internal_revenue_service appeals_office release number release date date date certified mail dear department of the treasury employer_identification_number xx-xxxxkxxx person to contact employee id number tel fax vil this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code it is determined that you do not qualify as exempt from federal_income_tax under sec_501 of the code effective xxxxxxxxx our revocation was made for the following reason s you are not organized for an exempt_purpose within the meaning of internal_revenue_code sec_501 because your organizational documents do not limit your activities to those in furtherance of exempt purposes within the meaning of sec_1_501_c_3_-1 you are not operated in furtherance of exempt purposes and are operated for the substantial non-exempt purpose of providing commercial financing services to xxxx owners within the meaning of sec_1_501_c_3_-1 you are not operated for an exempt_purpose within the meaning of internal_revenue_code sec_501 because you are not lessening the burdens of government or serving any other charitable purpose within the meaning of sec_1_501_c_3_-1 you are operated more than incidentally for the private benefit of xxxx owners xxxxxxxxxk xxxxxkx llc and xxxxx xxxxxxxxxx within the meaning of treas reg dollar_figure c -1 d ii contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov if you were a private_foundation as of the effective date of the adverse determination you are considered to be taxable private_foundation until you terminate your private_foundation_status under sec_507 of the code in addition to your income_tax return you must also continue to file form_990-pf by the 15th day of the fifth month after the end of your annual_accounting_period processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code we will make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you ina separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c see also publication you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matters that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours xxx xxxxkk appeals team manager enclosure publication and or internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations n street rm richmond va date date org address certified mail - return receipt requested dear department of the treasury taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax we propose to revoke our recognition of your tax exempt status as an organization described in sec_501 of the internal_revenue_code code we enclose our report of examination explaining why we are proposing this action if you accept or proposal please sign and return the enclosed form_6018 consent to proposed action - sec_7428 unless you have already provided us a signed form_6018 we will issue a final revocation letter determining you are not an organization described in sec_501 after the issuance of the final revocation letter we will publish an announcement that you have been deleted from the cumulative list of organizations contributions to which are deductible under sec_170 of the code if you do not respond to this proposal we will similarly issue a final revocation letter standing to seek a declaratory_judgment because you may be deemed to have failed to exhaust administrative remedies failing to respond to this proposal may adversely impact your legal if you do not agree with our proposed revocation and wish to protest our proposed revocation to the appeals_office of the internal_revenue_service then you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest your decision this written request is called a protest contain certain specific information which generally includes a statement of facts the applicable law and arguments in support of your position for the specific information needed for a valid protest please refer to page of the enclosed publication the examination process and page of the enclosed publication exempt_organizations appeal procedures for unagreed issues these documents also explain how to appeal an irs proposed action for your protest to be valid it needs to if you do submit a valid protest then an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication and publication explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process please note that fast tract mediation services referred to in publication generally do not apply after issuance of this letter letter rev catalog number 34809f you may also request that we refer this matter for technical_advice as explained in publication and an annual revenue_procedure please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the eo rulings and agreements function then no further administrative appeal will be available to you within the irs on the matter if you agreed with the proposed revocation or if you receive a final revocation letter you will be required to file federal_income_tax returns for the period s shown above file these returns with the ogden service_center within days of the date you agreed with the revocation or the date of your final revocation letter whichever is sooner unless a request for extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns we will notify the appropriate state officials of the revocation in accordance with sec_6104 of the code currently only certain states are eligible to receive notification of proposed revocation actions you can call the person at the heading of this letter to find out if your state is eligible to receive a notice of revocation of your tax-exempt status you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer year period ended 20xx06 org org legend org - organization name president - president through companies through dir-7 - through dir xx - date city - city state - state governor - governor ra-1 through ra-8 - co-1 through co-9 - through ra dir-1 issue revocation does the organization satisfy the operational_test for a tax exempt_organization per sec_501 as described in sec_501 is there inurement or private benefit to officer and or director per sec_501 as described in sec_501 facts org org was incorporated as a non-stock corporation by dir-1 and was issued a certificate of incorporation by the state corporation commission on june 20xx president is the current president secretary and service director of org he is also the founder of the organization org was established to purchase claims for refund by the fuel tank owners or contractors to clean up fuel spillage from their underground storage tanks which have been approved for reimbursement by the department of environmental quality co-9 in state the fuel tank owners are usually gasoline station owners fuel distributors homeowners or farmers upon purchase of the approved claims org acquires the right to reimbursement of the clean up costs from co-9 in the state of state it charges fees for borrowing costs management and set up fees which is its source of funding for its operations org has expanded its operations from state to other states such as state and state org filed its application_for exemption with a form_1023 signed by president on october 20xx it was granted tax exempt status per internal_revenue_code irc a as described per sec_501 as a charitable_organization with a letter dated august 20xx org’s purpose is described in its amended articles of incorporation dated september 20xx as follows to provide interim financing of and liquidity of claims filed by owners or operators as defined in the environmental act and their authorized environmental consultants with state sponsored funds implemented pursuant to the environmental act to encourage remediation of leaking underground storage tanks and related operation and management of such program and department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 shall include any other financing program or activity that the corporation’s board may hereafter determine will provide a positive environmental benefit or otherwise lessen the burdens that state or federal authorities confront in discharging their obligations under the environmental act and their environmental laws org described its stated purpose in its application_for exemption on form_1023 part iv as follows lessening the burdens of government by providing low cost liquidity that will speed reimbursements to claimants and consultants from state administered leaking underground storage tank org funds and thus encourages continued voluntary compliance with clean up efforts a better environment and improved public health it further states that various org funds do not have sufficient cash on hand to reimburse claims in a timely manner the result is that org owners and operators sometimes referred to as responsible parties or rp’s end up waiting months for reimbursement this can result in reduced voluntary cooperation and a consequential slowdown in the pace of cleaning up org delays in identifying and removing org can result in spreading petroleum plumes which increase pubic health risks and higher total clean up costs finally payment delays increase the risk that the org fund may no longer be deemed a viable mechanism for meeting epa's financial responsibility regulations org was established to assist these state governments in meeting their obligation to provide timely reimbursement of approved claims maintaining their org clean up programs and meeting the epa’s financial responsibility requirements’ org described its activity on form_1023 as follows org provides liquidity using simple financing technique rather than lending money to responsible parties rp org purchases the rp’s org claims using a two step payment process step one the rp assigns a prepared claim for a completed phase of a project claim to org concurrently with the claim being submitted to the state governmental agency for processing and approval typically immediately upon the claim being approved org issues an initial payment for a percentage of the amount approved the amount of the initial payment is typically a large percentage of the amount approved the specific percentage is determined based on the expected carrying time step two the state eventually issues the reimbursement of the approved amount directly to org org remits the remaining balance less the accrued carrying costs to the rp in the form of a second residual payment carrying costs for each claim are determined by allocating costs on a pro_rata basis based on the size of each claim and the number of days it takes until the claim is reimbursed carrying costs allocated in this manner include a the daily cost of org’s borrowed money b amortized legal department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 and set up costs and c ongoing administrative costs org anticipates that carrying costs will be at least as low as those of the co-8 program which have historically been approximately four percent on an annualized basis org will operate financing program in conjunction with org fund programs established by the participating states org will typically not review the claims but instead will rely upon the determination of the state entity charged with administering the state org fund to determine the amount of reimbursement financing will typically be made only for claims where the work was previously authorized and or approved by the applicable state regulatory authority composition of the board_of directors as described in its amended articles of incorporation further states the following article states and describes the role and responsibilities of the board_of directors article b - one of the directors at all times be a person assigned by the servicer the service director’ the initial service director is president resident of the city of city state who shall continue to serve until replaced by the servicer as the servicer director article a - servicer requires at all times that operational and investment management services shall be provided to the corporation by a servicer which shall initially be co-1 the servicer shall perform its duties pursuant to a written servicing agreement approved by the board article 6c states that the servicer shall be responsible to maintain books_and_records relating to the corporation’s as well as its own operations and to prepare a budget for the corporation on an annual basis the amended articles of incorporation deleted the requirement in the original articles of incorporation dated june 20xx requiring that the board_of directors consist of participant directors and permanent directors each of whom shall have voting powers and one or more non voting directors a participant director means a director appointed by the board_of directors by any participant representative a participant representative means a person who is appointed by a political_subdivision instrumentality or other body authorized under the laws of a particular state of the united_states or such persons delegate or successor to enforce and administer the state’s leaking underground storage tank a permanent director means a director appointed to the board_of directors by any industry representative an industry representative means the co-2 of america and the co-3 department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 members of the board_of directors as of april 20xx are as follows dir-2 dir-3 dir-4 dir-5 dir-6 dir-7 executive director co-4 president co-2 of america finance director of city of co-5 former executive director of state resources authority chief financial officer co-6 chairman co-7 compensation board president of xxx former president of state co-2 president president and secretary of org dir-6 also serves as org’s treasurer president is the principal in co-1 org’s sponsor and program administrator appears to be officials of state_or_local_government entities however there is no information or verification to indicate they were appointed to the board by the state or local entities the amended and restated articles of incorporation of org state that the board_of directors shall consist of not less than three and not more than seven persons the members of the board are elected by the directors except that one director is assigned by the servicer as the service director thus the articles do not require that the members of the board be appointed by state or governmental agencies there are members of the board_of directors who are state_or_local_government officials but not appointed by their respective state or local agencies in an official capacity they are serving as private citizens department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 org’s outside board members have served without compensation through december 20xx related_party transaction org disclosed its related_party transaction with co-1 co-1 in its application_for exemption on form_1023 as follows president is the sole member of co-1 which is a for profit entity he is also the founder and officer of org organization co-1 was to provide operational and investment management services the fee is based on of assets under management a nominal set up fee for each claim financed it is the same fee as co-1’s contract with co-8 program with the state of state in addition co-1 is entitled to reimbursement of all marketing costs the servicing agreement with co-1 was approved and ratified by the board members it was disclosed in the f-990 return the servicing agreement dated 20xx modified the prior agreement dated 20xx it modified the following servicing fee means a a fee equal to per annum of the face_amount of each reimbursement obligation acquired pursuant to the terms and conditions of financing agreement which shall only be assessed and calculated with respect to any reimbursement obligation during the related holding_period plus b a flat fee not to exceed of the face_amount of acquired reimbursement obligations further subject_to a minimum flat fee of dollar_figure and a maximum of dollar_figure per claim for reimbursement payment obligations financed prior to approval by co-9 under the paragon credit agreement dated november 20xx the servicer may charge a claim guaranty fee not to exceed of the face_amount of each claim subject_to a minimum of dollar_figure per claim and no maximum the servicer may at any time waive all or any portion of its servicing fee provided that any such unpaid amount will remain unabated and be payable at a future date unless such right of accrual is specifically waived in writing by the servicer modification was signed and ratified by president as president of org and at the same time as manager and sole member of co-1 some of the terms of the servicing agreement between org and co-1 dated 20xx include co-1 is the servicer who wishes to undertake the servicing duties of the program the program involves providing liquidity for co-4 claimants under a department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 program administered by the state department of environmental quality department by which such claimants will assign their right to be reimbursed by the commonwealth of state for approved costs incurred in the clean up of underground petroleum storage tank releases and thereby receive advances against amounts to be reimbursed program and ii paying certain issuance and other costs associated with authority bond and the ongoing administration of the program servicing fee means a a fee equal to per annum of the face_amount of each reimbursement payment obligation acquired pursuant to the terms and conditions of the financing agreement which shall only be assessed and calculated during the holding_period plus b a flat fee not to exceed of the face_amount of acquired reimbursement payment obligations further subject_to a minimum flat fee of dollar_figure and a maximum of dollar_figure per claim co-1 as the servicer is to perform org’s duties under the financing agreement to the extent practicable so as to ensure timely acquisition of reimbursement payment obligations with proceeds of the loan from time to time and the timely repayment of amounts due on the loan from the department's repayments org delegates to the servicer org’s duties with respect to the daily operation of the program sec_4 - servicing fees costs of promotion as compensation_for its activities the servicer shall be entitled to the servicing fee the servicer shall be responsible for the payment of any fees and expenses_incurred by the servicer in connection with the implementation of the program provided however that the servicer shall be entitled to receive but only from the org fee reasonable_compensation and reimbursement for out of pocket expenses related to promotional activities he may undertake on behalf of org org is currently operating in a consistent manner with the stated purpose in its articles of incorporation to provide interim financing to owners operators of fuel tank owners and consultants who have approved claims to clean up fuel spillage from underground storage tanks review of form_990 returns filed from 20xx through 20xx showed the following 20xx12 20xx06 20xx06 20xx06 20xx06 cum total revenues total contributions program service interest on sav invest total revenue dollar_figure - dollar_figure - dollar_figure department of the treasury - internal_revenue_service page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 total expenses excess deficit analysis of f-990 returns showed the organization had cumulative loss of dollar_figure over a year period since it started operations in 20xx through june 20xx during the same period the organization incurred servicing or management fees to co-1 which is an llc whose sole member is president 20xx12 20xx06 20xx06 20xx06 20xx06 cum total servicing fee management fees total org issued form_1099 - misc to co-1 in 20xx and 20xx for total amount of dollar_figure taxpayer stated that the servicing fee include reimbursements of expenses_incurred by co-1 on org these amounts are on a calendar_year basis accelerated from 20xx through 20xx it showed that the payments to co-1 f-1099 misc ssn ein 20xx 20xx cumulative total co-1 co-1 c o president during the course of the year period of operations president advanced funds for org’s operational expenses ending balances are loans from officer 20xx12 20xx06 20xx06 20xx06 20xx06 loan from officer for period ending june 20xx was not reported on form_990 part x balance_sheet on line as payables to current and former officers directors trustees key employees highest compensated employees and disqualified persons as in prior years instead it was reported on line as part of secured mortgages and notes payable to unrelated third parties with a total ending amount of dollar_figure additional information was provided as an attachment to the return with a description of subordinated loan from related_party with an ending balance of dollar_figure to determine how the role of financing activity performed by org fits into the leaking underground storage tank org fund program review of the co-9 website was performed it provided the following information laws state department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 the history of the state ust program in president reagan signed into law subtitle i of rcra creating the federal underground storage tank ust program on date the federal interim prohibition became effective banning nationwide the installation of corrodible tanks and piping until final federal regulations became effective date since date each existing ust any new usts any changes to usts and any closure of usts must be reported to the co-9-water on the new official ust notification forms thus far the co-9 has received over big_number facility forms representing over big_number usts in and reauthorized in congress amended rcra to create the federal leaking underground storage tank fund org fund with dollar_figure billion from a cent per gallon gasoline tax for the purpose of cleaning up petroleum ust leak sites nationwide thus far state has received over dollar_figure million of this money for cleanups many more sites are being prioritized for future cleanup actions there have been over big_number leaking tank sites reported to co-9 to date effective date the state general assembly created articles of the water control law sec_62 which gave the co-9 general supervision of usts set financial responsibility requirements and established the state underground petroleum storage tank state's ust technical regulation which became effective date is entitled ust technical standards and corrective action requirements vac et seq the state regulation is very similar to the federal regulation except it requires notifications from owners of fund state cleanup fund all regulated usts that remain in the ground insurance or any of the other mechanisms permitted in the regulation epa's final financial responsibility fr regulation was published on date and took effect date it requires owners operators of usts containing petroleum to demonstrate evidence of financial responsibility in the amount of dollar_figure million per occurrence for petroleum marketers dollar_figure for non-marketers to cover corrective action and third party liability costs for accidental petroleum releases from their usts you may do this using state law was amended effective date to require all owners operators to demonstrate financial responsibility based on the total annual gallons pumped through all regulated petroleum department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer - org org year period ended 20xx06 usts owned and operated by them in state the sliding scale financial responsibility requirement ranges from dollar_figure for corrective action and dollar_figure for third party claims dollar_figure annual aggregate to a maximum of dollar_figure for corrective action and dollar_figure for third party claims dollar_figure annual aggregate owners operators may then use the fund to demonstrate fr between the state financial responsibility requirement and dollar_figure million to meet the federal requirement the federal regulations are the law of the land nationwide and the co-9 and local building departments fire officials implement them in state for the epa and under state law there have been no substantive changes to the federal regulations to date there have been numerous policy calls over the years to epa and state which have been resolved within the context of the existing regulations regulations co-9 other agencies what must i do when i have a release when a release occurs from an aboveground or underground storage tank the owner and or operator of the tank is required to report the release to co-9 and or other governmental agencies release reporting requirements are dependent upon the statutes and regulation governing the tank from which the release occurred the contents of the tank and the nature of the release suspected and confirmed releases from usts subject_to the requirements of the ust technical regulation must be reported to co-9 within hours of discovery of the release discharges of oil from sources other than tanks subject_to the ust technical regulation eg home heating oil tanks above ground storage tanks farm tanks must be reported to co-9 immediately upon discovery of the discharge releases must be reported to the appropriate co-9 regional_office for additional information about release reporting please see chapter of the storage tank program technical manual an interview with ra-1 was conducted to get a practical understanding of the leaking underground storage tank org program administered by department of environmental quality co-9 of the state of state she provided the following information fuel tank owners are required to report any fuel spillage or leaks from the storage tanks to the environment department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 the field offices evaluate the spillage to determine if corrective action or clean up is required in case the water quality is affected fuel tank owner can apply for reimbursement of cost of clean up if they are not negligent with regards to the fuel spillage to the environment they can file a claim subject_to inspection of site and approval by co-9 inspectors fuel tank owners have a deductible for reimbursement fuel tank owners are not required to file claim for reimbursement the funds to reimburse claims are from the state’s share of the portion per gallon on fuel sold in the state therefore the amount of funding is based on a portion of the number of gallons sold the funds cannot be reallocated for other state programs the approval of the amount of a claim allowed the fuel tank owner is not dependent on the amount of funds that co-9 has on its books if co-9 does not have a sufficient amount of funds as compared to the amount of claims approved the release of funds is delayed until it is replenished from the state’s share of the sales of fuel allocated for the program from the federal government however there should not be a delay in issuance of funds if the state has a sufficient balance in its account to cover the claims the state allows the claimants to assign their rights to the approved claims to third parties based upon above interview it was learned that the amount of claims do not have a bearing on the amount of funds that co-9 has it may affect its timing to pay the claim but not the number of approved claims from tank owners the amount and number of claims are dependent on the fuel spillage reported to the agency filing of claim is not required but the reporting of fuel spillage to the environment is and subject_to penalty if not reported org provided a copy of letter written by ra-2 director office of spill response and remediation with state co-9 dated november 20xx it is filed with org’s position under exhibit the information on co-4 co-4 is provided in part as follows a funds collected and deposited in the federal org trust fund are separate and independent from funds collected and deposited into co-4 federal org trust fund monies are allocated in very limited amounts to states through cooperative agreements used to conduct cleanups where the responsible_party is unknown unwilling or unable to do so these funds are cost recoverable from the responsible_party co-4 funds are collected pursuant to state law and maintained in a separate state trust fund department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 federal regulations require tank owners and operators to maintain evidence of financial responsibility in response to these regulations many states created separate state funds to fulfill the federal requirements on behalf of tank owners and operators in their states the co-4 is one such fund this fund is not supported by the federal government it is the financial responsibility mechanism of state tank owners and operators to demonstrate compliance with the federal financial responsibility requirements while it is true that co-4 covers these types of entities the majority of claims filed are from home heating oil tank owners those tanks are not regulated and have no financial assurance requirements state law requires owners of home heating oil tanks to report leaks and clean them up state receives reports of roughly regulated tank leaks annually in contrast we receive reports of over big_number leaking heating oil tanks in the same period the federal government provides a small amount of funding toward federally regulated cleanups in state we receive less than dollar_figure annually while the state fund spends upwards of dollar_figure each year therefore it is not accurate to state that the federal government provides the necessary funds rather it is the co-4 that provides the vast majority of the funding necessary to assure that cleanups are completed because federal funds can be used only for cleanups involving federally regulated tanks the co-4 is the only funding source for home heating oil tank cleanups the co-4 is the financial responsibility mechanism for tank owners in state fuel tank owners subject_to state’s financial responsibility regulations are only required to demonstrate between dollar_figure and dollar_figure per occurrence for regulated underground storage tanks the state financial responsibility amount fr above that amount up to dollar_figure is provided by the co-4 additionally the co-4 funds claims for unregulated tanks such as home heating tanks these tank owners have no financial responsibility requirements therefore when the co-4 is unable to pay claims in a timely manner there is a significant impact on the pace of clean ups there are many tanks in state whose cleanup costs are covered by the co-4 but are not subject_to any fr requirements also tanks that are subject_to fr requirements rely on the co-4 to perform as their fr mechanism for the majority of the clean up costs therefore it appears that the irs memorandum is mistaken in its conclusion that tank owners must necessarily be out of compliance with federal requirements if they are in need of co-4 reimbursement co-9 has a statutory burden to protect the environment and public health for the citizens of state by among other things ensuring the timely cleanup of leaking petroleum tanks tank owners and operators are required_by_law and regulation to clean up contamination caused by petroleum tank releases however because of the potentially high cost of petroleum cleanups the presence of a timely reimbursement program is pivotal to cleanup compliance due to limited staff resources to pursue noncompliance this program relies heavily on prompt reimbursement from the co-4 to ensure that cleanups occur in a timely department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended - 20xx06 manner at this time the co-4 is experiencing a reimbursement claim delay of approximately months it has been my experience that org by providing liquidity to the marketplace increases the likelihood that tank owners will continue to move forward with cleanups expeditiously if org were to cease functioning in state co-9 would likely see a slowdown in the number and progress and cleanups around the state to date am not aware of any financial institutions consistently offering financing for reimbursement claims in state this eventually would lead to an increased compliance and enforcement burden on co-9 to ensure that cleanups continue to move forward this was our situation in 20xx before the co-8 program was implemented accordingly if org were to cease functioning in state co-9 would likely seek to restart the co-8 program also org provided a copy of the memorandum prepared by ra-2 dated september 20xx on the subject of co-4 fy20xx year end report and fy 20xx forecast stated in part org financing represented of the dollar_figure in delayed payment at any given time org financing represents between and of the delayed payment balance the presence or absence of org does not impact the size of the fund’s delayed payment balance or the number of days to pay the claim however if org were to cease financing of claims in state the rp and in turn the rp’s consultant would not receive any funds until the time the claim is actually paid org claimed in its application_for exemption on f-1023 that its organization is modeled on state’s award winning state resources authority accelerated claim payment program the commonwealth of state terminated the co-8 program and authorized org to begin providing the services formerly provided by the program on february 20xx contacted co-8 on 20xx co-8 staff was unable to verify if it has authority as a state_agency to authorize or sanction another entity to continue its program research conducted on the internet provided information that co-8 undertook the accelerated claim payment program co-8 program in 20xx in response to the delay in reimbursement of funds which was running for months at that time it issued a bond to advance the payment of claims the co-8 program was terminated in 20xx co-8 website showed it is a state_agency which provides financing package to state and local governments org submitted a written letter from ra-3 dated november 20xx he is a current member of the board_of directors of org and former executive director of state resources authority co-8 in this letter he provided a background on state resources authority and its co-8 accelerated ust claim payment program co-8 accelerated program in addition he also provided comments on the draft irs memorandum the full copy of his letter is shown in department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 exhibit of org’s position on the proposed revocation of its tax exempt status parts of his letter relating to co-8 are as follows for the record was appointed in may 20xx by then governor as executive director of the state resources authority co-8 an instrumentality of the commonwealth of state where served in the capacity until january 20xx currently serve as the city of city director of finance business services and also as one of org’s outside members on the board_of directors as set forth herein have direct first hand knowledge of the co-8’s accelerated ust claim payment program co-8 accelerated program as well as the transition to org in 20xx background information in 20xx the co-4 co-4 which is managed by state’s department of environmental quality co-9 was endeavoring to reduce a significant backlog of unpaid claims as reimbursement payments were routinely delayed for many months co-9 reported that many of the tank owners and environmental consultants who affect the majority of the org clean ups by direct payment are small companies with limited or no access to traditional financing co-9 reported that the inability to pay the claims in a timely manner was causing cash_flow problems in the marketplace and this in turn was leading to a slow down in the pace of clean ups public safety implications after consultation with co-9 and others co-8 determined that the slow down in clean ups caused by the lack of liquidity in the marketplace represented a public policy issue for the commonwealth among other things the payment delays a increased public health and environmental risks from spreading plumes b impeded the timely closing of real_estate transactions and c reduced employment among environmental consulfants who were leaving the business in addition co-9 noted that the payment delays caused pricing distortions that increased costs to co-4 finally co-9 noted that the insolvency of the co- could eventually result in the epa decertifying it as a federally approved mechanism for demonstrating financial responsibility such a decertification would have onerous consequences for this aspect of state’s environmental efforts co-8 accelerated ust claim payment program co-8 determined that because there was a lack of traditional bank financing available to the marketplace co-8 could assist in expediting this environment effort by developing a financing program to reduce the backlog to a less than 30-day waiting_period to proceed with the clean up co-8 staff worked with you co-9 state’s