department of the treasury internal_revenue_service commerce street ms dal dallas tx tax_exempt_and_government_entities_division date date number release date legend org organization name uil org address certified mail dear xx date address address person to contact contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court _june 20xx this is a final adverse determination_letter as to the org exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons a substantial part of your activities consists of providing down payment assistance to home buyers to finance the assistance you rely on home sellers and other real-estate related businesses that stand to benefit from these down payment assistance transactions your receipt of a payment from the home seller corresponds to the amount of the down payment assistance provided in substantially_all of your down payment assistance transactions the manner in which you operate demonstrates you are operated primarily to further your insiders’ business interests therefore you are operated for a substantial nonexempt purpose in addition your operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 c in addition you have failed to meet the requirements of internal_revenue_code sec_501 c and sec_1 c -1 d ii in that you have failed to provide information to establish that you were not operated for the benefit of private interests based upon these reasons we are retroactively revoking your sec_501 tax exempt status to october 20xx contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations enclosure form 886-a tak exempt and government entities division org address department of the treasury internal_revenue_service date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto issue whether org operated exclusively for exempt purposes within meaning of sec_501 facts org org is a xyz not-for-profit corporation incorporated on december 20xx president is org’s registered agent and president org’s address is address on december 20xx org applied for recognition as a tax-exempt_organization under sec_501 on october 20xx based on the information that org provided in its application_for exemption and on the assumption that org would operate in the manner represented in its application org was recognized as a tax-exempt_organization as described in sec_501 since 20xx org has promoted and operated a down payment assistance program for home buyers under which it provides funds to the buyers to use as their down payment and collects the same amount plus an additional fee from the home sellers as more fully described below under org’s down payment assistance program assistance is provided to buyers without income or asset limitations form_1023 application_for recognition of tax-exempt status org filed form_1023 with the irs to apply for recognition of tax-exempt status on december 20xx on its form_1023 org detailed the following activities the organization’s primary objective is to increase home ownership among individuals and families unable to save enough money for a down-payment to facilitate this objective the organization will provide gifts to be used as down-payments for homes in an amount of approximately three percent of the purchase_price the buyer is also encouraged but not required to participate in a home ownership education course the organization is funded primarily through collecting a service fee from the sellers or builders of the homes which are purchased by participants in the organization’s program the down-payment gifts will be available to anyone on a non-discriminatory basis if he or she makes a proper application to the organization the down-payment gifts will be made with no expectation of repayment the organization hopes to increase home ownership by offering assistance to individuals and families who are unable to save enough money for a down-payment the organization believes that home ownership benefits individuals and their communities by creating pride and a sense of belonging the organization has two mottos motto and motto the organization will work to implement these mottos through its programs form 886-a crev department of the treasury - internal_revenue_service page -1- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto in addition to the down-payment assistance program the organization will sponsor classes and seminars on the benefits and responsibilities of home ownership the organization will publicize its services through radio and newspaper advertising in addition the organization will work with other community organizations and out-reach programs to target individuals and families who will benefit from the programs regarding the organization’s sources of financial support org’s form_1023 listed the following sources the organization’s primary source of financial support will be from the service fees collected from sellers and builders whose homes are purchased by the participants other sources will include donations from other charitable foundations and organizations if necessary the organization may apply for grants or other funding from other sources regarding fundraising and contributions the application states the following the organization’s fundraising program has been started the organization has received commitments of support from a few organizations the main method of fundraising will be personal solicitation by an employee of the organization or a volunteer this person will meet with potential donors and explain the programs offered by the organization if the need arises the organization may form a committee to solicit donations on february 20xx the irs requested additional information from org regarding its application a letter was sent to the organization which stated based upon the information submitted and applicable law it appears you may not qualify under sec_501 of the code we reach our conclusion for the reasons discussed below first you indicate an important part of your operation and your primary source_of_income will be the performance of services to persons attempting to market their homes in exchange for a fee comprised of a percentage of the final sales_price there is no information from which it can be concluded that the services you describe will further or advance any charitable purpose it appears the described services provide a convenience and a benefit to homeowners who are not members of a charitable_class of persons because services you describe further no exempt_purpose and because they result in benefits to private persons you do not meet the operation test of sec_501 of the code which requires that you operate exclusively for charitable purposes form 886-a rev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto secondly you indicate another important part of your operations will be providing financial benefits to persons of low and moderate income to assist them in acquiring a home while the providing of assistance to low income or needy individuals to enable them to acquire housing would otherwise be considered a charitable activity providing these benefits to moderate income persons would not be deemed charitable you have not explained how benefits you propose to provide to moderate income persons further a charitable purpose and you have therefore not described activities that are exclusively charitable in compliance with the requirements of sec_501 of the code the letter also advised org regarding action to take in the event that it disagreed with the service’s findings in part the letter states the following also if you disagree please provide the following providing housing are described in sec_501 of the code a copy of your original filed articles of incorporation revproc_96_32 provides guidelines for determining whether organizations specifically address the following will you agree that for each housing project that a at least percent of the units will be occupied by residents that qualify as low-income and b either at least percent of the units will be occupied by residents that also meet the very low-income limit for the area or percent of the units will be occupied by residents that also do not exceed percent of the area’s very low-income limit up to percent of the units may be provided at market rates to persons who have incomes in excess of the low-income limit if you agree please submit a resolution adopted by your governing body and signed by at least officers agreeing to the above on march 20xx org provided its response to the request for additional information org disagreed with the irs’s findings the organization’s response states the following regarding the irs’s conclusion that performing services for those persons attempting to market their homes does not further or advance any charitable purpose in your letter you concluded that an important part of the organization’s operation will be the performance of services to persons attempting to market their homes in exchange for a fee comprised of a percentage of the final sales_price this is incorrect the organization’s primary function will be to offer down payment assistance in the form of gifts to participating form 886-a cev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto individuals the program as explained below a an individual or family that is interested in purchasing a home will apply to become a program participant a participant b a participant will then select a home from program-qualified homes as described below c at the time the participant closes on the purchase of the program-qualified home the organization will make a gift to the