department of the treasury internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations commerce street mc dal dallas texas number release date date date org address certified mail - return receipt requested taxpayer_identification_number form filing period s ended person to contact id number contact numbers phone fax manager’s name id number manager’s contact number phone dear in a determination_letter dated january 20xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on march 20xx you signed a form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you are therefore required to file form_1120 u s_corporation income_tax return or form 1120-h u s income_tax return for homeowners associations if qualified for the year ending december 20xx with the ogden service_center for future periods you are required to file form_1120 or 1120-h with the appropriate service_center indicated in the instructions for the return you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channel gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations enclosure reports of examination org ein ein form_1024 part n- activities and operational information legend org - organization name state companies city - city overview ein - ein co-2 co-1 county - county co-3 co-4 - state - the org foundation is a homeowner's association charged with the sole obligation to maintain the common areas streets sidewalks and other facilities commonly available to residents who are members of the foundation co-1 is a planned community in county state located within the city of city state city is an incorporated city in county state within the co-1 community there are about big_number housing units which house approximately big_number residents these residents are members of the foundation also there are approximately big_number additional residents in co-1 who are neither homeowners or members of the foundation the total residents within the co-1 housing units represents of the total residents of the city of city the real_property contained in the development consists of big_number acres of that amount are owned by the individual members acres are owned by the foundation and include lawn bowling greens green acres and park land club houses equestrian rink horse stables stalls tennis courts golf course sec_5 swimming pools the acreage owned by the foundation combined with the acres owned by individual residents of co-1 comprise approximately of the total acreage within the city of city county state the remaining balance is comprised of other real_property and residents who are not affiliated with the foundation or co-1 the foundation is subject_to the provisions of the state nonprofit corporate law and as a homeowner's association is further subject_to the state civil code section et seq under these civil code sections and at section the foundation is responsible for repairing replacing or maintaining the common areas other than exclusive use common areas and the owners of each separate interest is responsible for maintaining that separate interest and any exclusive use common area appurtenant to the separate interest exhibit a under state law a homeowner's association may not be relieved of this statutory duty to maintain and repair common areas through a contractual provision additionally under section the board_of directors of the foundation must review on a quarterly basis the actual reserve revenues and expenses of the current_year compared to current year's budget the foundation board_of directors must exercise prudent fiscal management in maintaining the integrity of the reserve_account finally once every years the board_of directors must conduct a reasonably diligent inspection and must review the study annually to consider and implement necessary adjustments to the board's analysis of the reserve_account requirements tax rulings the internal_revenue_service has stated in revrul_74_99 1974_1_cb_131 that in order for a homeowners_association to be eligible for tax exemption under sec_501 c it must serve a community that bears a reasonably recognizable relationship to an area ordinarily identified as governmental must not conduct activities directed to the exterior maintenance of private residences and the common areas and facilities it owns and maintains must be for the use and enjoyment of the general_public the foundation serves a community that bears a reasonable relationship to an area normally identified as a governmental_unit additionally the foundation is solely obligated to maintain common areas and facilities it cannot and does not conduct any activities directed to the maintenance of the exterior of private residences services to a community that bears a recognizable relationship to a governmental area as related above the area served by the foundation comprises approximately of the residents of the city of city and of the total real_property in the city of city the foundation provides for the health safety and welfare of its members and nonmembers in a variety of ways in so doing the foundation provides services which would otherwise be undertaken by the city of city by taking on these municipal-type services the foundation lessens the burden on the city of city to provide for such services a police the foundation provides quasi-police services for the entire big_number population of the of the total co-1 community which constitutes approximately population of the city of city there is a police patrol which provides security by patrolling the community on a 24-hours-a-day basis this important police function is the only 24-hours service provided within the city of city this patrol handles all parking exhibit a speeding failure to stop and failure to yield issues within the community this patrol also responds to any and all daytime or nighttime calls regarding emergency or other problematic situations this police patrol responds to all calls on a 24-hours-a-day basis and will refer a call to the police department of the city of city if criminal activity is involved indeed the foundation police patrol engages in all manner of security activities based on a sizable written standard operating procedures manual the security forces are primarily staffed with former or retired municipal police officers and others with traditional law enforcement experience the police operation of the foundation applies to of the residents of the city of city the annual cost of the police operation undertaken by the foundation is dollar_figure this marks a substantial effort of the foundation which lessens the burden of the city of city required to provide such security see revenue_ruling 1974_1_cb_130 organization that assist the police in apprehending criminals is exempt as a charitable_organization b library the foundation provides a full service library the average annual number of visits to the library is big_number the city of city does not have a library county does operate a library system but there is no branch in the city the library is staffed by unpaid volunteers drawn from the community served by the foundation average annual costs to operate the library are dollar_figure the foundation pays all costs for this facility in doing so it lessens the burdens on the city of city to provide a library for use by of its residents c churches there are eight churches that regularly meet within the foundation facilities with a collective congregation of over big_number approximately members of the various congregations are not residents of co-1 d streets and sidewalks the foundation owns repairs and maintains approximately miles of streets and sidewalks - over of the streets and sidewalks in the city of city it has sole and complete responsibility for this function the total cost to repair and maintain the streets and sidewalks is approximately dollar_figure per year again by undertaking this function at its own expense the foundation lessens the burden on the city of city to do so e waste collection exhibit a the foundation provides waste collection through a contact with a private waste collection company the annual cost for this service is dollar_figure this activity and the associated burdens undertaken by the