department of planning budget state’s treasury_department and outside counsel to create the co-8 accelerated program co-8’s board_of directors approved the financing which was announced by state’s then governor in 20xx co-8 offered to purchase any and all outstanding approved claims plus said it would stand ready to purchase new claims form any tank owner seeking liquidity your firm commonwealth acceptance co-1 was selected by the co-8 board_of directors to act as the servicer of accelerated program the financing program was department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 structured to not be debt to the commonwealth of state and avoided the necessity of raising taxes to back stop the co-4 the public purpose behind the co-8 accelerated program was to a provide co-9 with a financing mechanism that would help it meet its statutory obligation to protect public health and state’s environment through the timely clean up of petroleum releases and b assist in allowing the co-4 to maintain its federal certification while co-9 worked through the funding imbalance while there is no doubt that tank owners and environmental consultants benefited from the co-8 accelerated program as they would have benefited after receiving reimbursement payments from the co-9 after the extended delays this fact was irrelevant to co-8’s decision to move forward with the accelerated program co-8’s and my focus was on the benefits to the commonwealth of state the program proved effective as was evidenced by the fact that in many months over of all claims were voluntarily assigned to co-8 in 20xx after consultation with co-9 and ra-4 recommended to the co-8 board_of directors that co-8 could best serve the commonwealth of state by handing the program off to org the rationale was among other things a the backlog of unpaid claims had at the time been reduced to approximately match the timing of the co-8 accelerated program which reduced eliminated co-8’s benefit to co-9’s co-4 b org which by then was in formation by doing business with multiple states would likely have a larger program which would be more cost effective than co-8 due to the obvious economies of scale and would offer the commonwealth of state greater efficiencies should state’s backlog increases and c we correctly anticipated that within a few years state’s periodic backlog of claims had returned the idea was that by having org in place it would avoid a market disruption which could adversely impact co-9’s co-4 when the backlog increased accordingly in december 20xx co-8 and org jointly mailed letters to hundreds of stakeholders informing them that effective february 20xx co-8 would cease accepting new claims but that org would be available as a financing option to provide continuity and oversight agreed to join org’s advisory committee and later in 20xx agreed to join its board_of directors where continue to serve subsequent parts of dir-4’s letter disputing government's position on the tax exempt status of org is shown in exhibit with taxpayer's position org submitted various testimonial letters from various sources they are included as exhibits in its position on the proposed revocation of its tax exempt status org was accorded with a closing conference with its representative on july 20xx an unagreed conference with group manager was held on october 20xx issue was not resolved law department of the treasury - internal_revenue_service page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 sec_501 exemption from tax on corporations certain trusts etc a 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 c corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office definition of charitable in the regulations which include lessening the burdens of the government regs sec_1_501_c_3_-1 final-reg tax-regs sec_1_501_c_3_-1 organizations organized and operated for religious charitable scientific testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals charitable defined -the term charitable is used in sec_501 in its generally accepted legal sense and is therefore not to be construed as limited by the separate enumeration in sec_501 of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions such term includes relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science erection or maintenance of public buildings monuments or works lessening of the burdens of government and promotion of social welfare by organizations designed to accomplish any of the above purposes or i to lessen neighborhood tensions ii to eliminate prejudice and discrimination iii to defend human and civil rights secured_by law or iv to combat community deterioration and juvenile delinquency sec_1_501_c_3_-1 states that an organization is not exclusively operated for one or more exempt purposes if its net_earnings inure in whole or part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 prohibits private_inurement it states that an organization is nor organized or operated exclusively for one or more exempt_purpose unless it serves a public rather than private interest to meet the requirements it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by private interest sec_1_501_c_3_-1 states that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 in determining the existence or nonexistence of such primary purpose all the circumstances must be considered including the size and extent of the trade_or_business and the size and extent of the activities which are in furtherance of one or more exempt purposes an organization which is organized and operated for the primary purpose of carrying on an unrelated_trade_or_business is not exempt under sec_501 even though it has certain religious purposes its property is held in common and its profits do not inure to the benefit of individual members of the organization revrul_68_14 1968_1_cb_243 jan by planting trees in public areas and assisting municipal authorities in their programs to plant trees and keep the city clean the organization is lessening the burdens of government the organization’s informational program directed to the public architects and builders is educational the overall effect of these activities is to combat community deterioration accordingly the organization is exempt from federal_income_tax under sec_501 of the code revrul_69_528 1969_2_cb_127 jan if the services were regularly provided by one tax-exempt_organization for providing investment services on a regular basis for a fee is trade_or_business ordinarily carried on for profit other tax-exempt organizations such activity would constitute unrelated_trade_or_business it is held that this organization is not exempt under sec_501 of the code as an organization described in either sec_501 or sec_501 since it is regularly carrying on the business of providing investment services that would be unrelated_trade_or_business if carried on by any of the tax-exempt organizations on whose behalf it operates revrul_70_186 1970_1_cb_128 jan a nonprofit organization formed to preserve and improve a lake used extensively as a public recreational facility qualifies for exemption under sec_501 of the code the organization was formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features it is financed by contributions from lake front property owners from members of the community adjacent to the lake and from municipalities bordering the lake department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 the lake is a large body of water bordering on several municipalities it is used extensively by the public for recreational purposes along its shores are community-owned public beaches launching ramps and other recreational facilities of a public nature the organization’s principal activity is to treat the water to remove algae and to otherwise improve the condition of the water for recreational purposes by treating the water removing algae and otherwise improving the condition of the water thereby insuring the continued use of the lake for public recreational purposes the organization is performing a charitable activity see revrul_67_325 c b which relates to an organization exempt under sec_501 of the code providing recreational facilities to the residents of a township the benefits to be derived from the organization’s activities flow principally to the general_public through the maintenance and improvement of public recreational facilities any private benefits derived by the lake front property owners do not lessen the public benefits flowing from the organization's operations in fact it would be impossible for the organization to accomplish its purposes without providing benefits to the lake front property owners see revrul_66_358 c b which relates to an organization exempt under sec_501 of the code operating and maintaining a public park with incidental private benefits accordingly based on the facts presented it is held that this organization is exempt from federal_income_tax under sec_501 of the code this case is distinguishable from a situation where an organization uses its funds primarily to foster private interests and the benefit if any to the general_public is only incidental revrul_71_529 1971_2_cb_234 jan a nonprofit organization that provides assistance in the management of participating colleges and universities’ endowment or investment funds for a charge substantially below cost qualifies for exemption under sec_501 of the code revrul_69_528 distinguished revrul_72_369 1972_2_cb_245 an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations does not qualify for exemption under sec_501 of the code revrul_71_529 distinguished providing managerial and consulting services on a regular basis for a fee is trade_or_business ordinarily carried on for profit the fact that the services in this case are provided at cost and department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 solely for exempt_organizations is not sufficient to characterize this activity as charitable within the meaning of sec_501 of the code furnishing the services at cost lacks the donative element necessary to establish this activity as charitable accordingly it is held that the organization’s activities are not charitable and therefore the organization does not qualify for exemption from federal_income_tax under sec_501 of the code revrul_73_126 1973_1_cb_220 sec_501 --exemption from tax on corporations certain trusts etc an exempt organization's payment of reasonable pensions to retired employees at the discretion of its board_of directors does not adversely affect its exempt status revrul_74_117 1974_1_cb_128 political activities assisting in transition of office of governor -- a nonprofit organization formed to implement an orderly change_of administration of the office of governor of a state by assisting the governor-elect during the period between his election and inauguration in screening and selecting applicants for state appointive offices and preparing a legislative message and program reflecting the party's platform and budget is an action_organization under sec_1_501_c_3_-1 of the regulations and does not qualify for exemption the government is the party best qualified to decide whether a particular activity is sufficiently in the public interest to warrant its recognition as a legitimate function of government unlike some other jurisdictions this particular jurisdiction has not seen fit to provide services of the type described above for the governor-elect and thus has not recognized such activities as functions of government prior to his inauguration thus the activities of the subject organization are not relieving any burden of the government furthermore while the people of the jurisdiction may well derive a substantial benefit from the activities of this organization its predominant purpose is to effectuate changes in the government's policies and personnel which will make them correspond with the partisan political interests of both the governor-elect and the political_party he represents since the activities are partisan in nature and are directed to a substantial extent to the adoption of legislation the organization is an action_organization as described in sec_1_501_c_3_-1 of the regulations accordingly the organization described above is not exempt from federal_income_tax under sec_501 of the code department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 revrul_75_286 1975_2_cb_210 jan block association public area beautification and preservation -- a nonprofit organization with membership limited to the residents and business operators within a city block and formed to preserve and beautify the public areas in the block thereby benefiting the community as a whole as well as enhancing the members’ property rights will not qualify for exemption under sec_501 of code but may qualify under sec_501 revrul_68_14 distinguished revrul_85_1 1985_1_cb_177 jan an organization that provides funds to a county’s law enforcement agencies to police illegal narcotic traffic lessens the burdens of government and therefore qualifies for exemption under sec_501 of the code revrul_85_2 1985_1_cb_178 jan the organization employs attorneys to provide legal advice and representation to the lay volunteers and operates a training program for the volunteers on how best to represent the interests of abused and neglected children the organization is supported in part by grants from the juvenile court a determination of whether an organization is lessening the burdens of government requires consideration of whether the organization’s activities are activities that a governmental_unit considers to be its burdens and whether such activities actually lessen such governmental burden to determine whether an activity is a burden of government the question to be answered is whether there is an objective manifestation by the government that it considers such activity to be part of its burden the fact that an organization is engaged in an activity that is sometimes undertaken by the government is insufficient to establish a burden of government similarly the fact that the government or an official of the government expresses approval of an organization and its activities is also not sufficient to establish that the organization is lessening the burdens of government the interrelationship between the organization and the government may provide evidence that the government considers the organization’s activities to be its burden to determine whether the organization is actually lessening the burdens of government all of the relevant facts and circumstances must be considered a favorable working relationship between the government and the organization is strong evidence that the organization is actually lessening the burdens of the government department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 in this case the juvenile court requires the appointment of guardians ad litem the court previously undertook to appoint and compensate attorneys to serve as guardians in juvenile court proceedings after several years of this practice the court determined that the best way to conduct this activity would be to appoint volunteers and arranged with this organization for the training and legal representation of the volunteers the court supports this organization through grants and utilizes the volunteers trained by the organization these facts show that the government considers the activities of the organization to be its burden the organization’s training of lay volunteers is an integral part of the government’s program of providing guardians ad litem in juvenile court proceedings without the organization’s activities the government could not continue its present program unless it undertook to train lay volunteers itself or appointed attorneys to act as guardians as it had in the past thus the organization is actually lessening the government's burden within the meaning of sec_1_501_c_3_-1 of the regulations holding the organization described above which provides legal advice and training to guardians ad litem representing abused or neglected children before a juvenile court qualifies for exemption from federal_income_tax under sec_501 of the code revproc_2011_9 date sec_12 revocation or modification of determination_letter or ruling recognizing exemption revocation or modification of a determination_letter or ruling may be retroactive dollar_figure the revocation or modification of a determination_letter or ruling recognizing exemption may be retroactive if there has been a change in the applicable law the organization omitted or misstated a material fact operated in a manner materially different from that originally represented or in the case of organizations to which sec_503 of the code applies engaged ina prohibited_transaction with the purpose of diverting corpus or income of the organization from its exempt_purpose and such transaction involved a substantial part of the corpus or income of such organization in certain cases an organization may seek relief from retroactive revocation or modification of a determination_letter or ruling under sec_7805 requests for sec_7805 relief are subject_to the procedures set forth in revproc_2011_4 where there is a material_change inconsistent with exemption in the character the purpose or the method of operation of an organization revocation or modification will ordinarily take effect as of the date of such material_change in the case where a determination_letter or ruling is issued in error or is no longer in accord with the service's position and sec_7805 relief is granted see sections and of rev department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 proc ordinarily the revocation or modification will be effective not earlier than the date when the service modifies or revokes the original determination_letter or ruling b s w group incorporated v commissioner of internal revenue 70_tc_352 us tax ct date the court upheld the commissioner's denial of exemption under sec_501 c of the code the organization's sole planned activity was to offer consulting services for a fee to nonprofit_organizations having limited resources some of which were exempt_organizations and engaged in various rural-related activities the organization's goals were to help its clients deal with problems they face regarding the external environments within which they operate change their priorities implement realistic internal planning and management policies and improve their understanding of governmental policy processes