internal_revenue_service number release date index nos cc psi - plr-106317-01 date clinic university health system medical school billing hospital state city d1 d2 d3 d4 dear this is in reply to your letter dated date and subsequent correspondence requesting a ruling on behalf of clinic regarding whether the contract between clinic and billing will be classified as a partnership for federal_income_tax purposes and whether the fees paid_by clinic to billing for billing and collection services will be deductible by clinic as ordinary an necessary business_expenses under sec_162 of the internal_revenue_code the information provided states that clinic is a state professional limited_liability_company composed o f members of the clinical faculty of the medical school the clinic operates primarily within space leased from university in medical center facilities the medical center and uses the equipment facilities and other assets of the medical center and the hospital to provide medical services all in return for an amount determined annually by the clinic and university to represent the value of the facilities nonprofessional services goodwill and other valuable consideration made available to the clinic by university the clinic has been recognized by the state courts and by the internal_revenue_service as an independent entity separate from university and the health system the health system is a state non-profit corporation qualified as an exempt_organization under sec_501 the health system operates hospital an operating division of the health system the clinic’s clinical practice operations began in d1 shortly after the hospital opened until d2 the arrangement between the members of the clinic consisted of only unwritten understandings in d2 the members of the clinic formalized the terms of the partnership under the state version of the uniform_partnership_act in d3 the clinic converted from a general_partnership to a professional limited_liability_company in order to gain the benefits of limited_liability and improve the management of the organization most of the clinic’s clinical practice is carried on in space specifically designated for the clinic in the medical center and in the hospital virtually all of the clinic departments however also engage in practice at clinics or hospitals off-campus several of which are outside of the city community from the opening of the hospital in d1 until d2 the relationship between the clinic and university consisted of only an unwritten understanding in d2 the clinic and university entered into a formal contract to govern the terms of their relationship the d2 agreement pursuant to the d2 agreement the clinic pays annually to university an amount determined by the clinic and university to represent the value of the facilities nonprofessional services goodwill and other valuable consideration made available to the clinic by university many clinic patients are also patients of the health system however the health system and the clinic have historically maintained separate billing systems and departments that duplicate many of the costs associated with the collection of patient accounts and the management of patient financial records in d4 university and the clinic agreed to cooperate in seeking to improve the coordination of admissions as well as billings and a computer and software system were acquired to develop an admission system that avoided duplication of effort and that system is still being operated today by the clinic for the benefit of both the clinic and the health system nevertheless significant portions of both the clinic’s and the health system’s billing and collection process continues in a separate and uncoordinated system on the recommendation of independent consultants the clinic and the health system have agreed to coordinate their billing and collections activities with a single billing and collections agent so as to achieve greater efficiencies in the billing and collection process to accomplish this goal the health system has created a new limited_liability_company billing which will perform billing and collection services for the health system billing is a single member limited_liability_company with the health system as the sole member pursuant to sec_301_7701-3 of the procedure and administration regulations billing is disregarded as a separate_entity from its owner health system the health system will appoint all managers and hire all employees of billing the clinic has agreed to purchase billing and collection services from billing and to appoint billing as the clinic’s agent to collect its account receivables pursuant to certain guidelines the guidelines and other terms of the relationship between the clinic and billing are set forth in the services agreement being entered into by and between the clinic and billing the clinic will remit to billing a fixed annual fee in exchange for the services performed by billing as an agent to collect the clinic’s receivables pursuant to the terms of the services agreement the clinic and billing will negotiate each year the fee to be charged by billing for the billing and collection of the clinic’s accounts receivables in the event they cannot agree on a mutually acceptable fee the prior year’s fee for services will remain in effect the services agreement also provides that either party can cancel the agreement on days’ notice if the services agreement is cancelled billing will continue to provide services for a ten-month period during which time the clinic will pay fees equal to the greater of billing’s cost of providing such services or the fair_market_value of such services to insure quality standards and to protect the interest of the physician patient relationship billing must perform the billing and collection services in accordance with the written standards set forth in the services agreement all of the clinic accounts will be collected by billing as an agent and solely in the name of the clinic the services agreement affirms that the clinic patient accounts_receivable and medical records remain at all times property of the clinic and in no way are being transferred assigned or factored to billing furthermore billing has no authority to exercise control or negotiate any funds of the clinic and has no financial interest in the accounts collected on behalf of the clinic the proceeds collected by billing for the clinic’s accounts must be remitted to the clinic except for the fee due billing for its services in order to maintain a consistently high level of customer service billing has created a committee the council with client representation to monitor the quality of its services and business operations pursuant to the terms of the services agreement and in recognition of the primary importance of the physician patient relationship the health system agreed that at least half of the members of the council will be representatives from the clinic the council will approve the annual operating plan and proposed budget and will monitor billing’s operations to ensure billing complies with the services agreement guidelines the council will have the right to inspect the books_and_records of billing to monitor financial stability however except for the approval of an operating plan and budget the council will have no legal authority and will serve primarily as an advisory committee sec_761 provides that the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by mean of which any business financial operation or venture is carried on and which is not a corporation trust or estate sec_1_761-1 of the income_tax regulations provides that the term partnership means a partnership as determined under sec_301_7701-1 sec_301_7701-2 and sec_301_7701-3 in order for a joint_venture or other contractual arrangement to be classified as a partnership for federal tax purposes it must first be determined that the joint_venture or other contractual arrangement gives rise to a separate_entity for federal tax purposes see sec_301_7701-2 sec_301_7701-1 provides that a joint_venture or other contractual arrangement may create a separate_entity for federal tax purposes if the participants carry on a trade business financial operation or venture and divide the profits therefrom nevertheless a joint undertaking merely to share expenses does not create a separate_entity for federal tax purposes for example if two or more persons jointly construct a ditch merely to drain surface water from their properties they have not created a separate_entity for federal tax purposes mere co-ownership_of_property that is maintained kept in repair and rented or leased does not constitute a separate_entity for federal tax purposes for example if an individual owner or tenants in common of farm property lease it to a farmer for a cash rental or a share of the crops they do not necessarily create a separate_entity for federal tax purposes the service agreement expressly states that the parties intend to create an independent_contractor relationship there is no reference to a partnership relationship in the service agreement under the service agreement