department of the treasury internal_revenue_service attn mandatory review mc dal commerce st dallas tx release number release date date date legend org organization name org address xx date address address uil taxpayer_identification_number form tax period s ended september 20xx - september 20xx person to contact id number contact numbers telephone fax certified mail - return receipt requested dear in a determination_letter dated march 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective october 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on march 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you have filed taxable returns on form_1120 u s corporate_income_tax return for the years ended september 20xx through september 20xx with us for future periods you are required to file form_1120 with the appropriate service_center indicated in the instructions for the return 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 contact the person whose name and telephone number are shown at the beginning of this letter sincerely marsha a ramirez director eo examinations schedule number or exhibit form 886-a rev date explanations of items name of taxpayer year period ended 20xx - 20xx tax identification_number org legend org organization name city city issues xx - date xyz state address addre sec_1 should org org continue to be exempt from federal_income_tax under internal_revenue_code code sec_501 as a social_club should org be exempt from federal_income_tax under code sec_501 as a homeowners_association is org exempt from federal_income_tax under code sec_501 facts according to the xyz state secretary of state website the organization was incorporated march 19xx as a non- profit corporation in the state of xyz the org articles of incorporation articles state the following purposes for which the corporation was formed to purchase or otherwise acquire construct improve develop repair maintain operate care for and or dispose_of streets roadways easements parkways playgrounds open spaces and recreational areas tennis courts beaches boat landings mooring basins floats piers clubhouses swimming pools and or swimming areas bathhouses places of amusement community buildings community clubhouses and in general community facilities appropriate for the use and benefit of its members and or for the improvement and development of the property hereinafter referred to to build improve and maintain roadways culverts bridges and drainage area and to provide for the improving cleaning and sprinkling of streets and for collection and disposal of the street sweepings garbage ashes rubbish and the like to prevent and suppress fires to provide police protection and to make and collect charges to cover the costs and expenses therefore to improve light and or maintain streets roads alleys courts walks gateways fences and ornamental features now existing or hereafter to be created or erected and shelters comfort stations and or buildings and improvements ordinarily appurtenant to any of the foregoing to improve plant and maintain grass plots and other areas trees and plantings within the lines of the street immediately adjoining or within the property hereinafter described or referred to so far as it can legally do so to grant franchises rights of way and easements for public_utilities or other purposes upon over and or under any of said property to acquire by gift purchase lease or otherwise and to own hold enjoy operate maintain and to convey sell lease transfer mortgage and otherwise encumber dedicate for public use and or otherwise dispose_of real and or personal_property and interest therein wherever situate to enforce assessments liens charges restrictions conditions and covenants existing upon and or created for the benefit of parcels of real_property in the plat or added to the plat of org section address and the address section address and address section address and address of section address all of the foregoing in city xyz to which said parcels may be subject and to pay all expenses incidental thereto form 886-a department of the treasury-intemnal revenue service catalog number 20810w publish no irs gov -page_1 schedule number or exhibit form 886-a rev date name of taxpayer org explanations of items tax identification_number year period ended 20xx - 20xx to pay the taxes and assessments which may be levied by any public authority upon any of the said property now or hereafter used or set apart for roadway easements parks parkways play-grounds open areas tennis courts beaches boat landings mooring basins community clubhouses community club buildings places of amusement and or recreation areas or upon such other recreation spaces wherever situate as may be maintained for the general benefit and use of the owners of lots in said property to pay taxes and assessments levied by any public authority upon any property which may be held in trust for said corporation to exercise such powers of control interpretation construction consent decision determination modification amendment cancellation annulment and or enforcement of covenants reservations restrictions liens and charges imposed upon said property and as may be vested in delegated to or assigned to said corporation and such duties with respect thereto as may be assigned to and assumed by said corporation to appropriate purchase divert acquire and store water from streams water courses wells or any other source and to distribute the water so appropriated and acquired to its members for use upon the lands of said members and for domestic purposes to acquire own construct hold possess use and maintain such pumping plants tanks pipe lines reservoirs ditches buildings roads trails and appliances and such other_property including water rights and shares of stock in other corporations as said corporation may from time to time desire to acquire or purchase for furnishing and supplying water to its members provided that this corporation shall not use or dispose_of such water as a public_utility but solely for the use and benefit of its members and for the irrigation of lands and domestic and other useful and beneficial purposes to fix establish levy and collect annually such charges and or assessment as may be necessary in the judgment of the board_of trustees to carry out any or all of the purposes for which this corporation is formed but not in excess of the maximum from time to time fixed by the by-laws to expend the moneys collected by said corporation from assessments and charges and other sums received for the payment and discharge of costs expenses and obligations incurred by said corporation in carrying out any or all of the purposes for which said corporation is formed generally to do any and all lawful things which may be advisable proper authorized and or permitted to be done by said corporation under or by virtue of any restrictions conditions and or covenants or laws affecting said property or any portions thereof including areas now or hereafter dedicated to public use and to do and perform any and all acts which may be either necessary for or incidental to the exercise of any of the foregoing powers or for the peace health comfort safety and or general welfare of owners of said property or portions thereof or residents thereon to borrow money and mortgage pledge or hypothecate any or all of the real or personal_property of said corporation as security for money borrowed or debts incurred and to do any and all things that a corporation organized under laws of the state of xyz may lawfully do when operating for the benefit of its members or the property of its members and without profit to said corporation generally to do and perform any and all acts which may be either necessary or proper for or incidental to the exercise of any of the foregoing powers and such powers granted by the provisions of title xyz and other laws of the state of xyz relating to non-profit corporations revised code of nothing contained in these articles of incorporation shall be construed as authorizing or permitting said corporation to own manage or operate any real or personal_property for profit it is the intention and purpose that the business of said corporation shall not be carried on for profit either to itself or for the benefit of its members and wherever it is authorized to collect charges or assessments it shall have no power or authority to use said il form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number charges or assessments except as necessary to cover the actual cost or expense of the act duty power or transaction performed all of the foregoing purposes and powers are to be exercised and carried into effect for the purpose of doing serving and applying the things above set forth for the benefit of all property situated in the plat or added to the plat of org section address and the address section address and address section address and address of section address all of the foregoing in city xyz the org bylaws contain the following stated purposes to promote community welfare of the members and their families to make org a better place to live and enjoy life for the benefit of the members and their families to exercise all powers of non profit organizations and home owners’ associations pursuant to the laws of the state of xyz including or as amended chapters and the determination_letter org applied for and was granted exemption from federal_income_tax in march of issued by the internal_revenue_service gave org exemption under code sec_501 as an organization described in code sec_501 as required in part ii of the application_for exemption form application_for recognition of exemption org provided a detailed narrative description of all the activities of the organization for purposes of this report the org response has been duplicated below and can be seen in exhibit t of this report to purchase or otherwise acquire construct improve develop repair maintain operate care for and or