foundation lessen the burdens of government on the city of city relative to of the residents of the city of city f bus service total annual usage is big_number rides at an operating cost of almost dollar_figure year capital_investment in equipment is almost dollar_figure buses operate days a week hours a day most of them are fixed routes that cover all of city and part of org in the evenings the buses operate on a demand-response basis and offer door-to-door service there is also a specially equipped bus with specially trained drivers that operates on demand by appointment for severely handicapped people who need extra assistance boarding this bus replaced a service dial-a-ride that was previously operated by county which charged a nominal dollar_figure fee and was discontinued in 19xx in rendering this service the foundation lessens the burdens on the city of city to provide the service for of the residents of the city of city and with regard to the specially equipped bus the foundation has undertaken a burden previously undertaken by a governmental_unit - county state - which discontinued the service due to budgetary constraints discussions are currently in process between the foundation and the city of city with regard to allowing additional public use of the foundation buses under a subsidy arrangement with the city see revrul_78_69 1978_1_cb_156 organization that operated bus service during rush hour is exempt as a social_welfare_organization g water quality testing there are two creeks in the city of city that feed into public waters creek drains into the pacific ocean south of the city of city creek drains into the bay exhibit a there are limitations on the amount of various pollutants that each jurisdiction can add to water as it flows over their property independent testing of the water quality is performed to monitor the pollution levels so that corrective measures can be taken to clean up the water or so that it can be proven that the particular jurisdiction in question is not responsible for upstream pollutants the foundation undertakes all of the testing required of the city of city to comply with this environmental standard the foundation pays all of costs for this effort the total annual costs are over dollar_figure in undertaking this effort the foundation lessens the burden on exhibit a the city of city to provide this testing see revrul_70_186 1970_1_cb_127 organization treating lake water for recreational use is exempt as a charitable_organization ll common area maintenance the foundation maintains the common areas and facilities used by its members it is required by state law to do so it provides no services or benefits to the private residences owned by its members ill access to common areas and facilities additionally the foundation welcomes non-residents and nonmembers to its common areas and facilities as set out below a swimming pools the foundation owns operates and maintain sec_5 swimming pools for the benefit of the community see revrul_50_310 c b annual swimming pools visits are approximately big_number of that total approximately big_number are individuals including children who are members of the public and not members of the foundation b golf courses total annual number of rounds of golf on the golf courses maintained by the foundation are approximately big_number of that total approximately big_number rounds of golf are played by individuals who members of the public and are not members of the foundation additionally there are annual golf tournaments sponsored by a variety of public county seniors the total golfers organizations such as in these tournaments are of which approximately are members of the public and not members of the foundation hospital and c stables total average annual rides are big_number of that total approximately big_number are rides by individuals including children who are members of the public and not members of the foundation and who enjoy the annual easter egg hunt annual horse shows and the bar - b - qs hosted by the co-2 annually d lawn bowling average annual lawn bowling participation is big_number of that amount approximately big_number are individuals who are members of the public and are not members of the foundation additionally in the co-3 will be held at city this tournament will exhibit a have approximately individual bowlers of which will be members of the public and who are not members of the foundation additionally a further number of guests of the nonmembers estimated pincite will be present during the tournament e clubs and organizations there are clubs and organizations in city with total membership of approximately big_number of that total approximately big_number are members of the public and not members of the foundation f private gatherings community facilities are regularly used for private gatherings such as weddings birthday parties anniversaries and family gatherings the average annual attendance at all such gatherings is approximately big_number of that amount about big_number are members of the public and not members of the foundation g community college classes co-4 offers over classes in city - all of which are open to non-residents the total annual participation is about big_number of which are members of the public and not members of the foundation visitors in addition year over big_number non-residents visit the facilities with no limitation on their activities each such individual obtains a guest pass the foundation its facilities and its activities are coextensive with the city of city state the foundation provides facilities and services to of the residents of the city of city see rancho santa fe association v u s ustc us d ct so dist calif revrul_80_63 1980_1_cb_116 beyond providing services and facilities for the benefit of its members individuals who are not members of the co-1 community also participate in such benefits the foundation respectfully submits that it meets the requirements of revrul_74_99 because the foundation serves a community of approximately big_number people which comprises approximately of the population of the city of city the foundation provides services to the community which are municipal-like services thus this community clearly bears a reasonable relationship to an area ordinarily identified as governmental the foundation solely maintains common areas and facilities enjoyed by its members it provides no benefit to the exterior of private residence owned by its members exhibit a the common area and facilities owned and maintained by the foundation are annually accessed by over big_number individuals who are members of the public and not members of the foundation or residents of the community exhibit a form 886-a schedule number or exhibit form b86-a explanation of items tax identification_number year period ended name of organization taxpayer org december 20xx ein legend org - organization name xx - date ein - ein - agent - agent co-1 co-2 co-3 co-4 co-5 - city - city state - state companies issue whether org constitutes a community within the meaning of revenue_ruling whether org continues to qualify as a social_welfare_organization described in the internal_revenue_code sec_501 and the regulations thereunder organizational information facts org org was incorporated on november 19xx in the state of state org restated its articles and changed its name to the current name on november 20xx purposes stated in these articles of incorporation are a to act as trustee of org trust and any other trust incidental to any of these purposes b to provide services and community facilities to the members of this corporation and to their memberships to act as a partner and joint venturer and to enter into co-partnership and joint_venture agreements with other corporations and individuals to engage in any business or activity now or hereafter permitted under the nonprofit mutual benefit corporation law of the state of state c d e to sponsor and form state corporations whose joint purpose will be to develop the community of co-1 org filed forms 1120-h u s income_tax return for homeowners associations throughout the years prior to receiving exempt status under the