department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas 501-dollar_figure tax_exempt_and_government_entities_division release number release date legend org - organization name xx - date officer-1-3 officer address -- addre sec_1 2m g date date taxpayer_identification_number person to contact employee identification_number employee telephone number phone fax org address certified mail - return receipt dear this is a tinal adverse determination regarding your exempt status under sec_501 of the internal_revenue_code our favorable determination_letter to you dated february 20xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s organizations described in sec_501 and exempt under sec_501 must be both organized and operated exclusively for exempt purposes you must establish that you are operated exclusively for exempt purposes and that no part of your net_earnings inures to the benefit of private shareholders or individuals your earnings have inured to the benefit of three of your officers officer-1 officer-2 and officer- this inurement totaled dollar_figure during the years 20xx 20xx and 20xx this is a substantial amount of inurement and violates sec_1_501_c_3_-1 of the treasury regs given the routine and continuvus nature of the inurement this warrants revocation of your c status effective january 20xx contributions to your organization are no longer deductible under sec_170 after january 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to the united_states tax_court at the following address you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely nanette m downing director eo examinations ai department of the treasury internal_revenue_service irs tax_exempt_and_government_entities_division sw main street portland or org address date date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers manager's name id number manager's contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we’ll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we’ll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the letter rev catalog number 34809f irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at interia revenue service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely nanette m downing director eo examinations sal enclosures report of examination form_6018 publication publication letter rev catalog number 34809f form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx 20xx ‘ legend org organization name state - state secretary - secretary co-1 through co-11 - xx -- date president - president cpa - cpa address - address city - city vice-president - vice president ra founder -- founder ra-1 - through companies issue should org’ sec_501 status be revoked on the grounds that its net_earnings inured to the benefit of its president vice-president and secretary facts org formerly known as co-1 org’ is an online university located at address city state it offers degrees in its corporate office is and its enrollment was approximately students during the years under examination org also conducts live training seminars approximately times throughout each school year these seminars are held in locations throughout the united_states and canada during the years under examination org’s president and vice-president were president and vice-president husband and wife respectively org’s board secretary was secretary org filed with the irs a form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code on may 20xx on february 20xx the irs issued a ruling letter to org recognizing it as a tax-exempt public charity under sec_501 of the internal_revenue_code code effective april 20xx on april 20xx org filed a plan of conversion with the state of state to convert back to for-profit status as of june 20xx the state of state certified this conversion according to a valuation prepared by co-2 org’s value was appraised to be zero this was primarily due to org’s outstanding debt of dollar_figuredollar_figure to co-3 co-3’ president owns of co-3’s stock at conversion the debt was extinguished in exchange for org’s stock org formally changed its name from co-1 to org on december 20xx the examining irs agent contacted org president president on december 20xx and advised him of the audit of org’s year 20xx form_990 the agent mailed the audit letter to org on december 20xx the agent conducted the field_audit at the city office of org’s representative cpa cpa on january 20xx cpa was replaced as representative by cpa cpa on march 20xx form 886-a rev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx explanation of items department of the treasury - internal_revenue_service 20kx background of org org operated as a for-profit corporation from 19xx until 2oxx org was incorporated in city state on december 19xx it was a correspondence school organized to train individuals in various self-improvement techniques developed by its founder founder founder is the father of president co-3 was org’s predecessor it was incorporated november 19xx as a for-profit state corporation all of the rights title and interest in programs training books recordings and videos were held either by co-3 or founder personally ownership of co-3 passed from founder to president in 20xx according to org’s meeting minutes dated september 20xx org’s board voted unanimously to remove founder from his position as president of the board_of org president was voted to take the position as president following founder’ termination he demanded that org and co-3 cease using his registered marks name and likeness org and co-3 however continued to use his marks name and likeness in their print advertisements and on their web sites as a result president brought suit against org co-3 president and vice-president founder was granted a motion for temporary restraining order on march 20xx forms and payments to officers org’s forms for the years under examination reported as follows figure forms 20xx 20xx 20xx date filed 20xx 20xx 20xx revenues contributions and grants program service revenue investment_income other revenue total revenue expenses fotm 886-a rev department of the treasury p ry - internal_revenue_service page -2- name of taxpayer org formerly co-1 form_8 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended 20xx 20xx 20xx grants assistance to government grants assistance to individual compensation to officers other salaries and wages pension_plan contributions other employee_benefits payroll_taxes legal accounting other advertising and promo office expenses information_technology occupancy travel conferences and meetings depreciation insurance other 20xx excess deficit total expenses assets cash accounts_receivable receivables from officers inventories prepaid expenses land buildings equipment other assets total assets liabilities accounts_payable deferred revenue other liabilities total liabilities net assets 20xx 20xx form 886-a rev page -3- department of the treasury - internal_revenue_service form_8 a name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx explanation of items department of the treasury - internal_revenue_service 20xx amorig iiie disbursements org made during the years under examination were the following figure - payments 20xx date check 41xx xx xx 11xx 21xx 91xx xx 211xx xx 71xx xx xx xx xx 1ixx xx xx 21xx q 2ixx xx xx xx xx xx xx xx xx xx xx xx amount payee co-4 co-4 co-4 president co-4 president vice-president vice-president vice-president co-4 president president co-4 president co-4 co-4 vice-president vice-president vice-president co-4 president co-5 vice-president co-4 vice-president president vice-president co-4 president co-4 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figure dollar_figuredollar_figure figure payments 20xx date check amount 51xx xx payee co-4 president dollar_figuredollar_figure dollar_figuredollar_figure form 886-a rev department of the treasury - internal_revenue_service page -4- form_886 a name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx explanation of items department of the treasury - internal_revenue_service 20xx 41xx 27ixx cr gbixk 41xx xx xx xx xx xx xx xx 271xx xx ti2z4ixx xx xx xx xx xx xx xx xx xx dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure co-4 president co-4 president vice-president vice-president co-4 president co-4 co-4 president president co-4 vice-president co-4 vice-president president vice-president president vice-president president vice-president figure - payments 20xx date kx xx 51xx xx xx xx xx xx xx check amount dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure secretary’ city apartment payee vice-president vice-president president vice-president vice-president president vice-president president vice-president the payments to co-4 in 20xx and 20xx were for org board secretary secretary’ apartment at address in city state org did not report these payments as compensation to secretary on its own forms or on secretary’ forms w2 form 886-arev department of the treasury - internal_revenue_service page -5- form_8 a name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx explanation of items department of the treasury - internal_revenue_service 20xx the revenue_agent asked org in information_document_request idr issued march 20xx the following question regarding these payments question what was the reason for not including the value of the city apartment in the w2 of secretary as a