dispose_of streets roadways easements parkways playgrounds open spaces and recreational areas beaches boat landings mooring basins floats piers clubhouses swimming areas community buildings community club houses and general community facilities appropriate for the use and benefit of its members and or for the improvement and development of the property hereinafter referred to to build improve and maintain roadways culverts bridges and drainage areas and to provide for the improving cleaning and sprinkling of streets and for the collection and disposal of street sweepings garbage ashes rubbish and the like to prevent and suppress fires to improve light and or maintain streets roads alleys courts walks gateways fences and ornamental features now existing or hereafter to e created or erected to enforce assessments liens and or charges to operate a restaurant and lounge for the social and recreational use of the members to provide social activities for the members including banquets dances and other social occasions to operate additional recreational facilities for the benefit of the membership such as tennis courts swimming and boating locations form 886-a buplien tno s govsee eet nuo knees suai lee lus so by ice catalog number 20810w page_3 schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number on june 20xx an examination of org was initiated by the internal_revenue_service irs on july 20xx the examining agent interviewed agent who was then the current president of org below is a partial transcript of that interview that pertains to this report the questions asked are listed below with responses immediately following the numbered question did you receive publication have you read it and do you have any questions concerning your rights yes it was received and there were no questions to geta activities full understanding of your organization please describe the history of your organization and all of its the organization was originally incorporated in the 19xx’s it was started by three land developers the roads that go through the property are owned and maintained by city the golf course is open to the public however the restaurant and lounge below the office area are for members only the organization has a social member rule the club may have up to of its total membership as social members social members may use the restaurant and lounge area below the office the revenue generated by the social members is counted and reported as public or non-member revenue the organization owns and maintains its own water system the organization owns a number of wells that water is pumped from and provided to members for a monthly fee the water system has their own board_of directors checking account budget and employees however it is wholly owned by org and the final say on matters is decided by the org board_of directors the revenue and expenses are reported on the org form_990 what does the organization consider its recreational areas please explain which areas are for use be members only the parks beaches tennis courts and hiking areas are for members only this area consists of about acres and is maintained by org the lake itself i sec_3 miles around non-members are allowed to fish on the lake via a state owned boat launch the state stocks the lake with fish and thus it agreed with the state that non-members may use the lake as long as non-members are actively engaged in the activity of fishing however non-members are not allowed to swim ski or use the beach areas the water program is not available to non-members and or the public the water services are provided to members only for a dollar_figure per month fee non-members social members are limited with the amount of time that they can use the restaurant and lounge areas does your organization administer and enforce covenants to preserve appearance or architecture if so how please give examples yes org enforces covenants it is a three step process if a covenant is violated the member is afforded two warning letters the third warning letter usually accompanies a fine a lien may be placed on the residence for non- payment of dues and assessments form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page _4 schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org the covenants enforced are found in the architectural committee guidelines examples of covenants that can be enforced by org include but are not limited to year period ended 20xx - 20xx tax identification_number setbacks so many feet from the lake obstructing views of other members fences along properties have to meet certain specifications any built structure on properties requires approval of the architecture committee any structural modifications to the exterior of houses or outbuildings require the approval of the architecture committee noise ordinances like loud or obnoxious dogs are enforced by org e -- the building of a deck requires approval of said committee does your organization offer police and or other security services garbage utilities yes org provides security and protection services for its members org hired an individual who owns his own security business with his spouse he only work sec_30 hours a week on a typical basis no org does not provide garbage services to its members as city handles that and other utility_services with exception of water what is social and architecture revenue of dollar_figure this is revenue collected from members who apply for building permits and or fines from covenant infractions during the examination of org the examining agent requested and received any and all documents pertaining to enforced covenants and or restrictions on members the examining agent received the two following documents that specifically address covenants and restrictions enforced by org org covenants conditions and restrictions architectural committee guidelines this is a page document that was notarized on july 20xx the document states in section i that org shall be binding on the purchasers of any lot within said divisions section ii states that the architecture committee that is composed of or more members must approve of most architectural changes on said lots section ii also contains a subsection entitled restrictions common to all divisions which outlines rules and restrictions common to all lots and another subsection entitled specific restrictions by division the document clearly conveys restrictions regarding domestic pets storage sheds signs on property fences metal roofs green houses trees and general appearance of property and houses resolution no 20xx-10 violations of covenants articles bylaws resolutions and other rules this document states that org has the authority to enforce its protective covenants articles of incorporations bylaws resolutions and other rules that apply to the org development the document specifies a process in which complaints and referrals can be heard on violations of said restrictions violators of said restrictions are granted a hearing in cases in which there are disagreements with the findings of the committee the document describes the fines that may be imposed by said committee on those that violate said restrictions fines are imposed on a tiered scale from dollar_figure to dollar_figure depending on the number of times a restriction is violated the document states that org has the authority to place a lien on ones property for any amounts due the association pursuant to this resolution including fees and costs as set forth above form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number aaa tee form 886-a name of taxpayer org year period ended 20xx - 20xx org has a water program and committee that is responsible for providing water utility_services to the org members members are charged dollar_figure per month for water that is pumped out of three wells on org property when asked why the organization provides water to its members the officers stated that it is a county and or state requirement during the examination of org the examining agent reviewed the following two documents available for public inspection at water committee this document describes the purpose of the water committee in part the water committee is to determine and recommend to the board_of directors an appropriate rate structure providing for the continued operation of the system and the accumulation of adequate reserves to complete emergency repairs and upgrades to the system the document states that the water committee does not have the authority to act for the board_of directors with respect to any final decisions rather it recommends to the board based on its investigations experience and deliberations purpose and scope org water system water system bylaws this document states that the water system is charged with the operation and maintenance of the water system furthermore the document states in part that in order to retain a private water system classification with the xyz state property and members in good standing the monies collected by the water system are used solely for the operation maintenance and improvement of the water system facilities commission it is required that org water system supply only to org on july 20xx the examining agent toured the facilities of org accompanied by the office manager digital photographs were taken of the properties digital photographs were taken with permission of the office manager of the following a posted sign next to the beach area adjacent to the business office that read org - private property no trespassing - members only - guest must be accompanied by member tennis courts - the tennis courts are for members only as well beach front property a dock that extends in front of the business office - the dock is for member use only maintenance shop parking lot area with power building in background close up shot of the power building pro shop - picture is of inventory for sale to members and non-members alike pro shop - outside view the following