internal_revenue_code irc or the code sec_501 org submitted a form_1024 application_for recognition of exemption under sec_501 to the internal_revenue_service ‘the service on november 20xx requesting to be exempt under the code sec_501 org described its operation in detail see attachment a for a copy of the exhibit a attached to the form_1024 org answered yes to the question f the organization is claiming exemption as a homeowners’ association is access to any property or facilities it owns or maintains restricted in any way ’ within page of department of the treasury-internal revenue service form 886-a 886-a schedule number or exhibit form rev date explanation of items tax identification_number year period ended name of organization taxpayer org the form_1024 schedule b and added the explanation the facilities are open to the public taxpayer requests that all visitors sign in with the security office and that the visitor is sponsored by a member december 20xx the ein the service granted org its exempt status under sec_501 of the code on january 20xx without questioning statements made within the application operational information the service initiated a review of the form_990 return of organization exempt from income_tax form 990-t exempt_organization business income_tax return and activities of org for the year ending december 20xx org is comprised of at lease five separately gated areas these five gated areas are separated by the two main roads that cut through the city parkway going through north and south road going through east and west and avenue going through east and west org has gates most of them have security guards inspecting questioning every passing vehicle gates without security guards can only be accessed with keys or key cards access to facilities the acreage owned by org and resident-members comprises approximately of the total acreage of the city majority of the remaining acreage is located outside of the gated areas housing units within org represent of real properties within the city the remaining are churches and commercial businesses located along the two main roads and outside of the gated areas a post office is the only commercial facility behind the gated areas and is opened at the request of org and for the convenience of its resident-members org states in the application that its facilities and services are available to the general_public and supports its statement with various visitation data which indicated about non-member use of all facilities access to most common areas and facilities are strictly controlled a visitor must present a member student or guest pass to have access to a common area or facility the recreation division policy spells out rules placed on resident-members under use of org recreation facilities the policy states a uses are for co-2 residents and their guests only c an employee may not use a org facility or attend any function or event at any org recreational facility except as an invited guest of a resident or if approval is granted by the org board_of directors department of the treasury-internal revenue service form 886-a page of schedule number or exhibit for eo form explanation of items 886-a tax identification_number year period ended name of organization taxpayer org december 20xx ein d lease tenant s shall be entitled to the use of all of the org facilities or services as aforesaid during the term of said lease and the owner s shall not be entitled to such use e guests must always be accompanied by a resident exceptions are noted in policy for the specific activity guests may not enroll in recreation division coordinated classes except those requiring a partner and the resident’s partner is not a resident guests are not allowed to use any of the clubhouse four workshops where guests are permitted guests must pay applicable guest fees emphasis added the recreation division policy spells out rules by each facility or type of activity most of them clearly state restrictions placed on guests however hardly any one of them indicates how non-residents who are not students or guests can use or participate for example rules for billiards bocce pc workshop horseshoes lawn bowling paddle tennis shuffleboard courts table tennis tennis and video lab at clubhouse two contain a statement similar to a residents and guests must sign in upon arrival at the facility residents must accompany guests some of the facilities or activities have additional requirements as described below aquatics - residents must show their co-2 picture identification card to the lifeguard upon entering equestrian center - residents who have adult guests age or older wishing to ride must fitness - residents must accompany their guests to the fitness centers and sign them in bridge room - guests must arrive at and enter the bridge room with their sponsoring resident the pool area residents must accompany their guests to the pool and sign them in with the lifeguard but they are not required to stay with their adult guests not more than five guests per resident at any one time accompany their guests to the equestrian center and register them in addition the equestrian center supervisor must provide the guest with authorization to ride children must be years of age or older to use org owned horses or to take lessons a co-2 resident must sign the minor guest in at the facility guests may be denied use of any exercise equipment if residents are waiting non-resident co-4 students may use the equipment rooms in accordance with recreation division policy par section xi under the fitness center pass program requests for guests to use the equipment rooms without being accompanied by a resident for two weeks will be evaluated the resident must complete the required application form and on a case-by-case basis submit it to the recreation division with a letter from the resident's doctor attesting to the resident's inability to accompany someone to a fitness center equipment room or documentation identifying the guest as the executor of the estate golf courses - the golf courses are available only to residents and their guests non-residents may take lessons when accompanied by a resident department of the treasury-internal revenue service form 886-a page of 886-a schedule number or exhibit form rev date explanation of items tax identification_number year period ended name of organization taxpayer org december 20xx ein gymnasium - a resident may sponsor a maximum of two guests at any one time and must at all times accompany the guest s library - residents are assessed fines on all over due materials that are checked out to them non-member or guest usage of the library is not mentioned non-resident access to facilities clubs with non-resident-club-members many residents form clubs of their own a club with non-resident members is required to obtain gate clearance through process defined by community access for occasional non- resident members or guests’ for its non-resident members to access org facilities org changed requirements for non-resident-club-member access in 20xx and posted the following information on its website in response to a growing concern expressed by board and resident members regarding who is permitted to enter into the community and for the purpose of being able to identify visitors who attend events for which a flyer will provide gate access the org board has enacted a policy for access for non-residents attending events for which a flyer is presented at the gate for entry currently a resident organizer of an event can request access for non-residents to the event by submitting a gate clearance form at least business days in advance to community access with a list of all non-resident guest names included on the form the names of the guests are entered into the gate clearance system in order for the gate ambassador to permit access upon arrival of the guests alternatively the organizer of an event can submit a flyer to community access for approval using the gate clearance form in order to avoid having to list all the names of potential non- resident guests the approved flyer could then be shown to the gate ambassador by a non- resident to gain access into