1-hour hands-on approach to health disorders current state of the immune system possible vitamin deficiencies toxic effects ph mineral imbalances fungus and yeast plus other areas of concern and weakness zyto testing- a hour non-invasive way to survey your overall health including allergies and other causes of symptoms form 886-a catalog number 20810w page_1_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer facts continued explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx evox sessions- the evox vox is latin for voice uses your voice frequencies to map perception about specific topics like health relationships work or athletic performance educational classes - to learn how can be applied to help restore proper bio- electromagnetic conductivity circulation coherence without any risk or repercussions lectures - the conducts lectures throughout the year these average hours of informative health related lectures that have a wide range of subjects available to the public the range from dollar_figure offers a variety of for a lecture to dollar_figure classes ranging from introductory to advanced levels the costs for a multi-level course the organization sells numerous products on their website essentials bookmarks lumbar star and stratum chart energy pathways dvd set strategies for success dvd set level sec_3 and dvd set tooth chart pad o-pack tooth correlations laminated chart teeth and body poster energy sphere poster energy spheres dvd procedures booklet level sec_1 and dvd set wonderfully made textbook volume of textbook self help book - edition x self-help pocket booklet emt laminated card sec_3 x emergency integrative medicine technique emergency integrative medicine techniques emt introduction dvd palms finger and 24-hour chart dog and horse energy sphere chart are sold in single and multi-packs as natural health essentials natural health essentials pack - fights microbes form 886-a catalog number 20810w page_2_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx facts continued water purification systems are advertised through their website and distributed from the manufacturer products shower filter black purification elements arsenic and flouride protection elements crown imperial travel big -6 gallon size - gallon sfze gallon size dollar_figure gallon size is organized exclusively for charitable purposes it's articles of incorporation states that it's operated exclusively for charitable scientific literary and educational_purposes within the meaning of sec_501 c the articles state that no part of the net_earnings of the organization will inure to the benefit of any private_shareholder_or_individual no substantial part of the activities of the organization will be the carrying on of propaganda or otherwise attempting to influence legislation the organization will not participate in or intervene in any political campaign on behalf of or in opposition to any candidate for public_office upon dissolution the organization will dispose_of all assets exclusively for the purpose of the organization in such a manner or to an organization as described in sec_501 c the questions in the left column were presented to the activities are the organization's response is in the right column to clarify what their current charitable therapy information_document_request idrl responses to idr from for what activities were to enhance the public's understanding and granted exem_qtion availability of what is the institute's charitable the health education and treatment of the purpose s general_public what are the organization's current the activities and how are those activities in purpose through education books and accordance with the institute's purpose treatment describe the organization's day-to-day providing health education and treatment operations therapy to the general_public including how does the organization obtain clients or most clients are obtained through word-of- customers what is the billing procedure for clients that most clients pay at the time of service for visit the office serves its charitable mouth referrals how do you determine an individual's cost for treatment what happens when a client is unable to pay the stated treatment cost the website offers various financially challenged clients there are adjustable discounts to make the treatment available for those who truly cannot pay and need treatment the treatment without charge standard fees are set based on comparable services provided in the market if the client is truly unable to pay the still provides the services most of the products on the website are provides form 886-a catalog number 20810w page_3_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx products how does the institute obtain these products does the institute have distributor licenses no for any products are the products shipped directly from the all products are shipped directly from the institute or drop-shipped from the manufacturer distributor educational materials developed by and licensed by to the with the exception of the occasional water purification system that is drop shipped from the distributor manufacturer no does the institute have any medical affiliations or work directly with any physicians the institute offers classes and seminars most attendees are individuals learning how to on their website describe the individuals that typically enroll in these classes is a medical background re_guired are there any prerequisites to enrolling in these classes what does the individual do with the information learned in these classes your a contract to teach class fordollar_figure what does the contract include help themselves or a family_member with a health concern no medical background is required no prerequisites are required for these classes most individuals learn to better the health of themselves or their family members and allows access to the related materials emt and self-help classes offer the offers how to teach train others reported gross_receipts of dollar_figure the december 20xx in fact their only source_of_income for the prior current and subsequent year's return was from unrelated_business_income as shown from unrelated_business_income for the year ending 20xx- dollar_figure 20xx- dollar_figure 20xx- dollar_figure the initial interview was held july 20xx the organization's poa scheduled to represent the organization was out of the office due to medical reasons partner in the accounting firm agreed to represent the organization in his absence who was originally a advised the examiner that he was unable to reconcile the amounts listed on the return to the tax workpapers statements receipts and tax documents the following accounts were reviewed provided therefore he requested all of the organization's bank and credit card interest checking- a c ending credit card - a c ending checking - a c ending savings - aic ending free checking - aic ending personal form 886-a catalog number 20810w page _a_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx each transaction was input into their accounting software tax organizer and classified as either business or personal with the assistance of the following report was provided to the examiner for the tax_year ending december 20xx institute personal total expense accounting fees advertising appraisal auto- fuel auto - repairs maintenance bank charge car wash charitable_contributions cleaning clothing comp to dp computer expenses dry cleaning duplication electricity entertainment flowers for members gifts groceries household gym hoa dues insurance insurance interest_expense landscaping legal fees massage meals medical merchant card fees mortgage - home_office supplies payment processing payroll_taxes penalties personal pest control postage mailing svc printing copying recreation rent repairs maintenance form 886-a catalog number 20810w page_5_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx royalties salaries subcontractors supplies taxes taxes - personal telephone telecommunications tolls training travel unknown expenses water website these expenses weren't substantiated by adequate recording or contemporaneous documentation as required by sec_1 d at a meeting held january 20xx the examiner requested and received the general ledger and bank statements for 20xx and 20xx expenses for year ending december 20xx institute personal total expense accounting fees advertising auto- fuel auto-registration auto - repairs maintenance bank charge car wash charitable_contributions cleaning clothing computer expenses dry cleaning electricity entertainment flowers for members groceries household gym hoa dues insurance insurance interest_expense landscaping form 886-a catalog number 20810w page__ _ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx massage meals medical merchant card fees mortgage - home_office supplies payment processing payroll_taxes penalties personal pest control postage mailing svc printing copying property_tax recreation rent repairs maintenance royalties- salaries salon nails security subcontractors supplies taxes- personal telephone telecommunications travel uniforms water website expenses for year ending december 20xx institute personal total expense accounting fees advertising auto- fuel auto - repairs maintenance bank charge car wash charitable_contributions cleaning clothing computer expenses dry cleaning electricity entertainment form 886-a catalog number20810w page_ _ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx flowers for members groceries household gym hoa dues insurance insurance interest_expense jewelry landscaping massage meals medical merchant card fees mortgage - home_office supplies payment processing payroll_taxes penalties personal pest control postage mailing svc printing copying property_tax rent repairs maintenance royalties- salaries salon nails security subcontractors supplies taxes- personal telephone telecommunications travel uniforms water website see exhibit a for a detailed list of each transaction law sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals no part of the net form 886-a catalog number 20810w page_8_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx earnings_of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office sec_1 c -1 a of the regulations states that in order to be exempt as an organization described in sec_501 c of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1 c -1 d ii of the regulations provides that an exempt_organization must serve a public rather than a private interest the organization must demonstrate that it is not organized or operated to benefit private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests thus if an organization is operated to benefit private interests rather than for public purposes or is operated so that there is prohibited inurement of earnings to the benefit of private shareholders or individuals it may not retain its exempt status sec_6001 provides that every person liable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6001-1 states that in addition to such permanent books_and_records as are required by paragraph a of this section with respect to the tax imposed by sec_511 on unrelated_business_income of certain exempt_organizations every organization exempt from tax under sec_501 a shall keep such permanent books of account or records including inventories as are sufficient to show specifically the items of gross_income receipts and disbursements such organizations shall also keep such books_and_records as are required to substantiate the information required by sec_6033 see sec_6033 and sec_1_6033-1 through -3 sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal_revenue_service officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 a shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws the secretary may also prescribe by forms or regulations the requirement of every organization to keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6033-1 provides that every organization that has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 form 886-a catalog number 20810w page_9_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx sec_1 i states every organization which is exempt from tax whether or not it is required to file an information_return shall submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status and administering the provisions of subchapter_f chapter of subtitle a of the code sec_6033 and chapter of subtitled of the code revrul_59_95 1959_1_cb_627 held that failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of an exempt status revproc_2012_9 superseding revproc_90_27 1990_1_cb_514 sec_4 provides that the internal_revenue_service will recognize the tax-exempt status of an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal_income_tax is claimed section dollar_figure states that a determination_letter or ruling on exempt status is issued based solely upon the facts and representations contained in the administrative record it further states the applicant is responsible for the accuracy of any factual representations contained in the application any oral representation of additional facts or modification of facts as represented or alleged in the application must be reduced to writing over the signature of an officer or director of the taxpayer under a penalty of perjury statement the failure to disclose a material fact or misrepresentation of a material fact on the application may adversely affect the reliance that would otherwise be obtained through issuance by the service of a favorable determination_letter or ruling in plr the irs revoked the tax exemption of a public charity based on excess_benefit and private_inurement issues the charity's records demonstrated that the president consistently utilized the charity's income for private purposes the president routinely made loans to officers but never fully substantiated the purpose of these loans since the charity had no conflict of interest policy the president who made these loans in the first place then approved these loans with his wife and father all of these amounts went into a loans to officers account and inadequate records were kept on how this money was spent to further the charity's exempt purposes the irs noted that the charity's inurement issues and excess_benefit transactions resulted from the organization being under the control of one person with a family-based governing board moreover the irs noted that because of the charity's structure sufficient safeguards had not been put in place to prevent future violations in 485_us_351 108_sct_1179 99_led_368 the supreme court held that an organization must prove unambiguously that it qualifies for a tax exemption in better business bureau of washington d c inc v united_states 326_us_179 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 74_tc_531 in an action for declaratory_judgment pursuant to sec_7428 the tax_court considered an adverse_ruling by the irs form 886-a catalog number 20810w page__jq publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx on an application_for exempt status as a church the applicant had declined to furnish some information and made answers to other inquiries that were vague and uninformative on the basis of the record the court held that the applicant had not shown that no part of its net_earnings inures to the benefit of the family or that petitioner was not operated for private benefit in 73_tc_196 the petitioner's only activities were some individual counseling and distribution of a few grants to needy individuals the petitioner's failure to keep adequate_records and its manner of operation made it impossible to trace the money completely but the court found it clear that money passed back and forth between petitioner and its director and his for-profit businesses the court held that petitioner had not shown it was operated exclusively for exempt purposes or the no part of its earnings inured to the benefit of its officer in 70_fedclaims_782 the petitioner brought to challenge the denial of its application_for exempt status the court found that the administrative record supported the service's denial on the basis that the organization operated for the private benefit of its founder who had a history of promoting dubious schemes the organization's petition claimed that the founder had resigned and it had changed however there was little evidence of change other than replacement of the founder with an acquaintance who had no apparent qualifications the court resolved these questions against the petitioner who had the burden of establishing it was qualified for exemption if the petitioner had evidence that contradicted these findings it should have submitted it as part of the administrative process it is well accepted that in initial qualification cases such as this gaps in the administrative record are resolved against the applicant taxpayer's position the taxpayer's position is that the organization still serves its charitable purpose by providing health education and treatment including therapy to the general_public government's position based on the examination the does not qualify for exemption as a charitable_organization as described in sec_501 and sec_1 c which provides that an organization must be organized exclusively for charitable purposes it must be operated exclusively for charitable purposes no part of the net_earnings of which may inure to the benefit of any private_shareholder_or_individual it may not conduct more than an insubstantial amount of lobbying_activities and it may not intervene in a political campaign an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals used the net_earnings from the organization for_the_use_of his compensation from the organization despite having received compensation the of the funds from the organization's bank account received wages as well as additional received a royalty from the for their personal benefit material and had personal_use the organization offers certifications to teach work up one level at a time with a two year minimum of meeting all annual requirements for each level certification is renewed every year the instructors pay a fee for the contract to teach a class or train all approved instructors start at the emt level and form 886-a catalog number 20810w page_11 publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit years period ended 20xx 20xx 20xx others and they're allowed access to the related materials use of his licensed materials receives additional income from the to further demonstrate that the organization serves a private interest one would only need to look at the manner in which the institute is operated as stated in the questionnaire above the standard fees are set based on comparable services provided in the market as such he has recognized that the income the organization received for at least the last the income was reported as unrelated_business_income on form_990 yet form 990-t wasn't filed calendar years wasn't exempt_function_income conclusion the inured to the benefit of private individuals does not qualify for tax-exempt status under sec_501 c because their earnings accordingly the organization's exempt status is revoked effective january 20xx form_1120 returns should be filed for the tax periods ending on or after december 20xx form 886-a catalog number 20810w page____1 publish no irs gov department of the treasury-internal revenue service


