tax_exempt_and_government_entities_division department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx date release number release date uil code org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested deai we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director o examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication -exempt organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely renee b wells acting director eo examinations enclosures publication publication report of examination letter catalog number 34809f form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ein ein schedule no or exhibit year period ended 20xx05 20xxk05 legend org - organization name agent - agent through co-5 - president - president through companies ein - ein xx - date ra-1 ra-2 - state - state g ra coo-1 primary issue whether the sec_501 tax exempt status of org should be revoked because it is not operated exclusively for tax exempt purposes facts org the organization or org was incorporated in the state of state on october 20xx the purposes of the organization as stated in the articles of incorporation are exclusively for charitable educational religious or scientific purposes within the meaning of sec_501 of the internal revenue or corresponding section of any future federal tax code the articles state that the organization will not have members the articles contain a proper dissolution clause and address the prohibition on political activity and limited legislative activity in a general way by stating that the organization shall not carry on any activities that are not allowed by a sec_501 organization the bylaws co not contain a stated purpose for the organization the bylaws do state that there shall be tour initial board members and that number may increase or decrease at the board’s discretion the bylaws call for regular meetings at a time and place to be determined by the board officers of the corporation are chosen by the board and consist of a president vice president treasurer and secretary the bylaws further state that at each annual meeting the board would pick the officers for the coming year the bylaws further address the fact that the president initially and currently president certified_public_accountant would be the chief executive and administrative officer of the corporation the president may execute all deeds bonds mortgages and conveyances in the name of the organization president was the organization’s sole incorporator was and is a member of the board_of directors and has served as president since the organization’s inception president solicits and receives all cash and non-cash contributions from donors and operates the organization at his own discretion president is a member of the american institute of certified public accountants and a member of the state association of certified public accountants president’ vast knowledge and experience in the field of public accounting is demonstrated in his being one of less than non-lawyers nationwide to be admitted to practice before the united_states tax_court form 886-a crev department of the treasury - internal_revenue_service page -1- a an department of the treasury - internal_revenue_service explanation of items form_8 a name of taxpayer org ein ein schedule no or exhibit year period ended 20xx05 20xx05 beginning in 20xx president has been a member of the state state board_of certified_public_accountant examiners which is the governing body for licensing certified public accountants in state president was the president of this organization during 20xx-20xx and was again elected president for the organization in 20xx president is a current member of the executive committee and is a former member of the professional standards committee president is a member of the state general assembly’s revenue laws study committee and is a member of the ethics committee of the national association of state boards of accountancy the organization through president applied for tax exempt status under sec_501 of the internal_revenue_code as an organization described in sec_501 on october 20xx in the application_for recognition of exemption filed with the internal_revenue_service the service the corporation stated that the purpose of the organization was to accept hold and enforce conservation easements it also stated that it was concentrating on getting hunting clubs to donate conservation easements financial support was to come from contributions made by the general_public and from contributions received from donors of conservation easements on november 20xx the organization was issued a determination_letter stating that the organization was found to be exempt from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 as a newly formed organization the service did not make a final_determination of foundation status but did determine that the organization would be treated as a publicly_supported_organization as described in sec_509 and sec_170 the advance_ruling period was to run from october 20xx to may 20xx the determination_letter further states that if after the advance_ruling period ends the organization does not meet the public support requirements then the organization will be classified as a private_foundation for future periods the determination_letter also states that if the organization is classified as a private_foundation the organization will be treated as a private_foundation from its beginning date for purposes of sec_507 and sec_4940 of the code form_8734 support schedule for advance_ruling period was received from president on may 20xx on the form president calculated the public support percentage under sec_509 as and under sec_509 as an interview was conducted with president on january 20xx in that interview president stated that the purpose of the organization was to accept hold and enforce conservation easements the objective from the organization’s beginning was to convince owners of hunting land to make conservation_easement donations to protect the land in a relatively natural state during the january 20xx interview president was unclear as to why the idea of donating conservation easements began he stated that he came up with the idea to start org after form 886-a rev department of the treasury - internal_revenue_service page -2- department of the treasury - internal_revenue_service form_886 a explanation of items name of taxpayer org ein ein schedule no or exhibit year period ended 20xx05 20xx05 conducting some research at first he approached a conservation organization that accepted conservation easements but that did not go through because that organization wanted too much control_over the land and wanted dollar_figure as a contribution it was at that time that president decided to start org president performs all of the baseline studies and performs all of the annual inspections of each property during the january 20xx interview president acknowledged that he has not received any specialized training or even general training in any area relating to the accurate or general analysis of land conservation aspects relating to a potential donation or any area relating to the environment president further acknowledged in the january 20xx interview that he does not possess any specialized experience that would qualify him to perform these studies and inspections however he believes that the studies and inspections conform