the community for the event until now this clearance did not include that non-residents identify themselves org has approved a tear-off section that must be included on all flyers in order for a non- resident guest to enter into the community see below the flyer still must be approved by community acce sec_4 business days prior to the event the gate ambassador will receive the completed tear-off portion of the flyer from the non-resident guest in order to permit gate access each flyer is required to have the following section at the bottom page of department of the treasury-internal revenue service form 886-a 886-a schedule number or exhibit form rev date explanation of items name of organization taxpayer tax identification_number year period ended org december 20xx ein the following information is required to be detached and presented to the gate ambassador to gain access to the community for this event event information event type sponsor day of week date time location visitor information driver's license make model auto license plate name non-resident and guest fees non-resident and guest fees are listed for aquatics clubhouse five for saturday night dance clubhouse seven for bridge room equestrian center fitness center and golf course most fees are three to six times that of resident’s fees fines for failure to return library materials are not listed for non-residents or guests pool privilege pass for guest the resident must complete the required request for guests to use the pool facilities without being accompanied by a resident will be evaluated on a case-by-case basis application form and submit it to the recreation division with a letter from the resident's doctor attesting to the resident's inability to accompany someone to a pool facility or documentation identifying the guest as the executor of the estate if issued the pass has the guest’s name the manor number the pool number for which the pass was issued and the expiration date not to exceed two weeks from date_of_issue the pass may be renewed in two-week increments at the discretion of the recreation division ifa pass is misused in any way it will be confiscated by the lifeguard and retumed to the recreation director the resident may be referred for disciplinary action a resident is responsible for the actions of his her guest emphasis added private parties can be held at any of the seven clubhouses if a private party is for non- resident wedding the wedding has to be for a parent a child or a grandchild of a resident only department of the treasury-internal revenue service shows and movies private parties form 886-a page of 886-a schedule number or exhibit form rev januaty explanation of items tax identification_number year period ended name of organization taxpayer org december 20xx ein clubhouse three has an auditorium that provides shows or movies the only activity expressly permits employees to participate the rules state employees are permitted to purchase tickets for themselves and their immediate_family over years of age student passes since the education program is tax supported non-residents may register for classes non-resident co-3 student passes are issued for use while attending classes only and are not for use at any other time or at any other co-2 facilities non- resident students may arrive at the facility no more than minutes prior to the class’s official start time and must vacate the facility no more than minutes after the instructor dismisses the class passes issued to co-3 students are good for only the registered student guests may not accompany the student into the community for any reason driving student to class as approved by co-4 the expiration date on the student pass is the last day of the semester the expiration date on the instructor's pass is the friday following the last day of the semester the only exception is those co-3 education classes may be held at all clubhouses except clubhouses six and seven emphasis added tours filming and or photography access to verify public use of facilities we reviewed usage data for each common facility for the year 20xx the following table summarizes visitations by each facility the org foundation board_of directors and its staff are eager to promote the it should be noted that since this is a private community through tours and publicity gated community and residents expect a certain level of security freedom to use their facilities without interruption and personal privacy in their homes that the community affords them certain guidelines are required for community access this policy does not apply to media coverage of breaking news items covered by media such as newspapers or television nor does this policy address requests made by residents personally for media access to the community emphasis added recreation facilities clubhouse clubhouse ii clubhouse iii clubhouse iv clubhouse v clubhouse vi clubhouse vii department of the treasury-internal revenue service residents guests students unknown guest student unknown form 886-a page of total 886-a schedule number or exhibit form bbg os form explanation of items tax identification_number year period ended name of organization taxpayer ein december 20xx org clubhouse i pool community center golf course 27-hole golf course par library paddle tennis pool stables swimming pool iv swimming pool v swimming pool vi tennis courts total possible non-members students are restricted to facilities in which their registered chasses are held and are not allowed to hang around any facility there is no evidence that visitors designated as unknown are non- members nevertheless treating unknown visitors as general_public visitors org had general_public usage of its common facilities in the year 20xx clubhouse seven community center library and stables are located outside of the gated area and purportedly open to the general_public however clubhouse seven had no student or unknown visitor community center library and stables had big_number or big_number or and big_number or of unknown visitors respectively unknown visitors of these three facilities represented of the total visits org provides bus service to its residents and describes its bus service as providing transportation to nearby banking and restaurant facilities shopping centers houses of worship and some of the most modern and complete medical and hospital facilities all located in close proximity to the community rides are free to residents who show their resident id card to the driver the first item listed on bus rider rules regulations is identification and it states all bus users must show their resident id card or access pass to the driver or confirm that they are in the company of a resident when entering the bus since the bus service automatically permits gate entry to passengers there are no exceptions to this requirement the golf classic to benefit co-4 memorial was held on october 20xx however the visitor data indicates that no one played golf on this day co-5 held a seminar on october 20xx in the auditorium of clubhouse three the visitor data indicates that residents participated in this event the 20xx grandparents and grandkids fun day was held on july 20xx in clubhouse two the visitor data indicates that residents and three guests participated in this event org allows participants of org memorial half marathon 5k event to run through its gated areas this event takes place on memorial day of each year both course routes enter and exist through gate however visitor records for special events arts crafts shows for may 20xx the day of the marathon in 20xx indicates a total of zero visitors department of the treasury-internal revenue service form 886-a page of 886-a schedule number or exhibit form b86-a an form explanation of items tax identification_number year period ended name of organization taxpayer org december 20xx ein internal_revenue_code law sec_501 civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes sec_501 exemption from taxation - an organization described in subsection c or d or sec_401 shall be exempt from taxation under this subtitle unless such exemption is denied under sec_502 or sec_503 federal tax regulations the