fringe benefit org’s response to idr received may 20xx included the following answer to the above question answer we did not include the value of the city apartment in the w2 of secretary due to an oversight we would be issuing a for this on december 20xx secretary sent the agent an email regarding the dollar_figuredollar_figure in apartment payments in the year 20xx which stated as follows unfortunately was unable to locate the email correspondence via my old laptop as the pc was non-functional had hoped to find the email stating that was accepting the position with the information included that housing was a condition_of_employment as such for now have paid the dollar_figuredollar_figure to org and have attached evidence of this attached to the email was a scanned check written by secretary to org for dollar_figuredollar_figure and a scanned letter from org signed by president acknowledging receipt of the check on february 20xx secretary sent the agent an email regarding the dollar_figuredollar_figure in apartment paymenis in the year 20xx which stated as follows org did not report the payment to me of the apartment resided in as compensation as stated in my earlier correspondence with you as well as via telephone provision of housing was offered by the university as part of my original offer of employment also indicated to you previously that the correspondence which references this is unavailable there is no discussion in org’s board meeting minutes of paying for secretary’ apartment as part of her compensation or as a condition of her working for org payments to president and vice-president the agent requested source documents eg invoices or receipts to support the paymeriis made to president and vice-president in 20xx via idrs and org did not initially provide any source documents form 886-a cev department of the treasury - internal_revenue_service page -6- department of the treasury - internal_revenue_service form_886 a name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx explanation of items 20xx with respect to check for dollar_figure org stated that dollar_figure of this went to president for his anniversary gift in 20xx to be included i in his 20xx payroll’ org stated that the other dollar_figure went to vice-president for her anniversary gift in 20xx included in her 20xx payroll regarding the dollar_figure payment to co-5 org’s explanation was as follows the payment to co-5 was classified as consulting fee due to the styling makeup and other tips they were giving us during the big public relations push to increase marketing once we understood the styling tips there were sic no need for their services anymore their services include hair maintenance and make up services these were for the benefit of president president and lead trainer with respect to check for dollar_figure org stated that dollar_figure of it went to two employees’ payroll and the other dollar_figure went to vice-president for personal purposes org stated that this amount was to be included in her 20xx payroll’ on october 20xx the agent sent reports to president and vice-president proposing excise_taxes on excess_benefit transactions ebts as described in code sec_4958 for the year 20xx disbursements shown in figure above on january 20xx cpa responded to the reports on behalf of the president and vice-president’ the response had attached to it five employee expense reports none of which are legible also not legible the response included the following statements it also had attached about receipts many of which are taxpayers will agree to reimburse the company for dollar_figure for the watch that was purchased for vice-president taxpayers will agree to reimburse the company for the dollar_figuredollar_figure anniversary gift to president the response argued that the dollar_figuredollar_figure payment to co-5 was justified because at the time president was having to make tv appearances to talk about ra-1 a former org student and the deaths at his state sweat lodge in an effort to save org’s public image the examining agent later viewed footage of president’ tv appearances includivig one on the co-6 show kk ke kk ' cpa also represented the president and vice-president in their code sec_4958 examinations until march 20xx when they appointed cpa as their representative form 886-a cev department of the treasury - internal_revenue_service page -7- name of taxpayer org formerly co-1 form_8 a department of the treasury - internal_revenue_service explanation of items 20xx schedule no or exhibit year period ended 20xx 20xx the response argued that the dollar_figuredollar_figure of the dollar_figuredollar_figure from check that went to vice-president was included in her reported 20xx compensation prior to the examining agent's january 20xx initial audit appointment and that it should therefore not be included in ebts finally the response went on to state that the president and vice-president could only produce dollar_figuredollar_figure of the requested receipts it argued however that all of the remaining disbursements to the president and vice-president were for reimbursements of travel_expenses related to conducting org’s exempt_activities and that the per_diem for the dates and locations of this travel amounts to dollar_figuredollar_figure for president and dollar_figuredollar_figure for vice-president the response argues that these per_diem_amounts when added to the receipts comes to dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure and that compared to this amount the disbursements made to the president and vice-president in the year 20xx were reasonable on march 20xx the agent requested source documents to support the disbursements to the president and vice-president in 20xx and 20xx in figure sec_3 and via idrs and on may 20xx org responded by providing a cd with a number of receipts and invoices many of these receipts are either illegible or bear no relationship to carrying out org’s exempt_activities for example org submitted in support of checks and two receipts from co-7 a luxury watch dealer in city state and city state the receipts reflect the purchase of four rolex watches two oyster models one yachtmaster’ and one submariner totaling dollar_figuredollar_figure submitted dollar_figuredollar_figure in receipts from co-8 co-9 and the co-10 boutique in city of check org produced a receipt for a dollar_figuredollar_figure co-11 men’s bag for check org in support the agent reviewed all legible receipts that could conceivably be related to org’s exempt_activities and subtracted them from the corresponding disbursements in figure sec_3 and the detailed analysis of valid and invalid receipts is attached as exhibit a the results are as follows figure - unsubstantiated payments 20xx payee president president vice-president vice-president amount dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure valid receipts dollar_figure dollar_figure dollar_figure dollar_figure - - - - unsubstantiated payments dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure date check xx xx xx 211xx kk kek kek oe the agent found that the legible receipts only totaled dollar_figuredollar_figure which included dollar_figuredollar_figure was discussed separately and so presumably was not included in the dollar_figuredollar_figure in hotel receipts the dollar_figuredollar_figure co-5 invoice form 886-a rev department of the treasury - internal_revenue_service page -8- department of the treasury - internal_revenue_service explanation of items form 886a name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx 20xx xx xx xx xx xx xx 2i xx xx xx xx xx xx xx xx xx xx xx secretary’ apartment vice-president president president president president vice-president vice-president vice-president president president vice-president president president president vice-president vice-president president dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figuredollar_figure dollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figure dollar_figure dollar_figure dollar_figure - - - - dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure figure - unsubstantiated payments 20xx check payee ay date xx 271xx xx xx xx xx xx xx 241xx xx xx xx xx xx xx xx secretary apartment president president president vice-president vice-president president president president vice-president vice-president president vice-president president vice-president president vice president amount dollar_figuredollar_figure valid receipts dollar_figuredollar_figure unsubstantiated payments dollar_figuredollar_figure dollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figure form 886-acrev page -9- department of the treasury - internal_revenue_service department of the treasury - internal_revenue_service explanation of items form 886a name of taxpayer org formerly co-1 schedule no or exhibit yeat period ended 20xx 20xx 20xx figure - unsubstantiated payments 20xx date kx xx xx xx xx xx xx xx xx check payee vice-president vice-president president vice-president vice-president president vice-president president vice-president amount valid receipts dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure unsubstantiated payments law internal_revenue_code section01 c of the internal_revenue_code provides for exemption from income_tax for corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_4958 defines the term