to the law as written during the january 20xx interview president acknowledged that contrary to what is required in the organization bylaws there have not been any meetings of the board_of directors since the initial meeting to start the corporation whereas the organization bylaws call for annual appointment of officers the officers have remained the same since the organization’s inception in 20xx there is no indication that any of the board members have special expertise or training in the area of environmental conservation ' during the january 20xx interview president acknowledged that the organization has never solicited contributions from the general_public does not perform any educational_services does not produce any brochures or newsletters describing the organization’s purpose and has little activity with regard to acquiring conservation easements the organization uses printed materials distributed by the land trust alliance a national conservation organization for the purpose of providing information to prospective conservation_easement donors from the organization’s inception in 20xx through january 20xx the organization has received two conservation easements and one outright property transfer the first conservation_easement received was donated by co-1 co-1 on december 20xx co-1 during-the january 20xx interview president stated that at one time he hunted on the co-1 land as a guest of two members due to health concerns president stopped hunting on the land sometime before he created org president prepares the annual tax returns for two of the partners of co-1 at the time that he created this organization and for the year that the donation was made from co-1 to the organization he did not prepare the co-1 partnership return president did prepare the co-1 partnership return for the year after the donation was made the co-1 covers acres of forested land located near the coast of state and was granted in perpetuity co-1 is a partnership of sixteen individuals who use the land exclusively for hunting form 886-a crev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein the land has been used for hunting for generations and the intention is to keep the land in a natural state to continue hunting the stated purpose of the conservation_easement is to assure that the protected property will be retained in perpetuity predominately in its natural scenic and open condition as evidenced by the report the easement does not allow public access and the recreational hunting is for members only the easement does not allow any building on the property except for a 20xx square foot shed dividing or sub-dividing is not allowed the grantor does have the right to convey easements and rights of way over and across roads and easements to include the conservation_easement under grantor’s reserved rights the grantor is allowed to lease the property for any use permitted under the easement the grantor is also allowed to build and maintain one dock for use by the grantor and can have two burrow pits not to exceed two acres each the burrow pits would be used for providing fill material for road repair on the property the grantor is permitted to construct a well at the dock and at the storage shed and has the right to develop and maintain those water resources and wetlands necessary for wildlife private recreation farming and other agricultural uses permitted under the easement the grantor is also given the right to engage in not-for-profit and for-profit agricultural farming and aqua cultural activities the grantor is allowed to construct and maintain watering facilities and ponds and can encumber the property with agricultural easements to meet their agricultural objectives the grantor can use agrichemicals to accomplish agricultural and residential activities permitted by the easement to the extent that the property is restored back to its natural state the grantor reserves the right to extract minerals gases oil and other hydrocarbons during the january 20xx interview president expressed surprise at the favorable rights retained by the donor he stated that co-1 attorney prepared the conservation_easement deed document and that he did not review it prior to his signing for the organization the first appraisal of the property was performed by co-2 certified land appraisers in state that appraisal va ed the conservation_easement at dollar_figure president stated in the january 20xx interview that-he requested that co-1 obtain a second appraisal because he thought the appraised value was too high a second appraisal of the land was performed by co-3 certified land appraisers in state the second appraisal was performed on february 20xx and the appraised value of the conservation_easement was dollar_figure the baseline study for the co-1 was conducted by president on december 20xx the baseline study is a one page document that states that the only man-made structures on the property are deer stands feeders foot bridges and fiber glass wraps around some trees it also describes the trails on the property the one main access road and it also states that there are no recent signs of timber cutting attached to the baseline study is a hand drawn map this map does not set forth the boundaries of the property or provide any descriptive information beyond department of the treasury - internal_revenue_service page -4- form 886-a rev form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein identifying fields trails and a duck pond the baseline study does not meet the requirements imposed in the treasury regulations the conservation_easement deed states that the specific conservation values of the protected property on the date of this easement are documented in the baseline documentation report the deed further states that both parties agree the report provides an accurate representation of the protected property and the condition of the same as of the date of this easement as required by sec_1_170a-14 and is intended to serve as an objective informational baseline for monitoring compliance with the terms of this easement president signed the form_8283 acknowledging the donee's gift sent the required gift acknowledgement letter and has performed annual monitoring of the property the monitoring reports consist only of written statements referencing the lack of changes on the property the reports do not reference the baseline study and do not mention specific findings of any kind in a meetiiig at the property with revenue_agent agent president had trouble identifying the exact or approximate boundaries of the property encumbered by the easement in a january 20xx meeting at the property between this agent and president he appeared to be familiar with the boundaries even though they were not marked in any way the co-1 partnership tax_return for the year ended december 20xx was examined by the small_business_self-employed_division of the internal_revenue_service and it was determined that the conservation_easement had zero value as the proposed plan to build on the property was severely flawed the entire deduction for the conservation_easement was denied co-1 acknowledged the service’s findings and signed an agreement with the service as to the service’s determinations subsequent to the service’s findings and co-1 agreement co-1 requested that the conservation_easement donated to the organization be returned co-4 property transfer the second