and methods for becoming more effective in their work through public and private funding the organization obtained appropriate individuals to perform research projects for the clients the organization did not advertise its services the organization's officers planned for the first few years to serve without compensation the fees charged by the organization were set at or close to cost and were to some extent based on the client's ability to pay but as a whole were intended to cover its costs the organization projected a net profit in its first year of operation the court considered such factors as the particular manner in which the organization's activities were conducted the commercial hue of those activities and the existence and amount of annual or accumulated_profits as relevant evidence of the organization's predominant purpose to conduct a business the organization failed to show that it was not in competition with commercial enterprises which the court considered strong evidence of the predominance of a nonexempt commercial purpose the court contrasted the case to one where an organization concededly conducting substantial educational scientific or charitable activities also conducts a trade_or_business related to its exempt functions the organization's activity of linking researchers with client organizations was not inherently charitable and the organization failed to show that such research would further exclusively exempt purposes the organization's sole source of support was fees for services the organization's clientele was not limited to sec_501 organizations 326_us_279 s ct ed cb the united_states supreme court stated that the presence of a single non exempt_purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes gemological institute of america v commissioner 17tc the court concluded that the taxpayer was not exempt because the salary and royalties contracts between the taxpayer and its founder were characteristic of an enterprise that was conducted as a commercial enterprise for the greater benefit of one person the net earning department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 of the organization inured to the benefit of the officer such distribution is prohibited by statute therefore organization failed to qualify for exemption est of hawaii v commissioner t c several for profit est organizations exerted significant indirect control_over est of hawaii a non profit entity through contractual agreements court case concluded that the for-profits were able to use the nonprofit as an instrument to further their for-profit purposes the fact that amounts paid to the for-profit organizations under contracts were reasonable did not affect the court’s conclusion consequently est of hawaii did not qualify as an organization described in sec_501 in addition the court concluded that the organization engaged in a business and was operated for a commercial purpose its income producing activities are not incidental to its educational activities but are the very justification for its business redlands surgical services v commissioner tc affd f 3d cir the court_of_appeals adopted tax court’s holding that appellant has ceded effective_control over the operations of partnerships and the surgery center to private parties conferring impermissible private benefit redlands surgical services is therefore not operated exclusively for exempt_purpose within the meaning of sec_501 the court_of_appeals also affirmed the tax court’s conclusion that the benefit conferred on private parties by the surgery center's operations prevents redlands surgical services from attaining tax exempt status under the integral_part_doctrine 92_tc_1053 the court determined that petitioner is operated for the benefit of private interests a non exempt_purpose because more than an insubstantial part of petitioner’s activities further this nonexempt purpose the petitioner has failed to establish it operates exclusively for exempt purposes within the meaning of sec_501 consequently petitioner is not entitled to an exemption from taxation under sec_501 bob jones university museum and gallery inc v commissioner tc memo tcm the court ruled that the revenues raised by bob jones university museum and gallery inc from donations from the public to be used to pay rent to the for profit bob jones university does not result in an impermissible private benefit to the university and that the petitioner's net_earnings do not inure to the university 78_tc_921 the court ruled that any benefit accruing to the legal profession through the activities to be conducted at the kentucky bar center headquarters is incidental to the broad charitable department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 purposes served by those activities thus the petitioner is an exempt_organization within the meaning of sec_501 83_tc_20 organization has not engaged in any activities religious or otherwise it is controlled by a self perpetuating board_of three directors and at least one of its directors participates in the promotion of the organization of mail-order churches the court ruled that organization has not shown it is organized and operated or will be operated exclusively for public rather than private benefit of its organizers and petitioner is not entitled to sec_501 exempt status 75_tc_127 organization is operated as a christian church its ministers are paid predetermined percentages of gross tithes and offerings received the ministers are also members of the board the court ruled that whatever the minister's services are worth they are not directly related to organization’s gross_receipts the value of solace and spiritual leadership cannot be measured by the collection box by basing the minister's compensation upon a percentage of organization’s gross_receipts apparently subject_to no upper limit a portion of petitioner’s earnings is being passed on to the minister the statute specifically denies tax exemption where a portion of net_earnings is paid to private shareholders or individuals we hold here that paying over a portion of gross earnings to those vested with the control of a charitable_organization constitutes private_inurement as well allin all taking a slice off the top should be no less prohibited than a slice out of net we do not however mean to imply that all contingent_compensation arrangements made by charitable organizations will preclude tax exempt status such arrangements are a part of business life and must occasionally be paid_by a charity to salesmen support groups and even fund raisers what is prohibited is inurement to the benefit of any private shareholder or individual’ the term private_shareholder_or_individual refers to persons who have a personal and private interest in the payor organization the term does not refer to unrelated third parties in other words sec_501 denies exempt status to an organization whose founders or controlling members have a personal stake in that organization’s receipts such is the case here where petitioner's ministers and donhowe in particular control its affairs organization therefore fails to qualify for exemption under sec_501 its net_earnings inure to the benefit of private shareholders or individuals general counsel memorandum please note that the government cannot cite general counsel memorandums as a precedent in court cases however they are included in this report since they were cited by taxpayer in its updated position dated april 20xx they include the following department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 general counsel memorandum date it was determined that the organization which paid for certain expenses of the mayor of a city which are not included in the city’s budget and most of which are not of a type paid_by the city in the past years does not lessen the burden of the government since there was no objective manifestation that the city believes that the activity is a burden of the government therefore it does not qualify as a charitable_organization per sec_501 general counsel memorandum date it was determined that an organization which provided financial assistance to governmental units by refinancing acquiring constructing improving leasing or selling real or personal_property by avoiding paying leasing fees is lessening the burdens of the government and therefore qualifies as tax exempt_organization per sec_501 general counsel memorandum date it was determined that the citizens who provided funds to allow the county’s undercover agents to purchase drugs in the course of apprehending engaged in illegal drug use and guardians which provided legal counsel and training to volunteers who serve as guardians ad litem in juvenile court are lessening the burdens of the government and qualify as charitable organizations per sec_501 general_counsel's_memorandum date organization was established pursuant to a statutory directive of the legislature to hold and distribute funds of the program in a manner approved by the board the program is administered by the state there are evidences of a government's objective manifestation that it considered the activity of the organization to be a burden of the government there was also a legislative acknowledgement of governmental responsibility and the activities of the organization were previously funded by the government or a history of government participation in the activity taxpayer’s position an updated taxpayer’s formal written position dated april 20xx with attachments as exhibit sec_1 through are enclosed in its original form it was received by the internal_revenue_service on april 20xx government’s position the org org is a state non stock corporation established in 20xx to purchase claims from fuel tank owners that have been approved but not reimbursed by the co-9 in its application_for exemption on form_1023 it described its activity in part as follows department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 org provides liquidity using a simple financing technique rather than lending money to the rp’s responsible parties or org owners or operators org purchases the rp’s org claims using a two step payment process step one the rp assigns a prepared claim for a completed phase of a project claim to org concurrently with the claim being submitted to the state environmental agency for processing and approval typically immediately upon the claim being approved by the state_agency org issues an initial payment for a percentage of the amount approved the amount of the initial payment is typically a large percentage of the amount approved the specific percentage is determined based on the expected carrying time step two the state eventually issues the reimbursement of the approved amount directly to org org then remits the remaining balance less the accrued carrying costs to the rp in the form of a second residual payment carrying costs for each claim are determined by allocating costs on a pro_rata basis based on the size of each claim and the number of days it takes until the claim is reimbursed carrying costs allocated in this manner include a the daily cost of org’s borrowed money b amortized legal and set up costs and c ongoing administrative costs org anticipates that the carrying costs will be at least as low as those of the co-8 program which have historically been approximately four percent on an annualized basis org believes that economies of scale and the use of tax exempt bonds will likely further reduce the carrying costs to the program participants the amended and restated articles of incorporation dated september 20xx under article b stated in part one of the directors at all times be a person assigned by the servicer the service director’ the initial service director is president resident of the city of city state who shall continue to serve until replaced by the servicer as the servicer director’ article 6a on servicer stated in part at all times operational and investment management services shall be provided to the corporation by a servicer which shall initially be co-1 the servicer shall perform its duties pursuant to a written servicing agreement approved by the board acting however without the vote of the service director with due regard to limitations on private_inurement applicable to nonprofits’ the main issues are is the above principal activity conducted by the organization considered exempt does it satisfy the charitable activity for which it was granted as lessening the burden of the government has the government identified a burden and has the government considered the activities of the org as lessening the burden of the government does the financing activity of org lessen the burden of the government or lessen the burden of the fuel tank owners department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 does org demonstrate that the governmental_unit considers the organization to be acting on the government's behalf thereby freeing up government of human material and financial_assets that would otherwise have to be devoted to the particular activity is there inurement private benefit effective date of revocation reasoning of the examination reports has no relevance or merit charitable exempt activity org s principal and sole activity involves the purchasing of claims from fuel tank owners and consultants that have been approved by the co-9 for reimbursement for a fee it charges a fee based on the cost of borrowing money or interest plus amortized legal and set cost and other administrative costs fuel tank owners are comprised of home owners gasoline station owners fuel distributors refiners contractors and farmers based upon above facts a determination is made that org’s financing activity of providing liquidity to fuel tank owners for a fee does not qualify as a charitable activity per internal_revenue_code irc c financing is an activity that is normally carried on by for profit entities such as banks and investment companies in addition the financing activity is provided to fuel tank owners who do not qualify as a charitable_class such as the poor distressed elderly etc per sec_501 it its updated position dated april 20xx organization claimed that even if the financing activity carried on by org may be typically considered an unrelated_trade_or_business but or org the activity is directly related to org’s exempt_purpose and contributes importantly to the accomplishment of that exempt_purpose the financing activity therefore furthers org’s exempt_purpose of lessening the burdens of government org is not organized and operated to carry out financing activities per se instead org uses financing activities as the method of carrying out of its primary purpose which is to lessen the burdens of government government respectfully disagrees with org’s position for the following reasons a org does not satisfy the exempt_purpose of lessening the burdens of government as addressed later it’s financing activity is not an exempt activity as supported by the following b per revrul_72_369 an organization formed to provide managerial and consulting services at cost to an unrelated exempt_organization does not qualify for exemption under sec_501 of the code department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 b s w group incorporated v commissioner of internal revenue 70_tc_352 us tax ct date in this case the court upheld the denial of exemption of an organization's sole activity to offer consulting services for a fee to non profit organizations having limited resources the court considered such factors as the particular manner in which the organization’s activities were conducted the commercial hue of those activities and the existence and amount of annual or accumulated_profits as relevant evidence of organization’s predominant purpose to conduct a business the organization failed to show that it was not in competition with commercial enterprises which the court considered strong evidence of the predominance of a non-exempt commercial purpose this court case is very relevant to org where its financing activity is allowed by the state co-9 to for profit and non profit entities better business bureau of washington dc v united_states us 66_sct_112 90_led_67 cb the united_states supreme court stated that the presence of a single non exempt_purpose if substantial in nature will destroy the exemption regardless of the number of importance of truly exempt_purpose revrul_69_528 made a determination that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for-profit lf org was allowed to operate and engage in its financing activity as a tax-exempt_organization it will exert an undue and unfair advantage over for profit-entities that co-9 does not limit the assignment of approved claims to charitable organizations 71_tc_1067 the court determined that the organization engaged in a business and was operated in a commercial manner its income-producing activities are not incidental to its educational activities but are the very justification for its business therefore the organization did not qualify as a charitable_organization described in sec_501 another argument put forth to determine if org’s financing activity qualifies as charitable per sec_501 is the analogy with the rapid refund program provided by tax preparation businesses for the following factors the irs is assigned to carry the burden of government with the collection_of_taxes and issuance of overpayments just like the epa and the co-9 are assigned to carry out the org fund program to clean up the environment similar to the delay between the times co-9 approves a claim to the issuance of reimbursement of funds to the fuel tank owners there is a time lag between the filing of tax_return and issuance of refunds by the irs it is department of the treasury - internal_revenue_service form 886-a page please note u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 the rapid refund program provides liquidity to taxpayers who are in need of cash at the time they file the tax_return just like the purchase of claims by org from the fuel tank owners can the rapid refund program conducted by the tax preparation business be considered a charitable activity per sec_501 the answer is no the analogy can be extended to the defense of the country the burden to defend our country from foreign threats is assigned to the department of defense and the military department of defense does not build airplanes and aircraft carriers needed to defend the country therefore can we consider