excess_benefit_transaction as any transaction in which an economic benefit is provided by an applicable_tax-exempt_organization directly or indirectly to or for_the_use_of any disqualified_person if the value of the economic benefit provided exceeds the value of the consideration including the performance of services received for providing such benefit for purposes of the preceding sentence an economic benefit shall not be treated as consideration for performance of services unless such organization clearly indicated its intent to so treat such benefit sec_4958 defines applicable_tax-exempt_organization as an organization described in either sec_501 or sec_501 of the internal_revenue_code or an organization which was so described at any time during the five-year period ending on the date of the excess_benefit_transaction sec_4958 defines a disqualified_person as a any person who was at any time during the five-year period ending on the date of such transaction in a position to form 886-a rev department of the treasury - internal_revenue_service page -10- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org formerly co-1 20xx schedule no or exhibit year period ended 20xx 20xx exercise substantial influence over the affairs of the organization b a member_of_the_family of a disqualified_person and c a controlled_entity sec_4958 of the code defines correction with respect to any excess_benefit_transaction as the undoing of the excess_benefit to the extent possible and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified_person were dealing under the highest fiduciary standards sec_1_501_c_3_-1 of the treasury regulations regs provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regs provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 of the regs provides that in determining whether to continue to recognize the tax-exempt status of an applicable_tax-exempt_organization described in sec_501 that engages in one or more excess_benefit transactions that violate the prohibition on inurement under sec_501 the commissioner will consider all relevant facts and circumstances including but not limited to the following a the size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess_benefit_transaction or transactions occurred b the size and scope of the excess_benefit_transaction or transactions collectively if more than one in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes c whether the organization has been involved in multiple excess_benefit transactions with one or more persons d whether the organization has implemented safeguards that are reasonably calculated to prevent excess_benefit transactions and form 886-a rev department of the treasury - internal_revenue_service page -11- name of taxpayer org formerly co-1 form_8 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended 20xx 20xx 20x x e whether the excess_benefit_transaction has been corrected within the meaning of sec_4958 and sec_53_4958-7 or the organization has made good_faith efforts to seek correction from the disqualified_person s who benefited from the excess_benefit_transaction sec_53_4958-3 of the regs describes individuals having substantial influence over the affairs of the organization per code sec_4958 as including presidents chief executive officers chief operating officers or any person who regardless of title has ultimate responsibility for implementing the decisions of the governing body or for supervising the management administration or operation of the organization a person who serves as president chief_executive_officer or chief operating officer has this ultimate responsibility unless the person demonstrates otherwise if this ultimate responsibility resides with two or more individuals eg co- presidents who may exercise such responsibility in concert or individually then each individual is in a position to exercise substantial influence over the affairs of the organization sec_53_4958-4 provides that certain economic benefits are disregarded for purposes of sec_4958 including i nontaxable fringe_benefits an economic benefit that is excluded from income under sec_132 except any liability insurance premium payment or reimbursement that must be taken into account under paragraph b ii b of this section and ii expense reimbursement payments pursuant to accountable plans amounts paid under reimbursement arrangements that meet the requirements of sec_1_62-2 of this chapter sec_53_4958-4 provides that an economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates the intent to treat the benefit as compensation when the benefit is paid an applicable tax exempt_organization is treated as clearly indicating its intent to provide an economic benefit as compensation_for services only if the organization provided written substantiation that is contemporaneous with the transfer of the economic benefit at issue if an organization fails to provide this contemporaneous substantiation any services provided by the disqualified_person will not be treated as provided in consideration for the economic benefit for purposes of determining the reasonableness of the transaction in no event shall an economic benefit that a disqualified_person obtains by theft or fraud be treated as consideration for the performance of services sec_53_4958-4 provides that an organization’s reporting constitutes contemporaneous substantiation to treat a benefit as compensation if the organization reports the benefit as compensation on an original federal tax information_return with respect to the payment eg form_w-2 or or the recipient disqualified_person form 886-a cev department of the treasury - internal_revenue_service page -12- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org formerly co-1 schedule no ot exhibit year period ended 20xx 20xx 20xx reports the benefit as income on the person’s original federal tax_return eg form_1040 or there is an approved written employment contract executed on or before the date of the transfer indicating the benefit is compensation or there is documentation by the organization’s authorized body approving the transfer as compensation_for services on or before the date of the transfer or there was written evidence in existence before the due_date of the applicable federal tax_return indicating a reasonable belief by the organization that the benefit was a nontaxable benefit as described in regs sec_53_4958-4 sec_53_4958-7 provides that when the applicable_tax-exempt_organization is no longer described in sec_501 the disqualified_person must make correction to another organization described in sec_501 and sec_170 other than sec_170 or viii which has been so described for at least months ending on the date of correction it further provides that the disqualified_person must not be a disqualified_person with respect to the organization which receives the correction and that the organization receiving the correction_amount must not allow the disqualified_person to make or recommend any grants or distributions by the organization sec_1_62-2 provides that for purposes of determining adjusted_gross_income sec_62 allows an employee a deduction for expenses paid_by the employee in_connection_with_the_performance_of_services as an employee of the employer under a reimbursement or other expense allowance arrangement with a payor sec_62 provides that an arrangement will not be treated as a reimbursement or other expense allowance arrangement for purposes of sec_62 if- such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the payor or such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement ' c reimbursement or other expense allowance arrangement- defined for purposes of sec_1_62-1 sec_1_62-1t and sec_1_62-2 the phrase reimbursement or other expense allowance arrangement means an arrangement that meets the requirements of paragraphs d business connection e substantiation and f returning amounts in excess of expenses of this section accountable plans- i in general except as provided in paragraph c ii if an arrangement meets the requirements of paragraphs d e and f of this section all amounts paid under the arrangement are treated as paid under an accountable_plan mnt te form 886-a crev department of the treasury - internal_revenue_service page -13- name of taxpayer org formerly co-1 fotm a department of the treasury - internal_revenue_service explanation of items 20xx schedule no or exhibit year period ended 20xx 20xx ii special rule for failure to return excess if an arrangement meets the requirements of paragraphs qd e and f of this section but the employee fails to return within a reasonable period of time any amount in excess of the amount of the expenses substantiated in accordance with paragraph e of this section only the amounts paid under the arrangement that are not in excess of the substantiated expenses are treated as paid under an accountable_plan nonaccountable plans- i in general if an arrangement does not satisfy one or more of the requirements of paragraphs d e or f of this section all amounts paid under the arrangement are treated as paid under a nonaccountable_plan if a payor provides a nonaccountable_plan an employee who receives payments under the plan cannot compel the payor to treat the payments as paid under an accountable_plan by voluntarily substantiating the expenses and returning any excess to the payor ii special rule for failure