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 and sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter about your federal_income_tax status and responsibilities please contact irs customer service at if you have any questions letter cg catalog number or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number vil legend b date c date g city h city l county m county n county r river q date s date t county v date w state x dollar amount y dollar amount z dollar amount dear applicant we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 or sec_501 the basis for our conclusion is set forth below letter cg catalog number 47628k issue do you qualify for exemption under sec_501 of the internal_revenue_code no for the reasons given below alternate issue do you qualify for exemption under sec_501 of the internal_revenue_code no for the reasons given below facts you originally incorporated in the state of w on s organized to provide food at a low cost to low income people you submitted amended articles of incorporation dated b which stated that you are organized exclusively for charitable purposes under sec_501 an additional amendment was submitted dated c which states that you are organized to provide a forum for small local growers and others to make produce available to residents and support farming efforts in t you were formed by a small_group of vendors that wanted a place to sell their produce as well as stimulate interest in and demand for locally grown farm products to accomplish this you operate a traditional farmers market in g w you state that of your time and funds are spent on the farmers market the market operates out of a building that is owned by the city of g on land owned by the h in addition to running the market your staff also organizes and coordinates visiting tax-exempt organizations collects food from vendors for donation to local food banks and operates an educational booth tax-exempt organizations use space at the market to promote their missions and master gardeners are present each day that the market is open of the market space is used by vendors and customers and approximately approximately of the space is used by community organizations currently all of your board members are vendors as stipulated by your bylaws your mission is to promote the development of local agriculture by supporting the development and expansion of the small family farm to increase public awareness of nutritional values of local fresh farm produce and to make the highest quality locally grown produce available in one location you have approximately vendors who are given opportunities to improve growing techniques and merchandising through formal workshops and through close proximity to each other at the market you participate in the food stamp and wic programs in order to raise nutritional levels within the community customers are able to pick up information on recycling sustainable agriculture nutritional information on fresh produce and hints for shopping at the market along with shopping opportunities daily entertainment is provided for market patrons generally in the form of musical acts at a main stage on the premises the market operates from april to october thursday to sunday and in november and december on saturday and sunday from 10am to 3pm the following products are letter cg catalog number 47628k offered produce flowers meat seafood dairy and eggs condiments and honey lotions and soaps baked goods and confections and various artisan products such as glass wood paper and metal work puzzles pottery and jewelry membership includes vendor members and supporting members supporting members are simply non-profits or individuals who want to help your market vendor members who sell at your market are broken down into four categories farmers those who raise produce such as fruits vegetables herbs flowers crops beekeepers growers of animals egg farmers fish or shellfish growers approximately of members processors those offering fresh products such as meat fish baked goods meeting all state county and local legal requirements with proper permits and licenses approximately of members farmer processors those farmers who have a board approved processed unprocessed food or animal item meeting all health and legal requirements with proper permits and licenses approximately of members crafters those who craft the products offered for sale requiring tool skills personal handling and or guidance approximately of members anyone may be a member as long as they live in t m l or parts of n and they must grow or make their own product membership is limited to individuals or small family farms any new vendor applicants with established businesses or businesses which do not meet the individual or small family farm guidelines must apply to and receive approval from your board_of directors before they are able to sell at the market these memberships are granted only when individual or small family or farm units are not available all of your members are required to be vendors this is one of your member benefits vendor members cannot buy and resell commodities that are or can be grown or processed locally you define local as being from l m n t or east of the r membership also requires that all vendors submit to being inspected to make sure that all products sold are vendor produced and that the vendor lives and works within the geographical boundaries outlined in the bylaws members pay a fixed annual membership fee of z dollars you are funded by stall fees membership fees and parking and merchandise sales vendors also pay a percentage of daily gross_sales or a minimum fee whichever is greater of x dollars on thursday and friday and y dollars on saturday and sunday the percentage for sales based fees are broken down as follows letter cg catalog number 47628k farmers crafters farmer processors processors food carts- processors ll- crafter ii farmer ii food concessionaires- fruit vendors- your expenses include occupancy advertising salaries and benefits market entertainment supplies taxes and licenses you submitted a copy of a lease held between the h and the city of g for premises to be used for a market while the majority of your expenses cover advertising and market entertainment you were unable to provide any copies of advertising materials when asked you have three paid employees a general manager assistant manager and maintenance personnel you indicated of the employees time is spent on the market which included workshops sales and educational activities however you then stated of employees time is spent on educational activities these employees are neither members nor vendors you did submit a brochure that was used in the past as promotional material it includes a brief history of the market in that it was originally formed by a small_group of vendors and eventually revived which led to your current location the brochure you submitted states that the market is the jewel of the h’s new waterfront development and publicizes the unique waterfront location’s proximity to other entertainment and dining attractions as well as the ability for customers to access the market by most modes of transportation law - sec_501 sec_1_501_c_6_-1 of the income_tax regulations states in part a business league is an association of persons having some common business_interest the purpose of which is to promote such common interest it is an organization of the same general class as a chamber of commerce or board_of trade thus its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons revrul_58_224 held that an organization which operated a trade_show as its sole activity primarily for the purpose of rendering particular services to individual persons was not entitled to exemption as a business league under sec_501 of the code the organization’s sole activity consisted of staging an annual merchandise show primarily exhibits by manufacturers under the sponsorship of the chamber of commerce the ruling concluded that the activities of the organization substantially served the exhibitors and retailers as a convenience and economy in the conduct of letter cg catalog number 47628k their businesses by providing selling opportunities for the distributors which was found to be considered rendering particular services for individuals as distinguished from the improvement of business conditions generally and corporations revrul_59_391 1959_2_cb_151 describes an organization of individuals firms associations business occupation or profession it was created for the purpose of exchanging information on business prospects and has no common business_interest other than a desire to increase sales of members held such an organization is not entitled to exemption from federal_income_tax as internal_revenue_code of a business league under sec_501 