clinic will pay billing a predetermined fee neither billing nor health system will share in the profits of clinic and the fee charged by billing for services rendered will be determined on an arms’ length basis in advance without regard to clinic’s profits the service agreement does not provide for the sharing of profits or losses between clinic and health system or billing it is represented that the parties will not hold themselves out as partners further it is represented that the parties do not contemplate or expect that under the current federal tax laws that a partnership tax_return will be required to be filed by the internal_revenue_service accordingly based on the information provided and the representations made we conclude that the contractual relationship as set forth in the services agreement between clinic and billing will not give rise to a separate_entity for federal tax purposes between clinic billing health system and university therefore this relationship will not be a partnership for federal tax purposes sec_162 provides in part that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-1 provides in part that business_expenses deductible from gross_income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business except items which are used as the basis for a deduction or a credit under provisions of law other than sec_162 an expense is ordinary if according to time place and circumstance it is normal usual or customary to the taxpayer in the taxpayer’s course of business 290_us_111 308_us_488 an expense may be ordinary even if it is only made once in the taxpayer’s lifetime as long as the transaction out of which the obligation arose is common and accepted in the taxpayer’s particular business welch pincite a necessary expense is one that is appropriate and helpful to the development of the taxpayer’s business welch pincite when determining whether an amount is ordinary and necessary the reasonableness of the amount is called into question ciaravella v commissioner t c memo an amount is considered unreasonable if it is greater than the amount that would have been negotiated between parties dealing at arms’ length gill v commissioner t c memo in the present case clinic represents that medical practices frequently contract with third parties for the billing and collection of patient accounts and such services are typical business services that are incurred by many organizations including medical practices thus the fees charged by billing are ordinary expenses in the clinic’s business the clinic represents that the collection and billing of patient accounts by billing will result in the clinic’s business becoming more efficient with more collections on accounts and less wasted resources this would certainly be appropriate and helpful to clinic’s business making the fees necessary to clinic’s business finally the clinic represents that the fees and expenses charged by billing are the result of an arm’s length negotiation between the clinic and billing making the fees and expenses reasonable in amount accordingly the clinic may deduct as ordinary and necessary expenses under sec_162 the fees and expenses charged by billing under the services agreement for the processing and collection of the clinic’s accounts except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to the clinic sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


id office uilc cca_2008110615251954 ---------------- number release date from -------------------- sent thursday november pm to ------------------------ cc subject ------------------------------------------------------ ----------- ----------------------------- -------a corporation ---------------- failed to pay certain employment_taxes in connection with the payment of wages to its employees during ----- ------- and ------- ----------------did not make an election to be classified as an association sec_301_7701-3 accordingly ----------------is disregarded as an entity separate from its sole owner ---------------------- id at sec_301_7701-2 during date the service thereafter filed a notice_of_federal_tax_lien nftl form in with the recorder of deeds in the -------------------------- and this notice included the following name of taxpayer ------------------------------------------------------------------- ------------------------------------------------------------------------------- residence --------------------------------------------------------- ----------------------------------------------------------------------------------- we confirmed that the above address while listed as an address of residence is the business address of --------------- according to the service’s records ------------------------ lives at a different address a third-party lender considering extending credit to ----- ----- ---------- discovered the nftl and has asked the service to subordinate the service’s tax_lien the third-party has not alleged that the service’s nftl is incorrectly filed and it apparently believes that the tax_lien attached to ------------------property and rights to property the service’s technical services branch has questioned the nftl’s validity in light of the fact that it contains both the limited_liability company’s name and the owner’s name on it on date ------------- the revenue_officer making this request confirmed to us that ----------------is not liable for the employment_taxes and has no existing liabilities to the service rather the lien encumbers -------------------------property and rights to property we recommend advising ----------------that the service has no lien against ------------------- and that a subordination is therefore unnecessary in this case service should have followed internal_revenue_manual when preparing the nftl this states in part w hen filing a nftl on a single-member disregarded llc only the name of the single member should appear on the lien document do not include the name of the disregarded llc we also recommend that -----------------file a notice of withdrawal of the tax_lien pursuant to sec_301_6323_j_-1 as to ------------------------------------------ please call if you have any questions --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -----------------------


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 3-plr-115774-99 date date acquiring target state a state b state b tax this letter responds to your representative’s date request for rulings on the federal_income_tax consequences of a proposed transaction additional information with respect to the proposed transaction was submitted in letters dated date date and date the information submitted for consideration is summarized below acquiring is incorporated under the laws of state a and registered under the investment_company act of the act as a non-diversified closed-end management investment_company acquiring has elected to be taxed as a regulated_investment_company ric under acquiring’s investment objective is to provide shareholders with high current income exempt from federal_income_tax and state b tax acquiring pursues its investment objective by investing primarily in a portfolio of long-term municipal obligations issued by or on behalf of state b target is incorporated under the laws of state a and registered under the act as a non-diversified closed-end management investment_company target has elected to be taxed as a ric under target’s investment objective is to provide shareholders with high current income exempt from federal_income_tax and state b tax target pursues its investment objective by investing primarily in a portfolio of long-term municipal obligations issued by or on behalf of state b acquiring and target each has one class of voting common_stock and one class plr-115774-99 of voting preferred_stock outstanding both file their income_tax returns based on the accrual_method of accounting acquiring and target have approved a plan_of_reorganization for what are represented to be valid business reasons pursuant to the plan the following transaction is proposed the transaction target will transfer all of its assets and liabilities to acquiring in exchange for newly issued acquiring voting common_stock and voting preferred_stock the transfer target will liquidate and distribute to its shareholders all of the acquiring stock received in the exchange each target shareholder will receive on a pro_rata basis shares of the class of acquiring stock with the same class designation and respective rights as the target stock held by such shareholder immediately prior to the transfer target will dissolve in accordance with the laws of state a and will terminate its registration under the act acquiring may sell up to of the assets received in the transaction to unrelated purchasers and will reinvest any proceeds consistent with its investment objectives and policies the following representations have been made in connection with the transaction a b the fair_market_value of the acquiring stock received by each target shareholder will be approximately equal to the fair_market_value of the target stock surrendered in the exchange acquiring