transaction that the organization conducted was the acceptance of acres of land donated by co-4 co-4 on december 20xx in a letter from co-4 to the organization dated november 20xx donating acres of land to the organization the letter did not mention the term conservation_easement stated that his group was interested in per the warranty deed the purpose of the conveyance was to ensure that the land is utilized for conservation purposes as defined in sec_170 of the internal_revenue_code during the january 20xx interview president was asked about this transaction in relation to the organization’s stated purpose of receiving conservation easements president stated that he was unsure how the organization received the entire property instead of just a conservation department of the treasury - internal_revenue_service form 886-aicrev page -5- form_8 a department of the treasury - internal_revenue_service name of taxpayer 20xx05 20xx05 org ein ein explanation of items schedule no or exhibit year period ended easement he stated that there was a miscommunication between the donor and himself president believed this transaction was to be a conservation_easement donation and was surprised when he received the warranty deed showing a complete transfer of the property president in his capacity of certified_public_accountant prepares the annual tax returns for one of the two partners in co-4 for 20xx he received dollar_figure for that service president performed the baseline study and it is composed of a single piece of paper with one paragraph describing the land the paragraph states the land upon which the conservation_easement was given to org by co-4 is in a natural wooded state with no signs of recent timbering and no man made structures just as was the case with the co-1 the baseline study for co-4 does not meet the standards imposed in the treasury regulations president signed the form_8283 and on february 20xx president sent co-4 the required donor acknowledgement letter in that letter he acknowledged receiving the land and dollar_figure as a cash donation for performing inspections and enforcing the easement as this transaction was for the transfer of the entire property and not just a conservation_easement president was asked in a telephone interview on or about may 20xx why co-4 provided a contribution for inspections and enforcement president had no answer in a may 20xx letter from president to the examining agent president stated that there are no written inspection reports i often go by this property when riding my bicycle but never made notes about it the important thing is nothing has been disturbed this admission is in stark contrast to the requirements for annual monitoring and inspection reports with no reports of any kind there is no way to tell if the property has been disturbed since the original baseline study was completed co-5 conservation_easement the third and final transaction for the organization for the period of october 20xx through january 20xx was the acceptance of a conservation_easement consisting of dollar_figure acres donated by co-5 co-5 on december 20xx president in his capacity as certified_public_accountant prepares the annual tax_return for one of the two partners in co-5 for 20xx he received dollar_figure for those services the only baseline documentation provided by president is a one page unsigned and undated document that was attached as exhibit a to the conservation_easement deed the document states that the easement area is currently vacant land and consists of undeveloped wetlands woodlands and vegetation it further states that no disturbances nor construction is anticipated nor allowed within the easement area as is the case with the baseline documentation for the first two transactions the organization entered into the baseline documentation for this transaction fails to meet the standards imposed in the treasury regulations form 886-a crev department of the treasury - internal_revenue_service page -6- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year period ended 20xx05 20xx05 org ein ein the conservation deed states that the characteristics of the property its current use and state of improvement are described in exhibit a and that exhibit a is the appropriate basis for monitoring compliance with the objectives of preserving the conservation and water quality values the conservation_easement deed does not contain a specific conservation_purpose but rather uses a broad approach by stating that the property shall be maintained in its natural scenic wooded and open condition and restricted from any development or use that would impair or interfere with the conservation purposes of this conservation_easement set forth above the wording of the preceding paragraph indicates that the organization could intend the conservation_easement to cover both protection of a significant relatively natural habitat in which a fish wildlife or plant community or similar ecosystem normally lives and the preservation of open space article iii of the conservation_easement deed stipulates that there will be no industrial commercial or residential use there will be no agricultural timber harvesting grazing or horticultural uses permitted the vegetation is not to be disturbed and there is to be no mining excavation or dredging there shall be no diking draining or other alteration of the land that would be detrimental to water purity or alter the natural water levels or drainage there is to be no dumping construction or any disturbance of natural features there are to be no signs unless said signs relate to no trespassing signs signs identifying the conservation values of the property signs giving directions or proscribing rules for use of the land the conservation_easement deed does not mention public access or any restriction to public access the abbreviated baseline study does not address this area and there is no indication as to what access is allowed or not allowed the grantee is allowed to prevent any activity which is not consistent with the purposes of the easement the grantee is allowed to inspect the property to determine if any violations have occurred if enforcement is necessary to correct a violation the grantor agreed to bear the cost of enforcing the terms of the easement to include any restoration necessary president provided a letter dated may 20xx which was addressed to ra-1 and ra-2 that acknowledged the co-5 conservation_easement donation and receipt of dollar_figure from each party on january 20xx at the initial meeting between president and this agent president was unable to provide the baseline study for either the co-4 donation or for the co-5 easement he also could not produce the form_8283 for either donation he stated that he would have to get a copy of those documents from the donors form 886-a crev department of the treasury - internal_revenue_service page -7- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx05 20xx05 org ein ein president was asked by this agent on several occasions from january 20xx through mid-may 20xx to produce these documents and failed to do so until may 20xx president provided the excuse that he was too busy and had health issues as of the issuance date of this report the form_8283 for co-4 has not been provided and the form_8283 provided for co-5 shows that it was not signed by the organization with regard to books_and_records