data was obtained from the profit loss statements for 20xx and 20xx as provided by org the notes to the financial statements for the year ended september 20xx contained the following disclosures e note - the association’s board_of directors levied a special assessment of dollar_figure per lot for the funding of a new sprinkler system the assessment was approximately dollar_figure for the year ended september 20xx form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit ee earn form 886-a name of taxpayer org explanations of items tax identification_number year period ended 20xx - 20xx e other miscellaneous income included dollar_figure for administrative maintenance social dollar_figure golf and dollar_figure water 20xx revenues and expenses of org per profit loss statements revenues member dues water department income golf and pro shop - members golf and pro shop - public restaurant and lounge - members restaurant and lounge - public 20xx social and architecture total revenue program expenses water management golf and pro shop restaurant and lounge social youth and community management and administrative total program expenses other income expenses interest_income service charges gain loss on disposal of equipment interest_expense golf course sprinkler system other miscellaneous expenses other miscellaneous income total other income expense excess revenue over expenses the following is a representation of operating_expenses per each functional unit the data was extracted from the profit loss statements as provided golf pro shop admin- istrative lounge restaurant water management total expenses 20xx operating_expenses wages payroll_taxes employee_benefits education advertising auto truck bad_debt bank charges dues subscriptions equipment lease insurance form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer year period ended 20xx - 20xx tax identification_number org golf pro shop admin- istrative lounge water total restaurant management expenses laundry legal accounting licenses permits miscellaneous office supplies penalties professional fees repairs maintenance security services taxes telephone utilities telephone subtotal 20xx operating_expenses wages payroll_taxes employee_benefits education advertising aquatic lake treatment auto truck bad_debt bank charges credit card charges dues subscriptions engineering services equipment lease rentals insurance laundry legal accounting licenses permits miscellaneous newsletter expense office supplies supplies - general postage promotional expense penalties professional fees repairs maintenance security services service contracts water testing taxes telephone form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service year period ended 20xx - 20xx schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org utilities telephone subtotal the forms return of organization exempt from income_tax for the tax_year ending september 20xx and 20xx reported the following gross_receipts form_990 part vii - september 20xx and 20xx gross_receipts 20xx 20kx water department golf course - public golf course - members social architecture service charges membership dues interest on savings sale of assets non-inventory inventory sales miscellaneous revenue total gross_receipts according to the response provided to the initial examination letter the social architecture revenue is income received from members applying for building permits and fines service charges are water department related receipts issue law internal_revenue_code code sec_501 exempts from income_tax clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder code sec_512 provides that in the case of all exempt_organizations including social clubs described in code sec_501 the term unrelated_business_taxable_income means the gross_income excluding any exempt_function_income less deductions allowed by this chapter which are directly connected with the production of the gross_income excluding exempt_function_income code sec_512 provides that for purposes of code sec_512 the term exempt_function_income means gross_income from dues fees charges or similar amounts paid_by members of the organization as consideration for providing such members or their dependants or guests goods facilities or services in furtherance of the purpose of the purposes constituting the basis for the exemption of the organization to which such income is paid federal tax regulations sec_1_501_c_7_-1 of the federal tax regulations states that the exemption provided by sec_501 for organizations described in code sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other non-profitable purposes but does not apply to any club if any part of its net_earnings form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov -page_q schedule number or exhibit explanations of items tax identification_number rov date form 886-a name of taxpayer org year period ended 20xx - 20xx inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities sec_1_501_c_7_-1 of the federal tax regulations states that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes court cases in 68_tc_200 a social_club that was exempt from federal_income_tax under code sec_501 derived a substantial amount of income from the sale of packaged liquor to its members for off- premises consumption the bottled liquor sales were an ongoing and recurring operation of the club in each of the years examined by the court the dollar volume from the sale of bottled liquor for off-premises consumption was substantial in this case more than of the gross_receipts from all sources and the gross_income gross_profit derived from this service to members was not insignificant in excess of of gross_income from all sources it was held by the court that in light of the club’s ongoing and recurring sales of bottled liquor and the sizable percentages of gross_receipts and gross_income which such sales represented that the club was not entitled to exemption under code sec_501 in 23_tc_1017 f 2d cir it was held that the operation of a death-benefits fund for members caused a social_club to lose its exemption on the ground that such activity could not be classified as an operation for pleasure recreation or social services revenue rulings in revrul_68_535 1968_2_cb_219 it was held that the sale of liquor to members for consumption off the club’s premises does not constitute the raising of income from members through the use of the club’s facilities or in connection with club activities within the meaning of sec_1_501_c_7_-1 of the federal tax regulations neither was it considered income from the sale of merchandise to members through the operation of a restaurant or bas as provided in revenue_ruling rather the regular sale of liquor under the circumstances in the instant case was held to be a service to members that was neither related to nor in furtherance of a social club’s exempt purposes furthermore it was held that since said activity was neither social nor recreational the club was not operated exclusively for pleasure recreation and other non-profitable purposes within the meaning of code sec_501 in revrul_55_716 1955_2_cb_263 it was held that an organization that was formed for the purpose of furnishing television antenna service to its members was not entitled to exemption under code sec_501 furthermore the ruling stated fellowship did not constitute a material part of the life of the organization since the services television antenna service did not afford the opportunity for personal contacts and fellowship among members receiving said services in revrul_68_119 1968_1_cb_268 an equestrian social_club that holds an annual one-day steeplechase meet which is open to the general_public is found to be tax-exempt under sec_501 in this case the club is said to derive a small amount of income from nonmembers in excess of expenses attributable to their participation and form 886-a of the treasury-internal revenue service _publish no irs gov department catalog number 20810w page_10 schedule number or exhibit form 886-a rev date name of taxpayer org explanations of items tax identification_number year period ended 20xx - 20xx attendance if any profit results it is turned over to charity other club activities are supported by member dues therefore the ruling holds the income from non-members does not inure to the club’s members in revrul_69_281 1969_1_cb_155 it was held that a club whose membership is limited to homeowners in a housing development and that provides recreational facilities that afford opportunities for fellowship and social commingling is exempt from federal_income_tax under code sec_501 although the club was incorporated by a housing developer it was not controlled by him nor operated as commercial venture for his benefit revrul_75_494 1975_2_cb_214 provides answers to inquires asking whether certain activities engaged in by clubs similar to the club described in revrul_69_281 1969_1_cb_155 will preclude their exemption under code sec_501 the ruling was given in question answer format the question answers that are relevant to this report are shown below question will a club fail to qualify for exemption under code sec_501 if it administers and enforces covenants for preserving the architecture and appearance of the housing development answer yes a club which administers and enforces covenants for the preservation of the architecture and appearance of the housing development is not operated exclusively for pleasure recreation and other non-profitable purposes as required by code sec_501 question will a club fail to qualify for exemption under code sec_501 if it provides the housing development in which members live with fire and police protection and trash collection service answer yes a club may provide these services in connection with maintenance and security of its social facilities however as soon as these services go beyond merely maintaining social facilities and begin to include services to residential areas they are