to return excess if an arrangement meets the requirements of paragraphs d e and f of this section but the employee fails to return within a reasonable period of time any amount in excess of the amount of the expenses substantiated in accordance with paragraph e of this section the amounts paid under the arrangement that are in excess of the substantiated expenses are treated as paid under a nonaccountable_plan treatment of payments under accountable plans amounts treated as paid under an accountable_plan are excluded from the employee's gross_income are not reported as wages or other compensation on the employee's form_w-2 and are exempt from the withholding and payment of employment_taxes treatment of payments under nonaccountable plans amounts treated as paid under a nonaccountable_plan are included in the employee's gross_income must be reported as wages or other compensation on the employee's form w--2 and are subject_to_withholding and payment of employment_taxes fica futa rrta rurt and income_tax see paragraph h of this section expenses attributable to amounts included in the employee's gross_income may be deducted provided the employee can substantiate the full amount of his or her expenses ie the amount of the expenses if any the reimbursement for which is treated as paid under an accountable_plan as well as those for which the employee is claiming the deduction in accordance with sec_1 274--5t and d -1 or section sec_1_162-17 but only as a miscellaneous itemized_deduction subject_to the limitations applicable to such expenses eg the 80-percent limitation on meal and entertainment_expenses provided in sec_274 and the percent floor provided in sec_67 d business connection- in general except as provided in paragraphs d and d of this section an arrangement meets the requirements of this paragraph d if it provides advances allowances including per_diem allowances allowances only for form 886-a cev department of the treasury - internal_revenue_service page -14- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx 20xx meals and incidental_expenses and mileage allowances or reimbursements only for business_expenses that are allowable as deductions by part vi sec_161 and the following subchapter_b chapter of the code and that are paid_or_incurred by the employee in_connection_with_the_performance_of_services as an employee of the employer the payment may be actually received from the employer its agent or a third party for whom the employee performs a service as an employee of the employer and may include amounts charged directly or indirectly to the payor through credit card systems or otherwise in addition if both wages and the reimbursement or other expense allowance are combined in a single payment the reimbursement or other expense allowance must be identified either by making a separate payment or by specifically identifying the amount of the reimbursement or other expense allowance reimbursement requirement- i in general if a payor arranges to pay an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur business_expenses of a type described in paragraph d or d of this section the arrangement does not satisfy this paragraph d and all amounts paid under the arrangement are treated as paid under a nonaccountable_plan see paragraphs c and h of this section ii per_diem allowances an arrangement providing a per_diem_allowance for travel_expenses of a type described in paragraph d or d of this section that is computed on a basis similar to that used in computing the employee's wages or other compensation eg the number of hours worked miles traveled or pieces produced meets the requirements of this paragraph d only if on date the per_diem_allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the per_diem_allowance or a per_diem_allowance computed on that basis was commonly used in the industry in which the employee is employed see sec_274 and sec_1 d -1 a per_diem_allowance described in this paragraph d ii may be adjusted in a manner that reasonably reflects actual increases in employee business_expenses occurring after date e substantiation- in general an arrangement meets the requirements of this paragraph e if it requires each business_expense to be substantiated to the payor in accordance with paragraph e or e of this section whichever is applicable within a reasonable period of time see sec_1 5t or sec_1_162-17 expenses governed by sec_274 an arrangement that reimburses travel entertainment use of a passenger_automobile or other listed_property or other business_expenses governed by sec_274 meets the requirements of this paragraph e if information sufficient to satisfy the substantiation requirements of sec_274 and the regs thereunder is submitted to the payor see sec_1_274-5 under sec_274 information sufficient to substantiate the requisite elements of each expenditure or use must be submitted to the payor for example with respect to form 886-a cev department of the treasury - internal_revenue_service page -15- name of taxpayer org formerly co-1 form_8 a department of the treasury - internal_revenue_service explanation of items 20xx schedule no or exhibit year period ended 20xx 20xx travel away from home sec_1_274-5 requires that information sufficient to substantiate the amount time place and business_purpose of the expense must be submitted to the payor similarly with respect to use of a passenger_automobile or other listed_property sec_1_274-5 requires that information sufficient to substantiate the amount time use and business_purpose of the expense must be submitted to the payor see sec_1_274-5 and j which grant the commissioner the authority to establish optional methods of substantiating certain expenses substantiation of the amount of a business_expense in accordance with rules prescribed pursuant to the authority granted by sec_1_274-5 or j will be treated as substantiation of the amount of such expense for purposes of this section expenses not governed by sec_274 an arrangement that reimburses _ business_expenses not governed by sec_274 meets the requirements of this paragraph e if information is submitted to the payor sufficient to enable the payor to identify the specific nature of each expense and to conclude that the expense is attributable to the payor's business activities therefore each of the elements of an expenditure or use must be substantiated to the payor it is not sufficient if an employee merely aggregates expenses into broad categories such as travel or reports individual expenses through the use of vague nondescriptive terms such as miscellaneous business expenses’ see sec_1_162-17 f returning amounts in excess of expenses- in general except as provided in paragraph f of this section an arrangement meets the requirements of this paragraph f if it requires the employee to return to the payor within a reasonable period of time the amount_paid under the arrangement in excess of the expenses substantiated in accordance with paragraph e of this section the determination of whether an arrangement requires an employee to return amounts in excess of substantiated expenses will depend on the facts and circumstances an arrangement whereby money is advanced to an employee to defray expenses will be treated as satisfying the requirements of this paragraph f only if the amount of money advanced is reasonably calculated not to exceed the amount of anticipated expenditures the advance of money is made on a day within a reasonable period of the day that the anticipated expenditures are paid_or_incurred and any amounts in excess of the expenses substantiated in accordance with paragraph e of this section are required to be returned to the payor within a reasonable period of time after the advance is received org’ sec_501 status should be revoked effective january 20xx based on the substantial inurement evidenced by the payments shown in figure sec_5 and above the examining agent has requested documentation and explanations for the above department of the treasury - internal_revenue_service page -16- government's position form 886-a rev form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx 20xx payments org the president and vice-president and secretary have provided what documentation and explanations they could the payments to or for these individuals that have either been acknowledged as benefiting them or that still remain unsubstantiated total dollar_figure for 20xx dollar_figure for 20xx and dollar_figure for 20xx this inurement violates sec_501 of the internal_revenue_code and sec_1_501_c_3_-1 of the treasury regulations the payments for secretary’ city apartment constitute inurement and ebts they benefited her through the provision of free housing there was no contemporaneous substantiation that it was org’s intent to treat these payments as compensation_for services the dollar_figuredollar_figure from check constitutes inurement and an ebt to president it was not reported as compensation to president on any form w2 issued to him nor on any of org’s forms 990s filed prior to the december 20xx commencement of the irs examination this payment should have been included in president’ year 20xx form w2 issued in january of 20xx the president and vice-president acknowledged in the january response that this dollar_figuredollar_figure gift should be reimbursed the dollar_figure from check constitutes inurement and an