department of the treasury int ernal revenue service washington d c number release date cc pa cbs br2mascott gl-115666-01 u i l dollar_figure date memorandum for associate area_counsel sb_se laguna niguel from joseph w clark senior technician reviewer branch collection bankruptcy summonses subject advisory opinion-refund of offer deposits in bankruptcy this memorandum responds to a request for advice received from your office on date you have asked us to consider whether the service must refund a deposit it received in connection with a taxpayer’s offer_in_compromise when the taxpayer files chapter bankruptcy before the service has acted upon the offer in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent this writing may contain privileged information issue when a taxpayer with a pending offer_in_compromise files chapter bankruptcy must the service return the deposit it received in connection with the offer conclusion when the taxpayer files chapter bankruptcy the offer becomes nonprocessable unless the taxpayer has signed form_3040 authorizing the service to apply the deposit to tax_liabilities the service must refund the deposit to the taxpayer upon the bankruptcy filing discussion as a rule once a taxpayer files a bankruptcy petition any related and pending offer to compromise becomes unprocessable see i r m sec_7809 of the internal_revenue_code establishes a deposit fund account to hold sums offered in compromise and provides that upon acceptance of such offer_in_compromise the amount so accepted shall be withdrawn from the deposit account and deposited into the treasury as collections upon rejection sec_7809 requires the service to refund the deposit to the maker of the offer sec_301_7122-1t g provides that s ums submitted with an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments if an offer to compromise is determined to be nonprocessable any amount tendered with the offer will be refunded without interest the regulation further allows that refund is not required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted accordingly item c of form_656 notifies the taxpayer that i f the irs rejects or returns the offer the irs will return any amount_paid with the offer if i we agree in writing irs will apply the amount_paid with the offer to the amount owed by signing form_3040 the taxpayer may authorize the service to apply an offer_in_compromise deposit to outstanding tax_liability the internal_revenue_manual also requires return of the deposit in such situations i r m states that the service should request the taxpayer to sign form_3040 authorizing application of the deposit to outstanding liabilities in the event the offer is not accepted however i f the taxpayer does not authorize application of the deposit the deposit must be refunded to the taxpayer emphasis in original further i r m relating to the disposition of deposits received with unprocessable offers in compromise provides d eposits received with offers that are not processable must be returned to the taxpayer and that the employee making the determination is responsible for sending the deposit back to the taxpayer in light of language in the code the regulations and the i r m the service has made a policy decision to return any funds submitted with an offer when it becomes nonprocessable thus unless the taxpayer has signed a form_3040 authorizing application of the deposit to tax_liabilities the service should refund the deposit when a taxpayer has filed bankruptcy rendering the offer nonprocessable if you have any further questions please contact the attorney assigned to this matter at


t c memo united_states tax_court vena marilyn wofford petitioner v commissioner of internal revenue respondent docket no filed date g tomas rhodus for petitioner w mark scott for respondent memorandum opinion goldberg special_trial_judge the case was heard pursuant to sec_7443a of the code and rule sec_180 sec_181 and sec_182 unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in additions to and a penalty on petitioner's federal income taxes as follows additions to tax penalty sec sec_6653 a a sec sec deficiency a dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure n a n a n a --- --- dollar_figure n a dollar_figure --- --- year after concessions the issues for decision are whether petitioner is entitled to amortization deductions with respect to certain intangible assets acquired in connection with her business of being a safeguard distributor and whether petitioner is allowed to carry forward net operating losses sustained in taxable years and some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by this reference petitioner resided in dallas texas at the time her petition was filed petitioner began working in the printing business in in the dallas-fort worth area of texas she was employed in the early 1970's as a salesperson and sales manager for a company petitioner concedes she is liable for the additions to tax under sec_6651 for each taxable_year in issue and under sec_6654 for the taxable years and respondent concedes the addition_to_tax under sec_6653 for and the penalty under sec_6662 for petitioner concedes she is liable for self-employment_tax on her taxable_income as finally redetermined and agrees to all of the arithmetical adjustments set forth in the notice_of_deficiency to the amount of taxable_income as finally redetermined engaged in the business of producing and selling printed checks and accounting-related forms designed for small businesses at that time petitioner became familiar with the products of safeguard business systems inc safeguard a competitor of the company for which petitioner worked safeguard is engaged in producing and selling business forms to small_business owners safeguard's products and sales are oriented toward smaller businesses those with or fewer employees with a primary focus on businesses employing or fewer persons similar forms although perhaps not of comparable quality are available at office supply stores the safeguard name receives substantial recognition in the industry safeguard has approximately big_number customers serviced by a sales network of approximately people in north america safeguard does not operate any retail outlets safeguard operates through a limited number of distributors therefore in order to solicit sales of safeguard products a distributor generally must buy the right to receive commissions on sales to a base of customers referred to as a base or a list within a defined geographical territory from a current or former distributor referred to as a buy-sell in petitioner was recruited by and accepted employment with safeguard as a branch sales manager in this capacity petitioner gave sales support to distributors operating in parts of texas oklahoma and colorado petitioner did not have contact with customers and did not solicit sales of safeguard products by the end of petitioner was aware that a few distributors had given up their distributorships and that their customer bases had not been purchased petitioner was interested in becoming a distributor and she communicated her interest to her supervisor petitioner was laid off from the branch sales manager position effective date as of date she began acting as a safeguard distributor with respect to three existing customer lists in the dallas area petitioner acquired the rights associated with two of these customer lists effective date petitioner did not immediately acquire the rights to the third customer list but instead she solicited sales under a temporary babysitting agreement petitioner was to receive standard commission payments less amounts payable as territory payback a territory payback also referred to as territory repayments represents amounts due to the former distributor for the right to receive commissions on sales to customers on the former distributor's list petitioner acquired the right to the commissions related to the third list effective date the regional distributor agreement the agreement between safeguard and petitioner bears an effective date of date but the terms were not finalized and the agreement was not signed until date petitioner had the right to solicit sales of certain products and services and to receive commissions from safeguard on all such sales credited to her safeguard was responsible for billing customers and received payments directly from customers petitioner was authorized to represent safeguard only within a limited geographic area the agreement had an initial term of years petitioner had the right to terminate the agreement for any reason upon days' notice safeguard had the right to terminate the agreement with days' notice under limited circumstances including but not limited to failure by petitioner to meet certain annual commission quotas or petitioner's material failure to perform any of the other terms or conditions of the agreement petitioner's annual quotas were set at actual earnings for the first years and left to be negotiated for the remaining years of petitioner's initial year term the agreement provided that for a period of years following its termination petitioner is prohibited from soliciting selling or attempting to sell to any safeguard customer or persons contacted by petitioner for the purpose of their becoming a safeguard customer within her assigned territory the agreement further provided we will withhold each month from payments due you under this agreement a sum equal to the fixed monthly amounts specified in the territory payback schedule which is attached hereto as a rider we will continue to make these monthly withholdings until we have withheld the total sum of dollar_figure this amount is for the protected right to earn future commissions on sales of systems to the customers listed in attachment b the customer lists under this agreement it represents the price that the transferor of such rights has set no territory payback schedule was executed or attached to the agreement a proposed payment schedule requiring payment over a 10-year period was sent to petitioner in date but she rejected it desiring a longer payback period no interest rate was ever stated in connection with petitioner's payment obligation if the agreement was terminated for any reason before petitioner had paid the full amount remaining with respect to the customer account rights assigned to her the