will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by target immediately prior to the transaction for purposes of this representation amounts paid_by target to dissenters amounts used by target to pay its reorganization expenses and all redemptions and distributions except for regular normal dividends made by target immediately preceding the transfer will be included as assets of target held immediately prior to the transaction c acquiring has no plan or intention to reacquire any of its stock issued in the transaction d after the transaction acquiring will use the assets acquired from target except plr-115774-99 e f g h i j k l m that a portion of these assets may be sold or otherwise_disposed_of in the ordinary course of acquiring’s business any proceeds will be invested in accordance with acquiring’s investment objectives acquiring has no plan or intention to sell or dispose_of any of the assets of target acquired in the transaction except for dispositions made in the ordinary course of business or transfers described in sec_368 target will distribute to its shareholders the stock of acquiring it receives pursuant to the plan_of_reorganization the liabilities of target assumed by acquiring and any liabilities to which the transferred assets of target are subject were incurred by target in the ordinary course of its business following the transaction acquiring will continue the historic_business of target or use a significant portion of target’s historic_business_assets in the continuing business acquiring target and the shareholders of target will pay their respective expenses if any incurred in connection with the transaction there is no intercorporate indebtedness existing between target and acquiring that was issued acquired or will be settled at a discount acquiring and target each meets the requirements of a regulated_investment_company as defined in sec_368 acquiring does not own directly or indirectly nor has it owned during the past five years directly or indirectly any stock of target the fair_market_value of the assets of target transferred to acquiring will equal or exceed the sum of the liabilities assumed by acquiring plus the amount of liabilities if any to which the transferred assets are subject cash is being distributed to the shareholders of target in lieu of fractional shares of acquiring solely to save acquiring the expense and inconvenience of issuing and transferring fractional shares such cash does not represent separately bargained for consideration in the transaction the total cash consideration that will be paid to the target shareholders instead of issuing fractional shares of acquiring stock will not exceed one percent of the total consideration that will be issued in the transaction to the target shareholders in exchange for their shares of target stock the fractional share interests of each shareholder of target will be aggregated and no target shareholder will receive cash in an amount equal to or greater than the value of one full share of acquiring stock plr-115774-99 n o p q target is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 target and acquiring have elected to be taxed as rics under sec_851 and for all of their taxable periods including target’s last short taxable_period ending on the date of the transaction have qualified for the special tax treatment afforded rics under the internal_revenue_code after the transaction acquiring intends to continue to so qualify there is no plan or intention for acquiring the issuing_corporation as defined in sec_1_368-1 or any person related as defined in sec_1_368-1 to acquiring to acquire during the five year period beginning on the date of the transaction with consideration other than acquiring stock acquiring stock furnished in exchange for a proprietary interest in target in the transaction either directly or through any transaction agreement or arrangement with any other person except for cash distributed to the target common shareholders in lieu of fractional shares of acquiring common_stock during the five year period ending on the date of the transaction i neither acquiring nor any person related as defined in sec_1_368-1 to acquiring will have acquired target stock with consideration other than acquiring stock ii neither target not any person related as defined in sec_1_368-1 without regard to sec_1_368-1 to target will have acquired target stock with consideration other than acquiring stock or target stock and iii no distributions will have been made with respect to target stock other than regular normal dividend distributions made pursuant to target’s historic dividend paying practice either directly or through any transaction agreement or arrangement with any other person except for a cash paid to dissenters and b distributions described in sec_852 and sec_4982 as required for target’s tax treatment as a ric r the aggregate value of the acquisitions redemptions and distributions described in paragraphs p and q above will not exceed percent of the value without giving effect to the acquisitions redemptions and distributions of the proprietary interest in target on the effective date of the transaction based solely on the information submitted and on the representations set forth above we hold as follows the acquisition by acquiring of substantially_all of the assets of target in exchange for voting_stock of acquiring and acquiring’s assumption of target’s liabilities followed by the distribution by target to its shareholders of acquiring stock and any remaining assets in complete_liquidation will qualify as a reorganization within the meaning of sec_368 target and acquiring will plr-115774-99 each be a_party_to_a_reorganization within the meaning of sec_368 target will recognize no gain_or_loss upon the transfer of substantially_all of its assets to acquiring in exchange for voting_stock of acquiring and acquiring’s assumption of target’s liabilities or upon the distribution of the acquiring stock to the target shareholders sec_361 and c and a acquiring will recognize no gain_or_loss on the receipt of the assets of target in exchange for voting_stock of acquiring sec_1032 the basis of target’s assets in the hands of acquiring will be the same as the basis of those assets in the hands of target immediately prior to the transaction sec_362 acquiring’s holding_period for the target assets acquired will include the period during which such assets were held by target sec_1223 the target shareholders will recognize no gain_or_loss on the receipt of voting_stock of acquiring solely in exchange for their target stock including fractional shares to which they may be entitled sec_354 the basis of the acquiring stock received by the target shareholders will be the same as the basis of the target stock surrendered in exchange therefor sec_358 the holding_period of the acquiring stock received by the target shareholders in exchange for their target stock including fractional shares to which they may be entitled will include the period that the shareholder held the target stock exchanged therefor provided that the shareholder held such stock as a capital_asset on the date of the exchange sec_1223 the payment of cash to the target shareholders in lieu of fractional shares of acquiring will by treated as though the fractional shares were distributed as part of the transaction and then redeemed by acquiring the cash payments will be treated as distributions in full payment for the fractional shares deemed redeemed under sec_302 with the result that such target shareholders will have short-term or long-term_capital_gain or loss to the extent that the cash they receive differs from the basis allocable to such fractional shares rev_rul 1966_2_cb_116 and revproc_77_41 c b pursuant to sec_381 and sec_1_381_a_-1 the tax_year of target will end on the effective date of the transaction and acquiring will succeed to and take into account the items of target described in sec_381 subject_to the provisions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations plr-115774-99 thereunder no opinion is expressed about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings specifically no opinion was requested and none is expressed about whether acquiring or target qualify as a ric that is taxable under subchapter_m part of the code the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely yours assistant chief_counsel corporate by assistant to the chief branch


department of the treasury taxpayer_identification_number ee person to contact kkk tax period s ended kkkkek uil internal_revenue_service appeals_office number release date date date eek krkk kkk certified mail dear 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 date the revocation of your exempt status was made for the following reason s a substantial amount of your organization’s assets inured to the private benefit of your founders because a substantial amount of your charitable assets were used for private purposes the organization is not operated exclusively for exempt purposes described in sec_501 of the code contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms for the tax periods stated in the heading of this letter and for all tax years thereafter 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 you have waived your right to contest this determination under the declaratory_judgment provisions of sec_7428 of the code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours is appeals team manager department of the treasury internal_revenue_service commerce street dallas tx tax_exempt_and_government_entities_division date legend org - organization name xx - date address - address org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail-return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 c of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely nanette m downing director eo examinations enclosures publication publication report of examination letter catalog number 34809f form 886-a u s treasury department-internal revenue service explanation of items schedule no or exhibit name of taxpayer org year period ended december 20xx legend org - organization name city - city dir co-2 co-3 co-4 co-5 co-12 co-13 co-14 co-15 co-16 co-17 ai 12t state - state xx - date co-1 14t ot ein -- ein country - country address - address dir-1 dir-2 - co-7 co-6 co-18 -- co10 co-11 4th gth companies co-8 co-9 5th issue is org operating exclusively for charitable and educational_purposes as described in internal_revenue_code irc sec_501 c facts org whose employer_identification_number is ein was incorporated on october 19xx in a letter dated september 20xx org was granted exemption from federal_income_tax under sec_50l a of the internal_revenue_code as an organization described in sec_501 c with a foundation status of a during the advanced ruling period which ended on december 20xx another letter dated may 20xx stated that with the information submitted by org the organization will continue to be classified as a public charity with a status of b a vi the mission of the organization as stated on form play for future generations of children and parents in furtherance of its mission org will work to educate adults as to the value of constructive play in the lives of children and adults provide venues for education regarding and development of insightful play experiences among adults and children research and report for educational_purposes on the effects of play and the lack thereof on children and adults and establish a center for research and education on the benefits of constructive play and the ability to participate in the same is to preserve org began operations in city state in 20xx dir-1 the director holds an associates degree in business and a bachelor of science degree in education org has deviated from their original purpose as stated on form hiking trips and other outings this change in mission was not reported to the irs during their interview the more opportunity for hiking and other outdoor activities stated they moved to city to be in the country of state which provided to the helping of autistic persons by taking them on org has three main sources of income monetary contributions money from an annual fundraiser that the organization holds every november and advertising income their income is used for client incentives meals meeting costs uniforms transportation_expenses for taking children on outings travel and entertainment equipment and repairs and vehicle and equipment rental the organization does not receive any funding from the city county or the state of state department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx bank statements for org were reviewed on tuesday november 20xx there were recurring transactions at liquor stores grocery stores fast food restaurants full service restaurants co-1 co-2 and hair salons all located within close proximity of their former residence in city state see exhibits a -l for monthly debit card transactions another set of exhibits exhibit sec_1 -7 categorizes the different types of transactions and how many transactions were made for each category the final set of exhibits q-l -q-2 is a list of the checks written from the organization's checking account there are no copies of the cancelled checks just the check numbers and the amounts stated on their bank statement the information on information_document_request was requested on april 20xx and due to the agent by may 20xx the following responses to information_document_request were received on may 20xx and a duplicate copy with an original signature on may 20xx for exhibits r-1 -r-2 the officer created a spreadsheet to show how the organization received their revenue for the calendar_year 20xx the revenue was divided into five categories co-3 bank error contribution co-4 advertising income event income and class programming the officer explained that the co-3 bank error was an error on the side of co-3 when someone else's deposit was mistakenly credited to org's account the officer stated that copies of where the contributions came from are attached however only the proof of one contributor was attached see exhibits s-16 s-17 the officer stated that the cost of generating the publication co-4 was supported by low cost advertising from local businesses and organizations that provide services for children and their parents this was not entirely true as many of the advertisements were from businesses that did not provide services that either helped overcome learning differences or helped with motor skill development the organization did not report their advertising income on form the deposits in the paid class programming column were comprised of class programming sessions conducted by org it was also stated that dir-1 conducted these classes to further his research of play and its benefit to children he also was providing a service of monetary value to the children and their parents the officer also stated that the amounts were not donations or tax deductible for exhibits q-1 through q-2 the organization provided only partial information this was attributed to a computer problem and the officer stated that the cost of ordering these checks through co-3 will cost dollar_figure a piece the expenses that were explained in exhibits q-1 and q-2 were for an apartment that was rented at co-5 in city state there were also payments to co-6 co-7 co-8 payment co-9 and co-10 no explanation was provided as to how these expenses furthered their exempt_purpose or if any of these accounts were in the name of the organization the debit card transactions were broken down into eight separate categories see exhibit sec_1 for their explanation of exhibit concerning the liquor store transactions paid in the calendar_year 20xx the officer stated that the transactions were for wine purchases that we department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx needed to purchase a little at a time to increase inventory so that we have wine to pour at our annual food and wine events it relieves the financial burden of having to purchase it all at once to conduct our event and wine was also purchased as client incentives for the parents many times dir-1 would be invited to sit down over dinner with parents to discuss org's programming and how it could benefit their children this was the cost of doing business to further org's mission the organization did not provide documentation as to the times dates and topics discussed for these dinner meetings for their explanation of exhibit the grocery store purchases the officer stated these grocerystorepurchaseswerefoodpurchasessothatwecouldprovidepicnic lunches snacks candy and drinks to the children while we were on recreational play outings in addition to these expenses we would purchase food to prepare if we were hosting a lunch or dinner meeting to discuss org's mission and goals with potential supporters volunteers or program participants again the organization did not provide documentation as to the times dates places where the play outings took place or when lunch or dinner meetings took place for their explanation of exhibit the rental car and car payments the officer stated the car payments to either co-8 or co-11 were for dir-1's vehicle that he used for carrying out org's programming going to and from recreational location transporting the children and meeting potential clients we had another vehicle we used for non-business related activities and transportation the payment to co-12 glass was to fix a small rock chip in the windshield of the business vehicle that occurred during programming small amounts to co-13 and co-14 were for oil changes in the business vehicle for maintenance the payments to co-6 were for auto insurance on the business vehicle in the event of an accident the rental car and truck expenses were in conjunction with trips to and from city to assess possibly moving the organization and then for the expenses associated with the actual move this was a small portion of the actual move we personally incurred most of the expense to move the organization the organization did not provide documentation that the vehicles used for the organization were used exclusively for the organization and not for personal_use