building of airplanes and aircraft carriers by the defense contractors and the financing activity by their banks a charitable activity again the answer is no the org considers above analogies as misleading in its updated position dated april 20xx to which the government disagrees based upon above facts and argument a determination is made that org’s financing activity does not qualify as charitable per sec_501 does org’s activity satisfy the factors relating to the charitable activity under the lessening the burden of the government an activity is a burden of the government if there is an objective manifestation by a governmental_unit that it considers the activities of the organization to be its burden the government has identified a burden which is to clean up and protect the environment from leaking underground fuel storage tanks the federal and state governments have enacted laws to provide the necessary funds and administer the clean up of the environment the state legislature and the co-9 have this program in place a the state has enacted laws and regulations to require the following a fuel tank owners with the exception for home heating oil tanks must demonstrate evidence of financial responsibility to cover corrective action and third party liability costs for accidental petroleum releases from their underground storage tanks b to report fuel storage spillage to co-9 regional_office b the state co-9 administers the clean up of fuel spillage from underground storage tanks in the following manner a after receipt of report from fuel storage owners of the spillage to the environment it conducts and inspection to i determine if fuel tank owner is negligent in relation to the fuel spillage department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 ii determine the extent of corrective action required to clean up the environment and its cost if the fuel tank owner is not negligent with the fuel spillage the state will reimburse b the fuel tank owner for approved cost to clean up the environment by filing a claim c the claim for reimbursement can be assigned by the fuel tank owner to a third party the amount of clean up approved by the co-9 is based upon the cost of the clean up and not on the amount of available funds it has received from the federal government the source of fund for reimbursement is based upon the cent gallon of fuel purchased in state if the total amount of claim exceeds the available funds the reimbursement of claims will be delayed until the funds become available the facts showed that the government has identified a burden which is the clean up of the environment from fuel spillage from underground storage tanks and has undertaken the necessary programs to take care of the burden through the epa and co-9 in the case of the state of state org claims it qualifies as a tax exempt_organization by participating in acquiring the claims for reimbursement to clean up fuel spills from the fuel tank owners for a fee and thereby lessening the burdens of the government unfortunately government does not agree with above position for the following reasons a co-9 and other states allowed for the assignment of approved claims to clean up fuel spills to any third party which is not confined to a tax exempt_organization therefore it is available to for profit and not for profit entities b the fact that the assignment of claims is open to for profit and tax exempt entities means that engaging in this activity is not a charitable or tax exempt activity per sec_501 c the acquisition of a claim for a fee is a financing activity that is normally undertaken by banks and investment entities as a business the above facts and arguments did not show that there was an objective manifestation by the government that it considers the activities of org to be its burden this position is supported by revrul_85_2 org has taken the position in its legal analysis under operational_test a lessening the burdens of government objective manifestation by governmental_unit that it considers the activities to be its burden on its written positions dated november 20xx and updated on april 20xx as follows a commonwealth of state and the states of state and state have clearly manifested that they consider the clean up of the environment and improvement of public health to be burdens of state governments the state governments have acknowledged that the department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 government's burden of cleaning up the environment from fuel spillage from underground storage tanks also includes encouraging voluntary compliance with clean up efforts b state co-9 and state resources authority co-8 determined that the backlog of unpaid co-4 co-4 claims was resulting in cash_flow problems which in turn led to a decrease in voluntary compliance and pace of clean ups by making this decision to establish the program the co-8 demonstrated that the activity of correcting this problem was a governmental problem the government does not accept above position as it relates to the following claims and assumptions a state co-9 has the statutory burden to protect the environment it created the co-4 fund to reimburse fuel tank owners and consultants for to clean up fuel leakage from underground storage tanks not covered by the federal government b the funding mechanism of the co-4 program allows fuel tank owners and consultants to assign its approved claims to third parties this assignment of claims is allowed to for profit non profit or governmental entities engaged in financial transactions this was made to alleviate the financial difficulty encountered by claim holders in periods where there was a significant delay in the reimbursement by co-9 statements provided by ra-5 former executive director of co-8 and ra-1 an employee of co-9 indicated that the delay in reimbursement will fluctuate from time to time with the allowance of assignment of approved claims to third parties co-8 was able to offer its financial program to fuel tank owners and consultants government would like to note that state co-9 was still managing the approval and disbursements of claims to clean up the environment and has not delegated this activity to co-8 co-8 simply acquired approved claims from the fuel tank owners and contractors and therefore has not reduced the burden of state co-9 co-8 actually lessened the burden of the fuel tank owners and contractors by receiving its reimbursement up front prior to the completion of the clean up of fuel spill therefore even if org was patterned after and took after the financing program of co-8 it does not mean that it is lessening the burden of the government also it should be noted that co-8 did not and does not have the authority to endorse org as the official successor to its program this will create an undue competitive advantage over for profit entities such as commercial banks or other lending institutions to participate in this program in addition it may not be a healthy environment for co-8 to continue its financing program with the co-4 program since it enjoys an undue advantage over for profit entities such as bank and investment companies the same rationale holds true if org were allowed to operate as a non profit entity in providing its financing activity with the co-4 reimbursement program by not having to pay tax on its profits also it will stifle competition with its ability to avail of tax exempt bond financing c d department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 another position by org which the government does not agree with pertains to the co- established the program when the backlog of claims arose and operated the program for three years until the backlog of claims diminished this length of time was significant given the program was established once the need for the activity arose the program also established a history of the government conducting this activity the co-8 purchased claims totaling over dollar_figure over the life of the program considering when the backlog of claims arose and the amount of financing provided by the program the co-8 ran the program for a significant period of time and expended a significant amount of money on the program before org took over the operation of the activities of the program government does not agree with above position for the following reasons a three years of operation of the co-8 program does not constitute a significant amount of time revrul_85_2 stated in part that the fact that an organization is engaged in an activity that is sometimes undertaken by the government is insufficient to establish a burden of the government b co-8’s financial program to acquire claims from fuel tank owners and consultants is c not an exclusive function of the government it is an activity that is allowed to any third party that is normally engaged in the business of financing in other words co-8’s financial program did not help state co-9 manage its function of approval and disbursement of claims to clean up fuel spill but rather assisted the fuel tank owners and contractor secure up front financing prior to completion of the work to clean up the fuel spill in the environment therefore co-8 and org’s financial activity lessened the burden of the fuel tank owners and contractors more than the burden of the government another position by org which the government does not agree with pertains to the position which states in part the funding of org’s activities is a factor in determining whether the government considers the activities to be its burden the governors of state and state approved the issuance of tax exempt bonds to assist org in its activities org does not charge fees to any government for providing these services even though org is providing a service that was originally provided by the government these facts indicate a governmental burden government does not agree with above position for the following reasons a there is no evidence to show that org has taken over paying for fees or expenses that co-9 previously incurred b it does not charge the government fees to acquire claims from fuel tank owners or consultants because it is availing of low interest source of financing it actually enjoys an unfair advantage over for profit entities who cannot avail of the tax exempt bonds department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 c however org charges fees to owners of claims for interest administrative and other overhead costs it actually reduces the amount of funds and thereby adding costs to clean up the environment d the governor's certificate of approval dated 20xx and signed by governor as governor of state of stated in part the org bonds shall not be a debt of the commonwealth of state or any political_subdivision thereof other than the authority this approval is not intended to be and shall not be construed to be a determination by or on behalf of the commonwealth of state as to the soundness legality validity or the structure of or security for the org bonds’ e there is no evidence to indicate that the org bonds was issued it may have been approved but not issued f org does not charge fees to any government for providing its services because it does not help the co-9 and other state agencies in managing the approval financing and disbursement of funds to clean up fuel spills org acquires approved claims from fuel tank owners and contractors therefore it lessens the burden of for profit fuel tank owners and contractors rather than the government as a final note on this issue it is the government’s main position that even if org’s financing activity may provide liquidity to make the government’s reimbursement program a little bit more efficient it does not reduce the burden of the government in a significant manner to qualify as a tax exempt_organization per sec_501 and reg c - d the only thing that org has provided is a claim that its financing program increases compliance with the clean up of the environment but there is no data to back this up however offered testimony from ra-2 director of the co-9 office of spill response and remediation she also does not have any data or study to provide how much voluntary compliance was attributable to the org financing program it what she provided in her memorandum dated september 20xx actually supports the government's position that org does not reduce the burden of the government with the following statement which stated in part the presence or absence of org does not impact the size of the fund’s delayed payment balance or the number of days to pay the claim however if org were to cease financing of claims in state the rp and in turn the rp’s consultant would not receive any funds until the claim is actually paid in org’s updated position dated april 20xx it took the position that there was an objective manifestation by governmental_unit that it considers the activities to be its burden it cited several revenue_ruling and general counsel memorandums which include a revrul_85_1 department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer year period ended 20xx06 org org b revrul_74_117 cb c general counsel memorandum d general counsel memorandum e general counsel memorandum government respectfully disagrees with above position for the following reasons please note that government cannot cite general counsel memorandum’s in court cases as precedents but is addressing organization’s position a revrul_85_1 pertains to an organization which provides funds to the county’s law enforcement and therefore lessens the burden of government in org’s case it acquires claims from co-9 from the fuel tank owners for a fee it does not pay for expenses_incurred by the government therefore organization does not lessen the burden of the government on the contrary this revenue_ruling actually supports the government's position revrul_85_2 involves an organization who provides legal advice representation to lay volunteers and operates a training program for volunteers on how best to represent the interest of abused and neglected children again this does not apply to org as it does not provide volunteer or free service to co-9 but rather charges overhead and financing fees to purchase claims from fuel tank owners or contractors therefore it does not lessen the burden of the government on the contrary this revenue_ruling supports the government's position b revrul_74_117 relates to an organization that assisted the governor elect during the period between his election and inauguration in screening and selecting applicants for state appointive offices and preparing legislative message and program reflecting the party’s platform and budget it determined that the people may well derive a substantial benefit from the activities of this organization but its predominant purpose is to effectuate changes in the government’s policies and personnel which will make them correspond with partisan political interests of both the governor elect and the political_party he represents therefore the organization is not relieving the burden of the government and does not qualify as exempt_organization department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 the facts and determination of this revenue_ruling actually supports the government's position where org provides more benefit to the fuel tank owners and contractors and to co-1 rather than the government c general_counsel's_memorandum pertains to an organization which pays for the expenses of a mayor of the city which are not included in the city’s budget it was determined that the organization does not lessen the burden of the government and does not qualify as a charitable_organization per sec_501 ‘it actually supports the government's position d general counsel’s memorandum pertains to an organization which provided financial assistance to the governmental_unit by refinancing acquiring improving leasing or selling real or personal_property by helping it avoid fees is lessening the burden of the government and qualifies as a charitable_organization again this does not apply to org as it does not help co-9 avoid paying fees on the contrary it actually acquires claims from fuel tank owners for a fee it actually supports the government's position e general_counsel's_memorandum pertains to organizations with similar facts to revrul_85_1 and it actually supports the government's position does the financing activity of org lessen the burden of the government or lessen the burden of the fuel tank owners and or contractors org’s position from the time it applied for tax exemption on its attachment to form_1023 and to the current period is as follows org is a state nonstock corporation established in 20xx for the purpose of lessening the burdens of the government by providing low-cost liquidity that will speed reimbursements to claimants and consultants from state administered leaking underground storage tank org funds and thus encourage continued voluntary compliance with clean up efforts a better environment and improved public health various state administered org funds do not have sufficient cash on hand to reimburse claims in a timely manner the result is that org owners and operators sometimes referred to as responsible parties or rp’s end up waiting months for reimbursement delays in reimbursement often cause cash_flow problems for rp’s many of which are small independent business owners and homeowners this can result in reduced voluntary cooperation and consequential slowdown in the pace of clean ups of org delays in identifying and removing org can result in spreading petroleum plumes which increase public health risks and higher total clean up costs finally payment delays increase the risk that org fund may no longer be deemed a viable mechanism for meeting epa’s financial responsibility regulations org was established to assist the state governments in meeting department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 their obligation to provide timely reimbursement of approved claims maintaining their org clean up programs and meeting the epa’s financial responsibility requirements in summary organization stated its exempt_purpose in its application_for tax exemption that it is lessening the burden of the government by increasing voluntary compliance for fuel tank owners since they practically cannot get financing to fund the clean up cost even if reimbursement has been approved by the co-9 the service does not agree with this position for the following reasons a org