the organization does not maintain any except for the bank statements for the organization’s one account president stated that with the limited transactions involved and with the low levels of income received he didn’t see the need to maintain books_and_records that detail every transaction specific examination findings the organization did not file form_990 return of organization exempt from income_tax for the tax years ending may 20xx 20xx 20xx or 20xx the reason supplied by president was that the income level was below the dollar_figure threshold required for filing the examination of the organization covered the tax years ending may 20xx and may 20xx the financial documentation provided by president supports his claim that filing was not required for either year ending may 20xx or 20xx president submitted form_8734 support schedule for advance_ruling period and the information contained therein matched the financial information in the organization bank statements the information submitted by the organization on form_8734 is summarized below year ended 20xx year ended 20xx year ended 20xx year ended 20xx year ended 20kx cash contributions interest_income dollar_figure on the form_8734 that president submitted he claims that the organization qualifies for foundation status of a the form shows the public support percentage under sec_509 as calculated by president as calculation of public support under sec_509 of the code total support received for the five year period from june 20xx through may 20xx as reported by the organization on form_8734 was dollar_figuredollar_figure two percent of total support equals dollar_figuredollar_figure there were four substantial contributors all of whom contributed in excess of the dollar_figuredollar_figure two percent threshold therefore the percentage of public support to total support is zero subsequently the organization fails to qualify for foundation status under sec_509 of the code department of the treasury - internal_revenue_service form 886-a crev page -8- form_8 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended 20xx05 20xx05 org ein ein calculation of public support under sec_509 of the code total support received for the five year period from june 20xx through may 20xx as reported by the organization on form_8734 was dollar_figuredollar_figure of that amount dollar_figuredollar_figure came from interest_income and dollar_figuredollar_figure came from substantial contributors neither of those sources of income qualifies for public support and as such the percentage of public support to total support is zero subsequently the organization fails to qualify for foundation status under sec_509 of the code the organization does not include any non-cash contributions on the form_8734 that stance is consistent with the lack of reporting conservation easements as assets on the form_990 law sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which 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 furtherance of an exempt_purpose its activities i is not in sec_1_501_c_3_-1 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 the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization per sec_1_501_a_-1 sec_1_501_c_3_-1 provides 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 requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as the creator or‘his family shareholders of the organization or persons controlled directly or indirectly by such private interests form 886-a cev department of the treasury - internal_revenue_service page -9- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xxk05 20xx05 org ein ein sec_1_170a-14 provides that to be considered an eligible donee an organization must be a qualified_organization have a commitment to protect the conservation purposes of the donation and have the resources to enforce the restrictions for purposes of this section the term qualified means i ii iii _ iv a governmental_unit described in sec_170 an organization described in sec_170 a charitable_organization described in sec_501 that meets the public support_test of sec_509 accharitable organization described in sec_501 that meets the requirements of sec_509 and is controlled by an organization described in paragraphs c i ii or iii of this section sec_1_170a-14 provides that a donation to preserve land areas for the outdoor recreation of the general_public or for the education of the general_public will meet the conservation purposes of this section the preservation of land areas for recreation or education will not meet the test of this section unless the recreation or education is for the substantial and regular use of the general_public sec_1_170a-14 protection of environmental system - provides that the donation of a qualified_real_property_interest to protect a significant relatively natural habitat in which fish wildlife or plant community or similar ecosystem normally lives will meet the conservation purposes of this section alteration of the land will not result in a deduction being denied under this section if the fish wildlife or plants continue to exist there in a relatively natural state the example provided in this section refers to land alteration that is allowed if the lake or pond were a nature feeding area for a wildlife community that included rare endangered or threatened native species this section allows for the denial of public access sec_1 a -14 d preservation of open space - provides that the donation of a qualified_real_property_interest to preserve open space will meet the conservation purposes test of this section if such preservation is a pursuant to a clearly delineated federal state_or_local_government conservation policy and will yield a significant public benefit or b for the scenic enjoyment of the general_public and will yield a significant public benefit sec_1 a -14 d b - illustrations the preservation of an ordinary tract of land would not in and of itself yield a significant public benefit but the preservation of ordinary land areas in conjunction with other factors that demonstrate significant public benefit or the preservation of a unique land area for public enjoyment would yield a significant public benefit sec_1 a -14 g - protection of conservation_purpose where taxpayer reserves certain rights in the case of a donation made after date of any qualified_real_property_interest when the donor reserves rights the exercise of which may impair the department of the treasury - internal_revenue_service page -10- form 886-arev schedule no or exhibit year period ended 20xx05 20xx05 form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items org ein ein conservation interests associated with the property for a deduction to be allowable under this section the donor must make available to the donee prior to the time the donation is made documentation sufficient to establish the condition of the property at the time of the gift such documentation is designed to protect the conservation interests associated with the property which although protected in perpetuity by the easement could be adversely affected by the exercise of the reserved rights such documentation may include a the appropriate survey maps from the united_states geological survey showing the property line and other contiguous or nearby protected areas b a map of the area drawn to scale showing all existing man-made improvements or incursions such as