ebt to vice-president the january response acknowledged that this was for the purchase of a watch for vice- president and that it should be reimbursed the dollar_figuredollar_figure from check constitutes inurement and an ebt to vice-president it was not reported as compensation to vice-president on any form w2 issued to her nor on any of org’s forms 990s filed prior to the december 20xx commencement of the irs examination this payment should have been included in vice-president’ year 20xx form w2 issued in january of 20xx in any event org’s issuing of vice- president’ 20xx w2 in january 20xx came after the commencement of the irs examination it therefore does not meet the contemporaneous substantiation requirement of regs sec_53_4958-4 org’s inclusion of this amount on president and vice-president compensation_for the year 20xx is not a mitigating factor the rest of the unsubstantiated payments to president and vice-president shown in figure sec_5 and also constitute inurement and ebts they benefited the president and vice-president in the form of outright cash payments mostly in dollar_figure denominations these payments were not part of an accountable_plan they failed variously sections d e and f of regs sec_1_62-2 the shopping at co-11 and other boutiques and purchases of multiple rolex watches fail the sec_1_62-2 business connection requirement and the rest of the unexplained excess_reimbursements fail both the sec_1_62-2 and f substantiation and return of excess requirements form 886-acrev department of the treasury - internal_revenue_service page -17- name of taxpayer org formerly co-1 form_886 a department of the treasury - internal_revenue_service explanation of items 20xx schedule no or exhibit year period ended 20xx 20xx the argument in the january response to the code sec_4958 reports that the total of receipts should be added to the total of per_diem is not logical reimbursement arrangements are either actual or per_diem to the extent that org had a particular reimbursement arrangement in place it is clear from the fact that it used employee expense reports that it was not based on per_diem it should be noted that this report only cites the excess of reimbursements over what has been substantiated as having a business connection an employee would never be entitled to reimbursement of both actual and per_diem as was suggested in the response the unsubstantiated payments in figure sec_5 and thus constitute inurement and ebts with respect to sec_1_501_c_3_-1 of the treasury regs the analysis five factors set forth therein is as follows of the a the size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess_benefit_transaction or transactions no evidence was gathered during the examination to suggest that there was any fluctuation in org’s activities furthermore due to the frequency of the payments at issue being evenly spread throughout each year no distinction can be made between org’s activities before and after these payments the qualification of org’s activities for c status are not being challenged in this report thus this factor weighs neither in favor of nor against revocation b the size and scope of the excess_benefit_transaction or transactions in relation to the size and scope of the organization's regular and ongoing exempt_activities org does not have any ongoing exempt_activities it voluntarily became a for-profit entity on june 20xx inasmuch as org's revenues reflect its exempt_activities its revenues during the years under examination while it was still exempt was dollar_figure the inurement and ebts cited above total dollar_figure or about this is a significant amount of inurement and ebts and weighs in favor of revocation c wiether the organization has been involved in multiple excess_benefit transactions with one or more persons org engaged in over sixty ebts during the years under examination these transactions involved three different officers president vice-president and secretary this weighs in favor of revocation d whether the organization has implemented safequards that are reasonably calculated to prevent excess_benefit transactions form 886-a rev department of the treasury - internal_revenue_service page -18- department of the treasury - internal_revenue_service form_8 a name of taxpayer org formerly co-1 schedule no or exhibit year period ended 20xx 20xx explanation of items 20xx org forfeited its own c exemption june 20xx at issue then is whether its exemption should also be revoked for the period of january 20xx to may 20xx it is evident that no safeguards were put in place to prevent ebts from 20xx to 20xx or from 20xx to 20xx on the contrary president has even more unfettered control_over org’s assets now that org is owned by his wholly-owned company co-3 this factor weighs in favor of revocation e whether the excess_benefit_transaction has been corrected within the meaning of sec_4958 or the organization has made good_faith efforts to seek correction from those who benefited from the excess_benefit_transaction as of the date of this report org is no longer described in sec_501 of the internal_revenue_code repayments to org would not qualify as correction within the meaning of sec_4958 therefore per regs sec_53_4958-7 any correction to be made by the president and vice-president or secretary would have to go to a different 501_c_3_organization as of the date of this report no correction has been made to such a 501_c_3_organization therefore applying this factor would weigh in favor of revocation taxpayer’s position org has not yet taken a position with respect to this report conclusion org’s earnings have inured to the benefit of three of its officers president vice- president and secretary this inurement totaled dollar_figure during the years 20xx 20xx and 20xx this is a substantial amount of inurement and violates sec_1 c - c of the treasury regs given the routine and continuous nature of the inurement this warrants revocation of org’ sec_501 status effective january 20xx org should file form_1120 u s_corporation income_tax return for the years 20xx and 20xx and for the period ended may 20xx if the proposed revocation becomes final appropriate state officials will be notified in accordance with code sec_6104 form 886-a rev department of the treasury - internal_revenue_service page -19- ms


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date cc pa apjp ekaye cor-111147-01 number info release date uil no dear ms this is in response to a letter dated date written by mr general information regarding the penalty for failure to provide an employee’s taxpayer_identification_number tin on a form_w-2 and the waiver of such penalty for reasonable_cause specifically the letter asks about the situation in which an employee refuses to obtain an identifying number based on religious objections requesting sec_6721 of the internal_revenue_code code generally imposes a dollar_figure penalty for a failure-described in sec_6721 -to include all the information required to be shown on an information_return sec_6724 defines information_return to include any statement of the amount of payments to another person required by sec_6051 relating to information returns with respect to income_tax withheld as sec_31_6051-1 of the employment_tax regulations requires that a form_w-2 show an employee’s ssn an employer must request an employee’s ssn for inclusion on form_w-2 sec_6721 provides an exception for de_minimis failures the number of information returns to which this exception applies for any calendar_year may not exceed the greater of ten or one-half of one percent of the total number of information returns required to be filed by the person during the calendar_year under sec_6721 however this exception only applies if the failure is corrected by august 1st of the calendar_year in which the required_filing_date occurs sec_6724 provides for a waiver of a penalty imposed by sec_6721 when the failure regarding an information reporting requirement is due to reasonable_cause and not willful neglect sec_301_6724-1 of the regulations on procedure and administration defines reasonable_cause this provision requires significant mitigating factors related to the failure or requires that the failure result from events beyond the filer’s control moreover the filer must establish that the filer acted in a responsible manner both before and after the failure under sec_301_6724-1 of the regulations events beyond the filer’s control would include the failure of a person required to provide information necessary for the filer to comply with the information reporting requirements to provide such information to the filer sec_301_6724-1 of the regulations defines acting in a responsible manner and refers to sec_301_6724-1 for a special rule regarding missing tins under that rule a filer will only be considered to act in a responsible manner if the filer makes the required requests for a correct tin generally a filer must make an initial request and if a tin is not received as a result of this request the filer must generally make two more annual requests the regulations specify the time and manner of making these requests thus the law generally imposes a penalty on an employer who fails to include an employee’s ssn on a form_w-2 however the penalty will not apply if the employer shows reasonable_cause for this failure to show reasonable_cause when the failure occurs because an employee does not provide the ssn to the employer the employer must make the required number of requests to the employee at the time and in the manner described in the regulations the information contained in this letter is provided for your general information only and is not intended to constitute a legal conclusion regarding the facts set forth in the correspondence it is advisory only and has no binding effect on the internal_revenue_service we hope that this general information is useful to your company if you have any additional questions regarding this matter please call elizabeth kaye badge no at sincerely pamela wilson fuller senior technician reviewer branch administrative provisions and judicial practice division procedure and administration enclosure cc