such as a log book which would notate the date destination purpose and mileage no document was submitted that identified the windshield repair and vehicle maintenance as that of the organization's vehicle or personal vehicle such as a receipt for the make and model of the car as far as the rental car and truck expenses are concemed no distinction was made as to what part of the move to city constituted organizational_expenses versus personal expenses for their explanation of exhibit the salon health care and clothing store transactions the officer stated these transactions are the result of obtaining uniforms and equipment to carry out the programming and client incentives for the kids often time's children would be rewarded for working hard participating paying attention or following directions well during a recreational outing no explanation was received as to how the trips to the beauty salons cleaners jewelry stores and medical clinics were in furtherance of the organization's exempt_purpose or rewards for the children department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx for their explanation of exhibit the various utility payments the officer stated these were the utility costs associated with org's office space and one cell phone for dir-1 and internet service for the computers no supporting documentation was provided by the organization such as a lease agreement for the office space or copies of the bills with an address of the office space location this was requested in the idr for their explanation of exhibit the various purchases in city state the officer stated these city transactions were in conjunction with the organization's relocation such as gas expense to and from city research on-site recreational mapping of locations for programming meals and programming equipment no documentation was provided to support these claims such as where they went for on-site recreational mapping how the meals supported their exempt_purpose what types of programming equipment was purchased where it was purchased and what was purchased again no log book or any other type of receipt was submitted for their gas expenses for their explanation of exhibit the purchases made in state state and state the officer stated the charges outlined in this exhibit were also in conjunction with moving org these transactions are only a portion of the expenses_incurred for a trip to state to pick up some office furniture that was being stored there we personally paid for a majority of the moving cost no documentation was provided as to how the purchases at co-15 co-16 or co-17 all in city state related to the acquisition of their office furniture for their explanation of exhibit the restaurant and beverage purchases made in city state the officer stated these transactions are associated with various formal business meetings over lunch and dinner meetings organized and conducted at a local coffee shop as opposed to org's office to discuss furthering org's mission organize recreational outings with volunteers of the organization as well as to entertain potential donors grant writing advisors non-profit consultants and potential program participants many professional services were donated to keep org's cost low so that the organization could continue to operate on a very limited shoestring budget while getting the help needed to operate in return for the generous help of many professionals and volunteers we would treat them to a cup of coffee lunch or dinner as a thank you for their service often times a trip to co-1 was also made to treat the kids to an after session treat for validation of their good work and good behavior in addition to the expenses that org incurred co-1 would also donate some drinks to match a portion of what we were spending as a result we were consistent in going there as an after program location this may have happened multiple times in one day if there were multiple classes conducted once again no supporting documentation was provided no dates times who attended and what was discussed was provided most of the purchases made at co-1 appear to be for single purchases idr was sent via certified mail on june 20xx this request asked for additional information to clarify the responses given to the service in idr sent on april 20xx for department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx exhibit sec_1 -8 the officer noted on the reply that not all of the questions were answered and that the additional information will be faxed at a later date the following questions and answers are as follows i a where is the food and wine event held specifically such as a park hall rental etc please provide the service with a copy of the permit s and or rental contracts for the event in 20xx their reply was co-18 in city state no service_contract as catering was donated no correspondence between org and co-18 was provided b what activities are held at this event is this a one day event or is it longer their reply was wine tasting paired with food it was a one evening event c how do the annual food and wine events further org's exempt_purpose their reply was helped raise sustaining funds d how many people attend this event and do you keep attendance rosters their reply was people we have attendance roster no attendance roster was provided e how many bottles of wine and what kind of food is offered by org at this event their reply was wine poured by the glass paired with tapas small appetizer portions no documentation was submitted as to how many bottles of wine were poured or who provided the wine f do you sell tickets to the annual event their reply was charged for admission or sometimes offered opportunity to make donations when events were free g if so how much are they their reply was admission was based on venue's capacity since this event was already held no price was given or the capacity of co-18 facility h if tickets are sold does part of the cost of the ticket price go towards your wine and food costs their reply was all upfront costs were normally very minimal as venue food wine linens etc were donated ticket sales proceeds did not go to cover any of these costs this statement is contradictory to their response from idr exhibit the liquor store purchases that the transactions were for wine purchases that we needed to purchase a little at a time to increase inventory so that we have wine to pour at our annual food and wine events it relieves the financial burden of having to purchase it all at once to conduct our event i if some of the money is used to cover food and wine costs are the attendees given a statement that tells them how much of the proceeds qualify as a charitable deduction and that only the amount over and above the cost of food and wine is deductible their reply was jn 20xx everything was donated for exhibit questions a -e the following questions and answers are as follows a did you keep a log in 20xx of each outing org participated in their reply was outings can be accounted for no supporting documentation was provided as to when where how many children and or adults attended and what activities took place b if so how many children went on each trip and where did you go on each trip their reply was kids going to outdoor parks trails lakes etc no supporting documentation was provided department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx c please provide receipts a list of each outing's activities and insurance medical release forms from the parent's of the children for each outing their reply was outdoor play and recreation no release forms required once again no supporting documentation was provided to support the expenses d when org hosted a lunch or dinner meeting did you keep the receipts write down the date and time of the meeting and who attended the meeting their reply was yes via bank statements the bank statements do not provide any information that the expenses were related to the organization's exempt_purpose e when org hosted the lunch and dinner meetings how did you decide to invite their reply was mailings to parents in our area no supporting documentation of the mailings was sent with these responses for exhibit questions a -g the following questions and answers are as follows a we will need a copy of the loan agreement for dir-1's vehicle that is used for org's activities their reply to this was we no longer have this vehicle b we will need a copy of the mortgage contract for the residence on address city state their reply to this was this mortgage contract was signed until xx no mortgage contract was provided c was a record kept of the dates and mileage for each time dir-1's vehicle was used for org's activities if so please provide the service a copy their reply to this was will confirm as of december 20xx no records have been sent d were receipts from co-13 and co-14 for oil changes in the business vehicles maintenance retained for the year 20xx if so please provide the service a copy their reply to this was will send as of the date of this writing december 20xx no records have been sent e please provide proof of insurance for the business vehicle from