participant in an amount up to three percent of the purchase_price of the program-qualified home to be used as part or all of the down payment for the program-qualified home the organization will deliver the amount_of_the_gift on behalf of the participant directly to the closing agent d program-qualified homes are those homes that a builder seller has made available for the program and on which the builder-seller has agreed to pay to the organization a fee at the closing on the program-qualified home equal to four percent of the purchase_price this fee will be placed in a pool of funds for use by the organization for down-payment assistance for participants to the extent that the services provided under the program benefit the builders sellers the benefit is simply a by-product to the services provided to the participants as a result of the services being provided to the charitable_class of persons the seller builder may receive an ancillary benefit through the increase in the number of qualified buyers who may purchase the home however the organization does not guarantee the sale of a qualified home or offer any additional service to the builder seller regarding the irs’s conclusion that providing down-payment assistance to moderate income persons would not further a charitable purpose org’s response stated in your letter you also indicate that providing benefit to moderate-income persons would not be deemed charitable this is incorrect the organization’s board_of directors has approved a resolution a copy of which is enclosed whereby the organization agrees to follow the guidelines set forth in revproc_96_32 revproc_96_32 which establishes a safe_harbor for qualification as tax-exempt under sec_501 allows a percentage of participants in a program that qualifies under the safe_harbor to have income in excess of the low-income limit therefore as long as the organization is in compliance with revproc_96_32 the organization qualifies for tax-exemption the program can provide benefits to moderate-income persons under revproc_96_32 as a part of its response org included a resolution adopted by the board_of directors and signed by the president on march 20xx which outlined its intent to comply with revproc_96_32 the resolution states form 886-a cev department of the treasury - internal_revenue_service page -4- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto resolved that the board_of directors agrees to follow the guidelines set forth in revproc_96_32 as follows at least seventy-five percent of the participants who receive down payment gifts through the program will qualify as low-income and either a at least twenty percent of the participants who receive down payment gifts through the program will meet the very low-income limit for the area or b forty percent of the participants who receive down payment gifts through the program will not exceed one hundred and twenty percent of the area’s very low-income limit up to twenty-five percent of the participants who receive down payment gifts through the program may have income in excess of the low-income limit on june 20xx the irs again concluded that org may not qualify for exemption under sec_501 of the code the reason given states you indicate an important part of your operation and your primary source_of_income will be the performance of services to persons attempting to market their homes in exchange for a fee comprised of a percentage of the final sales_price there is no information from which it can be concluded that the services you describe will further or advance any charitable purpose it appears the described services provide a convenience and a benefit to homeowners who are not members of a charitable_class of persons because services you describe further no exempt_purpose and because they result in benefits to private persons you do not meet the operational_test of sec_501 of the code which requires that you operate exclusively for charitable purposes on june 20xx the irs again requested additional information from org in order to process the organization’s application_for exemption org was asked to provide a statement indicating that it has no relationship with any real_estate_professional it was also asked to sign an agreement indicating it would not require a fee from sellers participating in the dpa program on june 20xx org responded with a letter from its representative the letter includes the two statements below org inc submits that no member of its board_of directors will receive any financial benefit from the sale of such homes form 886-a rev department of the treasury - internal_revenue_service ce page -5- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xxk12 org legend org organization name president president xx date xyz state address address motto motto therefore org inc agrees that it will not in the future require the sellers to pay any percentage of the purchase_price of the qualified home at closing to org inc however org inc reserves the right to change its position based on an irs ruling finding or any court decision concluding the payments by the sellers under similar facts do not affect the tax- exempt status of the nonprofit organization on october 20xx letter was issued to org inc granting them exempt status as a 501_c_3_organization the advance_ruling period began on june 20xx and ended on december 20xx federal returns org filed forms for the calendar years ended december 20xx 20xx 20xx and 20xx it did not file form 990-t form_990 for the year under examination 20xx was filed on november 20xx org did not file form sec_941 w-2 or 1099-misc although its return for the year under examination does indicate that org paid salaries and wages in the amount of dollar_figure in 20xx org’s reported activities consisted of operating its down payment assistance program as described in more detail below org’s form_990 for 20xx includes an attached statement for part iii which explains the organization’s primary exempt_purpose org reported its program service accomplishments with related expenses as follows org inc is an affordable housing company created to provide a means to increase home ownership among individuals and families unable to save enough money for a down payment this purpose is facilitated by complying with fha guidelines to gift down payments to anyone purchasing a home with a fha loan the down payment is a gift from org inc with no expectation of repayment in any form of money or services the gifts of the down payment monies are available to anyone on a non-discriminatory basis during 20xx org inc provided over dollar_figure in gifts to individuals and families in 20xx org received dollar_figure in gross revenue from amounts paid to it by sellers participating in org’s dpa program org reported the seller’s payments as program service revenue org also reported that it distributed dollar_figure in down payment assistance to homebuyers for use as down payments and or to pay for closing costs in 20xx org also made charitable_contributions to other organizations in the amount of dollar_figure for 20xx org’s form_990 part iv form 886-a ev department of the treasury - internal_revenue_service page -6- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto line shows that as of december 20xx org had total unrestricted net assets of dollar_figure operation of org’s down payment assistance program org provided limited information regarding the operation of its down payment assistance program no website for the organization was located org did not provide copies of any of its promotional materials such as flyers brochures magazines newsletters or other promotional materials after repeated requests based on the financial documents provided org received all of its funding for its down payment assistance program from builders on its regular trial balance org recorded the total amount it received each month from builders as revenue builders contributions this amount represents the total amount_paid monthly to org by builders who sold homes through org’s homebuyer assistance program org also provided a monthly transaction listing which reports for each sale the amount_paid to org by the builder the amount of the down payment assistance plus the service fee and a corresponding transaction which records the amount_paid to the closing attorney on behalf of the buyer the amount of the down payment assistance only the transaction listing verifies that the amount_paid to org is for a particular home buyer as the buyer’s name is listed with each transaction therefore it is apparent that the builder intends for the monies to be designated for a specific home buyer based on the documents provided the amount contributed to org on behalf of each buyer is of the contract sales_price while the amount of down payment assistance provided to each buyer by org i sec_3 of the contract sales_price on the hud settlement statement the down payment assistance provided to the home buyers is recorded as opening doors gift funds org did not provide any information indicating whether the buyers in org’s down payment assistance program utilize federal housing administration fha financing and or conventional financing for their home purchases org refused to provide copies of any of its agreements applications forms and or other documents utilized in the dpa program org also refused to provide copies of any documents completed and or signed by the buyers sellers realtors and or others involved in the down payment assistance transactions however based on the documents org did