of the representing different trade each a revrul_68_264 defined a particular service for the purpose of sec_501 of the code as including an activity that serves as a convenience or economy to members of the organization in the operation of their own businesses in revrul_73_411 the history of sec_501 was described while discussing the exempt status of a shopping center in the case of a chamber of commerce or similar organization the common business_interest is usually the general economic welfare of a community an organization seeking exemption as a chamber of commerce must be one whose efforts are directed at promoting the common economic interests of all commercial enterprises in a given trade community the ruling also stresses that membership in sec_501 organization is voluntary and open generally to all businesses and professional persons in the community the american automobile association v commissioner of internal revenue 19_tc_1146 held that an organization whose principal activities consist of performing particular services and securing benefits for its members does not qualify for exemption under sec_501 of the code law - sec_501 sec_1_501_c_4_-1 provides that an organization is operated exclusively for the promotion of social welfare if is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and action is organization as set forth in paragraph c of regulation c -1 social improvements and not an it sec_1_501_c_4_-1 of the regulations provides that an organization is not operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general_public in a manner similar to organizations that are operated for profit letter cg catalog number 47628k revrul_78_86 held denial of an organization formed by various merchants to provide customer parking a parking arrangement whereby merchants join together to provide parking for their customers at a reduced_rate serves the merchants’ private interests by encouraging the public to patronize their stores thus it cannot be said to be operated exclusively for charitable purposes under sec_501 of the code or primarily for social welfare purposes under sec_501 281_f2d_912 10th cir thrift stores-a foundation reselling donated goods for a profit was held taxable even though its net profits were payable to a veterans’ organization exempt under sec_501 in that case the primary purpose of the organization as evidenced by its activities was to engage in a business and it did not qualify under c application of law - sec_501 you do not meet the qualifications under sec_1_501_c_6_-1 of the regulations as your activities are not aimed at the improvement of business conditions of one or more lines of business but rather you are performing particular services for members by operating and marketing a venue under which a member may sell their products you are providing a direct service to that member also operating a market for selected vendors does not improve business conditions of any industry or line_of_business but rather serves only as a convenience to those vendors chosen to sell at that market based on the information submitted your primary purpose is to provide a sales facility for your members similar to the organization in revrul_58_244 an activity such as this is providing a particular service to individuals the facility serves as a convenience and economy to anyone who uses the marketplace to sell their products serving your members in this manner provides a convenience and economy in the conduct of their businesses by providing selling opportunities they otherwise would not have revrul_68_264 defines this as providing a particular service to members performing services for members constitutes a prohibited activity under c thereby disqualifying you from exemption under this code section you are like the organization in revrul_58_294 in that you were formed to conduct advertising and marketing activities to promote the farmers market where the sale of products occurs the sales activities at the market are carried on for profit for the members vendors like the organization in revrul_58_294 you are engaged in furthering the business interests of the members vendors instead of focusing on the improvement of one or more lines of business the information you submitted indicates that your members have no common business_interest other than a mutual desire to have a location to increase their individual sales your marketplace activities are not directed at the improvement of business conditions letter cg catalog number 47628k of one or more lines of business but rather to the promotion of the private interests of those producers who rent stalls at your market the facts you submitted indicate that you are not promoting the general welfare of the community or promoting the common economic interests of all of the commercial enterprises in a given trade community rather you are simply providing a convenient place for individuals to market their products for their exclusive benefit as noted in revrul_73_411 by providing such service you are not considered to be the type of organization contemplated by sec_501 of the code therefore you do not qualify for exemption as an organization described in sec_501 of the code like the organization in revrul_59_391 your membership consists of individuals and farmers representing different products and crafts you were created for the purpose of conducting a farmers market you have no common business_interest other than a desire to increase the sales of your members vendors you are like the organizations in american automobile association v commissioner of internal revenue by conducting a farmers market your primary purpose is the operation of a regular business of a kind ordinarily carried on for profit you advertise and promote the farmers market as well as provide paid management services for the operation of the market and are therefore rendering particular services for your members vendors application of law - sec_501 sec_1_501_c_4_-1 provides that an organization is operated for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization that primarily benefits a private group of citizens cannot qualify for exemption you are formed to benefit your members who have joined as members to sell products as vendors at your market while the community at large derives some benefit from the availability of certain products the reason you were formed was to provide a place for these vendors to sell their products because you are primarily benefitting a group of private individuals your members you do not qualify under c sec_1_501_c_4_-1 of the regulations provides that an organization is not operated for the promotion of social welfare if is carrying on a business similar to organizations that are operated for profit you carry on a business similar to any for profit market in providing a varied array of products for customers members are selected based on the types of products provided measured by quality standards and legal and are allowed to operate generating maximized profits through individual sales at their own vendor stall activities licensing requirements enabling them to sell it letter cg catalog number 47628k of this type are no different from any grocery that sells food and food related products although you indicate you are the only market of this type in the area the goods you offer are not so unique as to not be in competition with any other store selling similar products in revrul_78_86 an organization formed by various merchants to provide parking for their customers at a reduced_rate was found to be serving the merchants’ private interests by encouraging the public to patronize their stores rather than providing their own parking merchants were able to join together to provide a common parking facility in which all share the benefits in that ruling although there was some public benefit derived from the construction and operation of the parking lot it was not formed to be operated primarily for social welfare purposes under sec_501 your market was formed by vendors looking for a place to sell goods the market is serving the private interests of your members merchants by providing a common venue for the sale of those goods rather then these vendors having to handle their own marketing promotion or advertising this is done by you customers are in turn encouraged by you to patronize and purchase goods sold by your members at your market for these reasons you are serving private members interests and much like the ruling although the public derived some benefit from the use of the parking lot and they derive benefit from the convenience or selection of goods sold at your market this was not the reason behind your formation you are similar to the organization in veterans foundation although you allow for the sale_of_goods to those of a disadvantaged class through the wic and food stamp programs which in turn helps the betterment of the community the operation of the market itself is still a regular business your primary purpose is to engage in a business of operating a market and therefore do not meet c qualifications conclusion based on the information provided we conclude that you are not operated as a business league described in sec_501 of the internal_revenue_code your operations provide specific services to members and allow them a convenience and private economic benefit you do not improve business conditions along one or more lines of business or of a certain area but instead provide services for the convenience of your members therefore you do not qualify for exemption under sec_501 in addition we conclude that you are not primarily operated as described in sec_501 of the code you were not formed for an overall community benefit and or for social welfare purposes but to provide a direct business service for your members’ economic benefit accordingly you do not qualify for recognition of exemption under sec_501 of the internal_revenue_code letter cg catalog number 47628k you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if that information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal item must be declared true under penalties of perjury to the appeal the following signed declaration this may be done by adding the statement of facts under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process to be represented during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter to you that letter will provide information about filing tax returns and other matters letter cg catalog number 47628k please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois lerner director exempt_organizations enclosure publication letter cg catalog number 47628k


internal_revenue_service number release date index number ------------------------------ ------------------------------- -------------------------------------------- ------------------------------ in re ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc intl b06 plr-116732-15 date date ty ------- legend taxpayer company z year year year year date date dear --------------- ------------------------------- -------------------------------------- ------- ------- ------- ------- ------------------- ----------- this responds to a letter dated date submitted by your representative the letter requests that the internal_revenue_service service grant taxpayer consent to use the methods described in sec_1_482-7 and notice_2005_99 2005_52_cb_1214 for measuring timing and identifying employee stock_options restricted shares and restricted share units for purposes of determining the amount taxpayer must include in its cost_sharing_arrangement csa as intangible_development_costs idcs for tax years subsequent to year the rulings contained in this letter are based upon information and representations submitted by taxpayer and its representative and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the factual information representations and other data may be required as part of the audit process plr-116732-15 facts taxpayer a domestic_corporation was incorporated in year on date in year taxpayer and its wholly-owned subsidiary company z entered into an agreement they intended would constitute a csa within the meaning of sec_1_482-7 since the onset of the csa taxpayer has granted stock-based compensation sbc in the form of stock_options with respect to taxpayer's common_stock and restricted_stock to its employees and employees of its affiliates the csa defines idcs as including sbc granted on or after date in year to the extent required_by_law as measured pursuant to the method provided in sec_1_482-7 default method on date in year taxpayer had an initial_public_offering and its common_stock was listed on an established u s securities market taxpayer filed this request for commissioner consent to prospectively change its method for measuring and timing sbc that taxpayer must include as idcs from the default method to the method described in sec_1_482-7 which was extended to certain restricted shares and restricted share units by notice_2005_99 elective method taxpayer also requested consent to prospectively change its method for identifying sbc with the intangible development activity ida from grant_date identification as provided in sec_1_482-7 to period-by-period identification as provided in notice_2005_99 taxpayer has made the following representations as stated in its submissions with respect to its csa taxpayer is in compliance and will remain in compliance with all record-keeping requirements of the internal_revenue_code_of_1986 as amended and the regulations thereunder including sec_1_482-7 upon request taxpayer will timely provide to the commissioner records kept pursuant to such requirements the sbc with respect to which taxpayer requests to use the elective method of measurement and timing and period-by-period identification as provided in sec_1_482-7 and notice_2005_99 are based on publicly traded stock within the meaning of sec_1_482-7 taxpayer's sbc is not subject_to market conditions or significant post-vesting restrictions within the meaning of statement of financial_accounting standards no share-based payment financial_accounting standards board rev sfa sec_123r the service and performance vesting restrictions do not have a substantial effect on the fair value of the sbc under u s generally_accepted_accounting_principles gaap plr-116732-15 and do not result in unreasonably long vesting periods within the meaning of sfa sec_123r with respect to any sbc the fair value of which is not reflected as a charge against income in audited financial statements taxpayer will identify such sbc for purposes of sec_1_482-7 as if the fair value of such compensation were reflected as a charge against income in audited financial statements taxpayer will treat sbc granted but not vested during the term of the csa as vesting immediately before expiration or termination of the csa for purposes of sec_1_482-7 as provided for in notice_2005_99 for all sbc granted before the first day of the first taxable_year following receipt of the service's consent legacy sbc taxpayer and all controlled participants to the csa will use the methods of measurement and timing provided in sec_1 d iii a and grant_date identification provided in sec_1_482-7 until all legacy sbc has been exercised or lapsed for all stock_options issued with respect to publicly traded stock within the meaning of sec_1_482-7 granted on or after the first day of the first taxable_year following receipt of the service's consent taxpayer and all controlled participants under the csa will use the elective method of measurement and timing and period-by-period identification as provided in sec_1_482-7 and notice_2005_99 for all restricted shares and restricted share units issued with respect to publicly traded stock within the meaning of sec_1_482-7 granted on or after the first day of the first taxable_year following receipt of the service’s consent that are a nonvested equity shares or nonvested equity share units within the meaning of sfa sec_123r and b not subject_to market conditions or significant post-vesting restrictions within the meaning of sfa sec_123r taxpayer and all controlled participants to the csa will use the elective method of measurement and timing and period-by- period identification taxpayer will amend its csa to elect the elective method of measurement and timing and specify the use of period-by-period identification within days of receiving the commissioner’s consent to change methods as requested taxpayer will apply the period-by-period identification method provided in notice_2005_99 consistently under the principles of sec_1_482-7 plr-116732-15 law measurement and timing of sbc related to intangible development sec_1_482-7 provides the default method for measurement and timing of sbc idcs as follows except as otherwise provided in this paragraph d iii the cost attributable to stock-based compensation is equal to the amount allowable to the controlled participant as a deduction for federal_income_tax purposes with respect to that stock-based compensation_for example under sec_83 and is taken into account as an idc under this section for the taxable_year for which the deduction is allowable sec_1_482-7 provides the alternative elective method for measurement and timing of sbc idcs with respect to options on publicly traded stock as follows with respect to stock-based compensation in the form of options on publicly traded stock the controlled participants in a csa may elect to take into account all idcs attributable to those stock_options in the same amount and as of the same time as the fair value of the stock_options reflected as a charge against income in audited financial statements or disclosed in footnotes to such financial statements provided that such statements are prepared in accordance with united_states generally_accepted_accounting_principles by or on behalf of the company issuing the publicly traded stock sec_1_482-7 provides for the time and manner of making the election in relevant part as follows the election described in this paragraph d iii b is made by an explicit reference to the election in the written contract required by paragraph k of this section or in a written amendment to the csa entered into with the consent of the commissioner pursuant to paragraph d iii c of this section sec_1_482-7 provides in relevant part i f controlled participants already have granted stock_options that have been or will be taken into account under the general_rule of paragraph d iii a of this section then except in cases specified in the last sentence of paragraph d iii b of this section the controlled participants may make the election described in paragraph d iii b of plr-116732-15 this section only with the consent of the commissioner and the consent will apply only to stock_options