regulations the regulation sec_1 c civic organizations and local associations of employees the following does not reflect changes made to the code by p l p l p l p l or p l a civic organizations i ii promotion of social welfare it is not organized or operated for profit and it is operated exclusively for the promotion of social welfare in general - a civic_league_or_organization may be exempt as an organization described in sec_501 c if i in general - an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements a social_welfare_organization will qualify for exemption as a charitable_organization if it falls within the definition of charitable set forth in paragraph d of sec_1_501_c_3_-1 and is not an action_organization as set forth in paragraph c of sec_1_501_c_3_-1 ii political or social activities - the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public_office nor is an organization operated primarily for the promotion of social welfare if its primary activity is operating a social_club for the benefit pleasure or recreation of its members or is carrying on a business with the general_public in a manner similar to organizations which are operated for profit department of the treasury-internal revenue service form 886-a court cases page of 886-a schedule number or exhibit ore oo form explanation of items tax identification_number year period ended name of organization taxpayer org december 20xx ein 305_f2d_814 this case involved a nonprofit membership housing cooperative that provided low cost housing to its members in denying exemption the court stated that the organization was not organized exclusively for the promotion of social welfare the court found that although its activities were available to all citizens eligible for membership its contribution is neither to the public at large nor of a public character the court looked to the benefits provided and not to the number of persons who received benefits through membership the court compared its decision in lake forest with that in 64_f2d_593 7th cir which held that a housing project formed and controlled by the local_government qualified for exemption 868_f2d_108 a f t r 2d ustc p the flat top lake association consisting of owners of property surrounding artificial lake that sought to restrict development to members only brought civil_action seeking judicial determination that it currently was and had been exempt from federal taxation as a social_welfare_organization the court_of_appeals held that organization that operated for exclusive benefit of members did not serve as community as that term related to broader concept of social welfare for purposes of tax exemption and association that had done everything within its power to create wholly private environment for its members was not community within meaning of federal tax exemption and could not claim tax exemption for benefiting itself indian lake property owners association v director of revenue s w 2d the supreme court of missouri held that homeowners’ association that enforced subdivision covenants maintained subdivision roads and provided security and trash collection services to residences within subdivision was not civic organization entitled to sales and use_tax exemption and to qualify as civic organization organization's purposes and functions must be concerned further the presiding judge referenced flat top lake stating with and relate to citizenry at large clearly congress believed that an organization cannot serve social welfare if it denies its benefits to implicitly congress recognized that a true community functions within a broader the general_public national fabric service to such a community thereby furthers the national interest by expanding potential by opening opportunities to all citizens who may find themselves within the bounds of that particular community exemption denied affirmed lake petersburg association v c i r 33_tcm_259 t c m p-h p big_number ph tc memo big_number lake petersburg association was an idea presented by the petersburg chamber of commerce to help stimulate the economy in the surrounding area a group of businessmen contributed capital and acquired capital from other sources such as the city the chamber and two banks to obtain funding to purchase property and develop it they formed an association which required prospective owners to become dues-paying members the dues helped finance the development of the lake and recreational facilities on said property use of the assets was limited to members and their guests the association’s basis for their argument is that the organization was created to stimulate the economy and make it a better place to live thereby fulfilling the requirement of a social_welfare_organization under sec_501 the respondent argued that it was operated primarily for the benefit of its members and therefore did not qualify the court found that department of the treasury-internal revenue service form 886-a page of schedule number or exhibit form bg os form explanation of items 886-a tax identification_number year period ended name of organization taxpayer org ein december 20xx regardless of the original intent the actual benefit went to the members and any economic benefits to the petersburg citizens were indirect and remote exemption was denied rancho santa fe association v u s a a f t r 2d rancho santa fe association's request for affirmation of their exempt status as a sec_501 organization was granted by the court the facts are that rancho santa fe association consists of big_number acres of property acres of which is owned by the association and the rest by members who are property owners of the acres owned by the association acres are dedicated to parkland and open space playgrounds athletic fields a public parking lot a community clubhouse and hiking and bridle trails which are all open to the public the remaining acres comprise an 18-hole golf course and eight tennis courts which are only available to members the association oversees the governance of the property furnishes private security protection and functions as a liaison between the community and the board_of supervisors on issues which require the participation of larger governmental entities such as maintenance of the rights-of-way and the sanitation system finally the association serves the community in loaning out its facilities free of charge to various public service organizations as well as to the schools the court decided that t performs the functions of a governmental entity and brings about civic betterments and social improvements that would be sorely missed by the rancho santa fe community should they be lost or curtailed exemption was granted revenue rulings revenue_ruling rev_rul cb the organization is a membership_organization that was formed by a developer and is operated to administer and enforce covenants for preserving the architecture and appearance of a housing development and to own and maintain common green areas streets and sidewalks for_the_use_of all development residents its activities are for the common benefit of the whole development rather than for individual residents or the developer revrul_74_99 1974_1_cb_131 modified revrul_72_102 to make clear that a homeowners’ association of the kind described in revrul_72_102 must in addition to otherwise qualifying for exemption under sec_501 of the code satisfy the following requirements it must engage in activities that confer benefit on a community comprising a geographical unit which bears a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof it must not conduct activities directed to the exterior maintenance of private residences and it owns and maintains only common areas or facilities such as roadways and parklands sidewalks and street lights access to or the use and enjoyment of which is extended to members of the general_public and is not restricted to members of the homeowners’ association revrul_80_63 cb this rev_rul clarifies revrul_74_99 by answering specific questions relevant portion of this revenue_ruling has been reproduced below page of department of the treasury-internal revenue service form 886-a schedule number or exhibit form rev date