vee department of the treasury internal_revenue_service washington d c 6a s10 s- of date nov contact person identification_number telephone number ein legend m dear sir or madam this is in reply to the letter submitted on your behalf concerning your proposal to implement a program through which you will make grants to certain organizations which receive a designated amount of volunteer services from employees and retired employees of m you are exempt under sec_501 of the internal_revenue_code and are a private_foundation within the meaning of sec_509 of the code mis a substantial_contributor to you and thus is a disqualified_person within the meaning of sec_4946 of the code you have proposed to establish a new program to make grants to organizations which have been recognized as exempt under sec_50i c of the code and which are classified as public_charities under sec_509 and to governmental units described in section i70 c i in order to be eligible to participate in this program the organization must receive a designated amount of volunteer services from m's employees and retirees it is to be the responsibility of the volunteer or team of volunteers to select the organization they will work for and the amount of hours to be volunteered the amount of the grant you will make is dependent upon the number of hours of volunteer service provided the grantee by m's employees and retirees you and m will ensure that this new program is separate from other similar programs operated by m m will not include references to this new program in product advertisements however m may refer to the program in annual reports news releases or institutional_advertising which do not also offer specific products for sale at specific prices you expect to contract with an independent for-profit entity to serve as the processor and fiscal agent for this program this entity will receive the applications from the volunteers inform the charitable organizations receiving this assistance that they are eligible for a grant from you and set forth the terms and conditions of the grant these conditions will include requiring the recipient acknowledge that the stated amount of volunteer hours have been performed and that the grant monies can only be used exclusively for charitable purposes that entity will confirm the status of any 50i c grantee which has been selected as a grant recipient an organization described in section i70 c i will certify its own status and use of equipment to you to help administer the proposed program the public relations and communications department will not charge you for any services they may provide it is also expected that m's public relations and communications department will provide services re grant monies may not be applied to discharge a legal_obligation of a volunteer or anyone else and cannot result in any economic benefit to the volunteer the grants will not be earmarked for particular projects or purposes of the donee organization grants will be made for the general support of the donee organization with the condition that they not be used for lobbying intervention in a political campaign or to carry on any voter registration drive you have requested rulings that conducting this new program wilf not jeopardize your status under sec_501 of the code will not constitute an act of self-dealing under sec_4941 of the code and will not constitute a taxable_expenditure under sec_4945 of the code sec_170 of the code in defining charitable_contributions provides that charitable_contributions include contributions or gifts made to or for_the_use_of a state a possession_of_the_united_states or any political_subdivision of any of the foregoing or the united_states or the district of columbia but only if the contribution or gift is made for exclusively public purposes sec_170 of the code indicates that charitable purposes include with certain restrictions any exclusively religious charitable scientific literary or educational purpose or fostering national or international amateur sports competition or preventing cruelty to children or animals but only if no part of the net_earnings of the organization carrying on such activities inures to the benefit of any private_shareholder_or_individual sec_501 of the code provides in part for exemption from federal_income_tax for a corporation organized and operated exclusively for charitable scientific or educational_purposes provided no part of the corporation's net_earnings inure to the benefit of any private_shareholder_or_individual sec_509 of the code provides that unless specifically excepted a domestic or foreign organization described in sec_501 is a private_foundation and subject_to the excise_taxes of chapter sec_509 and describe the various types of organizations which are not private_foundations sec_4941 imposes a tax on each act of self-dealing between a private_foundation and a disqualified_person as defined in sec_4946 sec_4941 of the code provides that the term self-dealing includes any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_53 d -i a of the foundation and similar excise_tax regulations provides that for purposes of sec_4941 the term self-dealing means any direct or indirect transaction described in sec_53_4941_d_-2 for purposes of this section it is immaterial whether the transaction results in a benefit or detriment to the private_foundation sec_53 d -2 f of the regulations provides in part that the fact that a disqualified d2 re person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itself make such use an act of self-dealing sec_53 d -2 d of the regulations provides that the furnishing of goods services or facilities by a disqualified_person to a private_foundation shail not be an act of self-dealing if they are furnished without charge sec_53 d -2 f of the regulations provides that the fact that a disqualified_person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itself make such use an act of self-dealing thus the public recognition a person may receive arising from the charitable activities of a private_foundation to which such person is a substantial_contributor does not in itself result in an act of self-dealing sec_4945 of the code imposes an excise_tax on each taxable_expenditure of a private_foundation sec_4945 of the code defines the term taxable_expenditure as including grants to an organization unless the organization is described in paragraph i or of sec_509 or is an exempt_operating_foundation it also includes any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 sec_53_4945-5 of the regulations provides that a grantee organization will be treated as a sec_509 organization if it is an organization described in sec_170 and the grant is made exclusively for charitable purposes as described in sec_170 c b sec_53_4945-6 of the regulations indicates that reasonable expenditures_for purposes of administrating a charitable program are not treated as taxable_expenditures as long as such costs are reasonable sec_4946 of the code describes a disqualified_person as including a substantial_contributor to a foundation sec_7701 a of the code defines the term person as inctuding an individual a_trust estate partnership_association company or corporation the information you have submitted establishes that you were created by m therefore m is a substantial_contributor to you you have proposed to establish a new program through which you will make grants to organizations which have been recognized as exempt under sec_50i c of the code and which are classified as public_charities under sec_509 and to governmental units described in section i70 c grants will be limited to those eligible entities which have received a designated amount of volunteer services from m's employees and retirees you have represented that you will take measures to ensure that the grantee organizations will qualify to participate in your program you have aiso represented that grants will be used for the general support of the donee and may not be used for lobbying intervention in a political campaign or in a voter registration drive furthermore grants cannot be applied to discharge a legal_obligation of a volunteer or anyone else or result in an economic benefit to the volunteer it is well established in the flaw of charity that an organization may qualify for exemption under sec_501 of the cade if it makes grants to other organizations described in sec_501 or to governmental entities described in sec_170 if made for exclusively public purposes accordingly the establishment of this program will not jeopardize