provide it is evident that these transactions result in a circular flow of money the sellers builders make payments to org org provides the funds to the buyers who use the funds to make the down payment necessary to purchase the sellers builders homes despite the representations in its application_for exemption and additional representations when asked for additional information in connection with the application org does not have income limitations for its down payment assistance program and did not screen applicants for down payment assistance based on income the records provided by org did not include data on the form 886-a ev department of the treasury - internal_revenue_service page -7- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto buyers’ incomes rather org’s down payment assistance program provided gifts to any homebuyers who qualified for a loan in fact the 20xx form_990 part iii states the following the gifts of the down payment monies are available to anyone on a non-discriminatory basis org did not provide any information to verify that it made any attempts to comply with revproc_96_32 as it agreed to during the application process based on the information provided it is impossible to determine whether the homes were purchased by low moderate or high income homebuyers and or investors in 20xx org brokered approximately dpa transactions between buyers and sellers most home sales were in the dollar_figure to dollar_figure price range it is unknown whether or not org promoted its down payment assistance program by advising home sellers and others that sellers may claim charitable deductions on their federal_income_tax returns for amounts they pay to org org refused to provide copies of any letters it may have issued or copies of any materials to verify how its down payment assistance program was marketed law sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided that no part of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual see sec_501 sec_1_501_c_3_-1 provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in sec_501 an organization must not engage in substantial activities that fail to further an exempt_purpose in 326_us_279 the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes sec_1_501_c_3_-1 i1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests form 886-acrev department of the treasury - internal_revenue_service page -8- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 legend org organization name president president xx date xyz state address address motto motto sec_1_501_c_3_-1 defines the term charitable for sec_501 purposes as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the advancement of education sec_1_501_c_3_-1 provides in part that the term educational for sec_501 purposes relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of sec_501 if the trade_or_business furthers an exempt_purpose and if the organization’s primary purpose does not consist of carrying on an unrelated_trade_or_business in easter house v united_states cl_ct aff'd 846_f2d_78 fed cir unpublished table decision the court of federal claims considered whether an organization that provided prenatal care and other health-related services to pregnant women including delivery room assistance and placed children with adoptive parents qualified for exemption under sec_501 the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization’s argument that the adoption services merely complemented the health-related services to unwed mothers and their children rather the court found that the health-related services were merely incident to the organization’s operation of an adoption service which in and of itself did not serve an exempt_purpose the organization’s sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for- profit adoption agencies engaged in substantial advertising and accumulated substantial profits in addition although the organization provided health care to indigent pregnant women it only did so when a family willing to adopt a woman’s child sponsored the care financially accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house cl_ct pincite in 92_tc_1053 the court held that an organization that operated a school to train individuals for careers as political campaign form 886-ackev department of the treasury - internal_revenue_service page -9- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 legend org organization name president president xx date xyz state address address motto motto professionals but that could not establish that it operated on a nonpartisan basis did not exclusively serve purposes described in sec_501 because it also served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with entities of a particular political_party and that most of the organization’s graduates worked in campaigns for the party’s candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting the party’s candidates and entities although the candidates and entities benefited were not organization insiders the court stated that the conferral of benefits on disinterested persons who are not members of a charitable_class may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 the court concluded by stating that even if the political party’s candidates and entities did comprise a charitable_class the organization would bear the burden of proving that its activities benefited members of the class in a non-select manner american campaign academy t c pincite in 71_tc_202 the court held that an organization that marketed handicrafts made by disadvantaged artisans through museums and other non-profit organizations and shops operated for exclusively charitable purposes within the meaning of sec_501 the organization in cooperation with national craft agencies selected the handicrafts it would market from craft cooperatives in communities identified as disadvantaged based on objective evidence collected by the bureau of indian affairs or other government agencies the organization marketed only handicrafts it purchased in bulk from communities of craftsmen the organization did not market the kind of products produced by studio craftsmen nor did it market the handicrafts of artisans who were not disadvantaged the court concluded that the overall purpose of the organization’s activity was to benefit disadvantaged communities the organization’s commercial activity was not an end in itself but the means through which the organization pursued its charitable goals the method the organization used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans therefore the court held that the organization operated exclusively for exempt purposes described in sec_501 in 283_fsupp2d_58 d d c 20xx the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which the organization conducted its activities the court found that it was operated for a nonexempt commercial purpose rather than for a tax-exempt purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for-profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether form 886-a crev department of the treasury - internal_revenue_service page -10- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations see also 950_f2d_365 7th cir holding that a religious_organization which ran restaurants and health food stores in furtherance of its health ministry did not qualify for tax-exempt status because it was operated for substantial commercial purposes and not for exclusively exempt purposes revrul_67_138 1967_1_cb_129 held that helping low-income persons obtain adequate and affordable housing is a charitable activity because it relieves the poor and distressed or underprivileged in revrul_67_138 the organization carried on several activities directed to assisting low-income families obtain improved housing including conducting a training course on various aspects of homebuilding and homeownership coordinating and supervising joint construction projects purchasing building sites for resale at cost and lending aid in obtaining home construction loans revrul_70_585 1970_2_cb_115 discussed four situations of organizations providing housing and whether each qualified as charitable within the meaning of sec_501 situation described an organization formed to construct new homes and renovate existing homes for sale to low-income families who could not obtain financing through conventional channels the organization also provided financial aid to low-income families who were eligible for loans under a federal housing program but did not have the necessary down payment the organization made rehabilitated homes available to families who could not qualify for any type of mortgage when possible the organization recovered the cost of the homes through very small periodic_payments but its operating funds were obtained from federal loans and contributions from the general_public the revenue_ruling held that by providing homes for low-income families who otherwise could not afford them the organization relieved the poor and distressed situation described an organization formed to ameliorate the housing needs of minority groups by building housing units for sale to persons of low and moderate income on an open-occupancy basis the housing was made available to members of minority groups who were unable to obtain adequate housing because of local discrimination the housing units were located to help reduce racial and ethnic imbalances in the community as the activities were designed to eliminate prejudice and discrimination and to lessen neighborhood tensions the revenue_ruling held that the