roads buildings fences or gravel pits vegetation and -gentification of flora and fauna including for example rare species locations animal breeding and roosting areas and migration routes land use history including present uses and recent past disturbances and distinct natural features such as large trees and aquatic areas c an aerial photograph of the property at an appropriate scale taken as close as possible to the date the donation is made and d on-site photographs taken at appropriate locations on the property if the terms of the donation contain restrictions with regard to a particular natural resource to be protected such as water quality or air quality the condition of the resource at or near the time of the gift must be established the documentation including the maps and photographs must be accompanied by a statement signed by the donor and a representative of the donee clearly referencing the documentation and in substance saying this natural_resources inventory is an accurate representation of the protected property at the time of the transfer in 326_us_279 the united_states supreme court held that regardless of the number of truly exempt purposes the presence of a single substantial non-exempt purpose will preclude exemption under sec_501 in benedict ginsberg and adele w 46_tc_47 the united_states tax_court held that the organization used its funds primarily to foster private interests and the benefit to the general_public was only incidental as such the organization was denied exemption under sec_501 in charles glass et ux v commissioner 124_tc_16 the united_states tax_court held that the conservation_easement was donated exclusively for conservation purposes the tax_court also stipulated that the donee organization operated at arms length and was a qualified_organization in turner v commissioner 126_tc_16 the united sates tax_court held that the voluntary restriction to develop less land in and of itself does not meet the qualifications form 886-a rev department of the treasury - internal_revenue_service page -11- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein necessary for a charitable deduction to be a qualified_conservation_contribution under sec_170 the conservation_easement has to be exclusively for conservation purposes in revrul_70_186 it was held that the organization was exempt from federal_income_tax under sec_501 of the code because the benefits derived from their activities flowed principally to the general_public and benefits to private landholders did not lessen the public benefit received in rev ruls and it was held that the land must be ecologically significant and that preservation of ordinary farmland was not sufficient to justify charitable status government’s position the sec_501 tax exempt status of org and organization should be revoked because it is not operated exclusively for tax exempt purposes the the facts show that the organization is not operated exclusively for a tax exempt charitable purpose rather the organization has operated as a conduit for president cpa to help his clients obtain sizable deductions on their tax returns all three land transactions that the organization has entered into were with entities that are in some way connected to president and his accounting practice for co-1 president prepared the annual tax returns for two of the sixteen partners for co-4 president prepared the annual tax returns for one of the two partners for co-5 president prepared the annual tax returns for one of the two partners this type of pattern is not coincidental instead it shows president’ intent and goals are not concerned with environmental or conservation issues but rather that he has used the organization as a vehicle for the enrichment of his clients this type of private benefit runs - counter to the requirements set forth in sec_501 with regard to private benefit president is considered an expert in the field of public accounting this position is evidenced by his membership on at least one ethics committee membership on a revenue laws study committee and former membership on a professional standards committee as well as being admitted to practice before the united_states tax_court in addition all of these qualifications demonstrate that president is an accountant who understands how to utilize the tax laws for the benefit of his clients in stark contrast to his vast experience and knowledge as a certified_public_accountant president does not possess the knowledge training or experience to make educated decisions on whether each conservation_easement serves a conservation_purpose under sec_170 department of the treasury - internal_revenue_service page -12- form 886-aev - form_886 a name of taxpayer explanation of items schedule no ot exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xxk05 org’ ein ein moreover he has no expertise in valuing land for conservation purposes he has acknowledged that he read a few articles and conducted some research on how an organization that accepts conservation easements should perform the lack of knowledge and experience are strong indicators that the organization does not possess the level of commitment required under sec_1_170a-14 of the treasury regulations and is not operated a charitable purpose as is evidenced by his baseline documentation and inspection reports president has chosen to follow his own path neither the baseline reports nor the inspection reports conform to the requirements set forth in the treasury regulations these documents do not in any way provide the necessary information that the organization would need to enforce the conservation easements received these documents and the lack of substantial information contained therein show that the main concern of president was not the protection of open space or natural habitats but the amount_of_deductions he could claim for his clients the baseline documentation for all three transactions consists of the barest of facts and is not substantiated by pictures analysis or expert opinion there is no description of flora or fauna and each report contains a generic statement that references the natural characteristic of the land president states that the baseline documentation is in accordance with sec_1_170a-14 because the regulation uses the word may instead of shall with regard to what should be contained in a baseline report president reliance on performing the bare minimum with regard to the protection of conservation values is an indication that the organization does not pursue conservationism as a primary goal the lack of detail in the baseline studies shows that the organization does not possess the level of commitment required under sec_1_170a-14 of the treasury regulations the monitoring or annual inspection reports are less descriptive than the baseline documentation the inspection reports for co-1 contain one or two handwritten sentences that state that no changes were noted for co-4 there are no inspection or monitoring reports after several months of inquiring as to the inspection report whereabouts president wrote that there are no written inspection reports i often go by this property when riding my bicycle but never made notes about it the important thing is nothing has been disturbed this statement reflects the fact that monitoring for compliance was not and is not a top priority for president this lack of vital documentation also demonstrates