customer bases petitioner had no further liability for additional payments however petitioner's right to future commissions with respect to sales to customers on the lists was subject_to reduction depending on the nature of the termination and any commissions payable were to be reduced by any amounts remaining due as territory repayments if the commissions earned by a distributor were not sufficient to cover the territory repayments due in that month as a matter of practice safeguard nevertheless would pay the former distributor the amount of the payments due safeguard considered any such amounts to be an advance to the current distributor and would deduct such amounts in the future phillip j rigney mr rigney signed the agreement on behalf of safeguard according to mr rigney safeguard was acting as an agent on behalf of the former distributors in the sale of their rights to their customer bases for over years mr rigney's position with safeguard was that of sales manager which involved direct responsibility for and support of a group of sales distributors mr rigney found in his experience that the purchase_price of a customer list generally is the product of the sales generated from the customer base over the previou sec_12 months multiplied by a factor ranging from to mr rigney's recollection was that there were several negative factors associated with the lists as to which petitioner acquired the commission rights including the poor economy in texas in and the lack of consistent servicing of the customers on the lists a factor of was used in determining the price charged to petitioner in mr rigney's opinion petitioner was a strong negotiator and he believed that this is why the agreement was not finalized until date petitioner received commission statements on or about the fifteenth of each month for the prior month's sales petitioner operated her business on the cash_basis safeguard withheld territory repayments of dollar_figure in from petitioner's monthly commission statement the amounts withheld in were not fixed monthly sums but varied petitioner's monthly commission statements for reflect a total amount of dollar_figure withheld as territory repayments in the following amounts month base 5h5 base base 5w1 dollar_figure -- -0- dollar_figure -- -0- dollar_figure -- -0- -- dollar_figure -- dollar_figure -- -- big_number -- -0- big_number -- -0- big_number -0- -- big_number -0- -0- date date date date date date date date date date -- dollar_figure -- date -- dollar_figure -- date -- dollar_figure -- totals dollar_figure dollar_figure -0- created a deficit commission balance that was carried forward into subsequent month s petitioner received commission payments from the aggregate due on the bases therefore a deficit commission balance for one base was offset against net commissions payable from the other bases territory repayments of dollar_figure and dollar_figure were withheld from petitioner's monthly commission statements in and respectively petitioner presently has approximately dollar_figure a year withheld from her commissions as territory repayments at this rate she is scheduled to complete the territory repayments approximately years from mr rigney estimated that generally the turnover rate of a customer base that is the number of years after which no repeat business is generated from a base ranged from to years after a buy-sell is completed from her experience as a branch sales manager petitioner believed the typical turnover rate to be to years petitioner determined the useful_life of the customer lists she had acquired in by determining how many customers contained thereon remained active as of the end of she found that to percent of the customers were no longer purchasing from her at that time and from this she estimated the useful_life of the bases to be years petitioner acted as a safeguard distributor from date and throughout the years in issue carrying on this business under the name of prestonwood business forms other than the salary which petitioner received from safeguard for the month of date petitioner's only other source of gross_income was derived from rental real_estate property that she operated at a loss during the taxable years in issue at the time of trial petitioner continued to be engaged in business as a safeguard distributor petitioner claimed deductions for amortization related to the customer lists based on a cost_basis of dollar_figure and a useful_life of years petitioner filed her income_tax returns for the taxable years and in on schedule c profit or loss from business or profession of her federal_income_tax return filed for the taxable_year petitioner claimed amortization deductions in the amount of dollar_figure petitioner claimed amortization deductions in the amount of dollar_figure on schedule c of her return filed for petitioner seeks additional amortization deductions for and in the amount of dollar_figure each petitioner also claims a net_operating_loss_carryover of dollar_figure from prior years in tax_year and an nol_carryover of dollar_figure in in the notice_of_deficiency respondent disallowed dollar_figure and dollar_figure of petitioner's claimed amortization deductions for and respectively respondent determined that petitioner's liability was not fixed for the territory payback agreement and therefore petitioner was not entitled to related amortization deductions respondent prepared substitute returns for petitioner for the taxable years and respondent allowed petitioner schedule c expenses of dollar_figure and dollar_figure in lieu of amortization deductions for and respectively because petitioner had failed to establish that her liability was fixed for the territory payback respondent's determinations are presumed to be correct and petitioner bears the burden of proving that they are erroneous rule a 290_us_111 under sec_167 a taxpayer may deduct as depreciation a reasonable allowance for the exhaustion and wear_and_tear of property used in a trade_or_business or held_for_the_production_of_income an intangible asset may be the subject of an allowance for depreciation or amortization if such asset is known from experience or other factors to be of use in business or in the production_of_income for a limited period of time which can be estimated with reasonable accuracy sec_1_167_a_-3 income_tax regs no deduction for depreciation is allowable with respect to an intangible asset the useful_life of which is not limited id under the regulation no allowance will be permitted merely because in the unsupported opinion of the taxpayer the intangible asset has a limited useful_life no deduction for depreciation is allowable with respect to good will id however an intangible asset with an ascertainable value and a limited useful_life the duration of which can be ascertained with reasonable accuracy is depreciable under sec_167 notwithstanding the fact that its value is related to the expectancy of continued patronage 507_us_546 petitioner contends that she acquired the customer lists and that her basis in those lists was equal to the purchase_price set forth in the agreement thus petitioner argues that her basis includes the total amount due as territory repayments respondent makes two counterarguments respondent argues that petitioner's obligation to make territory repayments was too contingent and cannot be included in computing petitioner's basis in her distributorship thus respondent contends that petitioner has not established a basis in excess of actual cash payments respondent also argues that petitioner did not actually acquire the customer lists but instead acquired franchise rights as defined in sec_1253 respondent contends that petitioner has not established that her right to the commissions from the customers contained on the lists had an ascertained value separate and distinct from other intangible rights she acquired for purposes of depreciation and amortization a taxpayer's basis in purchased property is the cost including any valid liabilities incurred in acquiring the property 331_us_1 ordinarily recourse_liabilities are included in basis because the taxpayer has a fixed unconditional obligation to pay with interest a specific sum of money 86_tc_848 affd 841_f2d_264 9th cir a borrower does not incur the same personal obligation to pay under a nonrecourse_liability however a nonrecourse obligation will be included in a taxpayer's cost_basis if it is a true debt id an obligation that is contingent will not be recognized for the purposes of determining cost_basis id the principle that an obligation or liability that is contingent will not be recognized for the purposes of determining cost_basis predates cases involving tax sheltered investments and applies with equal force in cases not involving tax_shelters see eg 52_tc_367 affd on another issue 451_f2d_173 9th cir a debt will be recognized for tax purposes if it appears likely based on the facts and circumstances at the outset of the transaction--including reasonable revenue projections based on objective criteria and the value of the security at the time the lender has a right to proceed against the security for payment--that the obligation will be paid waddell v commissioner supra pincite the territory repayments due under the agreement were payable only out of petitioner's commissions petitioner was not otherwise required to make payments if she did not earn sufficient commissions thus the obligation was nonrecourse as to her the monthly withholdings were not set at any amount at the inception of the transaction the relevant period in our analysis waddell v commissioner supra it is true that the obligation was set at a fixed amount however we do not believe this makes the obligation any less contingent see 80_tc_944 n petitioner's obligation was still conditioned on her success in earning commissions petitioner argues nonetheless that her obligation was real both petitioner and mr rigney testified that they viewed petitioner's obligation as real further petitioner places great weight on the value of the lists which she argues served as collateral securing her obligation to safeguard petitioner argues that she was building equity in her interest in the lists and that she had an incentive to fulfill her repayment obligation to avoid foreclosure respondent counters that petitioner and safeguard failed to follow customary