granted in taxable years subsequent to the taxable_year in which consent is obtained notice_2005_991 extended the elective method to nonvested equity shares or nonvested equity share units within the meaning of statement of financial_accounting standards no share- based payment financial_accounting standards board rev sfa sec_123r provided that those shares or share units i constitute or are issued with respect to publicly traded stock within the meaning of sec_1_482-7 and ii are not subject_to market conditions or significant post-vesting restrictions within the meaning of sfa sec_123r we refer to such shares and share units hereinafter as restricted shares and share units an election to apply the elective method to restricted shares or share units is generally made in the time and manner set forth in sec_1_482-7 however the consent of the commissioner is not required to elect the elective method for restricted shares and share units if the election is made by a written amendment to the csa not later than the latest due_date with regard to extensions of a federal_income_tax return of any controlled participant for the first taxable_year beginning after date identifying sbc related to intangible development sec_1_482-7 provides the rule for identification of sbc with the ida grant_date identification in relevant part as follows the determination of whether stock-based compensation is directly identified with or reasonably allocable to the ida is made as of the date that the stock-based compensation is granted accordingly all stock- based compensation that is granted during the term of the csa and at date of grant is directly identified with or reasonably allocable to the ida is included as an idc under paragraph d of this section notice_2005_99 provides that a taxpayer may choose to determine whether sbc measured by the elective method is related to the ida by analyzing the activities of the employee recipients of the sbc by reference to financial reporting periods identifying the related compensation on a period-by-period basis period-by-period identification rather than using grant_date identification notice_2005_99 further provides notice_2005_99 refers to the sbc rules contained in sec_1_482-7 the materially similar predecessor of the rules in sec_1_482-7 that are applicable in the present case plr-116732-15 taxpayers’ implementation of this identification method based on financial reporting periods must meet four requirements first the identification methodology must be applied consistently under the principles of sec_1_482-7 second any stock-based compensation the fair value of which is not reflected as a charge against income in audited financial statements for example as in the case of certain stock_options the fair value of which was disclosed in footnotes prior to the effective date of sfa sec_123r must be identified for purposes of sec_1_482-7 as if the fair value of such compensation were reflected as a charge against income in audited financial statements third as under the grant-date identification rule controlled participants using this identification methodology must exclude stock-based compensation granted prior to the term of the qcsa fourth and finally stock-based compensation granted but not vested during the term of the qcsa must be treated as vesting immediately before expiration or termination of the qcsa for purposes of sec_1_482-7 under this final requirement if costs attributable to stock- based compensation granted during the term of the qcsa are allocable under u s gaap to reporting periods subsequent to the term of the qcsa the determination of whether these costs must be taken into account as intangible_development_costs must be based on the employee's activities as of the financial reporting_period during which the date of the expiration or termination of the qcsa occurs generally pursuant to sec_1_482-7 and c a change_of identification method may be made only by a written amendment to the csa entered into with the consent of the commissioner however notice_2005_99 further provides that the consent of the commissioner is not required to change from grant_date identification to period-by-period identification if such written amendment is made no later than the latest due_date with regard to extensions of a federal_income_tax return of any controlled participant for the first taxable_year beginning after date in applying period-by-period identification notice_2005_99 provides a ctivities within the intangible development area are not necessarily coextensive with those activities classified as research_and_development for financial reporting purposes consequently nothing in this notice should be interpreted as eliminating the requirement to take into account all stock-based compensation costs related to the intangible development area controlled participants must identify the stock-based compensation that is related to the intangible development area notwithstanding that the activities conducted to develop intangibles covered by the qcsa may differ from the activities classified as research_and_development for u s gaap purposes plr-116732-15 analysis based on the representations taxpayer has made the service grants taxpayer prospective consent to change to the elective method for measurement and timing of employee stock_options restricted shares or restricted share units pursuant to sec_1_482-7 and notice_2005_99 for purposes of determining the amount taxpayer must include as idcs the service also grants taxpayer prospective consent to change to period-by-period identification of sbc with the ida pursuant to notice_2005_99 this consent is effective for days from the date of this letter therefore if taxpayer chooses to adopt the elective method and period-by-period identification it must make the written election in its csa within days from the date of this letter the sole purpose of this private_letter_ruling is to grant consent for taxpayer to use the elective method and period-by-period identification for purposes of including sbc as an idc that taxpayer must share for purposes of its csa except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including the csa or concerning the validity of any provisions within the csa this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely _____________________________________ robert z kelley acting assistant to the branch chief branch office of associate chief_counsel international cc


internal_revenue_service number release date index number --------------------------------------------------- ---------------------- ------------------ --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ---------------- telephone number -------------------- refer reply to cc psi b01 plr-120264-14 date date legend x ---------------------- -------------------------------------------------- date date date date date year year year state dollar_figurea dollar_figureb ------------------ ----------------------- ------------------ --------------------- -------------------------- -------------------------- -------------------------- -------------------------- ---------- ---------------- --------------------------------------------------------- plr-120264-14 dear -------------- this responds to a letter signed date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting inadvertent termination relief under sec_1362 of the internal_revenue_code the code facts according to the information submitted and representations within x was incorporated on date under a previous name under the laws of state effective date the taxpayer changed its name to x on date x elected to be taxed as an s_corporation for x’s taxable years ended year year and year x’s passive_investment_income exceeded of its gross_receipts furthermore x had c_corporation accumulated_earnings_and_profits ae p for each of the years stated above as a result x’s s election terminated on date x represents that it will distribute its ae p of dollar_figurea on or before date x represents that its previous tax advisor inadvertently failed to inform x of the passive investment rules in addition x represents that it has always intended to maintain its s_corporation status and that the termination of x’s s election was inadvertent and did not involve retroactive tax planning or tax_avoidance x further represents that x and its shareholders continued to consistently treat x as an s_corporation and that x and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent_termination_rule of sec_1362 that may be required by the secretary law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the plr-120264-14 corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation i has accumulated_earnings_and_profits at the close of each of consecutive taxable years and ii has gross_receipts for each of such taxable years more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided in sec_1362 the term passive_investment_income means gross_receipts derived from royalties rents dividends interest and annuities sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 provides in relevant part that the determination of whether a termination was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination was inadvertent the fact that the terminating event was not reasonably within the control of the corporation and in the case of a termination was not part of a plan to terminate the election or the fact that the