explanation of items 886-a tax identification_number year period ended name of organization taxpayer org december 20xx ein question does revrul_74_99 contemplate that the term community for purposes of sec_501 of the code embraces a minimum area or a certain number of homeowners answer no revrul_74_99 states that it was not possible to formulate a precise definition of the term community the ruling merely indicates what the term is generally understood to mean whether a particular homeowners’ association meets the requirements of conferring benefit on a community must be determined according to the thus although the area represented by facts and circumstances of the individual case an association may not be a community within the meaning of that term as contemplated by revrul_74_99 if the association’s activities benefit a community it may still qualify for exemption for instance if the association owns and maintains common areas and facilities for the use and enjoyment of the general_public as distinguished from areas and facilities whose use and enjoyment is controlled and restricted to members of the association then it may satisfy the requirement of serving a community question may a homeowners’ association which represents an area that is not a community qualify for exemption under sec_501 of the code if it restricts the use of its recreational facilities such as swimming pools tennis courts and picnic areas to members of the association answer no revrul_74_99 points out that the use and enjoyment of the common areas owned and maintained by a homeowners’ association must be extended to members of the general_public as distinguished from controlled use or access restricted to the members of the association for purposes of revrul_74_99 recreational facilities are included in the definition of common areas question can a homeowners’ association establish a separate organization to own and maintain recreational facilities and restrict their use to members of the association answer yes an affiliated recreational organization that is operated totally separate from the homeowners’ association may be exempt see revrul_69_281 1969_1_cb_155 which holds that a social_club providing exclusive and automatic membership to homeowners in a housing development with no part of its earnings inuring to the benefit of any member may qualify for exemption under sec_501 of the code government position although the areas owned by org and its residents represent of the city of city org strategically built gates around the areas owned by it and its member-residents so that substantially_all of the remaining of the city plus all general_public traffics are outside of the gated areas this of the city encompasses open spaces commercial buildings commercial businesses churches public toads and its community center that handles public access agent's visits to org were at this page of department of the treasury-internal revenue service form 886-a 886-a schedule number or exhibit form rev date explanation of items name of organization taxpayer tax identification_number year period ended org december 20xx ein community center that did not require passing through any of the gates for a tour of the facility the assistant treasurer accompanied agent and provided access to each facility with her identification org provides quasi-police services for its residents this quasi-police patrols the areas answers emergency calls issues parking and speeding tickets and impose fines on residents speeding tickets issued by these patrols don’t effect a resident’s driving record until violations become egregious the quasi-police services are not available to the remaining of the city that are outside of the gated areas org takes pride in providing bus services to its residents and claims that it is providing community service the flip side of this matter is that org prevents non-residents from entering the gated areas by riding buses that run through the gated areas this bus service doesn’t provide transportation to the community outside of the gates although the library is located outside of the gated area records indicate that the library doesn't provide services to non-members the library doesn’t even have a fee schedule to impose on non- members when they fail to return borrowed materials overall public visits to all facilities represented of total visits in 20xx other records indicate that the visitation data was incorrect and or incomplete it is not clear as to how much reliance we can place on visitation data nevertheless one matter is certain org strictly controls non-residents entering the gated areas to utilize facilities or participate in events even employees of org are prohibited from utilizing facilities or participating in events unless there is an expressed permission revrul_80_63 states if the association owns and maintains common areas and facilities for the use and enjoyment of the general_public as distinguished from areas and facilities whose use and enjoyment is controlled and restricted to members of the association then it may satisfy the requirement of serving a community we determine that org controls and restricts the use of its facilities for the enjoyment of it resident members in order for an entity to be exempt under the code sec_501 it must engage in activities that confer benefit on a community comprising a geographical unit which bears a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof first the size of org isn’t equivalent to the city of city second the activities and services org provides are not even available to the remaining of the city that are outside of the gated areas let along the general_public at large the court cases flat top lake association inc v u s a and indian lake property owners association v director of revenue state that an organization that operated for exclusive benefit of members and did everything within its power to create wholly private environment for its members was not serving a community within meaning of federal tax exemption and could not claim tax exemption for benefiting itself department of the treasury-internal revenue service form 886-a page of schedule number or exhibit form 886-a rev date name of organization taxpayer org explanation of items tax identification_number year period ended ein december 20xx taxpayer position org considers that its size is large enough to meet the requirement of a community and should not be required to expand the general public’s access to its common areas nevertheless org chooses to accept the revocation of its exempt status effective january 20xx conclusion org does not constitute a community within the meaning of revrul_80_63 org does not continue to qualify as a social_welfare_organization described in internal_revenue_code sec_501 and the regulations thereunder therefore revocation of exempt status is proposed effective january 20xx org is required to file forms 1120-h or u s_corporation income_tax return for the years ending december 20xx and after form 886-a page of department of the treasury-internal revenue service