business practices indicating that the obligation was not a true debt in this regard respondent points out that at the time the agreement was entered into neither petitioner nor safeguard required a final payment_date a written repayment schedule a minimum repayment amount based on a dollar amount or percentage of income or a specified interest factor we agree with respondent that these factors were clearly present and tend to indicate that the obligation was not bona_fide while we believe the testimony of the witnesses to be credible the subjective intent of the debtor to repay and the subjective expectation of the lender to be repaid are not controlling graf v commissioner supra pincite citing 505_f2d_1266 it is mere conjecture that a taxpayer will make payments when he is not so obligated id in addition it is not clear when safeguard's right to foreclose on the collateral would be triggered safeguard's right to terminate the agreement and thereafter transfer the lists was not absolute after termination of the agreement safeguard clearly had the right to transfer the lists in a manner consistent with its own best interests however there is no evidence in the record from which we can determine what the value might be at any such time we cannot determine from the record that the fair_market_value of the rights acquired by petitioner and claimed by her as a cost_basis was equal to dollar_figure the total amount which was to be withheld from her commissions according to the agreement moreover the withholdings were contingent on her success in earning commissions she has failed to establish that any amount approximating the dollar_figure was likely to be paid further the material facts in this case are virtually identical to the facts present in wakefield v commissioner tcmemo_1995_318 in that case the taxpayers as safeguard distributors claimed deductions for amortization with respect to certain customer lists acquired in connection with their distributorships the taxpayers did not make any cash payments when they signed their distributorship agreements safeguard was to withhold percent of the taxpayers' commissions on the sale of safeguard products to be applied against the purchase_price of customer lists the taxpayers were not liable for any payments once they ceased to be safeguard distributors the court found that the taxpayers' obligations were nonrecourse and contingent on their success in earning commissions id in addition the court found that the taxpayers had not established that the fair_market_value of the lists was equal to their stated purchase_price nor had they established that payment of the obligations was likely id therefore the court concluded that the taxpayers could not include the amount of the obligations in computing the cost bases of the lists petitioner's attempt to distinguish wakefield v commissioner supra is not persuasive petitioner contends that it is significant the payments therein were based on a percentage of sales whereas her payments were to be a fixed monthly sum the crucial factor however is the same in both cases an obligation would only arise if commissions were earned we find that petitioner's liability under the agreement was contingent and therefore no amount of the obligation may be included in computing her cost_basis thus petitioner has not established that the cost_basis of her interest in the customer lists exceeded her cash payments in her notice_of_deficiency respondent allowed petitioner deductions for the amount of the cash payments in the taxable years in issue therefore we need not address respondent's argument that petitioner acquired franchise rights based on the disallowance of a portion of petitioner's amortization deductions for tax_year and and the disallowance of such deductions in and respondent determined that petitioner did not sustain net operating losses in any of the years in issue thus as a result of our decision respondent determined that petitioner made payments of dollar_figure in we find that petitioner made payments of dollar_figure on the amortization issue it is not necessary to decide if petitioner is entitled to carry forward the losses she claimed from her safeguard distributorship decision will be entered under rule


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n all yes ------------- tax years --------------------- contact number identification_number form required to be filed employer_identification_number contact person ------------------ release date release number date date uil dear ------------- this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file file the returns in accordance with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter if you have any questions about your federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter lois g lerner director exempt_organizations rulings agreements sincerely informa t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n department of the treasury internal_revenue_service washington d c ------------- fax number --------------------- --------------------- contact number identification_number contact person ------------------ employer_identification_number date date uil legend b c d e f g h i j k l m n o p website a website b website c website d website e email address a dear ------------- we have considered your application_for recognition of exemption from federal_income_tax under sec_501 as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below facts founding and governance you were incorporated as l in and changed your name to m by amending your articles of incorporation later that year in your form_1023 application_for recognition of exemption hereinafter application you state that you were formed and have conducted business operations as a defacto nonprofit corporation since your founders are b and c according to your application in your officers and directors were b president and a director c treasurer and a director d secretary and a director e a director and f chief operating officer and a director in your date letter you no longer list c as a board member you list b as treasurer your letter of date describes subsequent changes among your officers and directors you state b was president ceo and chairman of the board from date until date g was president and ceo from date until present d was a director from date until date f was director of education and manager of customer service from date to date and h has been secretary treasurer and a director from date until present the resumes you provided show the following job experiences of your founders and directors b worked in sales marketing and credit education and restoration c was a professional football player football coach and had opened two restaurants e worked for a number of companies in management and sales development g was a real_estate investor and financial planner f worked in debt settlement negotiation financial counseling and education money management and credit counseling d was in the air force as a medical technician and worked as a registered nurse purposes your articles state that you are a nonprofit public benefit corporation organized for charitable purposes and not organized for the private gain of any person your specific purpose is to build community and public interest and awareness in debt and finance education and solutions your articles further state that upon dissolution of the corporation all remaining assets after payment of debts and liabilities shall be distributed to a nonprofit fund foundation or corporation which is organized and operated exclusively for charitable purposes under sec_501 of the internal_revenue_code your purpose as represented in your bylaws is to educate and instruct the general_public about credit the scoring of credit reports and the remediation of erroneous credit reports your application stated m is organized as a credit education credit improvement organization for the purpose of instructing clients in four important areas of credit education useful to individual clients and beneficial to the general_public your purposes also include removing the letter lists date as the date but was received date by our office the letter is cited as date errors from a client’s credit report to improve client credit scores and relieve them of the mental distress caused by sloppy credit bureau practices activities your application states that you instruct clients in a number of credit education topics and improve their credit scores by removing errors from their credit reports you do not limit your services to specific individuals or classes of individuals your application states further that clients will receive four credit education modules covering the following topics understanding your credit score budget planning basic money management restoring your good credit the wise use of credit home auto buying and teens and credit-what’s up with your money you email the volumes to your clients and encourage them to study the educational materials at their own pace your application also states you will create a web site which will offer the educational materials online the website will have information on credit reports credit scores payment history credit statistics and credit support your application’s proposed budgets for and shows that of your total revenue will be used for education and training seminars in each respective year your letter of date states that clients contacting your organization are referred to your website for information and if interested in proceeding complete a client application upon receipt of the application and payment you take the following steps payment and contract information are processed if payment is by echeck the paperwork is held until check clears a tri-merge credit report is pulled a customer service employee makes a welcome call and asks the client questions regarding expectations credit report concerns and address changes the client’s address is verified and he is informed he will receive credit education materials via email or mail every months the file goes to a processor who will do the first dispute letter dispute letters are mailed to the appropriate credit bureau and the client receives updates from the credit bureaus the welcome letter attached to your date letter states upon receipt of your client agreement and verification of your payment