is engaged in a financing activity of acquiring claims from fuel tank owners to clean up the fuel spill from their underground tanks the co-9 and other state agencies allowed fuel tank owners to assign their claims to third parties which are not restricted to tax exempt or charitable entities claims are also assignable to for profit organizations such as banks therefore government takes the position that org’s financing activity of acquiring claims which is open to for profit does not equate to engaging in an activity that is charitable per sec_501 as lessening the burdens of the government per reg c -1 d all assumptions that org made as to their role in increasing voluntary compliance and cleaning up the environment is not supported by data and may be overstated it appears that whatever benefit it may contribute to make the co-9 program efficient is not sufficient to outweigh the benefits it provides to the fuel tank owners consultants and its founder who are not deemed to be of a charitable_class per sec_501 therefore government takes the position that org provides more relief to the burden of the fuel tank owners and consultants than to the burden of the government b org took and added a position in its protest letter dated november 20xx with regards to the issue if org actually lessened the burdens of the government in part as follows org actually lessens the burdens of the government by conducting the activities of the program the co-8 had a strong working relationship with org as the co-8 went through the process of handling off the activities to org which evidences that org is actually lessening the burdens of government also the relationship between org and the government is not one of a commercial contract for services instead the co-8 recognized that it would be more cost effective to have org conduct the activities see exhibit org lessens the burdens of the government because if not for org the co-8 would have to continue conducting activities at a higher cost this the co-8 considered the conduct of the activities to be its burden and the co-8 turned over the activities to org for the specific purpose of lessening the burden on state by lessening the cost of administering the program department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 the letters from ra-5 and ra-6 indicate that org has been successful in significantly improving voluntary compliance of fuel tank owners and ensuring that the pace of clean up continues as well as ensuring that the co-4 continues to be a viable mechanism for allowing fuel tank owners to meet their financial responsibility requirements see exhibit the relationship between org and the co-8 the cost-effectiveness of turning over the activities to org and the success of org’s activities are all facts indicating that the activities of org actually lessen the burdens of governments’ government respectfully disagrees with the above position as of november 20xx for the following reasons a government does not accept the premise that the success in org’s program to purchase approved co-9 claims equates to increased compliance with the fuel tank owners to report fuel spillage to clean up the environment please note that org only buys approved claims from fuel tank owners or contractors since reporting of fuel spillage is required prior to having a claim approved it means that org buys claims from fuel tank owners or contractors who are already compliant with the reporting requirement by the co-9 in other words huge success in purchasing of co-9 claims does not equate to increased compliance it just means that the fuel tank owners or contractors got paid in advance prior to reimbursement by co-9 and the state of state still paid the same amount of claim co-9 did not reduce the amount of reimbursement as org discounts the claims paid to the fuel tank owners or contractors therefore there is no actual hard data to provide evidence of increased compliance or lessening the burden of government in cleaning up the environment due to org’s financing program b based on above rationale all claims by org along with written testimony by ra-5 and ra- are not supported by data to show that there was an increase in compliance with reporting of fuel spillage due to org’s financing activity org has to show supporting data that even if there is an increase in compliance with the reporting of fuel spillage how much of the increase is attributable to the program conducted by its financing program to purchase approved claims c the financing activity performed by the co-8 and org as noted earlier provides more benefit to the fuel tank owners consultants and co-1 as personified by president than lessening the burden of the government fuel tank owners and consultants benefit by cashing in on their claims before reimbursement by co-9 and co-1 benefits with the commission plus reimbursements for administrative costs and marketing costs it earns as noted earlier the fuel tank owners consultants and co-1 as personified by president do not represent a charitable_class per sec_501 ra-2 director of office of spill response and remediation with state co-9 clarified in a letter dated november 20xx that there are many tanks in state whose clean up costs are department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 covered by the co-4 co-4 but are not subject_to any financial responsibility requirements co-4 funds are collected pursuant to state law and maintained in a separate trust fund even with the clarification of the mechanism of the co-4 program of the co-9 the issue remains that org’s financing activity provides more benefits to the contractors fuel tank owners and co-1 than the state or federal government in lessening their burden to clean up the environment in fact the copy of memorandum provided by org dated september 20xx prepared by ra-2 as director of office of spill response and remediation with the state co-9 on the subject of co-4 fy 20xx year end report and fy 20xx forecast supports government's contention that the org financing program lessens the burdens of the fuel tank owner and or contractors rather than the government is cited in part as follows org financing represented of the dollar_figure in delayed payment at any given time org financing represents between and of the delayed payment balance the presence or absence of org does not impact the size of the fund’s delayed payment balance or the number of days to pay the claim however if org were to cease financing of claims in state the rp and in turn the rp’s consultant would not receive any funds until the time the claim is actually paid again it appears that org provides more benefits to the fuel tank owners and consultants rather than lessening the burdens of the federal or state agencies and does not satisfy the requirements of sec_501 and reg c -1 d the determination that org does not satisfy the requirements of lessening the burdens of the government is supported by revrul_85_1 1985_1_cb_177 date revrul_85_2 1985_1_cb_178 date revrul_74_117 1974_1_cb_128 date organization took the position in its letter dated april 20xx that org lessens the burden of the government and cited the following a revrul_85_1 and b general counsel’s memorandum the government respectfully disagrees with org’s position as follows revrul_85_1 and actually supports the government's position as noted earlier general counsel’s memorandum department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 organization was established pursuant to a statutory directive of the legislature to hold and distribute funds of the program in a manner approved by the board the program is administered by the state there are evidences of a government’s objective manifestation that it considered the activity of the organization to be a burden of the government there was also a legislative acknowledgement of governmental responsibility and the activities of the organization were previously funded by the government or a history of government participation in the activity this memorandum does not apply to org since it does not manage the funds of co-9 but rather acquire claims from fuel tank owners for a fee therefore it does not lessen the burden of the government does org demonstrate that the governmental_unit considers the organization to be acting on the government’s behalf thereby freeing up government of human material and fiscal assets that would otherwise have to be devoted to the particular activity factors which are deemed relevant to make this determination are as follows interrelationship with governmental_unit activity previously conducted by governmental_unit payment of governmental expense sources of funding m t c whether activity is one that could be performed directly by governmental_unit a interrelationship with governmental_unit interrelationship with governmental_unit may provide evidence that the governmental_unit considers the activity to be its burden the stronger the control the government has over the activities of the organization the better the evidence of objective manifestation that it considers the activity as a burden of the government if a government appoints all directors of the organization that is strong evidence that the government considers the activity to be its burden in the case of org it has some members of its board_of directors who are state and local_government officials however they were not appointed by the state_or_local_government to org’s board_of directors to act on its behalf they are members of the board_of directors as private citizens who are in a non official capacity org performs its activity independently of co-9 co-9 allows the assignment of fuel tank operator’s claims to any entity in the business of engaging in financing activity co-9 did not limit the entities to acquire the claims to tax exempt or charitable entities therefore it did not specifically sanction org to purchase these fuel claims department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 facts showed the government does not have any control_over the activity of org there is therefore no clear indication that org’s financing activity is considered a burden of the government org’s position with rebuttal dated november 20xx it claimed having a strong relationships with several state governmental units including state state and state it even provided testamentary letters from ra-3 former director of state resources authority and ra-2 director office of spill response and remediation in state org claimed that it acted as the predecessor to the accelerated co-4 payment program program created by the state resources authority co-8 the program was created in 20xx in response to the backlog of reimbursement of claims approved by the co-4 co-4 to clean up the leaking underground storage tanks the program paid the claims in two installments the first installment which represents of total claim was paid as soon as the state co-9 reviewed and approved the claim and the second installment was paid after the state co-9 paid the co-8 for the assignment of claim co-1 was selected by the co-8 to act as the servicer of its portfolio claims in 20xx the co-8 through its then executive director dir-4 determined that it would cease operating the program and would hand off the program to org because the backlog of claims was shrinking to the point where the program was not cost effective for the co-8 to run the co-8 determined that org would be able to conduct the same program more cost effectively by operating in multiple states and would provide continuity if the backlog of claims returned a copy of dir-4’s testamentary letter dated november 20xx was included in taxpayer’s position as exhibit it supported the position provided by org on this issue in addition a copy of ra-2’s testamentary letter dated november 20xx was also included in taxpayer's position as exhibit in state the general assembly established and amended the underground storage tank petroleum clean up program and allowed payment to an assignee a copy of the special session public act no sec_91 was included in taxpayer's position as exhibit the document stated in part the commissioner may also make payment from the account to an assignee who in the business of receiving assignments of amounts approved by the board but not yet paid from the account provided the party making any such assignment using a form approved by the commissioner directs the commissioner to pay such assignee that no cost of any assignment shall be borne by the account and that the state and its agencies shall not bear any liability with respect to any such assignment department of the treasury - internal_revenue_service form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 org also provided a copy of the testamentary letter issued by ra-7 member state leaking underground storage tank review board he claims to write the letter in his capacity as a member of the state’s leaking underground petroleum storage tank review board review board an instrumentality of the state copy of the letter is noted as exhibit org also provided a copy of the state governor's certificate of approval attached as exhibit in state the general assembly passed legislation to enable org activity in the state it authorizes the state environmental protection agency to disburse payments from the underground storage tank fund to persons providing financing to an owner or operator or consultant copy of public act no is attached as exhibit a copy of letter provided by representative ra-8 regarding org is attached as exhibit the government respectfully disagrees with org’s position and testimonies from third parties for the following reasons there is no evidence to show there was interrelationship with governmental_unit in terms of control org did not have any member of its board who was appointed by a governmental agency in an official manner org had members of the board_of directors who are members of the board as private citizens who are in a non official capacity ra-7 claims to have written his testamentary letter as a member of state’s leaking underground petroleum storage tank review board an instrumentality of the state why is it that the letter was written under the letterhead of gasoline automotive service dealers of america inc please note that he acknowledged that state legislation did not grant org exclusivity on claim assignments it indicates that purchase of claim reimbursements is not an exclusive activity for charitable organizations but rather open to any type of entities engaged in the business of receiving assignments as worded in the legislation org did not officially act as the predecessor to the accelerated co-4 payment program program co-8 does not have the authority to officially anoint org to take over its program org may have patterned its operations after the co-8 program however this does not make it a charitable activity of lessening the burden of the government the activity of acquiring claims owned by fuel tank owners and consultants undertaken by co-8 and org is allowed by the co-9 to any type of entity engaged in financing activity this situation applies to all other states which allowed the assignment of claims to third parties it did not limit the assignment of claims to tax exempt charitable organizations it also allowed to for profit entities such as bank and other financing institutions in other words org’s financing activity of acquiring approved claims from fuel tank owners and contractors did not relieve co-9 in state and other states in its burden of inspecting department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 fuel spills approval and disbursements of claims co-9 in state and other states which org operates continued to engage in managing its programs and was not relieved of any type of burden to manage its program or reduce its expenditures that is the reason why the government takes the position that org relieves the burden of the for-profit fuel tank owners and contractors rather than the government dir-4 wrote a testimonial letter dated november 20xx include a statement in part to indicate that the co-8 would hand off the program in 20xx to org because the backlog of claims was shrinking to the point where it was not cost effective for co-8 to run it does this statement show that there was no longer a burden to the government when org started its financing activity above statement does not appear to be consistent with statement in updated position taken in letter dated april 20xx on last paragraph on page which stated in part in addition ra-5 stated on behalf of the co-8 that if org had not carried out the activities of the program then the co-8 would have continued to operate the program’ government does not dispute dir-4’s testimony on inner workings of the co-8 and its program however government does not accept his position with regards to his comments regarding the irs memorandum statements relating to org’s impact on promoting voluntary compliance clean up of the environment and lessening the burdens of the government within the meaning of tax exempt_organizations per sec_501 not supported by data or evidence are deemed to be opinions and again the program undertaken by co-8 and subsequently org is not a charitable activity as it serves to lessen the burden of the fuel tank owners and consultants more than the co-9 or other state agencies where org eventually was allowed to operate statements made by ra-2 as director of office of spill response remediation with the co-9 of state with regards to the funding and inner workings of the co-4 co-4 are not disputed by the government it is used to augment the facts secured from the interview with an employee of the co-9 however government does not accept any statement she provided relating to the impact on promoting voluntary compliance cleaning up the environment enforcement actions and lessening the burdens of the government within the meaning of tax exempt_organizations per sec_501 which are not supported by data or evidence are deemed to be opinions government takes the position that org’s financing activity to acquire claims provide more benefits to fuel tank owners consultants and co-1 more than the lessening of the burden to the government department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 government cites a statement in a memorandum prepared by ra-2 dated june 20xx which was submitted by org which partly stated the presence or absence of org does not impact the size of the fund’s delayed payment balance or the number of days to pay the claim however if org were to cease financing of claims in state the rp and in turn the rp’s consultant would not receive any funds until the time the claim is actually paid government does not agree with the position taken by org of being granted access to be reimbursed for approved claims in the states of state and state somehow makes it a charitable_organization for easing the burden of the government for the following reasons a the legislative amendments which allowed org to be reimbursed for claims to clean up leakage from underground storage tanks is not exclusive to org or charitable organizations it is allowed to entities which are in the business of purchasing claims or in the financing business therefore granting access to purchase claims to clean up the fuel spills from underground storage tank does not translate to being a charitable activity in both states there is already a program similar to the co-9 program in state which undertakes the reimbursement of clean ups from fuel spills from underground storage tanks therefore org is not easing the burden of the government but rather advancing the reimbursement of claims it is a financing activity similar to discounting of a loan which is not a charitable activity b b activity previously conducted by governmental_unit when a governmental_unit engages in an activity on a regular basis for a significant length of time before it is taken over by the organization the activity may be a burden of government however when an organization engages in an activity that is sometimes undertaken by a governmental_unit it is insufficient to establish that a burden of the government exists as noted in revrul_85_2 the state resources authority co-8 undertook the accelerated claim payment program co-8 program in 20xx in response to the delay in reimbursement of funds which was running for months at that time it issued a bond to advance the payment of claims the co-8 program was terminated in 20xx org reported on its application_for exemption on form_1023 as follows org is modeled on state’s award winning state resources authority co-8 accelerated claim payment program co-8 program program and authorized org to begin providing the services formerly provided by the program on february 20xx the commonwealth of state terminated the co-8 org provided testamentary letter from dir-4 who was the executive director of co-8 at time the co-8 program was created in 20xx and discontinued in 20xx department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 based upon above facts government takes the position on this issue as follows co-8 program was created in 20xx and discontinued in early 20xx per revrul_85_1 the fact that an organization is engaged in an activity that is sometimes undertaken by the government is insufficient to establish a burden of government the co-8 program which involves the acquisition of claims from fuel tank owners is an activity that is allowed by the co-9 for any type of entity engaged in financing activity not limited to a governmental_unit exempt_organization or for profit entity any type of third party willing to acquire the claim it is allowed to it i sec_3 the statement that made by org in its form_1023 regarding the commonwealth of state terminated the co-8 program and authorized org to begin providing the services formerly provided by the program on february 20xx is misleading it conveyed an appearance that the state of state authorized org to exclusively acquire claims from fuel tank owners and consultants as noted earlier the co-9 allows any type of third parties to acquire claims for reimbursement government cites the statement provided by dir-4 where he determined that co-8 would case operating the program and would hand it off to org because the backlog of claims was shrinking to the point where the program was not cost effective for co-8 to run does this mean that there was no longer a burden to the government when org started its operations does it also mean that the program itself was becoming a burden to the government c payment of governmental expense payment of a specific or general governmental expense or part of government's debt is evidence of a governmental burden org does not pay any part of government's expense or debt to reimburse fuel tank owners or consultants to clean up of fuel spills tank owners or consultants it actually reduces the amount of proceeds for interest administrative legal and set up costs it charges the fuel tank owners or consultants to acquire their claims it adds to the cost of cleaning up the environment therefore it actually adds expenses to and does not lessen the burden of the government it acts as a middle man between the co-9 and the fuel d sources of funding funding of an organization’s activities may indicate a governmental burden if an organization regularly receives funding from the government in the form of general grants as opposed to fees for services it may indicate that the government considers the activity to be its burden in rev_rul the organization was supported in part by grants from a juvenile court a governmental_unit department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 org’s primary and main source of funding are the fees it charges to the fuel tank owners and consultants who assign their claims the fees are based on their borrowing and administrative costs to purchase and hold the claim until it receives reimbursement from the state not raise funds from grants or donations from the public or government agencies it does the government takes the position that the fees which org charges to the fuel tank owners and consultants as its source of funding reduces the amount available for cleaning up the environment and therefore does not lessen but add to the burden of the government e whether activity is one that could be performed directly by government unit org cited state resources authority's accelerated claim payment program as its business model the program was initiated in 20xx and discontinued in 20xx the government respectfully disagrees with org’s position as follows unlike in revrul_85_2 it does not appear that the government epa and co-9 could not continue its org fund program unless it undertook the financing activity of org to purchase its claim from fuel tank owners the financing activity conducted by co-8 and org to acquire claims from fuel tank owner is allowed to any type of third party who is engaged in the business of financing it is allowed to banks and other financing entities therefore org’s activity is not a charitable activity per sec_501 for lessening the burden of government per reg c -1 d per copy of memorandum from ra-2 dated september 20xx provided by org it stated in part as of june 20xx org financing represented of the dollar_figure in delayed payment at any given time org financing represents between and of the delayed payment balance the presence or absence of org does not impact the size of the fund’s delayed payment balance or the number of days to pay the claim however if org were to cease financing of claims in state the rp and in turn the rp’s consultant would not receive any funds until the time the claim is actually paid the statement above supports the government’s position that org is not lessening the burden of the government within the meaning of sec_1_501_c_3_-1 of the regulations it therefore does not qualify as a tax exempt_organization per internal_revenue_code sec_501 as described in sec_501 is there inurement org is a tax exempt charitable_organization which does not generate any support from public donations or government grant its revenue is generated from fees with its principal and sole activity of acquiring approved claims for reimbursement by co-9 from fuel tank owners or department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 consultants in other words it purchases approved claims to clean up of fuel leakage from underground fuel tanks for a fee a b amortized legal and set up costs c ongoing administrative costs daily cost of org’s borrowed money its fee is based upon org in turn outsources this principal and sole financing activity to co-1 for a fee president is the single member of co-1 and the officer and founder of org org is to pay co-1 for based upon its servicing agreement for a per annum of the face_amount of reimbursement obligation acquired pursuant to the terms and conditions of financing agreement plus flat fee not to exceed of the face_amount acquired reimbursement obligations further subject_to a minimum flat fee of dollar_figure and a maximum of dollar_figure per claim in addition co-1 is entitled to reimbursement of all marketing costs b c with the above business or operational model the system is set up for a org to expend and recoup its interest or borrowing cost legal organizational administrative and marketing expenses from its financing activity b org turns around and subcontracts or hands over its lucrative personal servicing activity to co-1 as personified by president c from another perspective the facts show that org appears to be a shell or a front for the servicing or financing business activity of co-1 as personified by president other facts which support this determination include a from the time of its inception org has designated president as a member of the board_of directors as a service director in its articles of incorporation b the articles of incorporation initially designated co-1 as its servicer to provide c operational recordkeeping financial reporting and management to org president advanced funds to provide start_up costs to establish org these funds are not donations to org but rather as loans that were repaid over time with president ensured as the director officer and servicer for org in its articles of incorporation this advance of start_up costs appears to be an indirect investment in org by president d from the time it started operations in 20xx through period ending june 20xx org incurred cumulative loss of dollar_figure while at the same time paying president through co-1 with servicing and management fees with cumulative amount of dollar_figure these payments advanced for calendar years 20xx and 20xx for a total amount of dollar_figure substantial servicing fees from org through co-1 in other words while org incurred losses in its operations president earned e the bigger the financing operation the bigger net_earnings to president therefore if org can expand its financing activity to fully utilize the dollar_figure tax exempt bonds from the state small_business financing authority co-1 as personified by president can department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 earl dollar_figure plus administrative fees plus reimbursement of marketing costs this is a great business model to benefit president with the use of tax exempt bonds through org as a charitable_organization this position is evidenced by the following financial results review of form_990 returns filed from 20xx through 20xx showed the following 20xx12 20xx06 20xx06 20xx06 20xx06 cum total revenues total contributions program service interest on sav invest total revenue total expenses excess deficit dollar_figure - dollar_figure dollar_figure analysis of f-990 returns filed showed the organization had cumulative loss of dollar_figure over a year period since it started operations in 20xx through june 20xx during the same period the organization incurred servicing and management fees to co-1 which is an llc whose sole member is president 20xx12 20xx06 20xx06 20xx06 20xx06 cum total servicing fee management fees total org issued form_1099 - misc to co-1 in 20xx and 20xxx for total amount of dollar_figure taxpayer stated that the servicing fee include reimbursements of expenses_incurred by co-1 on org these amounts are on a calendar_year basis accelerated from 20xx through 20xx it showed that the payments to co-1 f-1099 misc ssn ein 20xx 20xx cumulative total co-1 co-1 c o president during the course of the year period of operations president advanced funds for org’s operational expenses ending balances are loans from officer 20xx12 20xx06 20xx06 20xx06 20xx06 based upon the above facts cited a determination is made that the organization was created for the private benefit of president and the cumulative service fees represented inurement of department of the treasury internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 organization revenues assets and earnings regardless of whether org makes a profit the earnings stream of co-1 as personified by president is guaranteed it showed that organization was not exclusively operated for an exempt_purpose since its earnings inure in whole or part to the benefit of president who is a considered an insider as the founder or officer of org per sec_501 sec_1 c - d ii and sec_501 -1 c therefore a recommendation to revoke its tax exemption per sec_501 as described per sec_501 is warranted this determination is supported by the court case of gemological institute of america v commissioner 17tc the court concluded that the taxpayer was not exempt because the salary and royalties contracts between the taxpayer and its founder were characteristic of an enterprise that was conducted as a commercial enterprise for the greater benefit of one person the net earning of the organization inured to the benefit of the officer such distribution is prohibited by statute therefore organization failed to qualify for exemption the court case of est hawaii v commissioner tc also applies in org’s situation with regards to its finding that for profit organizations exerted significant indirect control_over est of hawaii a non profit entity through contractual agreements the tax_court concluded that the for-profits were able to use the nonprofit as an instrument to further their for profit purposes the fact that amounts paid to the for-profit organizations under the contracts were reasonable did not affect the court’s conclusion consequently the est of hawaii did not qualify as an organization described in sec_501 org disagreed and claimed in its protest letter dated april 20xx with the following positions a private_inurement does not occur where reasonable_compensation is paid for services actually rendered it cited revrul_73_126 1973_1_cb_220 and added that payment of such compensation does not constitute the improper use of an organization’s charitable resources nor does it constitute inurement of the organization’s net_earnings to private individuals private benefit applies to disinterest persons as well as insiders and cited court case of 113_tc_47 aff'd 242_f3d_904 cir and 92_tc_1053 b private benefit recognizes that certain incidental private benefit will not cause loss or denial of exempt status see bob jones university museum and gallery inc v commissioner tc memo 71_tcm_3120 and 78_tc_921 it further cited revrul_70_186 1970-1cb ginsberg v commissioner 46tc revrul_75_286 revrul_68_14 department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 government respectfully disagrees with taxpayer’s position that there was no evidence of inurement since the compensation paid to president through co-1 were reasonable and approved by the board_of directors the issue at hand is not whether the salary or contractual obligation to co-1 is reasonable but rather the earnings_of org inured for the benefit of its founder and officer as noted earlier this position is supported by the court case of est of hawaii v commissioner tc which concluded in part that the for-profits were able to use the nonprofit as an instrument to further their nonprofit purposes the fact that the amounts paid to the for-profit organizations under contracts were reasonable did not affect the court’s conclusion the organization did not qualify as exempt per sec_501 in addition the court concluded that the organization engaged in a business and was operated for a commercial purpose its income producing activities are not incidental to its educational activities but are the very justification for its business in the case of org it has one and only activity which is a financing activity that was also operated as a business that is competing with for profit entities with an added advantage as a tax exempt_organization and having access to tax exempt bonds the court of gemological institute of america v commissioner further provides support to the government's position where it ruled that the taxpayer was not exempt because the salary and royalties contracts between the taxpayer and its founder were characteristic of an enterprise that was conducted as a commercial enterprise for the greater benefit of one person the net earning of the organization inured to the benefit of the officer such distribution is prohibited by statute therefore organization failed to qualify for exemption government actually agrees with the court case cited by the taxpayer such as 113_tc_47 aff'd 242_f3d_904 cir and 92_tc_1053 the court cases ruled that the exempt_organizations conferred private benefit to private interests and parties which is impermissible for tax exempt_organizations another case cited by taxpayer in its protest letter dated april 20xx that is being used by the government to highlight the presence and prohibition of inurement for private benefit of the officer and founder is 75_tc_127 in this case the organization is operated as a christian church the ministers who are members of the board are paid a predetermined percentage of gross tithes and offerings the court ruled that whatever the minister’s services are worth they are not directly related to the organization’s gross_receipts by basing the minister's compensation upon a percentage of organization’s gross_receipts with no upper limit a portion of organization’s earnings is passed on to the minister department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 the statute specifically denies exemption where a portion of net_earnings is paid to private shareholders or individuals payment of a portion of gross earnings to those vested with the control of charitable_organization constitutes private_inurement taking a slice off the top should be no less prohibited than a slice out of net we do not mean to imply that all contingent_compensation arrangements made by charitable organizations will preclude tax exempt status such arrangements are part of business life what is prohibited is inurement to the benefit of private_shareholder_or_individual the term private_shareholder_or_individual refers to persons who have a personal and private interest in the payor organization the term does not refer to unrelated third parties in other words sec_501 denies exempt status to an organization whose founders or controlling members have a personal stake in that organization's receipts such is the case here where petitioner's ministers and donhowe in particular control its affairs organization therefore fails to qualify for exemption under sec_501 its net_earnings inure to the benefit of private shareholders or individuals the court case of people of god community v commissioner is relevant and shares similar facts with org where president as the founder officer and member of the board is paid a percentage of the servicing fees the issue of whether the compensation or fee paid to the officer and founder is reasonable but rather a percentage of the receipts therefore org’s net_earnings inure to the benefit of its officer or founder which is prohibited per sec_501 the court case of 83_tc_20 which is again cited by taxpayer also supports the government's position and court case cited above effective date of revocation of tax exempt status org took to position that retroactive revocation of its tax exempt status is not permissible in its rebuttal letter dated november 20xx and updated on april 20xx for reasons which include a org applied for recognition of exempt status under internal_revenue_code irc sec_501 and received a determination_letter from the irs dated august 20xx his letter is effective as of june 20xx b org has operated in the same manner as stated in its form_1023 application_for recognition of exemption and there has been no material_change inconsistent with exemption in the character purpose or method of operation org did not engage in prohibited_transactions org did not omit or misstate any material facts in its form_1023 a e therefore org is entitled to rely on its determination_letter until the irs issues a notice to org revoking or modifying the determination_letter department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 government takes the position that the revocation of org’s tax exempt status per sec_501 be effective july 20xx which is the first day of the form_990 return examined by the irs which established the following a there was a finding of inurement as prohibited per sec_501 and sec_501 -1 c and c -1 d ii b there was a material misstatement of fact claimed in its form_1023 which include in part that it was established to lessen the burdens of the government and thus encourage continued compliance with clean up efforts a better environment and improved public health and the commonwealth of state terminated the co-8 program and authorized org to begin providing the services formerly provided by the program on february 20xx determination is based upon rev_proc sec_12 in its protest letter dated april 20xx taxpayer stated an alternative position in the event that the internal_revenue_service irs revokes the tax exempt status of org that revocation be effective as of march 20xx which is the date the internal_revenue_service issued the examination_report it also reserves its right to request for technical_advice to limit the retroactive effect of the revocation government strongly believes that the effective date of the revocation of tax exempt status of org july 20xx based upon the day of the form_990 return that was examined is within the guidelines of revproc_2011_9 sec_501 sec_501 - c and c -1 d ii as noted above the reasoning of the examination reports has no relevance or merit in taxpayer's protest letter dated april 20xx it took the position and arguments addressed in the examination_report to which the government respectfully disagrees taxpayer’s position include the following a org’s activities are charitable because they lessen the burdens of government government respectfully disagrees with position taken by the taxpayer as addressed in this examination_report b org’s activities are not conducted in a commercial manner government respectfully disagrees with position taken by the taxpayer as addressed in this examination_report c org’s activities primarily benefit the governments whose burdens are lessened rather than fuel tank owners government respectfully disagrees with position taken by the taxpayer as addressed in this examination_report department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 d the facts support org’s claim that its activities serve to increase voluntary compliance government respectfully disagrees with position taken by the taxpayer as addressed in this examination_report e org reduces the cost of cleaning up government respectfully disagrees with position taken by the taxpayer as addressed in this examination_report f org’s earnings do not inure to co-1 or provide private benefit to president government respectfully disagrees with position taken by the taxpayer as addressed in this examination_report additional notes testamentary statements made by dir-4 current executive director of org and former executive director of state resources authority in a letter dated november 20xx and shown on exhibit regarding irs memorandum are deemed not consistent with the internal_revenue_code on matters pertaining to tax exempt_organizations testamentary statements made by ra-2 director office of spill response and remediation with the department of environmental quality co-9 of commonwealth of state in a letter dated november 20xx and shown as part of exhibit relating to claims that org’s financing activity will increase voluntary compliance and reduced enforcement burden on co- are opinions not backed up by data or studies as to -was there an increase in reporting and clean up of fuel spills and clean up from underground fuel tanks since org started its financing activity -if there was an increase in compliance activity how much was attributable to the service provided by org -if there was an increase in compliance activity attributable to the financing activity offered by org how much is its contribution to the improvement to the environment -how much is its contribution to the reduction in enforcement burden of co-9 these questions are raised in light of the following facts -the initial step in compliance with the fuel clean up is the reporting of the fuel spillage from underground storage tanks -claims for reimbursements are approved only after co-9 has inspected the fuel spill and determined the extent and cost of clean up of the fuel spill -org is providing service to fuel tank owners or consultants who have already complied with the reporting requirements of co-9 government is conceding the fact that there is a possibility that org’s financing activity encourage voluntary compliance but the question is how much and is it significant enough to lessen the burden of the government conclusion department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 org org did not satisfy the operational_test and there is inurement and or private benefit to the founder and officer therefore it does not qualify for tax exempt status per internal_revenue_code sec_501 as described in sec_501 a recommendation is made to revoke its tax exempt status effective on july 20xx the determination is based upon the following issues org’s activity of acquiring claims to clean up fuel spills from underground storage tank for a fee is a financing activity normally engaged in by for profit entities such as banks and investment companies and not a charitable activity per sec_501 this determination is supported by the following revrul_72_369 revrul_69_528 70_tc_352 us tax ct date better business bureau of washington dc vs united_states us 66_sct_112 90_led_67 cb est hawaii vs commissioner tc the owners of claims for reimbursements being served by org such as fuel tank owners and consultants do not represent a charitable_class per sec_501 the federal and state governments who have the statutory burden to protect the environment have identified the problems caused by fuel spill from underground storage tanks they have programs in place to protect the environment which a require fuel tank owners to report fuel spillage from fuel storage tanks in a timely manner b require government agencies to inspect the fuel spillage if clean up is warranted estimate the cost of clean up and determine if fuel tank owner can qualify for reimbursement from the government c allow fuel tank owners to file claims for cost of clean up of fuel spillage from underground fuel tank owners fuel tank owners are allowed to assign the reimbursement claims to a third party entity who are engaged in the business of financing activity org s financing activity to acquire claims from fuel tank owners does not qualify as a charitable activity per sec_501 as lessening the burden of the government per reg c -1 d since it is an activity that is allowed by co-9 and other state agencies to any third party that is in the financing business it is open to for profit entities such as banks and finance companies it is an activity that is not exclusive to a governmental agency or charitable_organization therefore there is nothing inherently charitable about its financing activity department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 org’s financing activity of acquiring claims actually lessen the burden of fuel tank owners and consultants more than the government by advancing the funds to the fuel tank owners and consultants prior to reimbursement by the co-9 this is similar to other financing activities such as the rapid tax_refund which is not a charitable activity the above statement is supported by the statement in a memorandum dated september 20xx by ra-2 director of office of spill response and remediation of the state co-9 it stated in part the presence or absence of org does not impact the size of the fund’s delayed payment balance or the number of days to pay the claim however if org were to cease financing of claims in state the rp and in turn the rp’s consultant would not receive any funds until the time the claim is actually paid’ this determination is supported by revrul_85_1 1985_1_cb_177 date revrul_85_2 1985_1_cb_178 date revrul_74_117 1974_1_cb_128 date org s financing activity and its relationship with co-9 does not demonstrate that the governmental_unit considers the organization to be acting on the government’s behalf thereby freeing up government of human material and fiscal assets that would otherwise have to be devoted to the particular activity as determined in revrul_85_2 a there is no interrelationship with the governmental_unit there is no oversight of any governmental_unit the members of the boards who happen to be government officials were not appointed to the board in an official manner on behalf of the governmental_unit b org claims to have been patterned after the co-8 program however the co-8 program was only been in operation from 20xx through early 20xx revrul_85_2 stated in part the fact that an organization is engaged in an activity that is sometimes undertaken by the government is insufficient to establish a burden of government even if org’s operation was patterned after the co-8 model the financing activity to acquire claims from co-9 and other state agencies are allowed for any type of third parties who are in the business of financing it is an activity that is not exclusive to charitable organizations or government agencies in fact it is an activity that is normally performed by banks and other for profit entities c org does not pay for governmental expense or part of government’s debt and therefore does not relieve the government of its burden org actually charges fuel tank owners or consultants who assign their claims for interest administrative set up and legal costs thereby department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 reducing the amount of funds available to clean up fuel spills cleaning up the environment it therefore adds to the cost of d org’s main source of funding is from fees it charges to the fuel tank owners or consultants who assign their claim therefore the amount received by fuel tank owners and consultants to clean up the environment are reduced by these fees and add to the burden of the government e unlike in revrul_85_2 it does not appear that the government co-9 could not continue its org fund program unless it undertook the financing activity of org to purchase claim from fuel tank owners per copy of memorandum from ra-2 dated september 20xx provided by org it stated in part as of june 20xx org financing represented of the dollar_figure in delayed payment at any given time org financing represents between and of the delayed payment balance the presence or absence of org does not impact the size of the fund’s delayed payment balance or the number of days to pay the claim however if org were to cease financing of claims in state the rp and in turn the rp’s consultant would not receive any funds until the time the claim is actually paid the statement above supports the government's position that org is not lessening the burden of the government within the meaning of sec_1_501_c_3_-1 of the regulations it therefore does not qualify as a tax exempt_organization per internal_revenue_code sec_501 as described in sec_501 org is not exclusively operated for an exempt_purpose since its earnings inure in whole or part to the benefit of president its founder and officer per sec_501 sec_501 -1 c and c -1 d ii org’s sole and principal activity is to acquire and purchase claims for reimbursement to clean up fuel spills from fuel tank owners and consultants for a fee upon the recovery_of its daily cost of borrowing the funds amortized legal and set up costs and ongoing administrative costs its fee structure is based org turns around and outsources this financing activity to co-1 llc whose sole member is president he happens to be the founder and officer of org org pays co-1 a of the face_amount of reimbursement obligation on an annual basis plus a flat fee not to exceed of the face_amount of acquired reimbursement obligations with a minimum flat fee of dollar_figure and a maximum amount of dollar_figure per claim and reimbursement for all marketing costs department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 org reported the results of its operations on its form_990 return from january 20xx through june 20xx a cumulative loss of dollar_figure for the same time period it paid servicing and management fees to co-1 for a cumulative amount of dollar_figure org issued form_1099 misc to co-1 in 20xx for dollar_figure and in 20xx for dollar_figure for a total amount of dollar_figure this represents servicing management fees and reimbursement for marketing fees over the two year period with org’s business model the bigger financing activity the bigger earnings for president if org can expand its financing activity to fully utilize the dollar_figure tax exempt bonds from state small_business financing authority co-1 as personified by president can earn dollar_figure plus administrative fees plus reimbursement for marketing costs this is a great business model to benefit president with the use of tax exempt bonds through org as a tax exempt_organization this determination is supported by the court cases of gemological institute of america v commissioner 17tc est hawaii v commissioner tc 83_tc_20 75_tc_127 effective date of revocation of tax exempt status effective date of revocation of tax exempt status of org is effective july 20xx org took to position that retroactive revocation of its tax exempt status is not permissible in its rebuttal letter dated november 20xx and as updated on april 20xx for the reasons which include a org applied for recognition of exempt status under sec_501 and received a determination_letter from the irs dated august 20xx tax exempt status is effective as of june 20xx b org has operated in the same manner as stated in its form_1023 application_for recognition of exemption and there has been no material_change inconsistent with exemption in the character purpose or method of operation c org did not omit or misstate any material facts in its form_1023 d therefore org is entitled to rely on its determination_letter until the irs issues a notice to org revoking or modifying the determination_letter department of the treasury - internal_revenue_service form 886-a page u s treasury department-internal revenue service schedule no or explanation of items exhibit form 886-a name of taxpayer org org year period ended 20xx06 government takes the position that the revocation of org’s tax exempt status per sec_501 be effective july 20xx which is the first day of the form_990 return examined by the irs for the following reasons a there was a finding of inurement as prohibited per sec_501 and sec_501 -1 c and c -1 d ii b there was a material misstatement of fact claimed in its form_1023 which include in part that it was established to lessen the burdens of the government and thus encourage continued compliance with clean up efforts a better environment and improved public health and the commonwealth of state terminated the co-8 program and authorized org to begin providing the services formerly provided by the program on february 20xx examination of operations of org showed it was established to lessen the burden of fuel tank owners and consultants more than that of the government in addition the statement regarding the state of state authorizing org to begin providing the services formerly provided by the co-8 program implies org was granted exclusivity by the state of state to acquire claims from fuel tank owners and consultants which is not true the above determination is based upon rev_proc sec_12 government strongly believes that the effective date of the revocation of tax exempt status of org july 20xx based upon the day of the form_990 return that was examined is consistent with the guidelines of revproc_2011_9 sec_501 sec_501 -1 c and c -1 d ii as noted above in its protest letter dated april 20xx taxpayer stated an alternative position in the event the internal_revenue_service irs revokes org’s tax exempt status it should be effective as of march 20xx which is the date the internal_revenue_service issued the examination_report it also reserves its right to request for technical_advice to limit the retroactive effect of the revocation department of the treasury - internal_revenue_service form 886-a page