terminating event or circumstance took place without the knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event or circumstance tends to establish that the termination of the election was inadvertent sec_1_1362-4 provides that the commissioner may require any adjustments that are appropriate in general the adjustments required should be consistent with the treatment of the corporation as an s_corporation during the period specified by the commissioner sec_1375 imposes a tax on the income of an s_corporation that has accumulated_earnings_and_profits at the close of a taxable_year and that has gross_receipts more plr-120264-14 than of which are passive_investment_income within the meaning of sec_1362 sec_1375 provides that the amount of the excess_net_passive_income for any taxable_year shall not exceed the amount of the corporation’s taxable_income for such taxable_year as determined under sec_63 a -- i without regard to the deductions allowed by part viii of subchapter_b other than the deduction allowed by sec_248 relating to organizational_expenditures and ii without regard to the deduction under sec_172 conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date because for three consecutive years x had ae p and more than percent of x’s income was passive_activity income under sec_1362 we further conclude that the termination of x’s s election on date was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on and after date provided x’s s_corporation_election was valid and is not otherwise terminated under sec_1362 this letter_ruling is subject_to the following condition as an adjustment under sec_1362 a payment of dollar_figureb and a copy of this letter must be sent to the following address internal_revenue_service cincinnati service_center west rivercenter blvd covington ky stop terri lackey manual deposit this payment must be sent no later than days from the date of this letter if this condition is not met then this ruling is null and void furthermore if this condition is not met x must send notification that its s election has terminated to the service_center with which x’s s election was filed except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding x’s eligibility to be an s_corporation this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent plr-120264-14 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 david r haglund david r haglund branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


department of the treasur internal_revenue_service washington d c significant index nos sep date contact person id number telephone number ope eo t employer_identification_number dear sir or madam this is in response to a request for a private_letter_ruling dated date as modified by a letter dated date submitted on your behalf by your authorized representatives concerning the federal tax consequences of the proposed transactions described below - the information provided indicates that you the foundation have been recognized as exempt from federal_income_tax as an organization described in sec_501 of the internal_revenue_code and are a private_operating_foundation described in sections a and j of the code the foundation’s purposes are to promote nature preservation and conservation and its activities include the operation of nature reserves and other protected areas on certain ecologically significant real_property owned by the foundation the foundation's real_property along with privately owned contiguous real_property together the land was formerly owned by m the company’ a corporation the company in turn was owned by certain descendants of the family the company granted to the county of x an open space easement covering substantially_all of the undeveloped portions of the land the easement the easement was granted for the express purpose of providing an opportunity for and to encourage access by the public to substantial portions of the land for scenic open space and recreational purposes and to preserve portions of the land for the protection of wildlife plants and unique geological sites the shareholders of the company donated all of the issued and outstanding class a common_stock of the company to the foundation subsequently all of the class a common_stock of the camnanv was redeemed in exchange for certain assets of the company most of which was subject_to the easement the company continues to own much of the land that does not belong to the foundation the state of y the state holds title to substantially ali of the submerged lands adjacent to the land the submerged lands although y has an informal policy that such lands are normally leased if at all to the owners of the adjacent uplands there is no formal rule_or_regulation granting the owners of the uplands such priority the company's lease of the submerged lands expired because of the interrelationship between the submerged lands and the foundation’s property both in terms of the preservation of the biotic and aquatic communities on the land and the fulfillment of the foundation’s responsibility for managing and maintaining public access to the open space areas of the land the foundation was concerned about the management of the submerged lands in order to increase the chances of success in obtaining the lease the company's financial resources were made available to the foundation and the state as a guarantor of the foundation’s performance of the terms and conditions of the lease through the company's execution of a joint bid with the foundation the company and the foundation were successful in obtaining the iease for a year term in the tease the submerged lands lease the state of y fifteen- subsequently the company and the foundation entered into a separate agreement the submeraed lands aqreement' to allocate the burdens and benefits of the submeraed lands lease n the manager’ was engaged by the foundation to provide the services required bv the management agreement provided that the manager i perform all of the submerged lands lease pursuant to a property management and service agreement the management agreement the manager was unrelated to the foundation the company or the family the terms of the personal management services required by the submerged lands lease and ji pay to the state the rent due under the submerged lands lease in exchange for iii the obligation of the foundation to pay to the manager a management and service fee equal to xx of the gross fees realized from the submerged lands lease from the foundation’s point of view the economic_effect of the arrangement was that the foundation was paid yy of the gross fees realized from the submerged lands lease after n collected the fees from the public as nart of its mission the foundation operates on were operated pursuant to the foundation’s obligations to do so under its land the terms of a memorandum of understanding pursuant to the open space easement with the county the foundation and n entered into necessary '- manage the variou’ management agreement to provide the services with respect to the the fees paid b ocated on property subject_to the easement were approved by the county the fees paid with respect tc are set at comparable rates the fees paid for are set by the foundation the management agreement was similar in structure management agreement in tnat n was responsible for performance of all of the to the management services needed to operate the expenditures required under the memorandum of understanding the agreement further provided that n was entitled to a fee based on a percentage of the gross license fees and gross_sales at the the gross fees realized from the management agreement was that the foundation was paid approximately aa of the which over time has averaged zz thus the economic_effect of n was alsn obligated to make the management in _ the owner of n conveyed his desire to retire and terminate all of the services provided by his company as soon as reasonably possible this decision was motivated in part by his determination that it was not profitable to continue the operations of his company notwithstanding the owner's decision the foundation was and is obligated under the terms of the submerged lands lease and the memorandum of understanding pursuant to open space easement to continue to provide the services performed by n the foundation examined alternatives to engaging n due to the remote location of the land and the lack of profit potential in the two agreements no unrelated contractor was sufficiently interested in assuming n's duties under the agreements to make a formal proposal the foundation had previously attempted to use unpaid volunteers to perform some of the management services prior to the execution of the services proved to be too labor intensive for volunteer staffing and thus the use of volunteers to perform the services provided by n was deemed impractical finally the foundation concluded that the capital_investment and additional paid employees which would be necessary to replicate n's operations would be extremely expensive and would place a heavy administrative burden on the foundation’s existing management management agreement but the _ in addition to the services provided to the foundation n conducted a variety of other business activities on the land including the operation of various facilities under lease from the company ir the company addressed the need to replace n by forming t as a wholly owned subsidiary to acquire n's assets and assume the operations of n company proposed that t he aliqwed to perform the services previously provided by n to the foundation and on financial statement shows that t is operatin _ t began nerfarminga all of such services since then its interim so that there would be no interruption in service the at a loss - because the services were and are necessary to carry out the exempt purposes of the foundation the foundation proposes to establish a limited_liability_company llc to perform the services the foundation and t will be the two members of the llc the foundation’s membership interest will hoid voting control_over the llc the foundation will contribute no capital to the llc but will assign its riahts to service under the submerged lands lease and its rights to service _ under the memorandum of understanding to the llc t will be obligated under the operating_agreement of the llc to contribute whatever capital and services are necessary to perform its functions the foundation's membership interest will be entitled to a oreferred return on income generated from the llc ie vwv of the fees generated from and aa of the fees generated from under the former agreements with n t's membership interest will have no preferred_return instead t will be entitled to distributions of net profits or losses which result from the llc's operations should the foundation desire to dissolve the llc the foundation will retain its rights under the submerged lands lease and the memorandum of understanding and t will be entitled to retain whatever capital it contributed to llc which will put the foundation in the same financial position that it was the llc will be treated as a partnership for federal tax purposes the llc will not engage in any legislative or political campaign activity within the meaning of sec_170 of the code the members will receive cash or property distributions and allocations of llc's gains and losses in accordance with sec_704 and there will be no transaction involving the llc which would properly be characterized as a sale_or_exchange of property between partners under sec_707 neither member will engage in any transaction with the llc other than in the capacity as a member members of the family are substantial contributors to the foundation and hence are disqualified persons with respect to the foundation under sec_4946 of the code the company is a corporation more than thirty-five percent of the total combined voting power of which is owned within the meaning of sec_4946 by persons members of the family described in sec_4946 a - d hence it is a disqualified_person with respect to the foundation under sec_4946 e t is a wholly-owned subsidiary of the company the llc will be a disqualified_person with respect to the foundation under sec_4946 of the code sec_501 of the code provides in part for an exemption from federal_income_tax for a corporation organized and operated exclusively for charitable scientific or educational_purposes provided no part of the corporations net_earnings inures to the benefit of any private sharehoider or individual sec_4941 of the code imposes a tax on each act of self-dealing directly or indirectly between a disqualified_person and a private_foundation sec_4941 of the code provides that the term self dealing includes any sale_or_exchange or leasing of property between a private_foundation and a disqualified_person sec_4941 of the code provides that the furnishing of goods services or facilities by a disqualified_person to a private_foundation shall not be an act of self-dealing if the furnishing is without charge and if the goods services or facilities so furnished are used exclusively for purposes specified in sec_501 sec_4943 of the code imposes an excise_tax on the excess_business_holdings of any private_foundation in a business_enterprise sec_4943 of the code provides that the term business_enterprise does not include pb a functionally_related_business as defined in sec_4942 sec_4942 of the code defines the term functionally_related_business as including a trade_or_business which is not an unrelated_trade_or_business as defined in sec_513 sec_4944 of the code imposes an excise_tax on the making of an investment by a private_foundation in such a manner as to jeopardize the carrying out of any of its exempt purposes sec_4944 of the code provides that program related investments the primary purpose of which is to accomplish one or more of the purposes described in sec_170 and no significant purpose of which is the production_of_income or the appreciation of property shall not be considered as investments which jeopardize the carrying out of exempt purposes sec_4945 of the code imposes a tax on taxable_expenditures sec_4945 of the code defines a taxable_expenditure as including any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 sec_53 d -2 f of the regulations provides that the fact that a disqualified_person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itself make such use an act of self-dealing sec_53_4944-3 of the regulations provides that a program related investment shail not be classified as an investment which jeopardizes the carrying out of exempt purposes of a private_foundation a program related investment is an investment which possesses the following characteristics i the primary purpose of the investment is to accomplish one or more of the purposes described in sec_170 ii no significant purpose of the investment is the production_of_income or the appreciation of property and iii no purpose of the investment is to accomplish one or more of the purposes described in sec_170 sec_53_4945-6 of the regulations provides that a grant to a an organization that is not described in sec_501 will not be a taxable_expenditure if the making of the grant itself constitutes the making of a program-related_investment because the foundation’s charitable mission requires the foundation to make its lands available to members of the public who visit the land for recreation and education the control_over the submerged lands provided by the submerged lands lease and the access it allows are critical to the accomolishment of the foundation’s charitable purposes therefore the llc's operation of would not constitute an unrelated_trade_or_business under sec_513 of the code but would constitute a functionally_related_business pursuant to the terms of the submerged lands agreement the joint lease by the company and the foundation is in substance a jease by the foundation with a guarantee by the company of the foundation’s performance of its obligations because the company does not realize any economic benefit from the submerged lands lease the submerged lands lease does not result in the exchange of money or property by a disqualified_person to a private_foundation the guarantee is in effect the provision of a service at no charge under sec_4941 of the code the provision of services by a disqualified_person to a private_foundation at no charge is not an act of self-dealing although the formation and operation of the llc will involve the transfer to and use by a disqualified_person the llc of an asset of the foundation its contractual rights under the agreements pertaining to the benefit received by any disqualified persons from the foundation's assets will be inciaental to the benefits received by the foundation from its participation in the llc under section sec_3 d -2 f of the regulations such formation and operation will not result in self-dealing moreover since the primary purpose of the foundation's investment in the llc is to accomplish the charitable purposes of the foundation and not made to produce income or to engage in political campaigning or legislative activities it is not a jeopardizing investment within the meaning of sec_4944 of the code since it is a program related investment the investment is not a taxable_expenditure within the meaning of sec_4945 since it is a program related investment accordingly we rule as follows the participation by the company in the joint fease of the submerged lands is for tax purposes the furnishing of services by the company to the foundation without charge and the services so furnished are used exclusively by the foundation for tax exempt purposes and therefore the participation by the company in the joint lease is not an act of self-dealing under sec_4941 d c the code of the contribution by the foundation to the llc of the rights to service the contribution of services and capital by t to the llc and the operation of the llc will not constitute acts of self-dealing under sec_4941 of the code the foundation’s membership interest in the llc constitutes a holding in a functionally_related_business under sec_4943 a of the code and does not constitute an excess business holding the contribution by the foundation to the llc of the rights to service is a program-retated investment by the foundation which does not jeopardize the carrying out of any of its exempt purposes and therefore does not constitute a jeopardy investment under sec_4944 of the code the contribution by the foundation to the llc of the rights to service does not constitute a taxable_expenditure under sec_4945 of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that this ruling may not be used or cited by others as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert c harper jr chief exempt_organizations technical branch a