m will begin the credit repair process you stated you have no formal criteria for individuals to qualify for your services but that your services generally are sought by persons denied credit or subject_to egregious credit terms you also stated that the customer service representative initially spends minutes on the phone with applicants explaining the credit services to be rendered and the scope of credit education available you also stated you had no formal training materials training is done in a group setting by f initial contact by an m affiliate affiliates are independent representatives that assist you in the promotion and sale of your services for a percentage of the fee the affiliate reviews the prospective client’s credit needs and examines his understanding of financial literacy topics you indicate further that the affiliate explains your benefits services and financial literacy education program and takes the following steps welcome call and educational material sent to client setup client's file in the your database first dispute cycle additional dispute cycle weekly educational conference call additional education material sent to clients your letter of date states that the first stage in the education process is the and seminars unlimited access to customer service and processing unlimited e-mail support and answers to questions and certificate of completion your date letter states that clients are invited to participate in regularly scheduled national conference calls you also plan to i conduct and host live face-to-face seminars and financial workshops on a monthly basis ii create a continuing education series that includes an opportunity for its associates investors and business owners to attend financial seminars and workshops to further their knowledge and awareness of new financial products investment tools and personal development programs and iii expand your education program to colleges and universities people filing for bankruptcy parolees real_estate agents and senior high school students your date letter states you offer a free 2-hour business briefing the business briefings are overviews which outline ways for your members to pool resources and take advantage of your unique training and support system the material your submitted states in part studies showed that investors have a great interest in having access to systems that streamline the investing process and give them the upper hand in the marketplace we believe we have what investors want and today anyone can join our power team of business professionals and participate in a variety of investor clubs and or mastermind groups to assist them in finding and funding good real_estate stock and business deals the promotional language says that clients must pay for the 1-day seminars 2-day workshops and 3-day boot-camps that you offer each course has a money back guarantee you market the courses as an opportunity for your associates investors and business owners to gain knowledge of new financial products investment tools and personal development programs you state that your clients are invited to participate in national conference calls your application stated that b and c each owned of n d owned and several conducted by b part of your educational program none of your websites or material offered to potential clients including the enrollment contract mentions the availability of national conference calls for client participation ownership of n other investors owned your application further stated that i was president and ceo of n investor sec_72 your date letter stated that b is a holder of the issued and outstanding shares of n in addition you attached to your date letter a letter to you from n dated date the letter from n states under past ownership that c owned of n and b owned under present ownership it states that c and i each own of n n’s letter also states that b is the only person who has been associated with both you and n date letter you stated therein that b own sec_25 of the shares of n by letter in your letter dated date you indicated that an error was discovered in your your date letter stated that b own sec_25 of n d own sec_3 and other dated date you advised us of other errors in your date letter with respect to the ownership of n you attached a letter from n dated date it states under past ownership that b owned of n from date to present c owned from date to date under present ownership the letter from n states from date to present c own sec_50 of n i own sec_25 and b own sec_25 officers and directors of n your application stated that i was president and ceo of n your date letter stated that none of the owners of n other than b and d are directors or employees of you you also represented that j is the current manager president and ceo of n your letter of date stated that i was president and a director of n from date until date then became secretary treasurer and a director from date until present it also stated that c was the secretary treasurer and a director of n from date until date k acted as president of n from date to date c was president from date until present the letter also states that b is ceo and a director of n in your letter dated date you advised us of errors in your date letter with respect to the officers of n you attached a letter from n dated date for past officers it states i was president from date to date k was president from date to date and b was secretary treasurer from date to date for present officers it states b was president from date to present and i was secretary treasurer from date to present agreements with n your application states that you and n entered into an oral marketing and sales agreement on date for the purpose of marketing and selling the credit education credit improvement services offered by you your application also states that on date you and n entered into a new written_agreement which provides n with an initial exclusive 3-year marketing sales and advertising agreement your application did not contain a copy of the written_agreement your date letter includes a copy of a marketing and sales agreement between you and n dated date the agreement states that it is nonexclusive and you will compensate n by paying a commission of of the gross_sales revenue generated by n’s activities it is signed by b as your president and j as president and ceo of n your date letter includes a copy of a marketing and sales agreement between you and n dated date the agreement states that it is nonexclusive and that you will compensate n by paying a commission of of the gross_sales revenue generated by n’s activities this agreement is signed by b as your president i as president of n in your application the proposed financial data for and respectively shows payments of dollar_figure dollar_figure and dollar_figure to n for marketing services the proposed budget in your application_for and shows dollar_figure dollar_figure and dollar_figure in revenue for each of those respective years thus for each respective year approximately and of your total revenue was projected to be paid to n for marketing and sales your website website a under about us the company states that n serves as your marketing arm and that you and n are in a joint_venture partnership a copy of the website dated date is attached under products and services the website states when n entered into a joint_venture partnership with m it began marketing both the credit correction system and the credit education programs under partnerships this website states n has formed a marketing alliance with m which is the actual processor of the credit correction and education system through this alliance n is able to use its marketing abilities and sales force to introduce customers to m’s credit correction and education services n has pooled resources and developed dynamic relationships with premier marketing organizations and sales forces across the country and is able to continue its focus on innovative sales and marketing strategies your date letter states that n will cease to function on or before date as of date the secretary of state listed n as an active corporation business address your application states that you occupy office space adjacent to but separate from office space occupied by n and that n expects to move to a separate building within a few months your lease real_estate appraisal client agreements and welcome letter contain the same address for you and n the real_estate appraisal submitted with your letter of date assessed the rental value of this entire property both you and n used this address on the marketing agreement dated date the lease submitted with your application states that you shall occupy big_number square feet of the southern ½ of the premises the lease grants you the right to install an identification sign on the building’s monument sign the agreement between you and n dated date submitted with your date letter lists your address as suite a and n’s as suite b the phone number both you and n list on your agreements training materials educational volumes and websites is the same website your date letter states your website address is website b under virtual business center the n associate training handbook you submitted with your date letter n handbook lists o ur demo sites as website c and website b the n handbook tells associates that they may get into my back office on these sites each of the websites websites a b c d and e list you as the sites’ sponsoring_organization and contain the same general information and contact information about you address and telephone number see attached the n handbook contains a model letter with your letterhead to be sent to clients that lists the customer service email as email address a your date letter states m does not now nor has it ever owned or the n handbook also contains pages with blank business card forms for use by associates the blank cards list on the bottom your website address your name websites b c and e present ways to recruit potential employees ie associates and to attract potential clients all of the websites have links to my back office controlled the referenced website website b your letter also states n informs m that it does not now nor has it ever owned the referenced website website e your date letter identifies website a as your website as of date websites b and e