your current status under sec_501 of the je re code however because you are a private_foundation you are subject_to the provisions of the chapter excise_taxes in particular the excise_tax imposed upon acts of self-dealing by sec_4941 and the excise_tax imposed upon taxable_expenditures by sec_4945 generally an act of self dealing may be present where the assets of a private_foundation are transferred to or used by or for the benefit of a disqualified_person it is not pertinent whether the transaction is beneficial or detrimental to the private_foundation based upon the information submitted it appears that the sole benefit that m receives through this program is the recognition it receives by reason of its employees or retirees performing volunteer work for recognized charities or governmental entities sec_4941 of the code specifically recognizes that an act of self-dealing is not present where a private_foundation only receives an incidental or tenuous benefit from an activity therefore an act of self-dealing within the meaning of sec_4941 of the code has not occurred in addition sec_53 d -2 d of the regulations provides that the furnishing of goods services or facilities by a disqualified_person to a private_foundation shall not be an act of self-dealing if the goods services or facilities are furnished without charge therefore whatever assistance you may receive from m or any of its various departments will not be considered an act of self-dealing a taxable_expenditure may occur where a private_foundation makes grants to other organizations however a taxable_expenditure is generally not present where the grantee organization is described in paragraph i or of sec_509 or is an exempt_operating_foundation a taxable_expenditure may also occur where a private_foundation expends funds for any purpose other than one specified in sec_170 it is clear that the program you have proposed will limit grants to organizations described in paragraph i or of sec_509 and that you have limited the purposes of your grants to those described in section i70 c b in addition sec_53_4945-5 of the regulations provides that a grantee organization will be treated as a sec_509 organization if it is an organization described in sec_170 and the grant is made exclusively for charitable purposes as described in sec_170 accordingly we have concluded that your grant making program will not be considered a taxable_expenditure within the meaning of sec_4945 furthermore sec_53_4945-6 of the regulations indicates that reasonable expenditures_for purposes of administrating a charitable program are not treated as taxable_expenditures accordingly based on your representations we have concluded that the expenditures you may incur either directly through m or through the entity you may hire to administer this program will not be taxable_expenditures therefore based on the information you have submitted we rule that conducting this new program will not jeopardize your status under sec_50i c of the code will not constitute an act of self-dealing under sec_4941 of the code and will not constitute a taxable_expenditure under sec_4945 of the code oy re this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent because this letter could help resolve any question about your exempt status you should keep it in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter for other matters including questions concerning reporting requirements please contact the ohio te_ge customer service office sincerely yours chai joseph chasin acting manager exempt_organizations technical group d2s


department of the treasury internal_revenue_service washington d c sin contact person id number telephone number ope eo01t dh date apr legend m dear sir or madam this responds to your request_for_ruling dated date and amended by your letters dated date and date concerning the effect of the internal_revenue_code and regulations on activities you intend to pursue m is a non-profit corporation which has been recognized by the internal_revenue_service as an organization described in sec_501 of the internal_revenue_code_of_1986 code described in sec_509 of the code which has been engaged in the production of affordable housing for some twenty years accomplished its goals by operating as the developer of affordable housing projects and by operating as a lender to developers providing below-market and deferred payment junior financing to make housing affordable to eligible tenants and owners m is the successor to a judicially operated program m has m is also m now seeks to expand its activities beyond those described in its exemption application in two ways first m plans to provide credit enhancement service to developers of affordable housing this service would consist of loan guarantees to lenders whose underwriting standards prohibit lending sufficient funds to enable affordable housing projects to proceed the use of enhancements rather that junior joans to developers will enable m to minimize the amount of junior lending and maximize the leverage of its capital so as to increase the assistance it is able to offer developers of affordable housing this service m proposes is not available in the marketplace secondly m proposes to engage in pre-development and construction lending to projects which result in the production of affordable housing m expects to provide these loans only when the developer is otherwise unabie to obtain financing for land acquisition pre-development and or construction financing m expects to serve as a lender of last resort to enable the development of affordable housing when federal state_or_local_government funding is not available and when underwriting standards cause commercial lenders to decline such loans m will offer these loans under terms more favorable than could be obtained in the market place even if such loans were available these loans will be at interest rates below the commercial market rate and will be for terms substantially longer than offered by third party lenders allow borrowers to defer payment of principal and interest until the due_date of the loans in addition where necessary m will olb2 in re m intends to limit its tending and its credit enhancement activities to housing organizations which are qualified for tax-exempt status on any basis described in revproc_96_32 c b sec_501 a of the internal_revenue_code provides an exemption from federal_income_tax for organizations described in sec_501 sec_501 describes organizations which are organized and operated exclusively for religious charitable scientific or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 c of the income_tax regulations regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if engages primarily in activities which accomplish one or more of such purposes specified in section c of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose it sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in its generally accepted lega sense the term includes among other things relief of the poor and distressed and the promotion of social welfare by organizations designed to iessen neighborhood tensions and to combat community deterioration revproc_96_32 1996_1_cb_717 sets forth a safe_harbor and facts and circumstances which distinguish organizations engaged in housing activities which are described in sec_501 of the code from those not so described sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt under sec_501 of the code sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived from any unrelated_trade_or_business as defined in sec_513 of the that is regularly carried on less allowable deductions sec_513 a of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related to the organization's exercise of performance of the purpose of functioning constituting the bases for its exemption under sec_501 of the code m and its predecessor organization have a long history of developing charitable housing both directly and by service as a junior lender the additional credit services described by m should increase its ability to enlarge the stock of charitable housing in the area of its operation the services as described are not available in the market place and will be related to m's purposes because they will be available only to organizations operating within the safe_harbor defined in revproc_96_32 supra further based on the above facts and law we therefore conclude m's conduct of lending activities in the manner described will not affect m's exempt status as an organization described in sec_501 of the code because m intends to limit its expanded activities so as to benefit only organizations operating within the safe_harbor of revproc_96_32 supra we further conclude that fees m obtains from these lending activities will be related to the performance by m of its exempt_function and will therefore not be subject_to the tax imposed by sec_511 of the code in re because this letter could help resolve any questions about your tax status you should keep it with your permanent records this ruling is based on the understanding that there will be no material changes in the facts upon which it is based any changes that may have a bearing upon your tax status should be reported to your key district_director this ruling letter is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely signed garland a carter garland a carter chief exempt_organizations technical branch oh


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp -plr date date legend company district selling shareholders date date date date state c xxx ppp project b ddd percent purchaser purchaser purchaser ccc plr hhh dollar_figurefff dollar_figureggg dollar_figureiii case j dear this letter responds to the date request for rulings submitted by your representative on behalf of company and the selling shareholders listed on the attached schedule a with respect to the transfer of certain water rights you have requested a ruling that for federal_income_tax purposes company's participation in the procedures by which the transfer of the water is accomplished in conjunction with the sales by the selling shareholders of their rights to the water will not constitute a sale_or_other_disposition of property by company nor a distribution_of_property by the company to the selling shareholders with respect to their stock additionally you have requested rulings on whether the water rights will constitute capital assets in the hands of the selling shareholders and whether certain_sales of these water rights will constitute sales or exchanges of capital assets the information submitted in the request and in a later submission is summarized below facts company was organized on date as a ditch and reservoir company and is subject_to state c's statutory requirements for mutual ditch companies company uses the cash_method_of_accounting and its fiscal_year ends on date approximately xxx of the company's shareholders are selling shareholders the other shareholders are not transferring any of their water rights and are not involved in the transactions described herein state c mutual ditch companies generally were created when a group of farmers banded together and formed the cooperative company for the express purpose of storing and conducting water for irrigation purposes company's primary function has been to deliver to and store the water of its shareholders the company's assets are limited to those necessary to deliver and store the water these assets include weirs canals dams water control devices and a storage reservoir the shareholders used the bylaws and shares to quantify each of their beneficial use rights in the water transported by the company the company owns no land on which to make use of the water it transports and stores although water is derived from two sources only the water from project b the project b water as described below is the subject of this ruling_request plr on date district a quasi-governmental corporation subject_to state c's statutory requirements for such entities entered into an agreement the repayment contract with the united_states bureau of reclamation the bureau for the development of project b project b emanates from the reclamation act of as amended the repayment contract grants district the right to allocate the project b water the district does so through allotment contracts that require the water users to pay their proportionate share of the district's costs to operate and maintain project b and to repay the federal government for its construction costs the operating reimbursements costs on date district entered into an allotment contract with company which provided that company would be entitled to receive an allocation of water for the beneficial use of its shareholders the project b water was then allocated pro_rata among the shareholders based on their shares in addition to paying on a pro_rata basis company's annual operating_expenses based on their respective allocation of project b water each shareholder pays his proportionate share of the operating reimbursements costs under the allotment contract conditions in state c are such that water is in great demand as such the selling shareholders intend to relinquish their beneficial_ownership of ddd percent of the project b water through three sales agreements the master sales agreements with purchaser purchaser and purchaser the master sales agreements with purchaser and purchaser provide they will acquire an aggregate of ccc units of project b water at dollar_figurefff per unit and dollar_figureggg per unit respectively the master sales agreement with purchaser provides for an allocation of hhh units of project b water at dollar_figureiii per unit in order to satisfy certain transfer requirements of the district the master sales agreement with purchaser includes an option for purchaser to take all or some of the units through a twenty-five year interruptible supply contract the interruptible supply contract under the interruptible supply contract the price for the units is the same as in the master sales agreement and it includes an option to purchase the units for a nominal fee by its terms the interruptible supply contract will remove beneficial_ownership of the units from the selling shareholders you have indicated that purchaser has elected to take all the units pursuant to the interruptible supply contract the selling shareholders will be paid in full for all units upon the closing of all three transactions including the transaction subject_to the interruptible supply contract to facilitate the negotiation of the master sales agreements and the interruptible supply contract the selling shareholders created ppp to act as their agent the only members of ppp are the selling shareholders the selling shareholders are not selling their shares in company but their shares will bear a legend to reflect that they are no longer entitled to their full allocation of the project b water plr you have indicated that company is not materially participating in the transactions described above company as a party to the allotment contract however will agree to the amendment of the allotment contract to reflect the reduced allotment of project b water the master sales agreements and the interruptible supply contract are conditioned on our rulings herein however the selling shareholders due to the crisis situation in state c have already transferred some of the project b water to the purchasers the emergency sales the consideration received by the selling shareholders from these emergency sales is being held in escrow pending our rulings herein according to the courts of state c mutual ditch companies are unique entities which are formed not under state c' s general corporation statutes but under special legislation reserved for ditch and reservoir companies in analyzing the relationship between the shareholders and mutual ditch companies in regards to water rights the supreme court of state c in case j has stated that a mutual ditch company is merely engaged in the business of transporting and storing the water for its shareholders benefit and the law of state c uniformly holds that the actual ownership of the water rights is in the shareholder the supreme court's analysis noted that a longstanding tenet of state c law is that ownership of a water right can be acquired only by the actual beneficial use of the water mere diversion is not sufficient to meet the requirements of state c's constitution finally the supreme court noted that it is well established that the water rights owned by the shareholders are property rights accordingly based on this supreme court's decision and other decisions by this court it is clear that under state c law company is not the beneficial_owner of any of the water it transports for the benefit of its shareholders including the project b water representations company has represented that it is not a party to the master sales agreements or the interruptible supply contract and shall not receive any proceeds or other consideration arising or resulting from the transactions described herein based on the information and representations submitted we rule as follows the selling shareholders for federal_income_tax purposes are the beneficial owners of the project b water rights and the sale of such rights including the short-term emergency sales described above will not be deemed to be a sale_or_other_disposition of property by the company or a distribution_of_property by the company to the selling shareholders with respect to their stock accordingly the company will not realize gain_or_loss as a result of the selling shareholders' transactions sec_1001 sec_301 sec_311 plr the beneficial rights in the project b water constitutes a capital_asset in the hands of the selling shareholders sec_1221 the transfer of the beneficial rights in the project b water under the master sales agreements and the interruptible supply contract constitute sales of capital assets by the selling shareholders sec_1222 caveat no opinion is expressed about the tax treatment of the transactions under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above ruling for example no opinion is expressed about whether the short-term emergency sales constitute sales or exchanges of capital assets nor are we opining on the selling shareholders' bases in these water rights the rulings contained in this letter are based upon information and a representation submitted by the company and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination procedural statements this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your taxpayer_representative sincerely steven hankin senior technical reviewer branch office of associate chief_counsel corporate