no longer exclusively in furtherance of pleasure and recreation thus a club providing police and fire protection and a trash collection service to residential areas will not qualify for exemption under code sec_501 in revrul_66_149 1966_1_cb_146 a club was held to be not exempt as an organization described in code sec_501 because it regularly derived a substantial part of its income from nonmember sources such as for example dividends and interest from investments it owned revenue procedures revproc_71_17 1971_1_cb_683 sets forth guidelines for determining the effect of gross_receipts derived from nonmember use of a social club’s facilities on the club’s exemption under code sec_501 in dollar_figure this revenue_procedure defines the term ‘total gross receipts’ total gross_receipts means receipts from normal and usual activities of the club including charges admissions membership fees dues and assessments excluded for this purpose are a initiation fees and capital contributions b interest dividends rents and similar receipts and c unusual amounts of income such as amounts derived from nonrecurring sales of club assets form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer org explanations of items tax identification_number year period ended 20xx - 20xx by public law 90_stat_2697 code sec_501 was amended to read clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and not part of net_earnings of which inures to the benefit of any private shareholder the committee report s rep nodollar_figure - cong sess that accompanied p l provides congressional intent to the limitations on revenue from outside membership the report reads as follows it is intended that a social_club national organization of a college fraternity or sorority and any other organization exempt under code sec_501 may receive the full 35-percent amount of its gross_receipts from investment_income sources reduced by any amount of nonmember income this means that a national organization of a college fraternity or sorority that has no outside income from permitting the general_public to use its facilities may receive investment_income up to the full 35-percent amount of its gross_receipts on the other hand in the case where a social_club permits nonmembers to use its club facilities and receive sec_15 percent of its gross_receipts from these nonmember sources it may receive only up to percent of its gross_receipts from investment_income issue government’s position should org org continue to be exempt from federal_income_tax under internal_revenue_code code sec_501 as a social_club org no longer qualifies for exemption from federal_income_tax under code sec_501 org it is not operated for pleasure recreation and other non-profitable purposes where substantially_all of the activities of which are for such purposes for the following three reasons org fails the non-member income tests as outlined in s rep no 94h cong sess 1976_2_cb_597 org receives a substantial amount of income from non-traditional business activities org administers and enforces covenants to preserve architecture and appearance of a housing development in violation of revrul_75_494 org had substantial non-traditional business activities during all years of examination which causes it to fail the test set forth in s rep no cong sess 1976_2_cb_597 in performing the and test we must first calculate the adjusted gross_receipts per revproc_71_17 using the definition of gross_receipts found in said revenue_procedure the amount of gross_receipts for the taxable_year ending september 20xx is calculated in the following manner receipts total receipts investment_income included in total receipts less adjustments initiation fees capital assessments sale of assets set-asides form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service year period ended 20xx - 20xx schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org total gross_receipts receipts less adjustments per rev_proc next the total amount of revenue generated from non-member usage must be calculated the income from nontraditional activities is included in the limit on income from non-member usage of club facilities and the limit on non-member income overall although the reports accompanying public law described those limits in terms of member and non-member income all nontraditional income must be included in the numerator and the denominator of the calculation even if the revenue was generated from members clearly it was not congress’ intent to allow organizations with income from nontraditional activities to have a greater percentage of their total income from unrelated activities than organizations with all traditional activities the following activities are classified as nontraditional social_club activities because they cannot be classified as operations for pleasure recreation social services and lack the commingling nature required under code sec_501 water department income social and architectural service charges total the aforementioned non-traditional sources of revenue are not unlike those found in revrul_68_535 and santa barbara club vs c i r supra those organizations generated revenue by selling packaged liquor to members for off premises consumption in both cases it was held that this activity was a service to members and was neither related to nor in furtherance of a social club’s exempt_purpose in both cases the income generated from this activity was not considered income from the sale of merchandise to members in addition in both cases the organizations were denied exemption under code sec_501 because of substantial nontraditional business activity similarly in the earlier case of allied trades club inc vs c lr supra the organization lost its exemption under code sec_501 because it carried on substantial nontraditional business activity in this case the organization provided a death-benefits fund for members in the instant case org provided a service to its members as well revenue was generated from providing water service to its members in addition revenue was generated from permit and service fees these activities like the ones found in the aforementioned court cases and revenue rulings are not in furtherance of a social club’s exempt_purpose and are nontraditional business activities both org forms and 990-t reported non-member sales of dollar_figure for 20xx the percentage of non-member receipts can now be calculated for the tax_year ending september 20xx in the following manner nonmember receipts and investment_income income summary receipts total receipts investment_income included in total receipts less adjustments initiation fees form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit form 886-a rev date name of taxpayer gre year period ended 20xx - 20xx tax identification_number explanations of items capital assessments sale of assets setasides total gross_receipts receipts less adjustments nonmember income sources reciprocal usage nontraditional activity cash sales nonmember club usage total nonmember receipts nonmember income_percentage nonmember income plus investment_income similarly in the tax period ending september 20xx org had excessive non-member income as demonstrated below nonmember receipts and investment_income income summary receipts total receipts investment_income included in total receipts less adjustments initiation fees capital assessments sale of assets set-asides total gross_receipts receipts less adjustments nonmember income sources reciprocal usage nontraditional activity cash sales nonmember club usage total nonmember receipts nonmember income_percentage nonmember income plus investment_income as can be seen in these calculations the org fails the non-member revenue test in both years under examination the non-member income_percentage is consistently exceeding the limit of by just over to org receives a substantial amount of income from non-traditional business activities and thus is not operated for pleasure recreation recreation and other non-profitable purposes where substantially_all of the activities of which are for such purposes in the tax_year ending september 20xx org received of its gross_receipts from non-traditional business activities dollar_figure dollar_figure again in the year ending september 20xx org received of its gross_receipts from non- traditional business activities dollar_figure dollar_figure these percentages are similar to that of santa barbara club vs c lr supra in form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number explanations of items org that case the organization received of there gross_receipts from a non-traditional business activity it was held by the court that in light of the club’s ongoing and recurring sales of bottled liquor and the sizable percentages of gross_receipts and gross_income which such sales represented that the club was not entitled to exemption under code sec_501 in like manner org no longer qualifies for exemption under code sec_501 due to an unusually high percentage of gross_receipts streaming from a non-traditional business activity that do not further its exempt purposes year period ended 20xx - 20xx lastly org operates in direct violation of revrul_75_494 by administering and enforcing covenants to preserve architecture and appearance of a housing development as evidenced by the following e e e e the org articles of incorporation article expressly states that one of the purposes of this organization is to enforce conditions and covenants existing upon and or created for the benefit of parcels of real_property the president of org in interview with the examining agent plainly stated that the organization enforces covenants to preserve architecture and appearance of a housing development and uses a three step process to do so org has in its books_and_records a page document entitled org covenants conditions and restrictions that outlines the covenants and restrictions that the organization enforces org has in its books_and_records