are active and operating web sites as are website a last checked date website d and website c last checked date clients your date letter states that you enrolled approximately big_number clients between date and date of these clients big_number were still engaged in the process your website a states that you have helped tens-of-thousands of americans it also states that since both you and n have successfully assisted over big_number clients remove incorrect and inaccurate items from their credit reports the n handbook states that you and n serviced big_number americans in the first year of operation fees your application lists the following fees for your services credit reports dollar_figure and credit education and improvement services dollar_figure your date letter contained the following fee schedule dollar_figure plus dollar_figure for one credit report and for two clients dollar_figure plus dollar_figure for two credit reports your letter of date states that the price for one year of financial literary education and credit correction services is dollar_figure websites b c and e state that the basic plan costs dollar_figure dollar_figure for credit report and a two for one plan costs dollar_figure dollar_figure for credit reports your application stated the fee will be refunded or waived if a client’s credit score has not been improved by the deletion of erroneous information or if the client can’t pay the fee because of a lack of financial resources it also stated that you provided free credit improvement services to as many as big_number individuals who were unable to pay you said these individuals had paid fees to other companies for credit improvement but had received no services you did not identify these companies your date letter stated that for those earning less than dollar_figure a year or who are active military the education and correction fee is dollar_figure it also said that you would provide the education and correction services for free to individuals with financial hardship victims of identify theft and individuals referred to you by another non-profit organization it also stated that approximately of your clients receive free services there is no mention in the n handbook your client agreements your welcome letter or your websites regarding the availability of free or reduced-cost services your date letter discusses making your services available to a local nonprofit organization that provides housing and services to individuals to enable them to find permanent housing and income it also states at times m has provide sic free assistance education support and training to help provide and establish a new foundation from which each participate sic of the project can launch their new life and career marketing and associates your date letter stated the organization has no present plans to advertise its products and services by means of tv ads internet ads or ads in the print media your date letter describes workshops that come with a money back guarantee and that all of your clients are given a money back guarantee if we are unable to expand their financial literacy awareness or improve their credit profile according to website b and d n has enlisted the services of independent representatives to assist in the promotion and sale of your services these representatives receive a percentage of each plan sold representatives receive higher fees as they recruit additional representatives they also receive a percentage of the sales fees earned by new representatives these new representatives are charged a website set-up fee of dollar_figure and dollar_figure per month billed in arrears the n handbook primarily addresses sales and marketing with topics including lifecycle of a new client programs and business opportunity under compensation plan the n handbook explains how associates are rewarded for recruiting more associates and clients an associate take sec_25 of every dollar_figure plan sold and a percentage commission from the sales of associates recruited under power of networking marketing the n handbook describes this compensation arrangement as a business opportunity for its associates everyone you meet is a prospective independent associate because the cost to become involved is relatively low and no experience is required everyone who becomes part of the network can expand business so the potential for growth and profitability is unlimited a modern network marketing business requires none of the risks headaches problems or limitations associated with business as usual your letter of date states that you now operate the associates program other agreements your application described a partnership with a bank to operate a program called get checking the program consisted of your clients gaining a certificate of completion upon finishing your education modules with the certificate the client could open an account with the bank which would also donate funds to support the educational programs you did not address whether the program continues to exist any client referrals were made or any payments were made by the bank or fees received from the program your letter of date states that you have entered into an agreement with o o is the exclusive licensing agent of certain software technology relating to the transfer of consumer payment and personal information to third party databases the contract states that o desires to have the software technology commercialized to benefit the public and is granting a use right to you the service allows your associates to have their on time monthly bill payments cell phone bills utilities rent payments etc reported to the national credit bureaus under the agreement you and o will each receive of a fee dollar_figure charged to your clients to have their on-time monthly bills all rent phone utilities etc reported to the national credit bureaus which in turn has a positive impact on an individual’s credit profile the contract also states it is expected that the technology will be diligently exploited by m to increase o technology utilization in the marketplace and with that expectation after technology is successfully tested and implemented m agrees to diligently market the service technology product as a part of its product offering or to third parties which may utilize the technology under separate agreement with o as may be negotiated public support your application states that your revenue will come from fees for services your letter of date states that you will solicit contributions from foundations community businesses and private individuals you did not submit information about actual solicitations or receipt of public donations compliance with state laws in your letter dated date you responded to our question about what type of registration permit or license you have with the state m has always considered itself to be a sec_501 organization and further compliance with state law is not required m respectfully submits that the irs lacks jurisdiction to inquire about m’s compliance with the state civil code under frequently asked questions--is the m credit correction program legal your website website a states we strictly follow the fair credit reporting act as well as state and federal laws we are fully licensed as a credit service_organization we are a member of the better business bureau registered with consumer affairs and listed on dun bradstreet class action lawsuit your predecessor organization l p and b are defendants in a class action lawsuit filed in the united_states district_court on date the suit alleges violations of the credit repair organizations act on date the court granted an initial 90-day stay on all proceedings renewed until date your date letter stated that it was the view of defendants’ trial counsel that the suit would be dismissed upon our recognition of you as exempt under sec_501 of the code you have submitted no evidence that the law suit has been dismissed law sec_501 of the code exempts from federal_income_tax corporations organize and operated exclusively for charitable educational and other purposes provided that no part of the net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that in order to exempt as an organization described in sec_501 and organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or part to the benefit of private shareholders or individuals sec_1_501_a_-1 defines the words private_shareholder_or_individual in sec_501 to refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subsection it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term educational refers to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community in revrul_65_299 1965_2_cb_165 the service recognized a credit counseling agency open to the general_public as exempt under sec_501 of the code the agency was incorporated as a nonprofit corporation to assist families and individuals with financial problems and to help reduce the incidence of personal bankruptcy the service found that the objective and activities of the agency contributed to the betterment of the community as a whole the agency did not limit its services to the poor the agency employed specialists to interview applicants who were in financial difficulty in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization analyze the specific problems involved and counsel on debt repayment with creditors’ consent it set up monthly repayment plans and made monthly pro_rata distributions to creditors it made no loans to the applicants nor negotiated loans on their behalf it charged nominal fees for monthly prorating services but charged no fees for counseling the organization relied upon contributions from local businesses lending agencies and labor unions to cover its costs formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the organization provided information to the public on budgeting buying practices and the sound use of consumer credit through the use of films speakers and publications it aided low- income individuals and families who have financial problems by providing them with individual counseling and if necessary by establishing budget plans under the budget plan the debtor voluntarily made fixed payments to the organization which held the funds in a_trust account and disbursed the funds on a partial payment basis to the creditors the organization did not charge fees for