organization was engaged in charitable activities within the meaning of sec_501 situation described an organization formed to formulate plans for the renewal and rehabilitation of a particular area in a city as a residential community the median income level in the area was lower than in other sections of the city and the housing in the area generally was old and badly form 886-a crev department of the treasury - internal_revenue_service page -11- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto deteriorated the organization developed an overall plan for the rehabilitation of the area sponsored a renewal project and involved residents in the area renewal plan the organization also purchased an apartment building that it rehabilitated and rented at cost to low and moderate income families with a preference given to residents of the area the revenue_ruling held that the organization was described in sec_501 because its purposes and activities combated community deterioration situation described an organization formed to alleviate a shortage of housing for moderate- income families in a particular community the organization planned to build housing to be rented at cost to moderate-income families the revenue_ruling held that the organization failed to qualify for exemption under sec_501 because the organization’s program was not designed to provide relief to the poor or further any other charitable purpose within the meaning of sec_501 and the regulations revenue_ruling 20xx-27 20xx-21 c b in part discusses whether down payment assistance organizations described in situations operate exclusively for charitable purposes those described in situation sec_1 and are relevant to this discussion the organization described in situation makes assistance available to low-income families to purchase decent and safe homes throughout the metropolitan area in which it is located individuals are eligible to participate if they are low-income and have the employment history and financial history to qualify for a mortgage with the exception that they do not have the funds necessary for down payments the organization is situation offers financial seminars conducts educational activities to prepare the individuals for home ownership and requires a home inspection report before providing funds for down payment assistance to fund the program the organization conducts broad based fundraising that attracts gifts grants and contributions from the general_public further the organization has policies in place to ensure that the grantmaking staff does not know the identity or contributor status of the home seller or other parties who may benefit from the sale and does not accept contributions contingent on the sale of particular properties because the organization described in situation relieves the poor and distressed requires a home inspection to ensure that the house is habitable conducts educational seminars has a broad based funding program and has policies to ensure that the organization is not beholden to particular donors the service held that the organization is operated exclusively for charitable purposes and qualifies for exemption from federal taxation as an organization described in sec_501 form 886-ackev department of the treasury - internal_revenue_service page -12- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto the organization described in situation of revenue_ruling 20xx-27 is like that described in situation except that its staff knows the identity of the party selling the home and may know the identity of other parties involved in the sale the organization receives a payment from the seller the amount of which bears a direct correlation to the amount of down payment assistance provided in substantially_all the cases in which the organization provides assistance to the home buyers and most of its financial support comes from home sellers and related businesses that may benefit from the sale of homes to buyers who receive assistance from the organization because the organization described in situation provides down payment assistance amounts that directly correlate to the amounts provided by home sellers and relies primarily on payments from home sellers and real_estate related businesses that stand to benefit from the transactions to finance the program the service held that the organization described in situation is not operated exclusively for exempt purposes and does not qualify for exemption from federal_income_tax as an organization described in sec_501 benefiting private interests even if an organization's activities serve a charitable_class or are otherwise charitable within the meaning of sec_501 it must demonstrate that its activities serve a public rather than a private interest within the meaning of sec_1_501_c_3_-1 revrul_72_147 1972_1_cb_147 held that an organization that provided housing to low income families did not qualify for exemption under sec_501 because it gave preference to employees of a business operated by the individual who also controlled the organization the ruling reasoned that although providing housing for low-income families furthers charitable purposes doing so in a manner that gives preference to employees of the founder’s business primarily serves the private interest of the founder rather than a public interest in kj's fund raisers v commissioner t c memo aff'd 166_f3d_1200 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization’s board the tax_court found and the second circuit agreed that the founders exercised substantial influence over the affairs of the organization the organization’s business consisted of selling lucky or similar instant win lottery tickets to patrons of kj's place the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations the lottery tickets were sold during regular business hours by the owners of the lounge and their employees from the proceeds of the sales form 886-a ev department of the treasury - internal_revenue_service page -13- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 legend org organization name president president xx date xyz state address address motto motto of the lottery tickets the organization made grants to a variety of charitable organizations although supporting charitable organizations may be a charitable activity the tax_court nevertheless upheld the commissioner’s denial of exemption to the organization on the ground that the organization’s operation resulted in more than incidental private benefit the tax_court held and the second circuit affirmed that a substantial purpose of kj's activities was to benefit kj’s place and its owners by attracting new patrons by way of lottery ticket sales to kj's place and by discouraging existing customers from abandoning kj's place in favor of other lounges where such tickets were available thus the organization was not operated exclusively for exempt purposes within the meaning of sec_501 returns and records sec_1 a provides in part that any person required to file a return of information with respect to income shall keep such permanent books of account or records including inventories as are sufficient to establish the amount of gross_income deductions credits or other matters required to be shown by such person in any return of such tax or information sec_1 b provides in part that every organization exempt from tax under sec_501 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 of the code sec_6033 a of the code provides in part that every organization_exempt_from_taxation under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purpose of carrying out the internal revenue laws as the secretary may by forms or regulation prescribe and shall 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 effective date of revocation an organization may ordinarily rely on a favorable determination_letter received from the internal_revenue_service sec_1_501_a_-1 rev_proc 20xx-4 dollar_figure cross-referencing dollar_figure et seq 20xx-1 c b an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely on a favorable determination if there is a material_change inconsistent with exemption in the organization’s character purposes form 886-ackev department of the treasury - internal_revenue_service page -14- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 legend org organization name president president xx date xyz state address address motto motto or methods of operation after the determination_letter is issued sec_601_201 revproc_90_27 1990_1_cb_514 the commissioner may revoke a favorable determination_letter for good cause sec_1_501_a_-1 revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented sec_601_201 rev_proc 20xx-4 dollar_figure cross-referencing dollar_figure et seq analysis org operates a program that does not exclusively serve an exempt_purpose described in sec_501 and provides substantial private benefit to persons who do not belong to a charitable_class charitable purposes include relief of the poor and distressed see sec_1 c - d org’s down payment assistance program does not operate in a manner that establishes that its primary purpose is to address the needs of low-income people by enabling low-income individuals and families to obtain decent safe housing see revrul_70_585 situation the down payment assistance program did not serve exclusively low-income persons despite the representations in its application_for exemption org did not provide documentation verifying that there were any income limitations for participation in its down payment assistance program org did not screen applicants for down payment assistance based on income org’s records do not include data on the buyers’ incomes instead the program is open to anyone without any income limitations who otherwise qualified for these loans based on the records provided there is no evidence that org’s down payment assistance program limited assistance to certain geographic areas or targeted those areas experiencing deterioration or neighborhood tensions see revrul_70_585 situation down payment assistance is available for any property that is otherwise able to qualify for a mortgage arranging or facilitating the purchase of homes in a broadly defined geographic area does not combat community deterioration or serve other social welfare objectives within the meaning of sec_501 of the code only an insubstantial portion of the activity of an exempt_organization may further a nonexempt purpose as the supreme court held in 326_us_279 the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes even if org’s down payment assistance program were directed to exclusively form 886-akev department of the treasury - internal_revenue_service page -15- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto low-income individuals or disadvantaged communities org’s total reliance for financing its down payment assistance activities on home sellers standing to benefit from the transactions demonstrates that the program is operated for the substantial purpose of benefiting private parties see rev_rul 20xx-27 situation like the organization considered in 92_tc_1053 org is structured and operated to assist the private parties who fund it sellers who participate in org’s down payment assistance program benefit from achieving access to a wider pool of buyers thereby decreasing their risk and the length of time the home is on the market buyers who participate in org’s down payment assistance program benefit by being able to purchase a home without having to commit more of their own funds real_estate professionals who participate in org’s down payment assistance program from real_estate brokers to escrow companies benefit from increased sales volume and the attendant increase in their compensation it is evident from the foregoing that org’s down payment assistance program provides ample private benefit to the parties in each home sale the manner in which org operated its down payment assistance program shows that the private benefit to the various participants in org’s activities was the intended outcome of org’s operations rather than a mere incident of such operations to finance its down payment assistance activities org relies exclusively on sellers and other real-estate related businesses that stand to benefit from the transactions it facilitates org provided no records to indicate that it either solicits or receives funds from other sources org’s receipt of a payment from the home seller corresponding to the amount of the down payment assistance in virtually every transaction indicates that the benefit to the home seller and others involved in the transaction is not a mere accident but rather an intended outcome of org’s operations in this respect org is like the organization considered in easter house which provided health care to indigent pregnant women but only when a family willing to adopt a woman’s child sponsored the care financially org’s records show that org operated in a manner consistent with a commercial firm seeking to maximize sales of services rather than in a manner that would be consistent with a charitable or educational_organization seeking to serve one or more of the charitable purposes enumerated in sec_501 the manner in which org operated its down payment assistance program shows that org was in the business of facilitating the sales of homes in a manner indistinguishable from an ordinary trade_or_business in this respect org’s operations were similar to an organization which was denied exemption because it operated a conference center for commercial purposes see 283_fsupp2d_58 d d c 20xx form 886-a rev department of the treasury - internal_revenue_service page -16- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 legend org organization name president president xx date address address xyz state motto operating a trade_or_business of facilitating home sales is not an inherently charitable activity unlike the trade_or_business in 71_tc_202 org’s trade_or_business was not utilized as a mere instrument of furthering charitable purposes but was an end in itself org provided services to home sellers for which it was paid a market rate fee org did not limit its services primarily to persons within a charitable_class org’s primary goal consisted of maximizing the fees it derived from facilitating the sales of real_property org did not solicit or receive any funds from parties that did not have an interest in the down payment assistance transactions like the organizations considered in american campaign academy supra and easter house v u s cl_ct aff'd 846_f2d_78 fed cir a substantial part of org’s activities furthered commercial rather than exempt purposes in addition although org made donations to other charitable organizations from the proceeds of its down payment assistance activities org’s primary activity resulted in substantial benefit to private parties supporting other charitable organizations may be a charitable activity but the organizations operations resulted in more than incidental private benefit based on the foregoing org has not operated exclusively for exempt purposes and accordingly is not entitled to exemption under sec_501 the government proposes revoking org’s exemption effective the date of the organization’s inception because the organization operated in a manner materially different from that represented in its application_for exemption and additional information provided during the application process in its application_for exemption received on december 20xx org stated the following with respect to its objective the organization’s primary objective is to increase home ownership among individuals and families unable to save enough money for a down-payment to facilitate this objective the organization will provide gifts to be used as down-payments for homes in an amount of approximately three percent of the purchase_price the buyer is also encouraged but not required to participate in a home ownership education course the organization is funded primarily through collecting a service fee from the sellers or builders of the homes which are purchased by participants in the organization’s program the down-payment gifts will be available to anyone on a non-discriminatory basis if he or she makes a proper application to the organization the down-payment gifts will be made with no expectation of repayment org adopted a resolution agreeing to comply with the internal_revenue_service revproc_96_32 despite these representations in its application_for exemption and additional information provided during the application process org does not have income limitations for participants in its down payment assistance program and did not provide any records to verify form 886-ackev department of the treasury - internal_revenue_service page -17- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 org legend org organization name president president xx date xyz state address address motto motto that it screened applicants for down payment assistance based on income the records provided by org did not include data on the buyers’ incomes and gave no indication that org screened on such data rather org’s down payment assistance program provided gifts to any homebuyers who qualified for a loan revocation of a determination_letter may be retroactive if the organization operated in a manner materially different from that originally represented sec_601_201 rev_proc 20xx-4 org’s operation of its down payment assistance activities in a manner materially different from that represented in its application_for exemption justifies retroactive revocation of org’s determination_letter conclusion org does not operate exclusively for an exempt_purpose as required of an organization described in sec_501 org provides down payment assistance purportedly in the form of a gift to individuals and families for the purchase of a home org offers its down payment assistance to interested buyers regardless of the buyers’ income levels or need org’s down payment assistance activities do not target neighborhoods in need of rehabilitations or other relief such as lessening neighborhood tensions or eliminating prejudice and discrimination org operates a trade_or_business in a commercial manner rather than to serve charitable purposes its activities further the private interests of home sellers and other real_estate related businesses org’s primary activity is brokering transactions to facilitate the selling of homes org’s brokering services are available to homebuyers sellers realtors lenders home builders and title companies regardless of the buyers’ income levels or need and regardless of the condition of the communities in which the homes are located alliances are built with the realtors lenders home builders and title companies to assure future business for the mutual benefit of the participants because org’s primary activity is not conducted in a manner designed to further sec_501 purposes org is not operated exclusively for exempt purposes within the meaning of sec_501 in addition org’s inability and or refusal to produce documents requested indicates that the organization did not exercise ordinary business care and prudence in meeting its obligation to keep and produce such records and comply with irs rules and regulations as required for the foregoing reasons revocation of exempt status is proposed because org operated in a manner materially different from that represented in its form_1023 application the government proposes that the revocation be effective retroactively to the date of the organization’s inception organization’s position form 886-a rev department of the treasury - internal_revenue_service page -18- department of the treasury - internal_revenue_service form_8 a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 legend org organization name president president xx date xyz state address address motto motto org’s position with respect to the issues facts applicable law and government’s position as discussed in this report is unknown org will be allowed days to review this report and respond with a rebuttal if considered necessary form 886-a rev department of the treasury - internal_revenue_service page -19-


third party communication none date of communication not applicable office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b02 cchyr postn-155021-09 uilc date date to eric r skinner associate area_counsel - detroit large mid-size business jadie t woods attorney large mid-size business from melissa c liquerman branch chief branch passthroughs special industries subject ------------------------------------- this memorandum responds to your request for chief_counsel_advice this advice may not be used or cited as precedent legend s corp dc1 dc2 dc3 cfc1 cfc2 z -------------------------------------- ------------------------------- -------------------------------- ------------------------------ ----------------------------- ------------------- ------------------------------------------------- postn-155021-09 ----------------- ------------------------- ---------------------- -------------------------- ------------- ---------------------- -------------- -------------- ------------------ ------------------ --------- ------- date date date date date date dollar_figurea dollar_figureb dollar_figurec dollar_figured year year issue sec_1 whether the controlled_foreign_corporations as defined in internal_revenue_code code sec_957 cfcs owned by s corp are c corporations for purposes of sec_1362 whether amounts that s corp included in income under sec_951 with respect to its cfcs are passive_investment_income as defined in sec_1362 whether the sec_1248 amounts that dc2 and dc3 included in gross_income are considered dividends from a lower-tier subsidiary under sec_1_1362-8 for purposes of applying sec_1362 to the date distribution from dc1 to s corp whether the amount included in dc2 and dc3’s gross_income under sec_78 with respect to the deemed_paid_foreign_tax_credit allowed under sec_902 attributable to the sec_1248 amount is considered a dividend postn-155021-09 from a lower-tier subsidiary under sec_1_1362-8 for purposes of applying sec_1362 to the date distribution from dc1 to s corp whether any portion of the distribution from dc1 to s corp on date is attributable to the deemed_dividend recognized by dc2 and dc3 pursuant to sec_1248 on date for purposes of sec_1362 whether the gross_receipts of z would be included in determining dc1’s total gross_receipts for the year in which the earnings_and_profits are produced for purposes of applying sec_1362 to the dividends_paid by dc1 to s corp facts s corp a domestic_corporation elected to be an s_corporation effective date prior to becoming an s_corporation s corp had been a c_corporation s corp wholly owned cfcs s corp wholly owned dc1 a domestic c_corporation and the parent of a group of corporations filing a consolidated_return the dc1 group which in turn wholly owned domestic subsidiaries and cfcs and indirectly owned other domestic subsidiaries and cfcs the dc1 group had a taxable_year ending on date of each year one of the domestic subsidiaries wholly owned by dc1 and a member of the dc1 group is dc2 dc2 wholly owned dc3 also a domestic_corporation and a member of the dc1 group dc2 and dc3 in turn owned cfc1 cfc2 was owned by dc2 and dc3 after the date transaction on date dc2 and dc3 contributed all of the outstanding_stock of cfc1 to cfc2 in exchange for common_stock and preferred_stock treated under sec_351 as nonqualified_preferred_stock dc2 and dc3 recognized gain of dollar_figurec on the exchange pursuant to sec_351 based on the fair_market_value of the nonqualified_preferred_stock they received on date dc1 paid to s corp a dividend of dollar_figured dollar_figured was less than dollar_figurec on date z was formed as a domestic_partnership for federal_income_tax purposes and was wholly owned by corporations that are included in the dc1 group dc1 group reported income from z at the time of s corp’s s election s corp had earnings_and_profits of approximately dollar_figurea to dollar_figureb for each taxable_year from year through year s corp reported substantial amounts of sec_316 dividends from cfcs dividend distributions from dc1 and sec_951 income inclusions with respect to its cfcs postn-155021-09 law and analysis sec_1375 imposes a tax on an s corporation’s excess passive_investment_income for any taxable_year in which an s_corporation has accumulated_earnings_and_profits at the close of such taxable_year and gross_receipts more than percent of which are passive_investment_income the tax is computed by multiplying the excess net passive_investment_income by the highest_rate of tax specified in sec_11 passive_investment_income means gross_receipts derived from royalties rents dividends interest and annuities sec_1375 sec_1362 excess net passive_investment_income means an amount which bears the same ratio to the net_passive_income for the taxable_year as the amount by which the passive_investment_income for the taxable_year exceed sec_25 percent of the gross_receipts for the taxable_year bears to the passive_investment_income for the taxable_year sec_1375 sec_1362 provides that an s election terminates whenever the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income under sec_1362 except otherwise provided in sec_1362 passive_investment_income includes gross_receipts derived from dividends sec_1_1362-2 states that the term dividends include dividends as defined in sec_316 amounts included in gross_income under sec_551 relating to foreign_personal_holding_company_income taxed to u s shareholders and consent dividends as provided in sec_565 sec_1362 however excludes dividends of certain c corporations from the definition of passive_investment_income specifically sec_1362 provides that if an s_corporation holds stock in a c_corporation meeting the requirements of sec_1504 the term passive_investment_income does not include dividends from such c_corporation to the extent such dividends are attributable to the earnings_and_profits of the c_corporation that are derived from the active_conduct_of_a_trade_or_business in addition sec_1_1362-8 provides that if such c_corporation upper-tier corporation owns stock in another c_corporation lower-tier subsidiary that meets the requirements of sec_1504 the upper-tier corporation’s gross_receipts attributable to dividends from the lower-tier subsidiary are considered to be derived from the active_conduct_of_a_trade_or_business to the extent the lower tier subsidiary’s earnings_and_profits are attributable to the active_conduct_of_a_trade_or_business by the subsidiary under paragraph b or of sec_1_1362-8 sec_1361 provides that the term c_corporation means with respect to any taxable_year a corporation which is not an s_corporation for such year sec_1504 provides that the ownership of stock of any corporation meets the requirements of this paragraph if it possesses at least percent of the total voting postn-155021-09 power of the stock of such corporation and has a value equal to at least percent of the total value of the stock of such corporation issue the exclusion of certain dividends from the definition of passive_investment_income as provided in sec_1362 applies only to dividends that an s_corporation receives from a c_corporation in which the s_corporation owns stock that meets the ownership requirements of sec_1504 for purposes of sec_1362 the term c_corporation includes a foreign_entity that is treated as a corporation for u s tax purposes see sec_1361 accordingly the cfcs that are owned by s corp fall within the meaning of c_corporation for purposes of sec_1362 based on the facts presented s corp holds the requisite stock ownership with respect to its directly wholly-owned cfcs and thus is eligible for the exclusion set forth in sec_1362 with respect to sec_316 dividends received from such cfcs issue for purposes of sec_1362 and sec_1375 the term passive_investment_income is limited to gross_receipts derived from royalties rents dividends interest and annuities amounts included in s corp’s income under sec_951 do not fall within any of the enumerated types of passive_investment_income in particular a sec_951 inclusion is not a dividend for purposes of sec_1362 accordingly the amounts that s corp included in income under sec_951 with respect to its cfcs are not passive_investment_income within the meaning of sec_1362 issue sec_1248 provides that gain recognized on the sale_or_exchange by a united_states_person of stock in a foreign_corporation must be included in the gross_income of the u_s_person as a dividend to the extent of the foreign corporation’s earnings_and_profits that were accumulated while the stock was held by the u_s_person and the foreign_corporation was a cfc for purposes of sec_1248 a u_s_person is treated as having sold stock if such person recognizes gain from the sale_or_exchange of such stock sec_1248 and sec_1_1248-1 sec_1248 therefore applies to treat the gain recognized by dc2 and dc3 under sec_351 on the exchange of cfc1 stock for cfc2 nonqualified_preferred_stock as a dividend to dc2 and dc3 to the extent of cfc1’s earnings_and_profits accumulated during periods in which cfc1 was a cfc owned by dc2 and dc3 as a result of this dividend treatment the look-through_rule of sec_1_1362-8 applies to treat the gross_receipts deemed to have been received by dc2 and dc3 as active to the postn-155021-09 extent that the earnings_and_profits of cfc1 are derived from the active_conduct_of_a_trade_or_business because both dc2 and dc3 are members of the dc1 group the earnings_and_profits attributable to the dividend are treated as earnings_and_profits of dc1 see sec_1_1502-33 accordingly the actual dividend paid from dc1 to s corp on date will not be passive_investment_income under sec_1362 to the extent that the gross_income of dc1 is attributable to earnings_and_profits of cfc1 derived from the active_conduct_of_a_trade_or_business issue sec_1_1248-1 provides that the foreign_tax_credit provisions including sec_902 apply in the same manner and subject_to the same conditions and limitations as if there had been an actual distribution of a dividend sec_1_1248-1 refers to the fact that under sec_78 amounts are included in the shareholder’s gross_income as a dividend if deemed paid foreign tax_credits under sec_902 are claimed with respect to the sec_1248 dividend sec_1_78-1 provides that a sec_78 dividend shall be treated as a dividend for all purposes of the code except that it shall not be treated as a dividend under sec_245 dc2 and dc3 included in their gross incomes as dividends under sec_78 amounts equal to the deemed paid foreign tax_credits they claimed under sec_902 and which were attributable to the sec_1248 amounts dc2 and dc3 included in their gross incomes as a dividend as a result of this dividend treatment of the sec_78 amounts the look-through_rule of sec_1_1362-8 applies to treat the gross_receipts deemed to have been received by dc2 and dc3 as active to the extent that the earnings_and_profits of cfc1 are derived from the active_conduct_of_a_trade_or_business under sec_1_1502-33 dc2 and dc3’s earnings_and_profits attributable to the dividend are treated as earnings_and_profits of dc1 accordingly the actual dividend paid from dc1 to s corp on date will not be passive_investment_income under sec_1362 to the extent that the gross_income of dc1 is attributable to earnings_and_profits of cfc1 derived from the active_conduct_of_a_trade_or_business issue sec_316 provides that the term dividend means any distribution_of_property made by a corporation to its shareholders out of its accumulated_earnings_and_profits or its earnings_and_profits of the taxable_year without regard to the amount of earnings_and_profits at the time the distribution was made thus the deemed dividends recognized by dc2 and dc3 from the application of sec_1248 in connection with the exchange of cfc1 stock for cfc2 stock are taken into account by dc2 and dc3 in determining their current_earnings_and_profits for the taxable_year ending on date accordingly the distribution made by dc1 to s corp on date which is earlier than date is a dividend out of such earnings_and_profits notwithstanding the fact that it was postn-155021-09 made before the deemed dividends to dc2 and dc3 under sec_1248 were recognized issue a corporation may treat its earnings_and_profits for a year as active earnings_and_profits in the same proportion as the corporation’s gross_receipts as defined in sec_1_1362-2 derived from activities that would not produce passive_investment_income if the c_corporation were an s_corporation including those that do not produce passive_investment_income under sec_1_1362-8 paragraphs b through b bear to the corporation’s total gross_receipts for the year in which the earnings_and_profits are produced sec_1_1362-8 gross_receipts generally means the total amount received or accrued under the method_of_accounting used by the corporation in computing its taxable_income and is not reduced by returns and allowances cost_of_goods_sold or deductions sec_1_1362-2 z’s gross_receipts accordingly are includable in determining dc1’s total gross_receipts for the year in which the earnings_and_profits are produced for purposes of applying sec_1362 to dividends_paid to s corp see sec_1375 sec_1_1362-8 sec_1_1362-2 conclusions based solely on the facts submitted and with respect to the facts of this case only we conclude the following s corp’s cfcs are c corporations for purposes of sec_1362 the amounts that s corp included in income under sec_951 with respect to its cfcs are not passive_investment_income within the meaning of sec_1362 the amounts included in dc2 and dc3’s gross_income under sec_1248 are considered dividends from a lower-tier subsidiary under sec_1_1362-8 for purposes of applying sec_1362 to the date distribution from dc1 to s corp the amount included in dc2 and dc3’s gross_income under sec_78 with respect to the deemed_paid_foreign_tax_credit allowed under sec_902 attributable to the sec_1248 amount is considered a dividend from a lower- tier subsidiary under sec_1_1362-8 for purposes of applying sec_1362 to the date distribution from dc1 to s corp the distribution made by dc1 to s corp on date is a dividend out of the earnings_and_profits of dc1 attributable to the deemed dividends recognized by dc2 and dc3 pursuant to sec_1248 on date notwithstanding the fact postn-155021-09 that such distribution was made before the deemed dividends to dc2 and dc3 were recognized therefore the actual dividend paid from dc1 to s corp on date will be active in proportion to the gross_receipts of dc1 that are attributable to active income of cfc1 z’s gross_receipts are includable in determining dc1’s total gross_receipts for the year in which the earnings_and_profits are produced please call charlotte chyr at or barbara e rasch at if you have any further questions


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b03 plr-121620-02 date date distributing controlled trust trust sub shareholder trustee trustee business m plr-121620-02 business n date date state x aa bb cc dd ee ff xxx dear we respond to your representative’s letter dated date for rulings concerning the federal_income_tax consequences of a proposed transaction additional information was submitted in a letter dated date the material information submitted for consideration is summarized below distributing a state x corporation is currently engaged directly in business m and business n the shares of distributing are all held by shareholder or for the benefit of his descendants through trust and trust distributing has aa shares of common_stock outstanding which are held in the following manner bb shares by trust cc shares by trust and dd shares by shareholder shareholder is not in a position of control as to trustee trustee of trust and does not have the power to remove trustee trustee of trust controlled is a newly created state x corporation and is wholly owned by distributing distributing and controlled use an accrual_method of accounting for each of their federal_income_tax returns with a taxable_year ending on date on date distributing sold its ownership interests in sub to a third party in a transaction unrelated to the proposed transaction discussed herein plr-121620-02 we have received financial information indicating that business m and business n each have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years a difference of opinion has arisen between shareholder and trustee and trustee as trustees to trust and trust respectively regarding the future operations of the businesses of distributing business n tends to produce more stable and consistent annual returns which better matches the investment goals of the two trusts business m tends to be more sporadic and long-term in nature and possesses opportunities to expand into development activities in which additional capital contributions by the shareholders or debt could be required which shareholder favors accordingly to resolve the conflicting goals of the shareholders the following transaction is proposed i distributing will contribute cash having an approximate value of dollar_figurexxx and ee of business n to controlled the contribution ii distributing will distribute bb shares of controlled stock to trust in exchange for all of trust 1's stock in distributing distributing will distribute cc shares of controlled stock to trust in exchange for all of trust 2's stock in distributing together the distribution after the proposed transaction controlled will be wholly owned by trust and trust and distributing will be wholly owned by shareholder distributing will remain engaged directly in business n and business m controlled will be directly engaged in business n independent of distributing the taxpayers have made the following representations in connection with the proposed transaction a b c the fair_market_value of the controlled stock to be received by each shareholder of distributing will be approximately equal to the fair_market_value of distributing stock surrendered by the shareholder in the exchange no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of business m and business n is representative of each business’ respective present operations and with regard to each business there has been no substantial operational changes since the date of the last financial plr-121620-02 d e f g h i j k l m statements submitted except for the sale of distributing’s interest in sub in a transaction otherwise unrelated to the transaction proposed herein following the distribution distributing and controlled each will continue the active_conduct of its business independently and with its separate employees and controlled may employ distributing as a consultant for its business n assets for a period not greater than ff months the distribution of controlled stock is carried out for the following corporate business purposes fit and focus the distribution of controlled stock is motivated in whole or substantial part by this corporate business_purpose distributing is not an s_corporation within the meaning of sec_1361 and there is no plan or intention by distributing or controlled to make an s_corporation_election pursuant to sec_1362 there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing or controlled after the transaction there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length neither distributing nor controlled is an investment_company as defined in sec_368 and iv the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either plr-121620-02 distributing or controlled or stock possessing percent or more of the total value of all classes of stock of distributing or controlled based solely on the information submitted and the representations as set forth above we hold as follows the contribution followed by the distribution will constitute a reorganization within the meaning of sec_368 distributing and controlled each will be a_party_to_a_reorganization within the meaning of sec_368 distributing will recognize no gain_or_loss on the contribution sec_361 sec_357 and sec_357 controlled will recognize no gain_or_loss on the contribution sec_1032 controlled’s basis in each asset received in the contribution will equal the basis of that asset in the hands of distributing immediately prior to the transfer sec_362 controlled’s holding_period for each asset received from distributing will include the period during which distributing held such asset sec_1223 distributing will recognize no gain_or_loss on the distribution sec_361 trust and trust will recognize no gain_or_loss and no amount will be included in their income upon receipt of controlled stock in exchange for their distributing stock sec_355 the basis of the controlled stock received by trust and trust in the transaction will equal the basis of the distributing stock surrendered by each of the shareholders respectively in exchange therefor sec_358 the holding_period of the controlled stock received by trust and trust in the transaction will include the holding_period of the distributing stock surrendered in exchange therefor provided the respective shareholder held the distributing stock as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the proposed transaction under any other provision of the plr-121620-02 code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction the rulings contained in this letter are predicated upon the facts and representations submitted by the taxpayers and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for a ruling verification of the information representations and other data may be required as part of the audit process see section dollar_figure of revproc_2002_1 2002_1_irb_1 which discusses in greater detail the revocation or modification of ruling letters however when the criteria in section dollar_figure of revproc_2002_1 i r b pincite are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to each of your authorized representatives sincerely yours richard e coss senior counsel office of associate chief_counsel corporate 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 ------------------------ telephone number --------------------- refer reply to cc tege eb ec plr-153839-06 date april legend corporation ---------------------------- partnership --------------------------- subsidiary ---------------------------------------------- x percent ----------------- y percent ----------------- dear ------------ this letter is in response to the letter dated date submitted by your authorized representative requesting a ruling under sec_162 of the internal_revenue_code code specifically you requested a ruling that the deduction limitation of sec_162 does not apply the facts as represented are as follows the corporation owns approximately x percent of the common limited_partnership units in the partnership the corporation also owns preferred units of the partnership the corporation’s overall ownership_interest in the partnership both common and preferred units is y percent the corporation elected to be taxed as a real_estate_investment_trust reit as defined under sec_856 of the code virtually all of the corporation’s interests in properties and other assets are held through the partnership both the corporation and the partnership have common equity securities that are required to be registered under sec_12 of the securities exchange act of exchange act plr-153839-06 the corporation has employees who are covered employees covered employees within the meaning of sec_162 of the code certain covered employees of the corporation are also employees and senior executives of the partnership the covered employees are compensated for the services they perform for both entities under a variety of arrangements the covered employees provide only a small portion of their services as employees of the corporation and the vast majority of their time and effort is devoted to managing the partnership the subsidiary is a subsidiary the partnership and it manages all payroll activities for the partnership and the corporation the total compensation of one or more of the covered employees will exceed dollar_figure million and will not be qualified_performance-based_compensation within the meaning of sec_162 of the code sec_162 of the code allows a deduction for all of the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 of the code provides that for any publicly_held_corporation no deduction shall be allowed for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of such remuneration for the taxable_year exceeds dollar_figure million sec_162 of the code defines publicly_held_corporation to mean any corporation issuing any class of common equity securities required to be registered under sec_12 of the exchange act sec_1_162-27 of the income_tax regulations regulations provides that whether a corporation is publicly held is determined based solely on whether as of the last day of its taxable_year the corporation is subject_to the reporting obligations of sec_12 of the exchange act under sec_1_162-27 of the regulations a publicly_held_corporation includes an affiliated_group_of_corporations as defined in sec_1504 of the code determined without regard to sec_1504 which lists exceptions to the definition for purposes of sec_162 an affiliated_group_of_corporations does not include any subsidiary that is itself a publicly_held_corporation sec_162 of the code defines covered_employee as any employee of the taxpayer if a as of the close of the taxable_year such employee is the chief_executive_officer of the taxpayer or is an individual acting in such capacity or b the total compensation of such employee for the taxable_year is required to be reported to shareholders under the exchange act by reason of such employee being among the four highest compensated officers for the taxable_year other than the chief executive plr-153839-06 officer sec_1_162-27 of the regulations generally provides that whether an individual is a covered_employee for purposes of sec_162 is determined pursuant to the executive compensation disclosure rules under the exchange act sec_1504 of the code defines affiliated_group to mean one or more chains of includible corporations connected through stock ownership with a common parent_corporation if the common parent directly own sec_80 percent of the total voting power of the stock and has a value equal to at least percent of the total value of the stock of the corporation based solely on the facts presented we rule as follows the deduction limitation of sec_162 of the code does not apply to the partnership with respect to remuneration paid to a covered_employee as compensation_for services performed by the covered_employee as an employee of the partnership the deduction limitation of sec_162 of the code does not apply to the corporation with respect to its distributive_share of income or loss from the partnership that includes the compensation expense of the covered employees to the extent such compensation expense is attributable to services performed by the covered employees as employees of the partnership 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 in this regard note that we specifically express no opinion concerning the limited_partnership agreement of the partnership including any amendments thereto or the allocation of the compensation between the partnership and the corporation 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 a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-153839-06 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 kenneth m griffin senior technician reviewer executive compensation branch office of division counsel associate chief_counsel tax exempt government entities