internal_revenue_service number release date index number ---------------------------- ------------------------------ -------------- --------------------------- ------------------------------------------------------------ --------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc ita b01 plr-111812-17 date date ein ----------------- legend taxpayer firm subsidiaries date date date date date sections amount service_center dear -------------- ----------------------------- ----------------------- --------------------------------------------------- -------------------------------------------------------- ---------------------------------------- -------------------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------------------------- ---------------------- ---------------------------- ---------------------- ------------------- ------------------ -------------------------------------------- ------------------ -------------------------------------------------- this letter is in response to a letter dated date submitted by taxpayer’s representative firm requesting that the commissioner of internal revenue grant taxpayer and its subsidiaries an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file taxpayer’s original form_3115 application_for change in accounting_method with its timely filed including plr-111812-17 extension federal_income_tax return for the taxable_year beginning date and ending date facts taxpayer a corporation is the parent of an affiliated_group that files a consolidated form_1120 on a fiscal date basis taxpayer determined that it was required to file form_3115 to comply with sections of the income_tax regulations for the taxable_year ended date taxpayer engaged firm to assist it in preparing and filing the automatic method changes for the period ending date firm determined that the accounting_method change would result in a total net positive sec_481 adjustment of amount and the automatic method changes were to be filed in accordance with the procedures in revproc_2011_14 and revproc_2014_16 under the transition_rules provided in revproc_2015_13 as modified by revproc_2015_33 on date firm on behalf of taxpayer filed a copy of the form_3115 with service_center on date taxpayer timely electronically filed its date return taxpayer intended to attach the original form_3115 to its electronically filed return firm was responsible for scanning the original form_3115 into the electronic return in preparing the date return for electronic_filing firm inadvertently failed to include the form_3115 with the electronic return that was filed on behalf of taxpayer firm discovered that the original form_3115 had not been attached to the electronically filed return during its review of the electronically filed return package firm advised taxpayer to request an extension of time to file the original form_3115 with taxpayer’s date return taxpayer represents that it implemented the method changes in the year_of_change and satisfied all procedural requirements of revproc_2011_14 except that it inadvertently failed to attach the original form_3115 with its timely filed return for the year_of_change law and analysis revproc_2011_14 provides the procedures by which a taxpayer may obtain automatic consent to change certain accounting methods a taxpayer complying with all the applicable provisions of this revenue_procedure has obtained the consent of the commissioner to change its accounting_method under sec_446 of the internal_revenue_code and the regulations thereunder section a of revproc_2011_14 provides that a taxpayer changing an accounting_method pursuant to revproc_2011_14 must complete and file a form_3115 in duplicate the original must be attached to the taxpayer’s timely filed including any plr-111812-17 extension original federal_income_tax return for the year_of_change and a copy with signature of the form_3115 must be filed with the appropriate office of the service no earlier than the first day of the year_of_change and no later than when the original is filed with the federal_income_tax return for the year_of_change sec_301_9100-1 sets forth the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 provides that a regulatory election is an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin pursuant to sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-2 sets forth the rules applicable to automatic 12-month extensions of time to make certain regulatory elections sec_301_9100-3 sets forth the rules applicable to requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief pursuant to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i ii iii iv v requests relief before the failure to make the regulatory election is discovered by the service failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the service or reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer is deemed to have not acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer plr-111812-17 requests relief and the new position requires or permits a regulatory election for which relief is requested was informed in all material respects of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief ii iii sec_301_9100-3 provides that the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by the granting of relief the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section sec_301_9100-3 sec_301_9100-3 provides special rules for accounting_method regulatory elections the interests of the government are deemed to be prejudiced except in unusual and compelling circumstances if the accounting_method regulatory election for which relief is requested i ii iii iv is subject_to the procedure described in sec_1_446-1 of this chapter requiring the advance written consent of the commissioner requires an adjustment under sec_481 or would require an adjustment under sec_481 if the taxpayer changed to the method_of_accounting for which relief is requested in a taxable_year subsequent to the taxable_year the election should have been made would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination an appeals_office or a federal court and the change would provide a more favorable method or more favorable terms and conditions than if the change were made as part of an examination or provides a more favorable method_of_accounting or more favorable terms and conditions if the election is made by a certain date or taxable_year conclusion based solely on the information provided representations made and affidavits submitted by taxpayer and firm we conclude that taxpayer acted reasonably and in plr-111812-17 good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file the required original form_3115 pertaining to the previously described accounting changes for the tax_year ending date with an amended federal_income_tax return for that year a copy of this letter must be attached to any income_tax return to which it is relevant alternatively a taxpayer filing its return electronically may satisfy this requirement by attaching a statement to its return that provides the date and control number of the letter_ruling caveats the rulings contained in this letter are based on information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of the facts described above under any other provision of the code or regulations in particular no opinion is expressed as to whether the accounting_method changes taxpayer has made are eligible to be made under revproc_2011_14 or taxpayer otherwise meets the requirements of revproc_2011_14 to make its accounting_method changes using the procedures of revproc_2011_14 further no opinion is expressed or implied regarding the correctness of taxpayer’s accounting_method plr-111812-17 this ruling is directed only to the taxpayer requesting it pursuant to sec_6110 this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely ronald j goldstein assistant to the branch chief branch income_tax accounting


internal_revenue_service number release date index number --------------------- ------------------------------------ --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number ------------------- refer reply to cc psi b03 plr-119616-13 date date trust grantor beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary legend ---------------------------------------------------- ------------------------------------------------------------------------------------------------------- --------------- ------------------------------------------------------------------------------------------------------- --------------- ------------------------------------------------------------------------------------------------------- --------------- ------------------------------------------------------------------------------------------------------- ---------------- ------------------------------------------------------------------------------------------------------- ---------------- ------------------------------------------------------------------------------------------------------- ----------------- ------------------------------------------------------------------------------------------------------- ------------------- ------------------------------------------------------------------------------------------------------- ------------------------ ------------------------------------------------------------------------------------------------------- -------------- plr-119616-13 beneficiary distribution committee spouse state trustee date dear --------------------- --------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------ ---------------------------- ---------- ------------------------- --------------------- this letter responds to a letter dated date submitted on your behalf by your authorized representative requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code facts the facts submitted and representations made are as follows on date grantor created an irrevocable_trust trust for the benefit of herself her stepchildren beneficiary beneficiary beneficiary and beneficiary and children beneficiary beneficiary beneficiary beneficiary and beneficiary and the issue of grantor’s children and stepchildren hereinafter collectively the beneficiaries a corporate trustee trustee is the sole trustee of trust during grantor’s lifetime trustee must distribute such amounts of net_income and principal to grantor and the beneficiaries as directed by the distribution committee and or grantor as follows at any time trustee pursuant to the direction of a majority of the distribution committee members with the written consent of grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by the distribution committee grantor’s consent power at any time trustee pursuant to the direction of all of the distribution committee members other than grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by the distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of the beneficiaries such amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of the beneficiaries plr-119616-13 grantor’s sole power the distribution committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal the distribution committee is initially composed of grantor grantor’s children through appointed guardians acting on their behalf until their majority and grantor’s stepchildren trust provides that at all times the distribution committee must include at least two members other than grantor if at any time the distribution committee does not include at least two members other than the grantor then the vacancy on the distribution committee must be filled by the eldest of grantor’s adult issue other than any issue already serving as a member of the distribution committee or if none of grantor’s issue not already serving as a member of the distribution committee is an adult then such vacancy shall be filled by the eldest of the adult issue of the grantor’s stepchildren if at any time the distribution committee does not include at least two members other than the grantor then the distribution committee shall be deemed not to exist in any event the distribution committee will cease to exist upon grantor’s death in addition at any time or times prior to or upon the distribution date the distribution committee may direct the trustee to distribute to the trustee or trustees of any one or more qualified trusts a_trust defined to be created under a document other than the trust agreement such amounts of the net_income and or principal of trust including the whole thereof as the distribution committee determines any such distribution shall be added to the principal of such qualified_trust and disposed of in accordance with the terms of such qualified_trust no distribution or transfer may be made to a qualified_trust unless made pursuant to the direction of the distribution committee upon the grantor’s death the trustee shall distribute the balance held in trust to or for the benefit of any person or persons or entity or entities other than the grantor’s estate the grantor’s creditors or the creditors of the grantor’s estate as the grantor appoints by will grantor’s testamentary power the balance of the trust funds which the grantor has not effectively appointed by will shall be distributed per stirpes to spouse’s then living issue in further trust if none of spouse’s issue is then living then the trustee will divide the trust assets into two parts the trustee will distribute the first part as if the grantor had died intestate unmarried and survived by no issue the trustee will distribute the second part to the individuals to whom and in the proportions that the property of spouse would be distributed if spouse had died intestate unmarried and survived by no issue to the extent there are no beneficiaries under one of those two categories the entire amount will be distributed under the other category if however none of the individuals designated as distributees in either category are living then the amounts will be distributed to charities designated by the trustee plr-119616-13 you have requested the following rulings so long as the distribution committee is serving no portion of the items of income deductions and credits against tax of trust shall be included in computing under sec_671 the taxable_income deductions and credits of grantor or any member of the distribution committee the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee other than grantor law and analysis ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides that for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust additionally sec_672 provides that the term nonadverse_party means any person who is not an adverse_party sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion plr-119616-13 sec_674 provides that in general the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the powers described in sec_674 regardless of by whom held sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof plr-119616-13 based solely on the facts submitted and representations made we conclude that an examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by him or herself to vest trust income or corpus in him or herself none shall be treated as the owner of any portion of trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name plr-119616-13 new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial plr-119616-13 adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely coholders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 a coholder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to any person or persons or entity or entities other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to plr-119616-13 federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a coholder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the plr-119616-13 death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-119616-13 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number --------------------------------------- ------------------------------------------------ --------------------- ------------------------- - department of the treasury washington dc person to contact ------------------------ --------- - ------------- telephone number --------------------- refer reply to cc psi b02 - plr-170574-03 date date ------------------------------------------------ x ------------------------------------------------------------- a ------------------------ -------------------------------------------------------------- d1 year dear ---------------- ------------- --------- this responds to a letter dated date submitted by x’s authorized representative on behalf of x requesting a ruling under ' b of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a the president of x represents that the shareholders of x intended for x to be an s_corporation effective d1 of year however no timely form_2553 election to be a small_business_corporation was filed sec_1362 of the code provides that if b a an election under ' a is made for any taxable_year after the date prescribed by ' b for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x s year taxable_year accordingly provided that x makes an election plr-170574-03 to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically ruled upon above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code including whether x was or is a small_business_corporation under ' b this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours carolyn hinchman gray senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes