department of the treasury internal_revenue_service washington d c tax exempt an government entities division release number release date date date uil code 03-g0 dear contact person identification_number contact number employer_identification_number form required to be filed tax years this is our final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code sec_501 as an organization described in code sec_501 we made this determination for the following reason s considering all the materials that you have submitted to date you have not established that you will not operate for the private benefit of your creator and that no part of your net_earnings will inure to a person having a personal and private interest in your activities therefore you are not operated exclusively for exempt purposes within the meaning of sec_501 of the code and sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the treasury regulations furthermore you have represented that you transferred your assets and activities to another organization and have not resumed independent operation because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 you must initiate a suit in the united_states tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia before the day after the date that we mailed this letter to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment filing a declaratory_judgment suit under code sec_7428 does not stay the requirement to file returns and pay taxes we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely holly o paz director rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter foe department of the treasury internal_revenue_service washington d c contact person identification_number phone number fax number employer_identification_number tax_exempt_and_government_entities_division date date uil code dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we have concluded that you do not qualify for exemption under sec_501 the basis for our conclusion is set forth below facts you were incorporated on december state of article iii of your articles of incorporation state that your purposes are asa nonprofit corporation under the laws of the to develop a spiritual path that is focused upon assisting individuals in achieving deepening levels of an authentic direct spiritual experience of the by collecting and systematizing the best of what mankind already knows of about this and arranging that knowledge to maximize its effectiveness in helping individuals achieve an authentic direct and ever deepening spiritual experience of it current and future authentic spiritual paths derived from an unbroken lineage of mankind’s most successful spiritual efforts to understand commune with and directly experience the to integrate the best spiritual wisdom and methods of all previous article xiv states that in the event of your liquidation dissolution or winding up your net assets will be disposed of exclusively to or for the benefit of such organization or organizations as shall at the time qualify under sec_501 governance article viii of your articles state that your board_of directors consists of between one and nine directors as fixed by your bylaws article xi provides that you shall have such officers as may from time to time be prescribed by the bylaws according to minutes of action dated december treasurer also adopted bylaws on this date according to the minutes of action your 20_ appointed to be your sole director president secretary and bylaws provide that your incorporator shall be your sole member and that this member has the sole authority to appoint and remove directors held a board meeting and decided that compensation would be on december established in accordance and in parity with the current similar salaries and compensation found in similar non profit religious groups in the area that a particular organization or mission resides board minutes of january _ month in addition to a parsonage_allowance for the best rental rates that can be obtained wherever sets up new missions for the organization the minutes explain that this compensation was more than in line with salaries for ministers doing the work will be doing and who have comparable skills form_1023 ’s salary was dollar_figure at the time you submitted your that set salary at dollar_figure per __ show on december _20 the sole director at the time voted to add two directors and upon the addition of these directors you required their approval of ’s compensation based upon salary surveys for similar ministerial positions in this area both and the remaining two directors received compensation_for serving in this capacity on the same date voted as sole director to adopt a parsonage resolution that dedicated a portion of your explained below to as residence although does not remit any payment to you for this benefit the value of the parsonage dollar_figure per month is considered additional compensation to you stated in the resolution that needs to be physically present on the to oversee ongoing maintenance and upgrades there is no lease employment agreement or other agreement between you and on march your board minutes state that you created a co-directorship hiring as a full-time_employee as co-director _ you filed your __'form 990-ez in which you listed as your sole on november officer director trustee or key_employee is listed as your executive director receiving no compensation personnel and membership _ appointed as your first in aresolution dated december subsequently ordained as a co-directors and only two employees you also paid several independent contractors for cleaning repair work accounting and financial services since you were formed you have -ordained additional individual must complete a self-directed course of study involving various religious traditions and texts in order to be ordained as a at the time and were your an is your single legal and ecclesiastical member with voting authority and privileges you offer other memberships without voting privileges for example you offer a free one-year annual membership on your website and currently have approximately big_number such members you also offer various donation-based annual supporting memberships in exchange for contributions of dollar_figure _ the benefits of such membership include free use of your online to dollar_figure companion finder service which is free for the first three months then accessible for a dollar_figure ner month suggested donation discounts on various events and services free access to- online spiritual courses and attendance at certain directors’ and advisors’ planning sessions to date you have very few if any paid memberships related_organization prior to your founding established an organization named which the internal_revenue_service has recognized as an organization described in sec_501 of the code e grant to 20f _ your board minutes stated that sought a grant of dollar_figure from you on sepiember for obtaining a property to handle its security needs the needs included conducting highly secure and confidential meetings storing critical records and information providing special mobile emergency backup security provisions for its website and data operations and providing the minutes state that many advantages to you in making the grant had come to y our knowledge through a common director these advantages included that you were looking for a lease at the time which would ideally be to share a property to conduct your religious services you stated that this would be cost efficient considering that as a new center you did nethave an established local congregation you stated as another advantage that you sought a lease under which leasehold improvements would result in an equity position for you and or substantial reductions in lease payments you also stated that you were not yet recognized as an exempt_organization and therefore could not receive large donations ' minutes state that a property providing all that needed had your september become available and that because of ’ sec_501 status dollar_figure of the purchase_price would be donated you also stated that if were to close on the property soon it would receive’an additional dollar_figure discount and that was willing to co-lease unused parts of the property to you in a way that would benefit both organizations’ budgets finally you stated that would provide you with an annual report on the use of this grant as sole director resolved and decided to in a resolution dated september grant donate dollar_figure to the resolution states that will co-lease and share property with you in a fair and cost efficient way this resolution also states that that disclosed dosition on the board_of and stated that received no salary from stated that believed could keep roles completely separate but that being a director of both could bring many benefits to both organizations in the form of cost cutting non duplicative efforts and other mutual benefits that would not be easily discoverable had not had a good working knowledge of the purposes and capabilities of each organization _ e lease agreement with purchased the on which you conduct your activities and began leasing it to you pursuant to an agreement dated october _ 20'_ and signed by for as director and for you as director your lease agreement provides that may have a permanent office and keke storage space on the property retain its emergency backup security provisions for website on the property use all internet connectivity equipment on the property and use the if 's events conflict with yours property for up to conferences and or meetings per year you will allow its use to take priority over yours conducts 's administrative activities on the and occasionally provides which is pursuant to ’s purposes you agreed to perform repairs on the immediately in exchange for six to nine months rent-free and to pay all fees state and federal property taxes insurance and maintenance fees amounting to about dollar_figure per month the lease provided that you would begin remitting payment of dollar_figure per month to no later than july _ additionally at the end of __ the value of all leasehold and security improvements made and insuraiige tax and fees paid_by you would be credited to you as an equity percentage position in the property dollar_figures your lease agreement with also provides that if you fail to be recognized as exempt under sec_501 of the code your equity in the property will revert back in full to your board minutes of december __ recognized as a church or exempt_organization any and ail of your assets will be donated to _ state that in the event you dissolve or fail to be keeke financial support is the sole shareholder of a for-profit corporation is the majority owner of a for-profit entity and is the minority owner in won a substantial judgment _ in20 caused to against the for transfer to you the bulk of that judgment dollar_figure these funds have been your primary source of revenue you have also received smail amounts of contributions from the general_public subsequently took the position that and were simply agents in transferring the dollar_figure to you and that the transfer was a loan rather than a gift your board subsequently the recharacterized the contribution as a loan to you in a resolution dated august minutes of that meeting state ’s conflict of interest but do not indicate that e was recused from final discussion or voting on the issue of whether to recharacterize the gift as a loan you represent that did not take a charitable_contribution_deduction for this transfer but that is amending tax returns to reflect the recharacterization in a promissory note signed by your board members on august but dated march_ the note states that as the initial 20f you agreed to pay dollar_figure on march holder of the note intends to forgive the note in its entirety on the date on which the later of the following two events occurs the maker is recognized by the irs as an organization described in sec_501 of the code and a final judgment from which no further appeal may be taken has been entered in ’s lawsuit against you state that if a judgment is entered against in this case then may use the note to satisfy some or all of the judgment activities you were formed by your executive director to create a new source spirituality you state that you were incorporated in particular to collect and use mankind’s spiritual wisdom to help individuals expand their direct spiritual experience of the and maximize their spiritual growth you seek to help individuals awaken to the truth beauty goodness and reality of the and manifest their own unique highest truth beauty and goodness reality gifts and personality open you do not refer to yourself as a church which you state is primarily due to the negative connotations of the word church to those who are disillusioned with their traditional church experience and seek a new form of spirituality instead you refer to yourself as a spiritual community your members may belong to other churches and spiritual communities your creed and code of conduct were created by your founder and president your creed reflects your spiritual beliefs that the core essence of all religions is the direct spiritual experience of the but does not require members to adhere to those beliefs you believe that the individual with the assistance of within him or her is the final authority in determining spiritual truth you believe that complete individual free will in spiritual matters is the subscribe to your creed or code of conduct and do not exercise traditional spiritual authority over your members therefore you do not require members to however you do expect the members of your spiritual community to live consistently with your code of conduct which prohibits committing crimes or using physical violence persons who repeatedly and severely violate this code may be locked out of your website and barred from your spiritual center until they cease such behavior members can reinstate their membership once their behavior has ceased and any damage has been repaired you will only implement this discipline after fair investigation by your members and or staff to date you have not taken such actions against any of your members your primary activities are maintaining a website that offers spiritual education resources for spiritual support and guidance helps facilitate an online spiritual community and offers a matchmaking service for singles and offering various programs and services to promote spirituality including seminars meditation services and other open source spiritual events you also provide shelter to your website is the center of your spiritual organization and your main international spiritual center for your global congregation you state because we were born as a global spiritual movement of the post-postmodern ara we are one of the first spiritual organizations to be delivering almost all of our services primarily on and from the internet our physical spiritual centers and locations play a significantly lesser role your website includes a member online prayer room a meditation room worship chapel a spiritual education lesson classroom hundreds of spiritually uplifting news stories and articles a discussion forum chat room and other interactive tools to help educate and serve members’ spiritual needs the website also includes the one of the largest online spiritual wisdom collection and sharing data bases ever created you believe that each television and computer screen in the world is potentially a special doorway to and seat in your sacred cyber temple and the conduit for the to be quickened within and with the individual through this electronic channel and the new spiritual information flowing through it you have spent nearly three years and several hundred thousand dollars to build the website which you continue to maintain and expand you opened your first spiritual center a you lease from which is at the end of a you hold spiritual services classes and other events there you refer to this as your not as a church you hope to establish a physical spiritual center on every continent and in many major cities you state that you hold various services and events at your including you hold these services which last for two hours generally once or twice each month they begin with a spiritual meditation and time of gratitude the then provides some form of spiritual education on divinity and or how to lead an effective spiritual life community members may share their spiritual successes and challenges some services conclude with a potluck dinner between and people attend these services and several attend most of the services you hold these services which last for two hours generally generally leads the salons and focuses on once or twice each month a the dissemination of thought-provoking spiritual information often through videos or films followed by group discussion between two and people attend a few of whom attend most of them morning meditation each morning four to five times per week a leads a morning meditation service for your staff with occasional guests one or two people typically attend sometimes as many as four other meditation services you conduct to minute services on wednesday evenings and on saturday mornings you have not reported how many persons attend these services or how many persons attend these services regularly sacramental rites preside over weddings funerals engagement ceremonies events for singles and other events you have conducted one funeral one engagement ritual several singles’ events and celebration dedicated to spiritual renewal in which participants shared their spiritual experiences and successes with each other spiritual spiritual retreats from time to time you host one to two overnight guests on your for up to one week at a time these individuals engage in spiritual reflection and meditation while on the retreats you hope to organize larger spiritual retreats in the future you currently person most of your monthly local services these five include your four three of whom are officers and directors and one additional person have five consistent and regular local spiritual service attendees who attend in you promote your events on your website and in occasional print advertisements and posters but do not provide directions to the events on the website or advertisements rather you provide contact information for persons to call or email to receive directions the dates and times of these events are subject_to change because your is from time to time away from its or is undergoing repairs also your posters and advertisements stated that persons should notify you whether they will attend the events because of the limited amount of space on your the holds about people comfortably although you state that you have packed in people for a few services you have not yet offered programs for the religious instruction of the young because the ‘members of your spiritual community do not have young children however you hope to offer instruction to the young in the future you state that you already have instruction for the young available on your website your members and others who attend services and participate in your activities consider you to be a spiritual community but do not consider themselves to be members of a church or a congregation law sec_501 c of the code describes a corporation organized and operated exclusively for charitable educational and other purposes provided that no part of its net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_a_-1 of the income_tax regulations states that the words private_shareholder_or_individual in sec_501 of the code refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations states that to be described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations states 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 of the code an organization will not be regarded as exempt if more than an insubstantial part of its activities further a nonexempt purpose sec_1_501_c_3_-1 of the regulations states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 of the regulations provides that an organization may be recognized as exempt under sec_501 of the code if it is operated exclusively for one or more of the following purposes religious charitable scientific testing for public safety literary educational or prevention of cruelty to children or animals sec_509 of the code provides that the term private_foundation means a domestic or foreigrorganization described in sec_501 other than an organization described in sec_170 sec_170 of the code describes a church_or_convention_or_association_of_churches revrul_69_266 1969_1_cb_151 describes an organization formed and controlled by a doctor of medicine hired to conduct research programs which consisted of examining and treating patients who were charged the prevailing fees for the services rendered the ruling held that the organization was not exempt under sec_501 of the code the doctor transferred assets including his medical practice his home and his automobile to the organization in return for his services the doctor received a small salary a paid vacation a pension_plan free health and life_insurance scholarships for his children and the use of a personal_residence and automobile the ruling held that the organization was operated by its creator as an attempt to reduce his personal federal_income_tax liability while still enjoying the benefits of his earnings thus its primary function was to serve the private interest of its creator rather than a public interest in rev ral c b 330' a nonprofit corporation was formed by a nurse who holds a certificate of ordination purchased from an organization selling such certificates and church charters the nurse is the corporation's minister director and principal officer the nurse maintains full-time employment with an unrelated employer pursuant to a vow of poverty the nurse transferred all of the nurse's assets including the nurse's house and automobile to the corporation all salary payments received from the ‘unrelated employer are deposited in a bank account maintained in the name of the corporation in return all of the nurse's existing liabilities were assumed by the corporation the nurse is also provided with a full living allowance sufficient to maintain or improve the nurse's previous standard of living the corporation permits the nurse to use the house and automobile for personal purposes this ruling states that the corporation serves as a vehicle for handling the nurse's personal financial transactions in the name of the nonprofit corporation thus it operates to serve the personatand private interests of a designated individual rather than a public interest in 48_tc_358 tannenwald j concurring an interdenominational organization sent out evangelical teams to preach throughout the world and to establish small indigenous churches these teams used dental services as the initial means by which they contacted prospective converts to christianity the court held that the amplified by revrul_89_74 1989_1_cb_3114 holding that churches such as those described in revrul_81_94 are tax_shelters for purposes of the substantial_understatement_penalty imposed by sec_6661 of the code repealed by pub_l_no c stat reenacted as sec_6662 organization was not a church for federal tax purposes in part because a sizable segment of its efforts to propagate the faith was performed on an individual basis judge tannenwald explained that the word ‘church’ implies that an otherwise qualified_organization bring people together as the principal means of accomplishing its purpose the permissible purpose may but it may not be accomplished in physical be accomplished individually and privately solitude the organization's religious services and preaching though functions normally associated with a church were not its primary activities and therefore were not determinative of church status in 412_f2d_1197 ct_cl the court stated that the payment of reasonable salaries by a tax-exempt_organization does not result in the inurement of net_earnings to the benefit of private individuals however an organization's net_earnings may inure to the benefit of a private individual in ways other than actual payment of excessive_salaries the court determined that the church’s founder and his family were entitled to personal_use of the church’s earnings in a number of ways for example the founder's wife received income for renting property owned by her to the church yet it provided no evidence to show that the rent paid was reasonable or that the arrangement was beneficial to the church the court held that the church could not prove it was entitled to exemption in pusch v commissioner 39_tcm_838 aff'd 628_f2d_1353 5th cir an organization seeking recognition as a church was completely controlled by its minister who considered himself to be self-ordained the minister maintained and had complete contro over the church’s bank account there were no restrictions on his usage of the funds in the account so that he took whatever amount he decided he needed as living_expenses over and above what he received as a salary the minister drafted and signed a statement to the effect that in the event of dissolution the church’s funds would to go to an exempt_organization at his complete discretion the court found that the organization's earnings inured to the benefit of its minister therefore it could not qualify for exemption under sec_501 of the code in 74_tc_507 the organization’s cofounder and his wife were two of the three members of the organization's board_of directors and controlled all financial decisions the cofounder and his wife controlled the determination of their parsonage_allowance decisions regarding reimbursement for their own travel_expenses repairs and improvements to the parsonage located in their house and the loans made to the cofounder’s secular employer although control of financial decisions by those who appear to benefit personally does not necessarily indicate inurement those factors coupled with little or no factors in the administrative record to indicate the reasonableness and appropriateness of the expenses were sufficient for a finding of inurement in 74_tc_846 a family formed an organization to operate as a subsidiary of a recognized church the parents and daughter assigned their income and other properties to the organization conditioned upon among other things the organization's recognition as an exempt_organization the organization received most of its funds from these individuals regular religious services took place at the founding family's home and the organization's congregation consisted of three to twelve members the court held that the organization served the private interests of the founding family the founder had total control_over the management of the organization's affairs and determined how its money was spent the organization also listed as its liabilities an automobile loan and debts for fuel for the founder’s residence and other items the court found that the organization existed largely to serve the private benefit of the founder in the southern church of universal brotherhood assembled inc v commissioner the 74_tc_1223 an organization formed to operate a church did not qualify for exemption under sec_501 of the code because it failed to serve a public purpose there was ample evidence’ that the church served the private purposes of its minister who with his family owned the residence that constituted the parsonage and the place where services were held the church paid the utilities fuel maintenance and repair expenses of the parsonage as well as provided the minister’s family with food postage stationery pots and pans dishes glassware sheets blankets towels and curtains in lieu of a parsonage_allowance the church's bylaws provided that the minister would have occupancy and free use of the houses grounds glebes books paintings and other_property made available by his separate congregation the court also found that the church’s minister donated virtually all of the church’s income the great majority of which was expended for the benefit of the minister and his family in 76_tc_380 an organization operating a religious retreat facility failed to qualify for exemption under sec_501 of the code because it did not show that the retreat facility was operated exclusively for religious purposes the court stated that to qualify for exemption an organization must show that it engages primarily in activities that accomplish exempt purposes that nonexempt activity is no more than an insubstantial part of its activities and that none of its activities has more than an insubstantial nonexempt purpose because a single activity may be carried on for more than one purpose an activity’s substantial secondary purpose must also be exempt although the schoger foundation’s lodge offered guests religious recreational and social activities none were regularly scheduled or required the court concluded that the organization did not operate primarily for an exempt religious purpose and that the recreation and social activities at the lodge were more than incidental to a religious purpose in 490_fsupp_304 d d c affirmed in an unpublished opinion d c cir the court recognized the irs’s 14-part test in determining whether a religious_organization was a church the criteria are a distinct legal existence arecognized creed and form of worship a definite and distinct ecclesiastical government a formal code of doctrine and discipline a distinct religious history amembership not associated with any other church or denomination an organization of ordained ministers ordained ministers selected after completing prescribed studies aliterature of its own established places of worship regular congregations regular religious services aries sunday schools_for religious instruction of the young and schools_for the preparation of its ministers the court stated that while some of these criteria are relatively minor others eg the existence of an established congregation served by an organized ministry the provision of regular worship services and religious education for the young and the dissemination of a doctrinal code are of central importance in 74_tc_396 the organization's primary activities were to hold church meetings just before club meetings sponsor a supper conduct club meetings and publish a club-church newsletter the court stated that if the purpose of the organization’s activities was exclusively religious ie not more than to an insubstantial degree nonreligious then it would qualify for exemption the organization failed to show that it had successfully segregated the clearly social and political aspects from the portion of the meetings designed to further its doctrine therefore the court held that even assuming a religious quality to the organization's activities and purposes it failed to demonstrate that its activities and purposes were not social or political to more than an insubstantial degree for this reason the organization failed to qualify for exemption in 733_fsupp_396 d d c the court held that an organization qualified as religious for purposes of sec_501 of the code because its primary purpose and activities served to convey mr ruud’s religious teachings to others and because there was no specific nonexempt purpose for which it was organized the court noted however e ven a bona_fide religious_organization which devotes substantial time to carrying out its religious purposes may still not satisfy the organizational_test the existence of any nonexempt purpose if it is ‘not insubstantial ’ destroys the exemption in 927_f2d_335 8th cir the court noted that the existence of an established congregation served by an organized ministry is of central importance in determining whether an organization constitutes a church for federal tax purposes the court found that the organization did not have an established congregation because nothing indicates that the participants considered the organization to be their church in 950_f2d_365 7th cir the court determined that a nonprofit organization established by the seventh day adventist church to operate restaurants and health food stores to carry out its health ministry was not exempt under sec_501 as a religious_organization the court affirmed the tax court’s finding that living faith’s religious purposes although sincere did not sufficiently mitigate the ‘clear commercial purpose’ of its operations in so finding the court stated that the tax_court had not inquired into the merits of the organization's religion thus the organization was not denied exemption because it espoused an illegitimate religious purpose but rather because its activities were motivated by a substantial nonexempt purpose in 88_fedclaims_203 fed cl eoundation relying principally on the irs’s criteria the court concluded that the organization should not be classified as a church under sec_170 of the code the court stated a is not synonymous with a ‘regular congregation the court found that group of followers the organization did not provide evidence as to the regularity if any with which its followers come together to practice because the case law consistently concludes that ‘ w hen bringing people together for worship is only an incidental part of the activities of a religious_organization those limited activities are insufficient to label the entire organization a churchj the organization could not prove that it had a regular congregation the court in foundation went on to note that the associational test is a ‘threshold’ standard which religious organizations must satisfy in order to obtain church status this test has also been called the minimum requirement to gain church status see american guidance foundation supra the court found that the organization was a self-described non- membership organization’ whose ‘religious purposes were accomplished through the writing publishing and distribution of religious literature rather than through the regular assembly of a group of believers to worship together thus in applying the associational test the court determined that the extent to which foundation brings people together to worship is incidental to its main function which consists of a dissemination of its religious message _ through radio and internet broadcasts coupled with written publications when bringing people together for worship is only an incidental part of the activities of a religious_organization those limited activities are insufficient to label the entire organization a church analysis we have determined that you do not qualify for exemption as an organization described in sec_501 of the code because a you have failed to establish that you are organized and operated exclusively for religious purposes within the meaning of sec_501 of the code arid b you violate the prohibition against inurement in sec_501 and sec_4 c -1 c of the regulations in any event even if you otherwise qualified as an organization described in sec_501 of the code you would not be classified as a church within the meaning of sec_509 and sec_170 i a you are not organized and operated exclusively for religious purposes you have failed to establish that you are organized and operated exclusively for religious purposes within the meaning of sec_1_501_c_3_-1 of the regulations you have not established that your activities are primarily religious rather than social recreational or personal see first libertarian church supra and schoger foundation supra similar to the organization described in living faith inc supra the merits of your religion are unable to mitigate your otherwise substantial social and recreational purposes in addition you are unlike the organization described in brian ruud international supra the primary activities of which furthered religious purposes b you violate the prohibition against inurement re for an organization to qualify as an one described in sec_501 of the code no part of its net_earnings may inure in whole or in part to the benefit of private shareholders or individuals see sec_501 of the code and sec_1_501_c_3_-1 of the regulations the term private shareholders or individuals means persons having a personal and private interest in the activities of the organization sec_1_501_a_-1 these persons are often referred to as insiders based on the following factors we have determined that is an insider for purposes of sec_1_501_a_-1 and sec_1 c -1 c of the regulations and that you violate the inurement prohibition in sec_1_501_c_3_-1 because your activities result in providing a personal and private benefit to see revrul_69_266 supra revrul_81_94 supra founding church of scientology supra unitary mission church of long island supra basic bible church supra the southern church supra and pusch supra when you were formed was your only member director and officer although has appointed other directors and you have had two to three directors in the past has always been the sole member with voting authority and control has power and authority to remove other directors at any time in sole discretion and to appoint other directors accordingly has always had control of the organization as did the minister in pusch supra ordained as minister in pusch supra and established own salary similar to the you claim that your entire three-member board established salaries but have not provided any documentation of board consideration or establishment of such salaries you were established by with the damages won from lawsuit against donated substantially_all of your assets dollar_figure through a limited_liability_company of which was a minority owner and of which a corporation of which was the sole shareholder was the majority owner subsequently re-characterized the dollar_figure donation as a loan evidenced by a promissory note that was retroactively dated to the date of the gift the promissory note states that intends to forgive the note in its entirety on the date on which the later of the following two events occurs you are recognized by the irs as an organization described in sec_501 of the code and a final judgment from which no further appeal may be taken has been entered in lawsuit against you stated that may use the note to fully or partially satisfy any judgments that may be entered against in the case acknowledged in the board’s august i 20f_ minutes that had a conflict of interest involving this transaction but the minutes do not indicate that was recused from voting or discussion your board ratified ’s decision to recharacterize the gift as a loan for its own administrative purposes your is a owned by an organization controlled by and which uses the c lives on the rent-free as a parsonage and uses the organization’s resources on the for personal purposes as did the minister in the southern church supra your full board has never approved nor ratified this arrangement your form 990-ez states that is your only director officer and employee you would not be classified as a church an organization that qualifies as an organization described in sec_501 of the code is classified as a private_foundation under sec_509 unless it meets one of the exceptions in that provision one such exception is that the organization meets the requirements ofa church under sec_170 as explained previously we have concluded that you do not qualify as an organization described in sec_501 of the code however even if you did qualify you would not be classified as a church within the meaning of sec_170 as explained below although you meet several of the criteria described in american guidance foundation supra including a distinct legal existence a formal code or doctrine a recognized creed and literature of your own these are not characteristics distinctive of a church but are common to both churches and non-church religious organizations meeting these criteria is not sufficient to establish that you qualify as a church within the meaning of sec_170 in a regular congregation regular addition you fail to meet the three most significant criteria worship services and a membership not associated with any other church or denomination regular congregation the court in spiritual outreach society supra stated that the existence of an established congregation is of central importance in determining whether an organization is a church you do not have a regular congregation you have several staff members that meet for worship meditation services and they are often joined by others however such worship activities are not the staff members’ primary activity the staff spends most of their time working on the website and preparing for various spiritual events on the that are attended by a diverse range of persons rather than a regular congregation they also appear to spend substantial time maintaining and improving the on which they meet and on which lives you consider your website to be a sacred spiritual center and your online members to be a spiritual community describing the site as your main international spiritual center for your global congregation however persons who access your website to gain spiritual information do not regularly engage with each other in religious worship and therefore do not constitute a congregation you have represented that your local mailing list is made up of over recipients and your online mailing list is between big_number and big_number recipients while you denote increased use of your its size limits the organization’s ability to have such a large regular congregation as you have stated that the center can only comfortably hold people moreover you acknowledge that you do not have a substantial or consistent congregation you state that every new faith or religion starts with one two or three members however these numbers are not sufficient to meet this criterion as established by foundation supra which states that there be a regular assembly of a group of believers to worship together you are similar to the organization in that case because the extent to which you bring people together to worship is incidental to your main function of operating a website as the court stated in foundation the associational test is the minimum requirement for gaining church status regutar worship services you hold regular worship meditation services several mornings per week and various other spiritual events on your the information you have provided regarding a majority of your spiritual events show that you require attendees to notify you if they will attend which is not typical of a regular worship service for the services not requiring notification you have stated that on average about to percent of attendees regularly attend these services these facts do not fully meet the definition of regular worship services you consider your website to be a sacred space and a temple in which members can worship however you have not presented evidence that cyber-members congregate for communal worship at a particular time or place on your website further to the extent that such communal worship may take place online you do not organize or direct it even if you did conduct worship services over the internet an organization which conducts worship services over the internet cannot be classified as a church according to foundation amémbership not associated with any other church or denomination the non-exclusivity faith you state that anyone from any other of faith is key to your doctrine_of religion may be a member without having to give up their former religious affiliation you do not ask proponents of particular faiths or members of particular churches to leave those faiths or churches but rather to integrate their existing faiths with your new religion you state o jur members enhance and may practice judaism they may have come from in addition to the new religious faith and meta-religious qualities of an opportunity to find a safe space to express the complexity of my own spiritual ideas that goes beyond my own particular religious tradition without having to dis-identify with it -in-training states this course is giving me the hinduism or any other form of buddhism or catholicism faith the court in spiritual outreach society supra determined that the organization did not have an established congregation because nothing indicate d that the participants considered the organization to be their church therefore this fact also prevents us from concluding that'you have a regular congregation as detailed above a formal code of doctrine and discipline your creed and code of conduct were created by your founder and president your creed reflects your spiritual beliefs including that the core essence of all religions is the direct spiritual experience of but does not require members to adhere to those beliefs you believe that the individual with the assistance of within him or her is the final authority in determining spiritual truth you believe that complete individual free will in spiritual matters is the therefore you do not exercise traditional spiritual authority over your members however you do expect the members of your spiritual community to live consistently within your code of conduct which prohibits committing crimes or using physical violence persons who repeatedly and severely violate this code may be locked out of your website and barred from your physical spiritual center until they cease such behavior to date you have not taken such actions against any members members do not have to subscribe to your creed or code of conduct or sign any other creedal agreement the only spiritual creedal requirement or expectation is that members be tolerant of other religious or spiritual expressions and that they seek to enhance their spiritual life through new transformative direct spiritual experiences of you also expect your doctrine to evolve with new developments in spiritual theology in the not too distant future arecognized creed and form of worship you have demonstrated that you have a place of worship with limited space but this does not necessarily demonstrate a form of worship rather the majority of your events are informational in nature inviting a variety of speakers to the center to speak on a topic related to integrated spirituality however you do conduct several meditative services definite and distinct ecclesiastical government your board_of directors is currently comprised of one self-appointed director your director oversees your who organize and lead spiritual events you stated in your form_1023 that because of the nature of your beliefs you have no final ecclesiastical authority within your structure you believe that no one in a congregation has been specially or uniquely appointed by and that no individual has an exclusive claim to the authority of divine leadership or special spiritual revelation you look instead to the combined_group spiritual wisdom of your membership and the existing spiritual validity tests of the existing spiritual heritage of mankind an organization of ordained ministers you currently have four other prospective is in training one ordained ministers selected after completing prescribed studies you expect your candidates to undergo a program that is largely self-instructive involving the reading of many spiritual books and essays that are available on your website sunday schools_for religious instruction of the young you do not currently offer sunday school or other programs for the religious instruction of the young as most of your members and attendees are in their late 40s 50s and 60s and do not have any young children in the future however you state that you hope to offer some instruction to the young a distinct legal existence you have a distinct legal existence adistinct religious history you were formed in 20_jand initially focused on the development of your website a literature of its own your staff prepare some articles that are featured on your website and you have a multitude of literature of your own available through your website established places of worship in chapman supra en - concurring it was stated that religious purposes mjay be accomplished individually and privately in the sense that oral manifestation is not necessary but it may not be accomplished in physical solitude a man may of course pray alone but in such case though his house may be a castle it is not a church similarly an organization engaged in an evangelical activity exclusively through the mails would not be a church you consider both your website and your to be established places of worship however most of the activities on both the website and are not worship rather the website is primarily for accessing various types of spiritual information and the spiritual center is used primarily for administrative activities and a residence you also use the center for various spiritual events and services some of which involve religious worship schools_for the preparation of ministers your officers and directors oversee the self- candidates however you do not own or operate any instruction of schools_for the preparation of ministers other factors that the irs and courts have considered in determining whether an organization is a church include the following e e administration of the sacraments you do not appear to administer sacraments such as baptism or communion celebration of life cycle events you have conducted a funeral a wedding an engagement ceremony and an ordination ceremony promotion of the organization’s services and activities to the public you have promoted your activities online and through various posters mailings and e-mail newsletters perception of church status by organization's participants you define yourself to the public through your website as a spiritual organization neither the public nor your members or staff consider you to be a church nor do you identify yourself as a church either publicly or internally to members or other staff see spiritual outreach society supra therefore although you meet several of the foregoing criteria you fail to meet most of them including the three most significant a regular congregation regular worship services and a membership not associated with any other church or denomination as a result even if you otherwise qualified as an organization described in sec_501 of the code you would not be classified as a church within the meaning of sec_170 conclusion you do not qualify for exemption as an organization described in sec_501 of the code because you are not organized and operated exclusively for religious purposes within the meaning of sec_501 and you violate the prohibition against inurement in sec_501 and sec_1_501_c_3_-1 of the regulations in any event even if you otherwise qualified as an organization described in sec_501 of the code you would not be classified as a church within the meaning of sec_170 accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for-more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service rkkkk constitution ave n w washington dc you may also fax your statement to the person whose name and fax number are shown in the if you fax your statement please call the person identified in the heading heading of this letter of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely rob choi director exempt_organizations


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b09-plr-144964-02 date date legend decedent date marital trust family_trust general fund generation-skipping fund family_trust childrens’ fund family_trust generation-skipping fund date dollar_figurex dear this letter responds to your request dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make a reverse qualified_terminable_interest_property qtip_election under sec_2652 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent died on date under article iv of decedent’s will the residue of her estate shall be held in a_trust which is to be divided into the marital trust and the family_trust the marital trust shall consist of that portion of the trust estate which is equal in value to the amount necessary to obtain a marital_deduction sufficient to reduce the federal estate_tax payable by reason of the decedent’s death to zero or to the lowest possible amount plr-144964-02 the family_trust shall consist of the portion of the trust estate which is not distributed to the marital trust article v sec_1 provides that the marital trust shall be divided into two separate funds the general fund and the generation-skipping fund the trustee shall allocate to the generation-skipping fund that portion of the trust estate equal in value to decedent’s generation-skipping_transfer gst_exemption which has not been allocated to the family_trust or other_property the personal representative shall claim the gst_exemption for the generation-skipping fund pursuant to sec_2652 the balance of the marital trust shall be allocated to the general fund decedent’s estate represents that the entire trust estate of the marital trust will be required to fully fund the generation-skipping fund article v sec_2 provides for income distribution to the spouse not less often than quarter-annually the trustee shall also pay to or for the benefit of the spouse such amounts of principal as the trustee believes advisable to provided for his health and support article v sec_3 provides the spouse during his lifetime with the right to withdraw such amounts of the principal of the general fund as he requests in writing provided that the total amount of such withdrawals does not exceed the greater of five thousand dollars or five per cent of the value of the principal of that fund on the last day of the calendar_year this right is noncumulative and shall lapse at the end of that calendar_year to the extent it was not exercised within the calendar_year article v sec_4 provides that upon the death of the spouse all income accrued but undistributed shall be distributed to the personal representative of the spouse’s estate article v section provides that upon the death of the spouse all remaining principal and income of the generation-skipping fund shall be distributed to the family_trust generation-skipping fund upon the distribution the marital trust shall terminate according to article v section it is decedent’s intention that her personal representative elect to have the initial corpus of the marital trust qualify for the federal estate_tax_marital_deduction as qtip under sec_2056 decedent’s form_706 united_states estate and generation-skipping tax_return was prepared by a qualified_tax professional with additional input from the estate’s legal counsel the estate’s personal representative counsel and accountant understood that the will specifically contemplated the reverse_qtip_election for the generation-skipping fund and that the election would be reflected on schedule r of the estate’s form_706 however the return preparer inadvertently failed to prepare plr-144964-02 schedule r for the return as filed on date as a result the reverse_qtip_election was not made counsel for the personal representative of the estate subsequently discovered the omission of schedule r decedent’s estate requests an extension of time to make a reverse_qtip_election under sec_2652 thereby allowing the unused portion of decedent’s gst_exemption to be allocated to the generation-skipping fund sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides the general_rule that no deduction shall be allowed for an interest passing to the surviving_spouse if on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur the interest will terminate or fail sec_2056 provides that in the case of qualified_terminable_interest_property the entire property shall be treated as passing to the surviving_spouse for purposes of sec_2056 and no part of the property shall be treated as passing to any person other than the surviving_spouse sec_2056 defines qualified_terminable_interest_property as property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies sec_2601 imposes a tax on every generation-skipping_transfer sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or by his or her executor to any property with respect to which such individual is the transferor sec_2631 provides that once an allocation of gst_exemption is made it is irrevocable under sec_2632 the allocation of the gst_exemption may be made at any time on or before the date prescribed for filing the individual’s estate_tax_return including extensions plr-144964-02 sec_2632 designated as sec_2632 at the time of decedent’s death provides that in general any portion of an individual’s gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows- a first to property which is the subject of a direct_skip occurring at the individual’s death and b second to trusts with respect to which the individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after the individual’s death sec_26_2632-1 of the generation-skipping_transfer_tax regulations supplies the method for the automatic allocation of any unused gst_exemption first the exemption is allocated pro_rata to direct skips on the basis of their values for estate_tax purposes the balance is then allocated pro_rata on the basis of estate_tax values to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made no automatic allocation is made to a_trust that will have a new transferor with respect to the entire trust prior to the occurrence of any gst with respect to the trust the automatic allocation is irrevocable sec_2652 provides that in the case of any trust with respect to which a deduction is allowed to the decedent’s estate under sec_2056 the estate of the decedent may elect to treat all of the property in the trust for purposes of the gst tax as if the election to be treated as qtip had not been made this election is referred to as the reverse_qtip_election the consequence of a reverse_qtip_election is that the decedent remains for gst tax purposes the transferor of the qtip_trust for which the election is made as a result the decedent’s gst_exemption may be allocated to the qtip_trust sec_26_2652-2 provides that the reverse_qtip_election is to be made on the return on which the qtip_election is made under sec_301_9100-1 the commissioner may 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 or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides for automatic extensions of time for making certain elections sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will plr-144964-02 be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and 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 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 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore an extension of time is granted until days from the date of this letter for making a reverse_qtip_election under sec_2652 with respect to the generation-skipping fund the election should be made on a supplemental form_706 filed with the service_center where the original form_706 was filed a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for that purpose an extension of time to make the reverse_qtip_election under sec_2652 does not extend the time to make an allocation of any remaining gst_exemption in this case no allocation of decedent’s available gst_exemption was made on the form_706 therefore the automatic allocation rules of sec_2632 and sec_26_2632-1 operate to allocate decedent’s available exemption 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 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 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 heather c maloy heather c maloy associate chief_counsel passthroughs and special industries


t c memo united_states tax_court mark e and patti l blackwell petitioners v commissioner of internal revenue respondent docket no filed date thomas m regan and benjamin a wagner for petitioners william r peck for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies in petitioners’ federal income taxes for and in the respective amounts of dollar_figure and dollar_figure the issue for decision is whether petitioners’ horse breeding activity constituted an activity carried on for profit under sec_183 the trial was held on date in st paul minnesota findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in minnesota petitioner mark blackwell mark has an m b a degree and years of significant experience in business management in the early 1970s mark was a motocross racer and instructor he participated in national and international motocross racing events and in he was national motocross champion mark established the first motocross drivers’ school for suzuki from the late 1970s through the present time mark has had a successful business career as manager and senior officer for a number of motorcycle snowmobile atv and personal watercraft manufacturing companies--for suzuki as instructor and manager of a winning professional motocross racing team including six national championships and as head of suzuki’s motorcycle and atv division for husqvarna motorcycle co for arctic cat and 1all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure for polaris industries manufacturer and seller of among other things victory motorcycles at these various jobs mark typically worked over hours a week in the mid-to-late 1980s while working full time mark completed his college degree and earned an m b a from pepperdine university over the years mark has participated in a number of executive management programs such as a business strategy course at the wharton school at the university of pennsylvania petitioner patti blackwell patti has a college degree in nursing during and patti did not work apart from her involvement in the horse activity described below beginning in patti worked approximately hours a week as a rehabilitation nurse counselor for the state of minnesota generally working out of the family residence in through petitioners’ salaries from their above employment were as follows year mark patti total dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number mark did not grow up around farm animals or horses and learned how to ride horses on family vacations patti grew up around farm animals and horses and always dreamed of owning and raising horses in petitioners purchased their first horse and from then until petitioners purchased a number of additional horses read books and magazines including the quarter horse journal quarter horse news and the reiner magazine and watched videos about horse management and breeding bloodlines and horse operations petitioners also attended a number of national horse shows in the mid-1990s petitioners developed an interest in starting up an activity of purchasing breeding and training horses in approximately patti enrolled in the equine industry management bachelor’s degree program at the university of minnesota in that program patti took courses relating to the health care showing judging breeding bloodlines and training of horses the management of a horse activity as a business and the economic aspects of horse breeding and training in that program patti in received another bachelor’s degree magna cum laude by the late 1990s as a result of their reading and research their conversations with horsemen and a number of training programs they had participated in relating to horse breeding and training petitioners’ interest became focused on western performance horses namely reining and cutting horses and working cow horses in in further preparation for starting up their horse breeding and training activity mark with patti’s assistance prepared a detailed business plan relating to the purchase breeding training showing and sale of reining horses the business plan included sections entitled executive summary market overview advertising and promotion and proforma income statement the business plan stated that patti would act as the barn and breeding manager and would be responsible for the health care nutrition and training of the horses and that mark would be responsible for the business and marketing side of the horse activity in the business plan the proforma income statement projected estimated losses for and of dollar_figure and dollar_figure and estimated profits for through of dollar_figure dollar_figure dollar_figure and dollar_figure respectively the estimated profits were based on projections petitioners made of breeding fees and horse sale proceeds beginning in on their horse ranch property in delano minnesota on which petitioners’ family residence also was located petitioners began an american quarter horse breeding activity and training activity under the name of fresh horses farm fhf with the objective of purchasing breeding training and selling reining horses as planned patti was in charge of the horses and mark was responsible for the business and marketing side of the horse activity generally petitioners sought to purchase quarter horses that had already had some success in regional horse shows and or that had recognized bloodlines patti with some advice from mark would make the decisions as to which horses to purchase patti and mark jointly would decide which stallions to hire to breed with their mares and whether and when to sell their horses during the years in issue petitioners did not hire anyone to manage their horse activity patti typically spent to hours a week taking care of the horses and mark spent to hours a week in the horse activity each day patti would feed the horses groom them exercise them turn them out and clean out the horse stalls with her training in medicine and to avoid additional expenses patti did much of the health maintenance on the horses without hiring a veterinarian patti vaccinated and dewormed the horses she did the foal watch and would assist in the delivery of the foals in connection with their fhf horse activity petitioners maintained a bank account under the name of fhf and petitioners used barnpro a recognized horse farm software program to record and keep track of fhf income and expenses in connection with their ownership of horses and the activities of fhf one or both of petitioners were members of the following horse organizations american quarter horse association to present national reining horse association to present north central reining horses association to present national cutting horses association to and minnesota cutting horses association to both mark and patti occasionally rode their horses in horse shows won some nominal prize money and participated in social events at horse shows in and later years petitioners sought and received advice on their fhf horse activity from a number of expert horsemen including bob janssen of janssen performance horses a nationally recognized horse trainer foal watch consists of 24-hour observation of a mare about to deliver a foal over the years petitioners advertised their horses on their own fhf web site on business cards calendars clothing flyers and in videos and magazine articles occasionally petitioners would hire professional horse trainers to work with their horses and to show or ride their horses in horse shows in petitioners shifted their horse breeding and training activity from reining horses to cutting horses because by cutting horses were in greater demand in the horse industry at one point petitioners began trying to sell some of their horses as long yearlings to avoid horse training expenses they would incur if they kept the horses longer petitioners purchased three horses in one horse in three horses in one horse in one horse in one horse in three horses in and two horses in all but four of the horses petitioners eventually sold were sold at a loss three were sold at a small profit over petitioners’ purchase_price not taking into account expenses relating to the horses and one died for which petitioners received an insurance payment the schedule below provides some detail about the horses petitioners purchased and sold horse name purchased year purchase selling_price price year sold dollar_figure glo jessie glo big_number calico catalyst big_number zf zap em dunitz midnight glo big_number miss bessie westwind big_number big_number ceecee pauli big_number sheza chexy dunit smart little dun it big_number big_number smart chic hoo does big_number sweet sugar boon u neek hickory big_number big_number lenas lucky chic big_number memphis chic to smart lil juice big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioners purchased the following five additional horses which as of the date of trial either had died or were still owned by petitioners horse name year purchased price died still own purchase year petitioners dollar_figure --- dudes jackie may big_number --- sonata starlight yes smart chicaway big_number --- high brow madonna big_number --- yes yes big_number --- jodies bh 1when sonata starlight died unexpectedly in from colic petitioners received a dollar_figure insurance payment from through petitioners acquired and sold additional horses which petitioners acquired by breeding their mares to outside horses for which stud services petitioners paid fees the resulting foals after being raised and trained for a period by petitioners were sold by petitioners as follows birth year - - horse name stud fee selling_price year sold dunitz fresh dude dollar_figure jessies gotta whiz big_number big_number arcticatalyst big_number dollar_figure fresh n dun get fresh with me freshinic big_number big_number big_number big_number fresh champagne fresh victory a farm fresh chic mid west whiz big_number big_number big_number over the reinbow to the moon foxy cleopatra after midnight lil ruf shagwell big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number ruf talkin dunit big_number big_number chics big star big_number smart lil miss starry eyed chic fresh juice little wrangler sonatas rock star big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total big_number big_number boonaliciou sec_1the foal chics big star was purchased in utero 2petitioners incurred no stud fee for sonatas rock star as their mare was bred with one of their own stallions a horse smart chicaway that petitioners purchased in for dollar_figure and which petitioners still own has sired a number of horses--all owned by others--which horses have won a number of horse cutting competitions and have earned a total of dollar_figure in winnings for their owners in events sponsored by the national cutting horse association and a total of dollar_figure in winnings in events sponsored by the national reining horse association petitioners still own a horse called starbucks fresh brew which petitioners acquired through breeding one of their mares for a stud fee of dollar_figure petitioners believed that two particular horses--smart lena and sonata starlight--that petitioners purchased in and had the potential with the right breeding to produce foals that would have bloodlines attractive on the national horse market petitioners’ horse activity was marred by a number of illnesses their horses experienced the sudden and unexpected death of sonata starlight in was a major setback to petitioners’ plans to have successful and profitable breeding mares that would produce foals that would eventually be sold at the national level petitioners propose respondent does not object to and we find the following additional facts petitioners believed in they had a broodmare band which would allow them to sell their foals at the national level they hoped the sale of sonata’s foal would recoup much of fhf’s investment at one point two of petitioners’ horses were shipped to missouri for sale with the hope of selling each horse for dollar_figure because of a softening of the horse market the horses were each sold for less than one- half of the price expected one of petitioners’ foals boonalicious was a filly by a leading cutting stallion boonalicious’ stud fee was dollar_figure petitioners were optimistic about their prospects with this filly petitioners hired an experienced horseman to fit and present boonalicious at the national reined cow horse futurity in reno nevada they understood that the horseman was the best of the best they were devastated when they received only dollar_figure for the horse less than percent of what similar horses had sold for in prior years and what they thought she was worth petitioners consulted all the experts and did everything the experts told them to do but finally in petitioners determined that their fhf horse business was not sustainable petitioners kept track of the income and expenses of their fhf horse activity by making entries into their barnpro horse management farm software annually petitioners prepared a summary report of their expenses involving their ownership of horses and fhf’s activities in because of the losses they continued to experience petitioners terminated their horse breeding activity on the schedules c profit or loss from business attached to their through federal_income_tax returns petitioners reported gross_income total expenses including depreciation net operating losses and gain from the sales of business property form gain relating to their fhf horse activity as follows year gross_income net total operating_expenses loss dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number form_4797 gain dollar_figure big_number big_number -0- big_number -0- -0- big_number on the schedules c attached to their and federal_income_tax returns petitioners claimed the following business_expenses relating to their fhf horse activity expense advertising commission fees depreciation insurance repairs maintenance supplies board breeding farrier feed hay health maintenance membership miscellaneous shavings show expense training tack transportation vet total dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number --- big_number big_number big_number --- big_number big_number big_number dollar_figure big_number big_number big_number --- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number on audit for and respondent determined that petitioners’ fhf horse activity did not qualify as an activity engaged in for profit and respondent disallowed deductions for all of the reported business_expenses in excess of income received opinion under sec_183 and b if an activity is not engaged in for profit by a taxpayer the deductions claimed by the taxpayer relating to the activity are not allowed except to the extent of income received from the activity to be treated as engaged in for profit an activity must be carried on by the taxpayer with an actual and honest profit objective 78_tc_642 affd without opinion 702_f2d_1205 d c cir activities carried on primarily for sport hobby or recreation do not qualify as for-profit activities sec_1 a income_tax regs whether a taxpayer has the requisite profit objective with respect to an activity is a question of fact that is to be decided on the basis of all the evidence in a case generally the taxpayer bears the burden of proving that he or she carried on the activity with a profit objective rule a in deciding this question regulations under sec_183 set forth a nonexclusive list of nine factors which generally are 3petitioners do not argue for a shift of the burden_of_proof to respondent under sec_7491 considered and which we discuss below sec_1_183-2 income_tax regs manner in which the activity is carried on petitioners generally carried on their fhf horse activity in a reasonably businesslike manner during the 1990s petitioners prepared to start_up a horse breeding and training activity by taking educational courses relating to the care management breeding and economics of horses and by purchasing caring for training and selling a number of horses petitioners developed a rather comprehensive written business plan relating to the proposed horse activity beginning in petitioners took or years learning about horse breeding and management before attempting to engage in a for-profit horse breeding activity in mark’s words w e were pretty cautious so we didn’t jump into it we just kept trying to learn and figure out is this a business that we could be in and be successful and it took us some time to make the final_decision to get in once petitioners started up their fhf horse activity in and during the years in issue petitioners were not absentee aloof or recreational horse owners patti managed and worked diligently and daily on the horse activity doing essentially all of the horse maintenance herself petitioners consulted expert horsemen hired expert horse trainers to assist in training the horses advertised showed the horses and paid significant stud fees to have their mares bred with stallions which they regarded as having good bloodlines in their efforts to make improvements to the horse activity petitioners made adjustments in their business plan moving from reining horses to cutting horses and selling their horses as yearlings petitioners maintained reasonably good books_and_records of income and expenses relating to their horse activity in petitioners terminated their unprofitable horse activity in light of the losses realized expertise of the taxpayer through patti’s experience with and her education relating to horses and through mark’s business experience petitioners were reasonably well qualified to engage in a horse breeding activity for profit mark’s business qualifications were particularly strong and he had a gifted ability to make good business decisions to market and advertise effectively and to work successfully with others time and effort expended in carrying on the activity the time effort and financial resources petitioners personally put into and invested in their fhf horse activity are not indicative of a hobby rather they are indicative of a for- profit activity of the time petitioners spent with the horses most of it was daily hard work expectation that the horses may appreciate in value petitioners certainly had the expectation and acted thereon that at least some of their horses would become valuable as reining or cutting horses or as valuable mares or stallions with recognized bloodlines with significant value for breeding purposes success in other activities patti’s degree from the university of minnesota relating to horse management indicates some likelihood of success and a high commitment to petitioners’ horse activity mark’s obvious business acumen and success in business development and management with other companies along with petitioners’ credible testimony indicate to us an ability determination and savvy to make a profit and be successful in petitioners’ horse activity history of income or losses a series of losses during the startup_period of an activity is not necessarily an indication that the activity is not engaged in for profit bearing in mind however that the objective must be to realize a profit on the entire operation--future net_earnings and also enough earnings to recoup losses that have been incurred in intervening years 45_tc_261 affd 379_f2d_252 2d cir emerson v commissioner tcmemo_2000_137 we note that in and petitioners did receive significant gross_income from their horse activity dollar_figure dollar_figure and dollar_figure respectively although not what petitioners hoped for the bottom line losses realized in petitioners’ horse activity were substantial however the losses were realized during what we in this case regard as still the early or startup years of the activity and petitioners terminated the horse activity in when it became clear to petitioners that the likelihood of profitability was remote amount of occasional profits an opportunity to earn a substantial ultimate profit in a highly speculative venture may be sufficient to indicate that an activity is engaged in for profit sec_1_183-2 income_tax regs horse breeding and training is a speculative venture petitioners have convinced us that they had an opportunity or the potential to earn a profit in their fhf horse activity financial status petitioners did have substantial wealth and resources not related to their horse activity but in light of the minimal recreational aspects of petitioners’ horse activity we do not regard petitioners’ wealth as indicative of a nonprofit objective for petitioners’ horse activity elements of personal pleasure although patti had a lifelong interest in horses the facts of this case do not indicate that petitioners’ fhf horse activity was motivated or driven by personal pleasure alone as we have found petitioners had actual hopes for the sale of their horses at a profit and petitioners’ horse activity is appropriately described as a business petitioners’ business plan did not work out and income did not exceed expenses but we discern few recreational and sports aspects in petitioners’ fhf horse activity rather in petitioners’ motive efforts and investment in carrying on their fhf horse activity during the years in issue we discern and find a profit objective we so hold decision will be entered for petitioners