counseling services or proration services the debtor received full credit against his debts for all amounts paid the organization did not make loans to debtors or negotiate loans on their behalf finally the organization relied upon voluntary contributions primarily from the creditors participating in the organization’s budget plans for its support the service found that by aiding low-income individuals and families who have financial problems and by providing without charge counseling and a means for the orderly discharge_of_indebtedness the organization was relieving the poor and distressed moreover by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization was instructing the public on subjects useful to the individual and beneficial to the community thus the organization was exempt from federal_income_tax under sec_501 of the code consumer credit counseling service of alabama inc v united_states u s t c d d c held that an organization which provided information and counseling on budgeting and consumer credit was exempt under sec_501 of the code the organization provided information to the general_public through the use of speakers symposia and publications on the subjects of budgeting buying practices and the sound use of consumer credit it also provided counseling on budgeting and the appropriate use of consumer credit to debt-distressed individuals and families the organization did not charge for these information and counseling programs as an adjunct to its counseling programs the organization developed and implemented debt management programs the debt management activities accounted for approximately percent of the professional counselors’ time the organization charged a nominal fee of up to dollar_figure per month for them which was waived for financial hardship the organization received financial support from government and private_foundation grants contributions and assistance from labor agencies and the united way revrul_78_99 1978_1_cb_152 held that the provision of individual and group in 326_us_279 the court held that the community education and counseling assistance programs were charitable because they advanced education and promoted social welfare it concluded the debt management and creditor intercession activities were an integral part of the agency’s counseling function and thus were charitable and educational alternatively these activities were incidental to the agency’s principal functions see also credit counseling centers of oklahoma inc v united_states u s t c d d c virtually identical facts counseling for widows based on their ability to pay is an educational activity the supreme court held that the presence of a single non-exempt purposes if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 70_tc_352 the court found that a corporation formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational nor scientific but rather commercial in addition the court found that the organization’s financing did not resemble that of the typical 501_c_3_organization it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations the court in 71_tc_1067 date found that an organization formed to educate people in hawaii in the theory and practice of est was a part of a franchise system which is operated for private benefit and therefore may not be recognized as exempt under sec_501 of the code the applicant for exempt status was not formally controlled by the same individuals controlling the for-profit organization owning the license to the est body of knowledge publications methods etc however the for-profit exerted considerable control_over the applicant’s activities by setting pricing the number and frequency of different kinds of seminars and training and providing the trainers and management personnel who are responsible to it in addition to setting price for the training the court found that the fact that the applicant’s rights were dependent upon its tax-exempt status showed the likelihood that the for-profit corporations were trading on that status the question for the court was not whether the payments made to the for-profit were excessive but whether it benefited substantially from the operation of the applicant the court determined that there was a substantial private benefit because the applicant was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations a bar for the avowed purpose of raising money for scholarships the board included the bar owners the bar’s accountant also a director of the bar as well as two players the board was self-perpetuating the court reasoned that because the bar owners controlled the organization and appointed the organization’s directors the activities of the organization could be used to the advantage of the bar owners the organization claimed that it was independent because there was separate_accounting and no payments were going to the bar the court was not persuaded in p l l scholarship v commissioner t c an organization operated bingo at a realistic look at the operations of these two entities however shows that the activities of the taxpayer and the pastime lounge were so interrelated as to be functionally inseparable separate accountings of receipts and disbursements do not change that fact the court went on to conclude that because the record did not show that the organization was operated for exempt purposes but rather indicates that it benefited private interests exemption was properly denied in harding hospital inc v united_states f 2d a previously for-profit hospital amended its articles of incorporation to gain tax exempt status it retained its previous contract with a for profit medical partnership composed of seven doctors the associates who performed all the treatments on to of the hospital patients the hospital entered into contracts with the associates whereby the associates provided nearly all of the hospital’s services in return for significant fees and favorable leasing agreements the majority of the board_of trustees was comprised of individuals not connected with the associates the court stated that the phrase net_earnings as used in sec_501 may include more than the term net profits as shown by the books of the organization or than the difference between the gross_receipts and disbursements in dollars 99_f2d_460 8t h cir earnings may inure to an individual in ways other than though the distribution of dividends mertens law of income_taxation sec_34 pincite ed the court affirmed the finding that the hospital did not qualify under sec_501 because the hospital did not hold itself out as a charitable institution did not have a specific plan or policy for the treatment of charity patients for the years in question the doctors who treated between and of the hospital’s patients derived substantial benefit from the hospital’s operations the associates benefited from the favorable rental agreements and earnings for their supervision of the hospital nursing pharmacy and laboratory american campaign academy an outgrowth of the national republican campaign committee in american campaign academy v commissioner t c pincite the nrcc claimed no formal ties with the republican party gop yet the court found that the secondary benefits conferred on the republican party and its candidates who employed the students were not incidental to the academy’s exempt educational purpose several factors showed that the academy operated with the targeted goal of benefiting the gop the academy accepted office equipment from the nrcc and exclusive funding from the national republican congressional trust two of three academy directors held significant positions within the gop the general counsel to the nrcc incorporated the academy and the entire admissions committee consisted of people associated with the republican party the academy studied topics such as growth of the nrcc and why are people republicans but did not include similar topics with respect to other political parties in light of these facts the court found that the academy conducted its educational activities with the partisan objective of benefiting republican candidates and entities in american institute for economic research v united_states 301_f2d_934 ct_cl the court considered the status of an organization that provided analysis of securities and industries and of the economic climate in general the organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities although the court noted that education is a broad concept and assumed for the sake of argument that the organization had an educational purpose it held that the organization had a significant non-exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt in st louis science fiction limited v commissioner t c memo date the court reviewed the annual convention of a science fiction organization it held that while the conventions may have provided some educational benefit to some of the individuals involved that social and recreational purposes and private benefit predominated the court distinguished 75_tc_337 in which the organization provided public art education by using juries to insure artistic quality and integrity petitioner relies heavily upon 75_tc_337 in support of its contention that it is tax-exempt in goldsboro art league the taxpayer was an organization that operated two art galleries that exhibited and sold artworks we held that the taxpayer was tax-exempt under sec_501 because it was organized and operated exclusively for an exempt purpose--art education we noted that in order to insure artistic quality and integrity the artworks displayed were selected by jury procedures we also noted that the taxpayer was the only such museum or gallery within its county or any contiguous county we held that it served public rather than private interests and that its sales activities were incidental to advancing its exempt_purpose by contrast petitioner in this case did not apply any controls to insure the quality of the books and artworks sold at its convention also the tone of petitioner's convention is substantially if not predominantly social and recreational rather than educational in addition petitioner's huckster's room and art auction provided substantial benefit to private interests that is not incidental to its exempt_purpose consequently we think the case goldsboro art league is clearly distinguishable on its facts from the instant case cir the tax_court found that a church was operated with a substantial purpose of in church by mail inc v commissioner t c memo aff’d 765_f2d_1387 9th providing a market for an advertising and mailing company owned by the same people who controlled the church the church argued that the contracts between the two were reasonable but the court_of_appeals pointed out that the critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the church in easter house v united_states 846_f2d_78 fed cir aff’g cl_ct the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because it operated for a substantial commercial purpose rather than for the exempt purposes of providing educational and charitable services to unwed mothers and children the services for unwed mothers and children were merely provided incident to the organization’s adoption service business the agency’s operation was funded completely by the fixed fees charged adoptive parents it relied entirely on those fees and sought no funds from federal state or local sources nor engaged in fund raising programs nor did it solicit contributions moreover the court found that adoption services do not in and of themselves constitute an exempt_purpose on the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations the credit repair organizations act croa u s c section et seq effective date imposes restrictions on credit repair organizations including forbidding the making of untrue or misleading statements and forbidding advance_payment before services are fully performed u s c section 1679b sec_501 organizations are by definition excluded from regulation under the croa the croa defines a credit repair organization as in 283_fsupp2d_58 d d c the court relied a any person who uses any instrumentality of interstate commerce or the mails to sell provide or perform or represent that such person can or will sell provide or perform any service in return for the payment of money or other valuable consideration for the express or implied purpose of- i improving any consumer’s credit record credit history or credit rating or ii providing advice or assistance to any consumer with regard to any activity or service described in clause i u s c section 1679a the courts have interpreted this definition broadly to apply to credit counseling agencies the federal trade commission’s policy is that if an entity communicates with consumers in any way about the consumers’ credit situation it is providing a service covered by the croa 21_fsupp2d_424 n d n j in ftc v gill 265_f3d_944 9th cir aff’g 183_fsupp2d_1171 the appellate court inferred that a credit repair organization that first promised a free consultation but charged fees in advance of the full performance of services was being operated as a charity primarily for purposes of evading regulation under the croa sec_508 a of the code provides with certain exceptions that an organization organized after date shall not be treated as an organization described in sec_501 c unless within the time prescribed in the regulations it gives notice that it is applying for recognition of exempt status sec_1_508-1 a i of the regulations provides that notice must be given months from the end of the month in which the organization was organized notice is given by submitting a properly completed and executed form_1023 application_for recognition of exemption to the appropriate key district_director sec_1_508-1 a iii provides that an organization shall be considered organized on the date it becomes an organization described in sec_501 c determined without regard to sec_508 a sec_508 c and sec_1_508-1 a describe organizations such as churches that are not subject_to sec_508 a notice requirements revproc_84_47 irb and revrul_77_208 1977_1_cb_153 revproc_90_27 1990_1_cb_514 provides in part that exempt status will be recognized in advance of operations if proposed operations can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed a mere statement of purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement the organization must fully describe the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned and the nature of the contemplated expenditures where the organization cannot demonstrate to the satisfaction of the service that its proposed activities will be exempt a record of actual operations may be required before a ruling or determination_letter will be issued an organization must establish through the administrative record that it is organized and operated as a sec_501 organization denial of exemption may be based solely upon failure to provide information describing in adequate detail how the operational_test will be met american science foundation v commissioner tcmemo_1986_556 82_tc_215 pius xii academy v commissioner tcmemo_1982_97 exempt status can be recognized in advance of operations if proposed operations can be described in enough detail to permit a conclusion that the organization will clearly meet the requirements of sec_501 american science foundation v commissioner tcmemo_1986_556 the organization has the burden of providing sufficient documentation or other substantive information regarding its activities and operations which would establish entitlement to tax-exempt status information that is vague or nonspecific is not sufficient to meet the requirements under sec_501 share v commisioner t c memo analysis you have not established that you are exempt under sec_501 of the code you do not operate primarily in furtherance of exempt purposes you also operate for the benefit of private interests finally your net_earnings inure to the benefit of private entities and individuals operation for exempt purposes you do not operate primarily for charitable or other exempt purposes you have not shown that your credit repair and education activities further charitable purposes you do not limit your services to a specific class of individuals or apply any formal criteria to determine eligibility for your services see revrul_69_441 counseling and debt management activities limited to low income individuals and families with financial problems further a potential client first must complete an agreement and pay dollar_figure before receiving any of your credit repair and training services or materials your representations about providing free or below-cost services are inconsistent with what is presented on your websites client agreements welcome letters and the n handbook see consumer credit counseling service of alabama no charge for counseling and education debt management fees waived for financial hardship revrul_69_441 no fees for counseling or debt management services nor have you shown that you primarily further educational_purposes your projected budget for educational programs is incidental and of revenue respectively for the years and compare consumer credit counseling service of alabama finding nonexempt purposes to be incidental to educational_purposes a potential client first must complete an agreement and pay dollar_figure for your credit repair services before you send any of your instructional materials compare consumer credit counseling service of alabama debt management services were an adjunct to counseling function with easter house educational_services to unwed mothers were incidental to adoption services business your welcome letter only mentions that the credit repair process begins upon your receipt of the application and payment it does not mention educational programs when a paid client does receive a welcome call your customer representative speaks to them only for minutes time just to make sure the client understands the credit repair services to be rendered and the scope of credit education available you also stated that you have no formal training materials for your representatives the commissions and bonuses for your and n’s associates are tied to the number of credit repair plans they and other associates they recruit sell not the level of education they provide the material posted on your websites and the n handbook primarily promote the marketing and sales of your credit repair services rather than education and counseling moreover you operate for a substantial nonexempt commercial purpose you charge up-front fees before providing any services the n handbook instructs representatives on selling and marketing your services to expand business opportunities and increase profitability associates’ commissions and bonuses reward increased sales of credit repair services and recruiting more sales associates none of your client agreements welcome letters web sites or the n handbook mention free or below-cost services you provide a money back guarantee if clients’ credit scores do not improve with respect to o you agreed to diligently market exploit and commercialize its software technology and both you and o receive a fee for each client who purchases the service you established power teams to help business professionals find and fund good real_estate stock and business deals thereby your billing marketing training and while you and blg both have disavowed your previously identified websites these sites contain the same or similar information with respect to you and blg and your respective activities as your current site the previous sites also continue to be active compensation practices are similar to commercial entities see airlie foundation conducting activities in a commercial manner easter house adoption agency operated for substantial commercial purposes b s w group engaging in commercial ventures your substantial nonexempt commercial purpose outweighs any other exempt purposes you may serve see better business bureau of washington d c operation for private benefit you do not operate for the benefit of the general_public instead you operate primarily for the private benefit of n and your founders your founders b and c always have owned between and of n from your formation to the present they both have served as directors and officers of you and n c has been an officer and director of both you and n at the same time since formation you only have contracted with n to sell and market your services at least one agreement was exclusive even though subsequent agreements were non-exclusive you continued to use only n for sales and marketing services pursuant to these agreements you have paid or been obligated to pay n between and percent of your total revenue your