a document entitled resolution no 20xx-10 that gives the organization express authority to impose fines and place liens on properties to enforce said covenants revrul_75_494 could not be clearer on the prohibition it states ‘ a club which administers and enforces covenants for the preservation of the architecture and appearance of the housing development is not operated exclusively for pleasure recreation and other non-profitable purposes as required by code sec_501 issue taxpayer’s position the taxpayer is being presented with this report at this time the examining agent is awaiting their response as to this position issue law internal_revenue_code code sec_501 provides for exemption from federal_income_tax civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes code sec_501 states that subparagraph a shall not apply to an entity unless no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual federal tax regulations sec_1_501_c_4_-1 of the federal tax regulations states that civic leagues or organizations may be exempt as an organization described in code sec_501 if form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number form 886-a rev date name of taxpayer org year period ended 20xx - 20xx i it is not operated for profit and ii it is operated exclusively for the promoting of social welfare sec_1_501_c_4_-1 of the regulations states that i in general - an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements a social_welfare_organization will qualify for exemption as a charitable_organization if it falls within the definition of charitable set forth in paragraph d of sec_1_501_c_3_-1 and is not an action_organization as set forth in paragraph c of sec_1_501_c_3_-1 ii political or social activities - the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public_office nor is an organization operated primarily for the promotion of social welfare if its primary activity is operating a social_club for the benefit pleasure or recreation of its members or is carrying on a business with the general_public in a manner similar to organizations which are operated for profit revenue rulings revrul_74_99 1974_1_cb_131 describes the circumstances in which a homeowner’s association may qualify for exemption under code sec_501 the ruling states that three elements must be satisfied it must serve a community that bears a reasonably recognizable relationship to an area ordinarily identified as governmental it must not conduct activities directed to the exterior maintenance of private residences and the common areas or facilities it owns and maintains must be for the use and enjoyment of the general_public the ruling also states that a community in within the meaning of code sec_501 is not merely an aggregation of homeowners bound together in a structured unit formed as an integral part of a plan for the development of real_estate subdivision and the sale of purchase of homes therein revrul_72_102 1972_1_cb_149 states in order to be exempt under code sec_501 an organization must maintain common streets and sidewalks which will be available for use by the community as a whole revrul_74_99 1974_1_cb_116 further emphasizes that such organizations must serve a community which bears a reasonable and recognizable relation to an area ordinarily identified as governmental and that the common area it owns or maintains must be for the use and enjoyment of the general_public revrul_80_63 1980_1_cb_116 was issued to discuss in question and answer format certain issues raised by revrul_74_99 question form 886-a of the treasury-internal revenue service publish no irs gov department catalog number 20810w page schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org does revrul_74_99 contemplate that the term community for purposes of code sec_501 embraces a minimum area or a certain number of homeowners year period ended 20xx - 20xx answer no revrul_74_99 states that it was not possible to formulate a precise definition of the term community the ruling merely indicates what the term is generally understood to mean whether a particular homeowners’ association meets the requirements of conferring benefit on a community must be determined according to the facts and circumstances of the individual case thus although the area represented by an association may not be a community within the meaning of that term as contemplated by revrul_74_99 if the association’s activities benefit a community it may still qualify for exemption for instance if the association owns and maintains common areas and facilities for the use and enjoyment of the general_public as distinguished from areas and facilities whose use and enjoyment is controlled and restricted to members of the association then it may satisfy the requirement of serving a community question may a homeowners’ association which represents an area that is not a community qualify for exemption under code sec_501 if it restricts the use of its recreational facilities such as swimming pools tennis courts and picnic areas to members of the association answer no revrul_74_99 points out that the use and enjoyment of the common areas owned and maintained by a homeowners’ association must be extended to members of the general_public as distinguished from controlled use or access restricted to the members of the association for purposes of revrul_74_99 recreational facilities are included in the definition of common areas question can a homeowners’ association establish a separate organization to own and maintain recreational facilities and restrict their use to members of the association answer yes an affiliated recreational organization that is operated totally separate from the homeowners’ association may be exempt see revrul_69_281 1969_1_cb_155 which holds that a social_club providing exclusive and automatic membership to homeowners in a housing development with no part of its earnings inuring to the benefit of any member may qualify for exemption under code sec_501 question can an exempt homeowners’ association own and maintain parking facilities only for its members if it represents an area that is not a community answer no by providing these facilities only for_the_use_of its members the association is operating for the private benefit of its members and not for the promotion of social welfare within the meaning of code sec_501 form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx - 20xx issue government’s position should org be exempt from federal_income_tax under code sec_501 as a homeowners_association org does not qualify for exemption from federal tax under code sec_501 as a home owners association for the following two reasons the primary activity of org is the operation of a social_club for the benefit pleasure or recreation of its members in direct conflict of federal tax regulations sec_1_501_c_4_-1 org restricts access to its common areas to its members in direct conflict to various revenue rulings including revrul_80_63 the primary activity of org is the operation of a social_club for the benefit pleasure or recreation of its members this is evident when the activities and facilities of the organization are considered they are as follows the organization owns and operates a public golf course with a pro-shop it owns and operates a restaurant that has limited public access it owns lake beaches and hiking trails that are limited to member access it owns tennis courts that are restricted to member’s use furthermore it can be readily ascertained that a majority of the organization’s expenditures and expenses are in furtherance of social_club type activities according to the statement of functional expenses for 20xx the organization had expenditures totaling dollar_figure of that amount dollar_figure dollar_figure dollar_figure were allocated to the golf pro shop and restaurant the percentage of expenditures allocated to social_club activities totaled according to org calculations however administrative expenditures totaled almost of total expenditures dollar_figure dollar_figure surely some of these administrative and management expenses could be allocated to the golf restaurant areas with well over of the org expenditures on social_club type activities in conjunction with a quick review of the organization’s facilities and activities it can easily be stated that org is operated primarily as a social_club for the benefit pleasure or recreation of its members federal tax regulations sec_1_501_c_4_-1 clearly states that an organization is not operated primarily for the promotion of social welfare if its primary activity is operated a social_club for the benefit pleasure or recreation of its members if an organization is not operated exclusively for the promotion of social welfare it cannot be exempt from federal_income_tax under code sec_501 during all years under examination org allowed public use of its golf course and pro shop it allowed minimal public use of its restaurant org has a social member policy that is of its membership may be social members who are not members by means of being jot owners in the housing development however org restricted access to its beaches lake hiking trails and tennis courts to members only revrul_80_63 plainly states that the use and enjoyment of common areas owned and maintained by a homeowners’ association must be extended to members of the general_public as distinguished from controlled use or access restricted to the members of the association therefore by limiting access to common areas and recreational facilities org is not entitled to exemption from federal_income_tax under code sec_501 issue taxpayer’s position form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org the taxpayer is being presented with this report at this time the examining agent is awaiting their response as to this position year period ended 20xx - 20xx issue law code sec_277 provides that in the case of a social_club or other membership_organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation deductions for the taxable_year attributable to furnishing services insurance goods or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members including income derived during such year from institutes and trade shows which are primarily for the education of members if for any taxable_year such deductions exceed such income the excess shall be treated as a deduction attributable to furnishing services insurance goods or other items of value to members paid_or_incurred in the succeeding taxable_year the deductions provided by code sec_243 sec_244 relating to dividends received by corporations shall not be allowed to any organization to which this section applies for the taxable_year code sec_528 as added by code sec_2101 of the tax reform act of p l 90_stat_1525 provides an elective exemption for certain homeowners associations that are described in code sec_528 code sec_528 exempts from federal_income_tax any dues and assessments received by qualified homeowners’ associations that are paid_by property owners who are members of the association where the assessments are used for maintenance and improvements of the association_property code sec_528 defines a homeowners’ association as an organization which is a condominium_management_association or a residential_real_estate_management_association if e e e it is organized and operated to provide for the acquisition construction management maintenance and care of association_property it elects to have the section apply for the taxable_year no part of the earnings_of the association inures to any private_shareholder_or_individual percent or more of the association’s gross_income consists solely of amounts received as membership dues fees assessments from owners of residential units or residences or residential lots exempt_function_income and percent or more of the association’s expenditures_for the taxable_year are expenditures_for the acquisition construction management maintenance and care of association_property issue government’s position is org exempt from federal_income_tax under code sec_501 org is no longer qualified for exemption from federal_income_tax under code sec_501 neither is org qualified for exemption under code sec_501 the government contends in its position that the org exemption from federal_income_tax should be revoked back to the tax period ending september 20xx form_1120 u s_corporation income_tax return should be filed for the tax period ending september 20xx through september 20xx rules contained in code sec_277 should be adhered to in determining the correct amount of tax_liability for those years in any subsequent year org may annually elect to be treated as a taxable home owners association under code sec_528 by timely filing form 1120-h u s income_tax return for homeowners associations org must first determine if they meet the criteria outlined in code sec_528 prior to making said election form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx - 20xx issue taxpayer’s position the taxpayer is being presented with this report at this time the examining agent is awaiting their response as to this position conclusion issue org no longer qualifies for exemption from federal_income_tax under code sec_501 for the following reasons org fails the non-member incomes tests as outlined in s rep no cong sess c b big_number org receives a substantial amount of income from non-traditional business activities and org administers and enforces covenants to preserve the architecture and appearance of a housing development in violation of revrul_75_494 issue org does not qualify for exemption from federal_income_tax under code sec_501 for the following reasons the primary activity of org is the operation of a social_club for the benefit pleasure or recreation of its members in direct conflict of federal tax regulations sec_1_501_c_4_-1 org restricts access to its common areas to its members in direct conflict to various revenue rulings including revrul_80_63 issue org does not qualify for exemption from federal_income_tax under code sec_501 org was previously granted exemption under code sec_501 but no longer qualifies under that code section neither does it qualify for exemption as a home owner’s association under code sec_501 as such the government’s position is that the exemption of org from federal_income_tax is to be revoked as of october 20kx org will be required to file forms for the tax periods ending september 20xx through september 20xx the rules contained in code sec_277 should be used to determine the correct_tax amount in subsequent years org may potentially qualify for the annual election as a taxable homeowners_association under code sec_528 an election must be made by timely filing a form 1120-h the criteria for said election are found in code sec_528 corresponding federal tax regulations and in the instructions to the form 1120-h form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service internal_revenue_service date date org address certified mail - return receipt requested dear department of the treasury te_ge eo examinations division commerce st mc dallas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax 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 rev 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 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 if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha a ramirez director eo examinations division enclosures publication publication report of examination letter rev catalog number 34809f


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date january uniform issue list legend director1 director2 director3 director4 son employee corporation dear contact person identification_number telephone number employer_identification_number this is in reply to your ruling_request dated date from your authorized representatives as modified by your letter dated date regarding the proposed recapitalization of corporation and related actions pursuant to sec_4943 and sec_511 of the internal_revenue_code code facts according to the information provided by you you are recognized as exempt from federal_income_tax under sec_501 of the code and are classified as a private_foundation within the meaning of sec_509 you carry out your charitable purposes through discretionary donations made for the public welfare including charitable scientific literary and educational_purposes you also distribute grants to other organizations enterprises and individuals with like purposes the current members of your board_of directors are director1 director2 director3 and director4 director1 and director2 are married to each other director3 director4 and son employee are the adult children of director1 and director2 a current full time employee and shareholder of corporation son employee is a for-profit corporation actively engaged in corporation is a trade_or_business as described in sec_53_4943-8 of the regulations that is not substantially related to your exempt_purpose within the meaning of sec_513 of the code corporation is employee-owned and director1 owns less than percent of the outstanding shares of stock entitled to vote employees may purchase and sell stock at predetermined values through corporation's employee_stock_purchase_plan corporation currently has five classes of capital stock none of which is directly owned by you the specific attributes and current shareholders of each class of stock are class a stock this class of stock is held only by active employees who are not family members of director1 or director2 holders of this class of stock are entitled to one vote per share and may vote to elect directors and on other major transactions including mergers charter amendments the sale of all assets and where required_by_law class b stock this class of stock is held only by retired employees who are not family members of director1 or director2 holders of this class of stock are not entitled to vote to elect directors or on any other transaction except where required_by_law class c1 stock this class of stock is held only by or in trust for descendents of director who are active employees of corporation holders of this class of stock are entitled to one vote per share and may vote to elect directors and on other major transactions including mergers charter amendments the sale of all assets and where required_by_law all outstanding shares of this class of stock are currently held by son employee class c2 stock this class of stock is held only by or in trust for descendents of director who are not employed by corporation holders of class c2 stock are not entitled to vote to elect directors or on any other transaction except where required_by_law class d stock this class of stock is held only by or in trust for director1 holders of this class of stock are entitled to one vote per share and may vote to elect directors and on other major transactions including mergers charter amendments the sale of all assets and where required_by_law all classes of stock retain the same rights to dividends and liquidation proceeds and no class of stock has contingent voting rights or rights of first refusal director1 intends on transferring a number of shares of corporation stock to you before this occurs corporation will undergo a first_corporation will amend its charter to provide for an exchange of all recapitalization plan class d shares for newly created class d1 and class d2 shares holders of class d1 shares will be entitled to one vote per share and may vote to elect directors and on other major transactions including mergers charter amendments the sale of all assets and where required_by_law holders of class d2 shares will not be entitled to vote to elect directors or on any other transaction except where required_by_law holders of class b class c2 and class d2 shares of stock are not entitled to vote to elect directors and these shares are referred to as nonvoting_stock the allocation of class d shares to class d1 and d2 shares will be made such that the class d1 shares will constitute no more than percent of all shares of any class entitled to vote to elect directors after the recapitalization the voting power of the class c1 shares will be less than percent director1 will then transfer all class d1 shares to you within three years of the issuance of upon the death of director1 any remaining class d1 and all class d2 shares will be this ruling transferred to you at the time that class d1 shares are transferred to you the shares of class d1 in combination with class c1 will be less than of all outstanding voting_stock of corporation none of the shares of corporation held by you will be subject_to an acquisition_indebtedness as described in sec_514 you have requested the following rulings ownership of some nonvoting_stock and all class d1 stock of corporation by you will not constitute excess_business_holdings for purposes of sec_4943 if the code dividends and income received by you on nonvoting_stock of corporation will constitute unrelated_business_taxable_income under sec_511 of the code not law sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable or educational_purposes sec_509 of the code provides that unless specifically excepted a domestic or foreign organization described in sec_501 is a private_foundation and subject_to the excise_taxes of chapter sec_511 of the code in part imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code describes the term unrelated_business_taxable_income as the gross_income derived by an exempt_organization from any unrelated_trade_or_business as defined under sec_513 regularly carried on by it less certain deductions but with modifications provided in sec_512 sec_512 of the code sets forth various modifications which exclude certain income from the computation of unrelated_business_taxable_income these modifications include dividends interest royalties rent from real_property and gain from the sale of property sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function sec_4943 of the code imposes a tax on the excess_business_holdings of any private_foundation in a business_enterprise during any taxable_year sec_4943 of the code defines the term excess_business_holdings as the amount of stock in a corporation that a foundation would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in the corporation to be permitted holdings sec_4943 of the code limits the holdings of a private_foundation in a corporation to percent of the voting_stock of the business_enterprise reduced by the percentage of the voting_stock owned by all disqualified persons sec_4943 of the code provides that the permitted holdings of any private_foundation in an incorporated business_enterprise are i percent of the voting_stock reduced by ii the percentage of the voting_stock owned by all disqualified persons sec_4943 of the code defines business holdings as in computing the holdings of a private_foundation or a disqualified_person with respect thereto in any business_enterprise any stock or other interest owned directly or indirectly by or for a corporation shall be considered as being owned proportionately by or for its shareholders sec_4946 of the code provides that for the purposes of sec_4943 the term disqualified_person includes both foundation managers and family members of any foundation_manager sec_4946 of the code provides that a foundation_manager is with respect to any private_foundation an officer director or trustee of the foundation sec_4946 of the code provides that the term family_member as used in sec_4946 includes a spouse and ancestors children grandchildren great grandchildren any spouses thereof sec_53_4943-1 of the foundation and similar excise_taxes regulations regulations provides that generally under sec_4943 of the code the combined holdings of a private_foundation and all disqualified persons as defined in sec_4946 in any corporation conducting a business which is not substantially related to the exempt_purpose of the foundation are limited to percent of the voting_stock in such corporation sec_53_4943-3 of the regulations provides that except as otherwise provided in sec_4943 and the permitted holdings of any private_foundation in an incorporated business_enterprise are- a percent of the voting_stock in such enterprise reduced but not below zero by b the percent of voting_stock in such enterprise actually or constructively owned by all disqualified persons sec_53_4943-3 of the regulations provides that the percentage of voting_stock held by any person in a corporation is normally determined by reference to the power of stock to vote for the election of directors with treasury_stock and stock which is authorized but unissued being disregarded sec_53_4943-3 of the regulations provides that in general in addition to those holdings permitted by paragraph b of this section the permitted holdings of a private_foundation in an incorporated business_enterprise shall include any share of nonvoting_stock in such enterprise held by the foundation in any case in which all disqualified persons hold no more than percent of the voting_stock in such enterprise all equity interests which do not have voting power attributable to them shall for purposes of sec_4943 be classified as nonvoting_stock for this purpose evidence_of_indebtedness including convertible indebtedness and warrants and other options or rights to acquire stock shall not be considered equity interests analysis ruling director1 director2 director3 and director4 are the current members of your board_of directors son employee is the adult child of director1 and director2 sec_4946 of the code provides that the term disqualified_person includes both foundation managers and family members pursuant to sec_4946 the directors of a private_foundation of any foundation_manager director3 and director4 are therefore qualify as foundation managers son employee is disqualified persons by way of being your foundation managers a disqualified_person because son employee is a family_member of director1 and director2 director1 director2 also and sec_4943 of the code imposes a tax on the business holdings of any private_foundation in a business_enterprise in excess of the foundation’s maximum permitted holdings in that enterprise pursuant to sec_4943 and sec_4943 the capital stock in corporation held by director1 director3 director4 and son employee is included in determining your maximum director2 permitted holdings in corporation pursuant to sec_4943 of the code and sec_53_4943-1 b i holdings of corporation is percent of the voting_stock reduced by the percentage of voting_stock owned by all disqualified persons because sec_53_4943-3 of the regulations provides that voting_stock is determined by reference to the power of stock to vote for election of directors your maximum permitted holdings are reduced by any class a c1 and d1 stock owned by director1 director2 director3 director4 and son employee classes b c2 and d2 stock are nonvoting and therefore do not reduce your maximum permitted holdings under sec_4943 only the ownership and attributes of classes a c1 and d1 stock require further analysis your maximum permitted regulations the of class a stock the outstanding shares of class a stock are held only by active employees that are not descendents of director1 neither you nor any disqualified persons therefore own any class a stock and any outstanding shares will not reduce your maximum permitted holdings class c1 stock the outstanding shares of class c1 stock are held by son employee a disqualified_person and will therefore reduce your maximum permitted holdings class d1 stock after the recapitalization plan the total outstanding shares of class d1 stock will constitute no more than percent of all shares of any class entitled to vote to elect directors of these outstanding shares will by director1 a thus the outstanding shares of disqualified_person and then transferred directly to you class d1 stock will reduce your maximum permitted holdings be held at first all the total of outstanding shares of voting_stock is calculated via the summation of the total outstanding shares of class a c1 and d1 stock because you have represented that your direct and attributable ownership of class c1 and d1 stock after the recapitalization will be less than percent of all of the total outstanding shares of voting_stock your ownership of class c1 and d1 stock will be permitted holdings under sec_4943 of the code with regard to your direct and indirect ownership of the nonvoting_stock class b c2 and d2 stock pursuant to sec_53_4943-3 of the regulations the permitted holdings of a private_foundation in an incorporated business_enterprise shall also include any share of nonvoting_stock in such enterprise held by the foundation in any case in which all disqualified persons hold no more than percent of the voting_stock in such enterprise because of your representations that you and your associated disqualified persons own less than percent of all of the voting_stock of corporation your ownership of nonvoting shares of corporation stock after the recapitalization will therefore be permitted holdings under sec_4943 of the code thus your ownership of some nonvoting_stock and all class d1 stock of corporation will not constitute excess_business_holdings for purposes of sec_4943 of the code ruling sec_512 of the code excludes dividends from qualifying as unrelated_business_taxable_income sec_512 excludes all gains or losses recognized in connection with a tax exempt organization's investment activities sec_512 excepts from these provisions certain income from debt-financed_property but you have represented that your stock in corporation will not be subject_to an acquisition_indebtedness and thus not constitute debt-financed_property pursuant to these modifications to the unrelated_business_taxable_income rules any dividends or gains you receive from your possession or sale of nonvoting_stock will not constitute unrelated_business_taxable_income on nonvoting_stock of corporation will not constitute unrelated_business_taxable_income under sec_511 of the code dividends and income received by you ruling sec_1 your ownership of some nonvoting_stock and all class d1 stock of corporation by you will not constitute excess_business_holdings for purposes of sec_4943 if the code dividends and income received by you on nonvoting_stock of corporation will not constitute unrelated_business_taxable_income under sec_511 of the code this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts any changes that may have a bearing upon your tax status should be reported to the service because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative except as we have specifically ruled herein we express no opinion as to the consequences of this transaction under the cited provisions or under any other provision of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely manager exempt_organizations technical group enclosure notice


department of the treasury internal_revenue_service irs p o box cincinnati oh number release date uil dear date date employer id number contact person id number contact telephone number form you must file tax years this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we'll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number 47635z sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 other than c redacted letter final adverse determination under sec_501 other than c - no protest letter rev catalog number 47635z department of the treasury internal_revenue_service cincinnati oh legend x state highway y counties b date dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were formed as a trade_association of small businesses located along a scenic state highway most of the businesses are galleries selling locally and regionally created arts and crafts other businesses include restaurants lodging providers and real_estate brokers you had been cooperating informally for several years and were only recently incorporated on b your bylaws state you are organized to develop evaluate and promote ideas activities and programs which increase commerce and promote economic development tourism and preservation of the historic and natural_resources of the x corridor in y counties your primary activity is the advertisement of member businesses group advertising in the form of rack cards consumes about half of your expenditures_for a two year cycle print advertising in local and area newspapers and magazines and internet advertising make up most of the rest of your expenditures your financials do not reflect joint advertising expenditures by your members ads paid for individually by the members but at a reduced_rate because they advertise as a group you also act as the contact and spokesperson for the members within the county governments chambers_of_commerce and arts organizations in the area law sec_501 of the code provides for the exemption from federal_income_tax of business_leagues not organized for profit no part of the net_earnings of which inure to the benefit of any private_shareholder_or_individual sec_1_501_c_6_-1 states that a business league is an association of persons having some common business_interest the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit business conditions of one or more lines of business as distinguished from the performance of particular services for individuals its activities should be directed to the improvement of revrul_59_391 c b held that an organization which restricts its membership to individuals firms associations and corporations each representing a different trade business occupation or profession and which is organized for the purpose of exchanging information on business prospects has no common business_interest other than a mutual desire to increase their individual sales the activities are not directed to the improvement of one or more lines of business but rather to the promotion of the private interests of its members and is not exempt under sec_501 of the code revrul_65_14 c b states an organization formed to promote the tourist industry in its area whose principal activity is publishing a tourist guidebook and other advertising matter containing listings of the names of individual members is performing particular services for its members and is accordingly not exempt under sec_501 of the code revrul_73_411 states that a shopping center merchants’ association whose membership is restricted to and required of the tenants of a one-owner shopping center and their common lessor and whose activities are directed to promoting the general business interests of its members does not qualify as a business league or chamber of commerce under sec_501 of the code application of law you are not described in sec_501 of the code and sec_1_501_c_6_-1 because the facts show your activities are not directed to the improvement of business conditions of one or more lines of business but to the performance of particular services for individual businesses you are like the organization described in revrul_65_14 in that your primary activity is providing particular services for your members by advertising their businesses you are like the organization in revrul_59_391 in that your members have no common business_interest other than a mutual desire to increase their individual sales and your activities are not directed to the improvement of one or more lines of business but rather to the promotion of the private interests of your members you are not a chamber of commerce because like the organization in rev_rul your activities are directed to promoting the general business interests of your members exclusively your position your position is that no part of any net_earnings will inure to the benefit of any private_shareholder_or_individual and you are not organized for profit or to engage in an activity ordinarily carried on for profit you are primarily engaged in the activities that are the basis for the requested exemption you also state that you are a business league of persons having a common business_interest ie the promotion of tourism and trade along x letter rev catalog number 47628k corridor in y your purpose is to promote that common interest it is not engaged in regular business of a kind ordinarily carried on for profit all current members are retail art and craft businesses lodging establishments restaurants fishing lodges and real_estate brokers located along the scenic highway other businesses located on the scenic highway which are not currently members also benefit from your activities and are eligible to join you work to promote a favorable environment for tourism by producing route maps of the highway and cooperating with local governments and the department of transportation to keep the highway clean and beautiful you provide a point_of_contact between your members and state county and municipal officials the county chambers_of_commerce and other organizations and churches located along the route you also link up these scattered businesses and others including the residents and artists in the region our response to your position your primary activity is to conduct an advertising campaign to attract customers to your individual businesses and therefore you are not promoting one or more lines of business but providing particular services for your members conclusion you are not an association of persons promoting one or more lines of business and your activities constitute specific services to members accordingly you do not qualify for exemption as an organization described in sec_501 of the code if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative e one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives letter rev catalog number 47628k under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we’ ll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements letter rev catalog number 47628k you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k


internal_revenue_service number release date index number - ------------------------------------------------------------ ------------------------------- ----------------------------------------------------------- -------------------------------------- ---------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-150129-06 date date dear ------------- this letter is in response to your application_for an allocation of authority to issue dollar_figure------- ----------------- in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation an allocation of shares of the limitation cannot be made with respect to the projects owned by the borrower listed in appendix a because such borrower is a governmental presp-150129-06 body and dollar_figure has already been allocated to applications requesting a smaller share of the limitation to finance qualified projects owned by qualified borrowers that are governmental bodies we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing a clean renewable energy project sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-150129-06 borrower name -------------------------------- -------------------------------- ---- -------------------------------- -------------------------------- ---- -------------------------------- -------------------------------- ---- -------------------------------- -------------------------------- ---- total appendix a project type project location wind facility ----------------------------- wind facility wind facility wind facility ----------------------- --------------------------- -------------------- -------------------------------- ------------------------------ ----------------------- amount requested dollar_figure-------------- dollar_figure-------------- dollar_figure--------------- dollar_figure--------------- dollar_figure---------------- ---------------------------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------