that the organization does not possess the commitment necessary for accepting holding and monitoring conservation easements for co-5 the inspection reports are available but do not indicate what was done by president in the way of ensuring compliance for the inspection visit on september 20xx the report states the foliowing for sale sign on adjacent property according to only buildings could form 886-a rev department of the treasury - internal_revenue_service page -13- form_886 a name of ‘taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service _ org ein ein 20xx05 20xx05 be put on property called building inspector to make sure he knew of easement the inspection report for april 20xx was extremely brief and stated walked by property ok baseline documentation reports and annual inspection reports that do not contain more descriptive information as to the type quality or full description of the land as well as the boundaries are indicators of an organization that is not operating for conservation or environmental purposes and do not meet the requirements of sec_1 a -14 g of the treasury regulations with the co-1 president stated in the january 20xx interview that he did not review the easement deed prior to signing since he did not read the document he was unaware as to the rights granted and retained by the donor president was unaware of the extensive rights retained by the donor until it was brought to his attention by this agent this situation shows that president does not possess the knowledge experience or willingness to follow the treasury regulations as written with regard to the commitment necessary this situation also demonstrates a business practice that could be described as poor for the co-4 transaction president failed to secure a conservation_easement deed but instead received title to the land in its entirety president has no explanation that would demonstrate how this transaction was a proper business practice for a conservation organization what this transaction does demonstrate is president lack of experience knowledge and willingness to act as a proper fiduciary for the organization again like the co-1 transaction president has failed to demonstrate the proper commitment required by sec_1 a -14 c of the treasury regulations the qrganization-is not run as a sec_501 charitable_organization there are no financial records beyond what is contained in the bank statements there are no solicitations from the general_public for support no receipts no expense vouchers and no balance sheets prepared at year end considering the fact that president is a certified_public_accountant and is considered an expert in this field this situation is disturbing at best and at worst demonstrates that president has not been working in the best interests of the organization considering that the organization has only received two conservation easements and one land transfer in four plus years shows that the commitment to perform as a conservation organization as described in the treasury regulations is not present there are no educational events developed and sponsored by the organization the organization does not appear to hold itself out to the public as a charitable conservation organization except through word-of-mouth and of course president’ clients the organization has not been operated in accordance with the organization bylaws there are no meetings of officers or board members and there are no elections in essence president has form 886-a rev department of the treasury - internal_revenue_service page -14- form_8 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein sole control and is operating his own business under his own terms there are no internal controls and only the bare minimum with regard to records and recordkeeping president’ lack of expertise in the area of conservation easements and the lack of detail in the baseline studies and inspection reports show that the organization does not have clear established criteria for accepting easements nor adequate procedures in place for enforcing the easements president prepares the baseline studies and makes decisions on whether or not easements qualify as valid conservation easements neither of the two conservation_easement instead there are generic statements that deeds state exactly what the purpose of the easement is do not provide-a clear representation as to the purpose as stated under sec_1 a -14 of the the organization does not take the steps necessary to ensure that each easement regulations accepted serves a conservation_purpose under sec_170 of the code there is no one associated with the organization that has any formal education training or expertise in conservation matters and it is not known whether the appraisers that appraised the donated easements had qualifications in valuing conservation easements however any mention of conservation purposes in the appraisals does not aid the organization because no one on the organization’s governing body has any formal education on conservation matters the organization’s monitoring activities such as they are cannot further a charitable purpose uner these circumstances where there is no knowledge as to whether the easements the organization has accepted serve the conservation purposes under sec_170 moreover there is no evidence that the organization possesses sufficient resources to enforce easement restrictions in instances where any donor were to use an underlying property contrary to a conservation_purpose the organization fails to meet the requirements set forth in regulation sec_1 c -1 c in that it is not operated exclusively for an exempt_purpose more than an insubstantial part of its activities are the acceptance of conservation easements or property transfers for which there is not proper documentation the organization has failed to establish that the acceptance of these easements furthers an exempt_purpose under sec_501 of the code in short org fails to operate for a charitable conservation_purpose the organization also fails to meet the requirements set forth in regulation sec_1 c - d ii in that they are not operated exclusively for one or more exempt purposes because it serves the private interests of president and his clients the presence of a single substantial non-exempt purpose precludes exemption under sec_501 see 326_us_279 this organization exists not to serve the greater good of the general_public but rather fits the needs of president clients to have sizable deductions on their tax returns president who is a certified_public_accountant submitted form_8734 support schedule for advance_ruling period and it was calculated incorrectly on the form he calculated the public support percentage for foundation statu sec_509 as and for foundation statu sec_509 as form 886-a rev department of the treasury - internal_revenue_service page -15- fotm’ 886a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein president failed to take into account that all monies that were received came from substantial contributors which by definition are disqualified persons any income received from disqualified persons is excluded from the calculation of public support both for a and a when the monies received from substantial contributors is removed from the calculation public support under both a and a equal zero as such the organization can not be considered publicly supported and if revocation of exempt status is not pursued reclassification to a private_foundation should occur the first year under examination is the first year that the organization operated the fiscal_year ending may 20xx the organization’s status as an organization described under sec_501 should be revoked effective october 20xx because it did not operate exclusively for exempt purposes if revocation of exempt status is not upheld then the organization should be reclassified as a private_foundation and be subject_to chapter excise_taxes taxpayer’s position the taxpaye wishes to keep its exempt status and believes its activities serve a significant public beneiit with regard to preservation and conservation of natural land areas president also believes that if the organization is reclassified to a private_foundation based on not meeting the public support requirements then the organization would still be able to hold the conservation easements already in the organization’s possession president has stated that there is no mention in either the code or the treasury regulations that would prohibit a private_foundation from holding conservation easements that were acquired during an organization’s advance_ruling period conclusion the organization is not being operated as an exempt sec_501 organization the charitable exempt status should be revoked effective october 20xx alternative issue should org be reclassified as a private_foundation facts president submitted form_8734 support schedule for advance_ruling period and the information contained therein matched the financial information in the organization bank statements the information submitted by the organization on form_8734 is summarized below department of the treasury - internal_revenue_service form 886-a crev page -16- year ended year ended year ended year ended year ended form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein 20xx 20xx 20xx 20xx 20xx cash contributions interest_income on the form_8734 that president submitted it purports that the organization qualifies for foundation status of a the public support percentage as reflected on the form shows calculation of public support under sec_509 of the code total support received for the five year period from june 20xx through may 20xx as reported by the organization on form_8734 was dollar_figuredollar_figure two percent of total support equals dollar_figuredollar_figure there were four substantial contributors all of whom contributed in excess of the dollar_figuredollar_figure two percent threshold therefore the percentage of public support to total support is zero subsequently the organization fails to qualify for foundation status under sec_509 of the code calculation of public support under sec_509 of the code total support received for the five year period from june 20xx through may 20xx as reported by the organization on form_8734 was dollar_figuredollar_figure of that amount dollar_figuredollar_figure came from interest_income and dollar_figuredollar_figure came from substantial contributors neither of those sources of income qualifies for public support and as such the percentage of public support to total support is zero subsequently the organization fails to qualify for foundation status under sec_509 of the code the organization does not include any non-cash contributions on the form_8734 that stance is consistent with the lack of reporting conservation easements as assets on the form_990 law sec_509private foundation defined a general_rule -for purposes of this title the term private_foundation means a domestic or foreign organization described in sec_501 other than - a an organization described in sec_170 other than in clauses vii and viii a an organization which - form 886-a rev department of the treasury - internal_revenue_service page -17- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein a a normally receives more than one-third of its support in each taxable_year from any combination of - a a i gifts grants contributions or membership fees and a a ii gross_receipts from admissions sales of merchandise performance of services or furnishing of facilities in an activity which is not an unrelated_trade_or_business within the meaning of sec_513 not including such receipts from any person or from any bureau or similar agency of a governmental_unit as described in sec_170 in any taxable_year to the extent such receipts exceed the greater of dollar_figure or percent of the organization's support in such taxable_year from persons other than disqualified persons as defined in sec_4946 with respect to the oiganization from governmental units described in sec_170 or from organizations described in sec_170 other than in clauses vii and viii sec_170 charitable etc contributions and gifts b a vi an organization which normally receives a substantial part of its support exclusive of income received in the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption from a governmental_unit referred to in subsection or from direct or indirect_contributions from the general_public sec_4946 definitions and special rule sec_4946 disqualified_person -- a in general -for purposes of this subchapter the term disqualified_person means with respect to a private_foundation a person who is - a a a substantial_contributor to the foundation sec_1_507-6 substantial_contributor defined a definition in general - the term substantial_contributor means with respect to a private_foundation any person within the meaning of sec_7701 whether or not exempt from taxation under sec_501 who contributed or bequeathed an aggregate amount of more than dollar_figure to the private_foundation if such amount is more than percent of the total contributions and bequests received by the private_foundation before the close of the form 886-a crev department of the treasury - internal_revenue_service page -18- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx05 20xx05 org ein ein taxable_year of the private_foundation in which a contribution or bequest is received by the foundation from such person government ’s position as set forth above it is the government’s primary position that the tax exempt status of org should be revoked alternatively org should be reclassified as a private_foundation the organization was created in 20xx and since that time has failed to meet the requirements for public support as outlined in the code the organization has only received contributions from substaritial contributors which by definition are disqualified persons public support does not include any receipts from disqualified persons as defined in sec_4946 as such the organization does not qualify for foundation status under sec_509 or sec_509 of the code if revocation of exempt status is not achieved then the organization should be reclassified as a private_foundation effective june 20xx the end of the advance_ruling period as it fails qualify for any foundation status as described in sec_509 of the code to taxpayer’s position president also believes that if the organization is reclassified to a private_foundation based on not meeting the public support requirements then the organization would still be able to hold the conservation easements already in the organization’s possession president has stated that there - is no mention in either the code or the treasury regulations that would prohibit a private_foundation from holding conservation easements that were acquired during an organization’s advance_ruling period conclusion org does not qualify for tax exempt status under sec_501 as an organization described in sec_501 of the code the lack of any qualified exempt activity indicates that the organization should not be allowed to continue as a tax exempt_organization revocation of the tax exempt status of org is proposed with an effective date of october 20xx alternately org should be reclassified as an organization that is a private_foundation as defined in sec_509 of the code effective june 20xx the end of the advance_ruling period a closing conference was held by telephone with president president of org on july 20xx form 886-a cev department of the treasury - internal_revenue_service page -19-


internal_revenue_service number release date index number ------------------ ---------- ------------------------------------------------ ------------------ --------------------------------------------------------------- ----- ----------------------------- ---------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc tege eo2 plr-146327-08 date date legend trust board county state plan dear --------------- ------------------------------------------------- ---------------------------------------------------------- ------------------------- ----------------------------------------------------------------------- ----------------------------------------- ------------ ---------------------------------------------------------------- this is in reply to a letter date requesting a ruling that the income of trust is excluded from gross_income under sec_115 of the internal_revenue_code facts board oversees the public school system in county board a publicly elected body is a political_subdivision of state board adopted plan to provide post-employment welfare benefits to eligible retirees their spouses and dependents the county public school system is the only participating employer in plan plan provides benefits through a self- plr-146327-08 insurance arrangement benefits provided by plan include medical dental vision prescription drug life and long-term care benefits there is no cash-out of any amounts paid for plan benefits and no conversion of sick or vacation days to post-retirement medical benefits plan does not permit any benefits to be paid_by pre-tax salary reduction in administering plan reasonable efforts will be made to identify individuals who do not qualify as a spouse or dependent under sec_152 of the internal_revenue_code of the retiree who participates in plan the fair_market_value of coverage under plan for such individuals will be included in the gross_income of the retiree board created trust as a vehicle to pre-fund the benefits provided by plan trust funds are used to pay for plan benefits and trust administration_expenses trust is governed by a board_of between five and nine trustees the trustees consist of five county public school employees who serve as a condition of their employment and up to four additional trustees selected by board board may remove any trustee immediately upon providing written notice to the trustee board can also amend trust the income of trust consists of contributions to plan and investment_income no part of trust may be diverted to purposes other than the exclusive benefit of the plan participants and their beneficiaries no part of trust’s net_earnings may inure to the benefit of any private person other than the incidental benefit to the plan participants upon termination of trust the trust agreement provides that any assets remaining in trust will be used for the exclusive benefit of participants entitled to benefits under plan and to defray reasonable expenses of administering plan in no event will any trust assets be transferred to an entity that is not a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the code sec_115 law analysis sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance plr-146327-08 of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization trust provides health benefits to retired employees of board which is a political_subdivision of state providing health benefits to retired employees of a political_subdivision of a state constitutes the performance of an essential government function based upon revrul_90_74 and revrul_77_261 trust performs an essential_governmental_function within the meaning of sec_115 of the code the income of trust accrues to board the sole participating employer in plan upon termination of trust its remaining assets will be distributed to fulfill an obligation assumed by board with respect to its employees in no case will trust assets be distributed to an entity that is not a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the code based on the information and representations submitted by trust we hold that the income of trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 accordingly trust’s income is excludable from gross_income under sec_115 of the code sec_6012 sec_6012 and sec_1_6012-2 of the regulations provide in part that every corporation as defined in sec_7701 subject_to taxation under subtitle a is required to file an income_tax return regardless of whether it has taxable_income or regardless of the amount of its gross_income sec_6012 provides that every trust having for the taxable_year any taxable_income or having gross_income of dollar_figure or over regardless of the amount of taxable_income must file an annual income_tax return sec_7701 and sec_301_7701-4 of the regulations define trust for purposes of sec_6012 plr-146327-08 if trust is classified as a_trust for federal_income_tax purposes no annual income_tax return is required to be filed by trust pursuant to sec_6012 since any income realized by trust is excluded from gross_income under sec_115 however if trust is a corporation as defined in sec_7701 it will be required to file an income_tax return pursuant to sec_6012 no opinion is expressed on the classification of trust as a_trust or corporation for federal tax purposes no opinion is expressed concerning the federal tax consequences of trust under any other provision of the code other than those specifically cited above this ruling concerns only the federal tax treatment of the trust’s income no opinion is expressed regarding the treatment of plan under any particular section of the code in particular no opinion is expressed concerning the federal tax consequences of contributions to or payments from plan including but not limited to whether amounts are excludable from the gross_income of employees former employees or retirees under sec_104 sec_105 or sec_106 sec_3 of revproc_2008_3 2008_1_irb_110 provides that the service will not issue a ruling concerning whether a self-insured_medical_reimbursement_plan satisfies the requirements of sec_105 for a plan_year accordingly no opinion is expressed concerning whether plan satisfies the nondiscrimination requirements of sec_105 of the code and sec_1_105-11 of the regulations this ruling is directed only to the taxpayer who requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with a power_of_attorney on file we are sending a copy of this letter to your representative sincerely ________________________ sylvia f hunt assistant chief exempt_organizations branch division counsel associate chief_counsel tax exempt and government entities enclosures copy of this letter copy for sec_6110 purposes