representations also raise serious doubts about whether you and n operate as separate independent corporations you share the same address and phone number your websites client agreements and the n handbook do not clearly delineate your separate identities or operations further the timing of your formation after the enactment of croa and after the filing of the class action suit and the fact that you were founded by the owners of n raise serious questions about whether you were formed for the express purpose of allowing n to continue to operate much as it had prior to your formation but without being subject_to croa or the class action claims see ftc v gill taken together these facts indicate that you operate for the private benefit of n and its owners see p l l scholarship activities of exempt and for-profit were so interrelated as to be functionally inseparable american campaign academy benefits to other organization not incidental to exempt educational purpose inurement your net_earnings inure in whole or in part to the benefit of private shareholders or individuals your founders b and c always have owned between and of n from your formation to the present your founders both have served as directors and officers of you and n as noted in the statement of facts your representations about past and present ownership of n have been inconsistent both in terms of ownership percentage and owners even considering your date corrections some of your representations with respect to officers and directors also have been inconsistent based on your representations as presented in the facts it does not appear you have provided us copies of all your agreements with n there also are a number of inconsistencies between your representations and the terms of the agreements you have provided us sometimes at the same time you have contracted solely with n to sell and market your services you have paid or been obligated to pay n between and percent of your total revenue you did not obtain bids from other companies or otherwise establish that the compensation under these contracts was reasonable or at arms length terms under these circumstances your net_earnings inure to the benefit of your founders and n see est of hawaii for-profit exerted considerable control_over nonprofit which simply was the instrument to subsidize the for-profit harding hospital non-profit hospital continued to contract with founding physicians for most patient care church by mail advertising and mailing company that was owned by the same individuals who controlled the church benefited substantially from the church’s operations conclusion you have not established that you are exempt under sec_501 of the code you do not operate primarily in furtherance of exempt purposes you have a substantial non-exempt commercial purpose you also operate for the private benefit of blg and its owners finally your net_earnings inure to the benefit of blg and its owners accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you if you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address -------------- you may also fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter lois g lerner director exempt_organizations rulings agreements sincerely


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 1-plr-104488-00 date date legend x d1 this responds to a letter dated date together with subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 x intended to be treated as an s_corporation for federal_income_tax purposes effective on d1 but the s election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the plr-104488-00 secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under sec_1362 effective on d1 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed concerning whether the original election made by x to be treated as an s_corporation was a valid election under sec_1362 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative s christopher t kelley sincerely christopher t kelley acting assistant to the branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


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 ita b03 plr-155504-05 date date this is in response to your letter requesting permission to revoke an election legend taxpayer -------------------------------- partnership ----------------- year ------- dollar_figurea ----------- date ------------------------------ dear ------------------- under sec_1_163_d_-1t c of the income_tax regulations to treat qualified_dividend_income as investment_income under sec_163 and sec_163 of the internal_revenue_code for year facts taxpayer is a_trust whose business is that of a passive investor taxpayer filed form_1041 for year on form_4952 attached to the form_1041 taxpayer elected to include dollar_figurea of qualified_dividend_income as investment_income for purposes of the investment_interest expense deduction taxpayer made the decision to elect to include dollar_figurea of qualified_dividend_income as investment_income based upon information received in a k-1 from partnership on date partnership issued a revised k-1 to taxpayer showing an increase in short term capital_gains a decrease in long term capital_gains a reduction of portfolio deductions and a reduction of dividend income the revisions in the k-1 have a sec_163 defines investment_income in general as the sum of iii so much of the net_capital_gain referred to in clause ii i as the taxpayer i gross_income from property_held_for_investment other than gain taken into sec_163 provides that in the case of a taxpayer other than a corporation ii the excess if any of i the net gain attributable to the disposition of property_held_for_investment over ii the net_capital_gain determined by only taking into account gains and losses plr-155504-05 substantial impact on taxpayer’s calculation of the investment_interest expense deduction applicable law the amount allowed as a deduction for investment_interest shall not exceed the net_investment_income of the taxpayer for the taxable_year account under clause ii i from dispositions of property_held_for_investment plus elects to take into account under this clause sec_163 also states that such term shall include qualified_dividend_income as defined in section h ii b only to the extent the taxpayer elects to treat such income as investment_income for purposes of this subsection under sec_163 must be made on or before the due_date including extensions of the income_tax return for the taxable_year in which the qualified_dividend_income is received d b is revocable with the consent of the commissioner dividend income in investment_income this situation is analogous to those situations concerning taxpayers who have not made a particular election provided in the regulations because of inadequate or incorrect advice from knowledgeable tax professionals and are subsequently seeking extensions of time under section of the regulations revrul_83_74 1983_1_cb_112 provides extensions of time for making regulatory elections for this purpose sec_301_9100-1 defines the term regulatory election to include an election whose deadline is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_1_163_d_-1t c of the regulations provides that the election under section sec_1_163_d_-1t b of the income_tax regulations provides that the election sec_301_9100-3 of the procedure and administration regulations generally taxpayer is requesting permission to revoke its election to include qualified sec_301_9100-3 provides that requests for extensions of time for regulatory plr-155504-05 elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government reasonably and in good_faith if the taxpayerb sec_301_9100-3 states that a taxpayer will be deemed to have acted i requests relief before the failure to make the regulatory election is discovered by the service ii inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election in this case taxpayer may be considered to have acted reasonably and in good_faith because taxpayer inadvertently made the election because of events beyond taxpayer’s control ie the receipt of erroneous information on the original k-1 provided to taxpayer by partnership in addition taxpayer relied on a qualified_tax professional who advised taxpayer to make the election based on erroneous information which was subsequently corrected reasonably and in good_faith if the taxpayer-- under sec_301_9100-3 a taxpayer will not be considered to have acted i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1_6664-2 of the income_tax regulations and the new position requires a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief in this case taxpayer is not seeking to alter a return position for which an accuracy- related penalty has been or could be imposed under sec_6662 at the time relief is requested taxpayer was not informed in all material respects of the related tax plr-155504-05 consequences of making or not making the election since it was unaware of the amounts reported in partnership’s corrected k-1 furthermore taxpayer is not using hindsight in requesting relief specific facts have not changed since the filing of the return and making of the original election that made the election disadvantageous to taxpayer sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under these criteria the interests of the government are not prejudiced in this case allowing taxpayer to revoke its election would not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than it would have had if the election had not been timely made taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election that is sought to be revoked here and any taxable_year affected by it is not closed by the period of limitations on assessment in addition granting the revocation in the present situation would not cause undue administrative burden nor would it be inconsistent with the objectives of the underlying statute and the regulatory election election under sec_163 to include dollar_figurea of qualified_dividend_income as investment_income for year concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party accordingly the consent of the commissioner is hereby granted to revoke the except as expressly provided herein no opinion is expressed or implied plr-155504-05 while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely christopher f kane branch chief branch income_tax accounting cc