co-6 for 20xx also were your personal vehicles insured with a different insurance_company or with co-6 in 20xx please provide the service with proof of insurance on your personal vehicles for 20xx their reply to this was working on this as of december 20xx no records have been sent f why did you rent car and trucks for trips to city instead of using your personal vehicles their reply to this was moved here for business reasons org both lives and runs the organization out of their home so the move was not exclusively for business reasons g do you have receipts for the total moving costs from city to city if so please provide the service with a copy their reply to this was will find and submit as of december 20xx no records have been sent for exhibit questions a b the following questions and answers are as follows a you told the service that the transactions in exhibit were to obtain uniforms and equipment to carry out programming and client incentives for the kids so how does beauty supply stores jewelry stores cleaners and doctor visits further the organization's exempt_purpose their reply to this was beauty supplies for girls will find receipts for the other and explain for the beauty supplies no documentation was provided as to what was bought and for department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx whom as of december 20xx no supporting documents have been sent for the other expenses inquired about b please send copies of the medical visits incurred on exhibit their reply to this was okay will find and submit as of december 20xx no records have been sent for exhibit questions a -d the following questions and answers are as follows a what was the physical address of your residence in city in 20xx their reply was address city state this coincides with the checks written from orgs checking account the officer of the organization stated that in 20xx the organization leased office space at a different location from their residence the following check numbers dates written amounts written and who to are as follows thursday april 20xx dollar_figure the co-5 tuesday may 20xx dollar_figure the co-5 thursday june 20xx dollar_figure the co-5 wednesday july 20xx dollar_figure the co-5 tuesday august 20xx dollar_figure the co-5 b what was the physical address of the office if different from your personal_residence their reply was same no supporting documentation was provided that the utility expenses and rental payments were either for personal or organizational use c if the office was at a different location please send a copy of the lease or rental agreement their reply to this was n a it appears the officer's personal_residence and org's office is at the same location and no distinction can be made as to what expenses that were paid_by org were for personal or organizational use d please send copies of the utility bills listed on exhibit their reply was coming as of december 20xx no records have been sent for exhibit questions a -c the following questions and answers are as follows a did org keep a log book or any other records to record the mileage transactions and explain how these expenses furthered org's exempt_purpose if so please provide the copies their reply was answered in exhibit c as of december 20xx no records have been sent b did you record what types of research was performed during your trips to city tx if so please provide the service with copies their reply to this was research was on best areas for play outdoor recreational activities the organization did not record the types of research conducted such as why they picked the place they did if they did any internet research or the dates they visited each location c provide a list of on-site recreational locations you mapped for programming their reply was city city city city city city for exhibit questions a -c the following questions and answers are as follows department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service explanation of items schedule no or exhibit name of taxpayer org year period ended december 20xx a provide a copy of the storage agreement for the office furniture in state their reply was coming as of december 20xx no records have been sent b does the office furniture belong to org their reply was yes c what was the total cost incurred to move the furniture from state to state please provide the receipts for the cost of the move their reply was coming as of december 20xx no records have been sent for exhibit questions a -c the following questions and answers are as follows a please provide receipts to substantiate the business meeting over lunch and dinner their response was coming as of december 20xx no records have been sent b how does entertaining potential donors grant writing advisors non-profit consultants and potential program participants classify as a charitable or educational activity their reply was this was the cost of doing business_expense as we further org c provide documentation that shows co-1 donates drinks to match a portion of org's spending their reply was will do as of december 20xx no records have been sent idr was sent via certified mail on september 20xx this request asked for responses and or documentation that org still has not provided this was the last information_document_request that was sent the following entries are follow-up responses from information_document_request which have been requested on information_document_request exhibit a -question and response to a on idr where is the food and wine event held specifically such as a park hall rental etc please provide the service with a copy of the permit s and or rental contracts for the event in 20xx their reply from idr was no service_contract as catering was donated idr requested that if they provide the company with a thank you letter or something else so they could prove the services and or catering was a donation please provide the service with a copy their reply was called and thanked personally so there is no letter or other documentation exhibit l c -question and response to c on idr how do the annual food and wine events further org's exempt_purpose their reply from idr was helped raise sustaining funds idr requested the organization to provide the service with a detailed summary such as follows date fundraising event location amount received their reply to this was april 20xx date fundraising event fall fundraiser location co-18 - city exhibit d -question and response to led on idr how many people attend this event and do you keep attendance records their reply from idr was people we have an attendance roster idr requested the organization to provide the service with a copy of the attendance roster and the date and time held their reply was cannot retrieve from inaccessible computer hard drive in time for deadline department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service explanation of items schedule no or exhibit name of taxpayer org year period ended december 20xx exhibit i -question and response to i on idr if some of the money is used to cover food and wine costs are the attendees given a statement that tells them how much of the proceeds qualify as a charitable deduction and that only the amount over and above the cost of food and wine is deductible their reply from idr was 20xx everything was donated see h in idr the organization was asked to provide a copy of any written documentation given to donors during 20xx their reply was none of the money raised was used for food costs because as previously stated the passed food small quantities was donated in full also we did not charge in excess ofdollar_figure exhibit a -question and response to a on idr did you keep a log book in 20xx of each outing org participated in their reply was that the outings can be accounted or but no records were sent idr asked them to please provide the date s time purpose how many children went the cost to the parent s and a detailed description of the outing s their reply was cannot retrieve from inaccessible computer hard drive for deadline exhibit d -question and response to d on idr when org hosted a lunch or dinner did you keep the receipts write down the date and time of the meeting and who attended the meeting their reply to this request was yes via bank statement as of december 20xx no bank statements have been provided idr asked to provide the date and time of the lunch and dinner meetings the place where the meeting was held what business_purpose that meeting had such as what was discussed how it was presented and how long it took org's relation to those who attended and especially who attended their reply to idr was copies of all bank statements have previously been provided to you exhibit -request and response to question b from idr we will need a copy of the mortgage contract for the residence on address city state their reply was this mortgage contract wasn't signed until xx as of december 20xx a copy of the mortgage has yet to be submitted in idr the organization was asked to please provide the service with a copy of the mortgage contract for the address stated in exhibit b their reply was the closing documents for address were executed at the title company on 20xx and no mortgage payments were made until the following year 20xx exhibit c -question and response to question c from idr was a record kept of the dates and mileage for each time dir-1's vehicle was used for org's activities if so please provide the service a copy their reply was will confirm as of december 20xx no documents have been submitted idr asked them to please provide the service with a copy of these records their reply was can now confirm that we did not keep a mileage log exhibit d -question and response to question d from idr were receipts from co-13 and co-14 for oil changes in the business vehicles maintenance retained for the year 20xx if so please provide the service a copy their reply was will send as of december 20xx no documents have been submitted please provide the service with copies of these receipts their reply to idr was no department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx exhibit3 e -requestandresponseto3 e from idr please provide proof of insurance for the business vehicle from co-6 for 20xx also were your personal vehicles insured with a different insurance_company or with co-6 in 20xx their reply was working on this as of december 20xx no documents have been submitted idr again requested the documentation their reply was can 't find in time for deadline exhibit f -question and response to question f from idr why did you rent cars and trucks for trips to city instead of using your personal vehicles their response to this was moved here for business reasons in idr the organization was asked to please provide an explicit explanation of business reasons their reply was as stated in our initial interview_audit in city state and is stated in our organization's charter we moved to city to research and establish a center for promoting the value of play for kids and adults exhibit g -question and response to question g from idr do you have receipts for the total moving costs from city to city if so please provide the service with a copy their reply was will find and submit as of the december 20xx no documents have been submitted idr asked the organization again to please send copies of these receipts their reply was can 't find in time for deadline exhibit exhibit a -question and response to question a from idr how do the beauty supply stores jewelry stores cleaners and doctor visits further the organization's exempt_purpose their reply was beauty supplies for girls will find receipts for other and explain in idr the organization was asked to provide a list of the girls org provided beauty supplies for and the receipts and explanation of the other expenses listed on exhibit a their reply to idr was no separate list exists other than the list that was kept on the computer hard drive that can no longer be accessed and the receipts were presented during the initial interview exhibit b -request and response to b from idr please send copies of the medical visits incurred on exhibit their reply was okay will find and submit as of december 20xx no documents have been submitted in idr we asked the organization to please send the service copies of the medical visits their reply was can't find in time for deadline exhibit exhibit d -request and response to item d from idr please send copies of the utility bills listed on exhibit their reply was coming as of december 20xx no documents have been submitted in idr we asked the organization to please provide the service with the requested information their reply was can't find in time for deadline exhibit exhibit a -question and response to question a from idr did org keep a log book or any other records to record the mileage transactions and explanations of how these expenses furthered org's exempt_purpose their reply was answered in exhibit c as of december 20xx no documentation has been received in idr we asked the organization to please provide the service with the amount of each separate expense for transportation and lodging the department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx date you left and returned on each outing who attended each outing and the name and location of each outing their reply was cannot retrieve from inaccessible computer hard drive in time jor deadline exhibit b -question and response to question b from idr did you record what types of research was performed during your trips to city tx their reply was research was on best areas for play outdoor recreational activities in idr we asked the organization to please provide the service with a list of what sources was used for research their reply was research was done by visiting and researching what areas of the country would offer the best options for play outdoor recreation such as hills water and abundance of outdoor activity exhibit exhibit a -request and response to exhibit a from idr provide a copy of the storage agreement for the office furniture in state their reply was coming as of december 20xx no documents have been submitted in idr we asked the organization to please provide the service the requested documentation their reply was there was no storage agreement exhibit b -question and response to question b from idr does the office furniture belong to org there reply was yes idr asked for copies of receipts or cancelled checks for the furniture their reply was cannot retrieve from inaccessible computer hard drive in time for deadline exhibit c -question and response to question c from idr what was the total incurred to move the furniture from state to state please provide the receipts for the cost of the move their reply was coming as of december 20xx no documents have been submitted idr asked the organization to provide the service the requested information their reply was cannot retrieve from inaccessible computer hard drive in time for deadline exhibit exhibit a -request and response from item a from idr please provide receipts to substantiate the business meetings over lunch and dinner their reply was coming as of december 20xx no documents have been submitted idr asked the organization to please provide the service the requested information their reply was actual transactions are listed on the copies of the bank statements exhibit c -request and response from item c from idr provide documentation that shows co-1 donates drinks to match a portion of org's spending their reply was coming as of december 20xx no documents have been submitted idr we asked the organization to please provide the service the requested information their reply was cannot retrieve from inaccessible computer hard drive in time for deadline idr asked about the dollar_figure in assets reported on the 20xx form 990-ez but no response was given idr asked for a list of the assets along with copies of receipts and cancelled checks their reply was on the 20xx form 990-e2 the dollar_figure in assets listed would have been outstanding accounts_receivable due to org at the time the return was filed department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx law sec_501 provides in part that organizations described in sec_501 are exempt from federal_income_tax sec_501 provides in pertinent part that an organization must be organized and operated exclusively for religious charitable or educational_purposes and no part of its net_earnings may inure to the benefit of any private_shareholder_or_individual sec_501 are 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 and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_6001 provides that every person liable for any_tax imposed by this title or for the collection thereof shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe whenever in the judgment of the secretary it is necessary he may require any person by notice served upon such person or by regulations to make such returns render such statements or keep such records as the secretary deems sufficient to show whether or not such person is liable for tax under this title sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1 c -i a i of the income_tax regulations provides that in order for an organization to be exempt under sec_501 of the code it must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational or operational_test it is not exempt sec_1_501_a_-1 states that the words private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization the word shareholder as used here does not have the same meaning as it does in a for-profit corporation an exempt_organization cannot have shareholders or it would not meet the organizational_test however these are terms that congress gave us department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx sec_1_501_c_3_-1 provides that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose further it provides that an organization does not meet the organizational_test if its articles or the law of the state in which it was created provide that its assets would upon dissolution be distributed to its members or shareholders sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more such exempt purposes specified in sec_50i c of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 states that an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests this group of individuals is generally referred to as insiders this regulation places the burden_of_proof on the organization to demonstrate that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests the operational_test must meet the following three requirements engage primarily in activities which accomplish one or more of the exempt purposes specified in sec_501 and sec_1 c -1 c not allow its net_earnings to inure to the benefit of private shareholders or individuals sec_1_501_c_3_-1 not engage in substantial lobbying activity sec_1 c c and not engage in any political activity sec_1 c -1 g if an organization fails to comply with any of these requirements it will fail the operational_test and lose its sec_501 exemption department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx rev rut 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax revrul_78_232 c bdollar_figure explains that in the instant case the money deposited by the taxpayer in the abc church account was used or available for use for the taxpayer's benefit the taxpayer had complete control and enjoyment of the money and it was used to maintain the taxpayer's accustomed standard of living under the circumstances no portion of the amounts deposited by the taxpayer in the abc church account can be identified as for the exclusive benefit of the organization church by mail inc v commissioner of internal revenue 765_f2d_1387 a f t r 2d ustc p the dispositive issue in this case is whether the church meets the operational_test imposed by lr c sec_501 c the treasury regulations specify three criteria for this requirement first the organization must be primarily engaged in activities which accomplish one or more of the exempt purposes specified in sec_501 so that it is operated exclusively for exempt purposes sec_1 c - c d second the organization's net_earnings must not be distributed in whole or in part to the benefit of private shareholders or individuals the tax_court upheld the commissioner's determination holding that the church was operated for the non-exempt purpose of providing a market for twentieth's services and a substantial if not principal purpose of the church's operations was to generate income for the private benefit of reverend ewing and reverend mcelrath and their respective families in 640_fsupp_96 u s dist due to the taxpayer's failure to keep adequate_records the court held that the taxpayer failed to sustain its burden to show that it was qualified for federal tax exemption as a corporation organized and operated exclusively for religious and charitable purposes as required under sec_501 c and department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx that it was further qualified to receive deductible charitable_contributions under sec_170 the court found that as a prerequisite to an sec_6033 filing exemption it was necessary for the taxpayer to show it qualified as an sec_501 c organization which it could not john marshall law school v u s wl a f t r 2d ustc p ct_cl trial div jun no in its determination_letter the irs stated that it had considered numerous items pertaining to the fiscal years ended date to date including but not limited to payments by john marshall law school jmls for fenster family automobiles education and travel_expenses insurance policies basketball and hockey tickets membership in a private eating establishment membership in a health spa interest-free loans home repairs personal household furnishings and appliances and golfing equipment john marshall law school hereinafter plaintiff argued that all the expenses_incurred by the organization were ordinary and necessary in furtherance of their exempt_purpose the term 'net earnings’ in the inurement-of-benefit clause of sec_501 has been construed to permit an organization to incur ordinary and necessary expenses in the course of its operations without losing its tax-exempt status the issue therefore is whether or not the expenditures plaintiff paid to or on behalf of the fenster family were ordinary and necessary to plaintiff operations also the burden_of_proof was on plaintiff to establish that the grounds set forth in determination_letter and the resulting revocation of notice of exemption was erroneous ultimately the court decided that their jurisdiction was limited to a review of error for the service's revocation of plaintiffs favorable tax-exempt ruling the burden of establishing whether the plaintiff is an organization described in sec_501 furthermore rests with the plaintiff it is the courts decision that the commissioner of internal revenue's revocation of plaintiffs notices of exemption for the years through was correct in 326_us_279 the supreme court held that the presence of a single non-exempt purposes if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes also the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university governments position based on the facts shown above org has been involved in numerous transactions that without further detail indicates the organization is not operating within scope of sec_501 org a corporation recognized by the internal_revenue_service as being exempt from federal_income_tax under internal_revenue_code sec_501 c and having a foundation status of department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx b a vi must pass two tests in order to continue its exempt status the first test an organizational_test relates to the organizational documents this test can only be satisfied if the written documents prepared at the time of the organization's formation meets the requirements of the regulations an organizational document must meet requirements in both form and language org satisfied the organizational requirement by having their articles of incorporation formed under the state of state’ non-profit corporation law their articles of incorporation were stamped received by the secretary of state of state org also satisfied the language requirement by having an acceptable purpose clause powers clause and although not needed in the state of state a dissolution clause the second test relates to the organization's activities to establish that org operates primarily in activities which accomplish its exempt purposes the organization must establish that no more than an insubstantial part of its activities does not further an exempt_purpose sec_1 c -1 c income_tax regulations the presence of a single substantial nonexempt purpose destroys the exemption regardless of the number or importance of the exempt purposes better business bureau v united_states while org is not an action_organization it has failed to comply with the first two conditions of the operational_test because of the egregious usage of the organization's assets for private benefit a sec_501's assets are required to be irrevocably dedicated to their exempt_purpose s sec_1_501_c_3_-1 b the inurement prohibition serves to prevent the individuals who operate the organization from siphoning off any of a c organization's income or assets for personal_use an organization is described in sec_501 only if no part of its net_earnings inures to the benefit of any private shareholder the inurement prohibition is designed to insure that organization's assets are dedicated to exclusively furthering public purposes org is not operated exclusively for exempt purposes because its net_earnings inure to the benefit of dir-1 dir-2 inurement can take the form of questionable transactions that have no causal relationship to the - organization's exempt_purpose s but result in some benefit to an insider the insiders dir-1 dir-2 are in a position to exercise control_over the organization's net_earnings as if they were their own by using them at will rather than within the limitations of a fiduciary capacity in effect the booth's are using the public's net_earnings for their own benefit by using the organization's assets to further their own interests org has breached the private_inurement prohibition although the requirements for finding inurement or private benefit are similar inurement and private benefit differ in two key respects the first is that even a minimal amount of inurement results in disqualification for exempt status whereas private benefit must be more than quantitatively or qualitatively incidental in order to jeopardize tax exempt status the second is that inurement only applies to insiders individuals whose relationship with an organization offers them an opportunity to make use of the organization's income or assets for personal gain department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx whereas private benefit may accrue to anyone org has failed the operational requirement inurement in using a substantial amount of the organization's assets for personal gain as discussed in sec_1_501_c_3_-1 inurement can take the form of any transaction the transaction results in inurement because it provides a disproportionate benefit to an insider both dir-1 dir-2 are considered insiders private_inurement may be as straightforward as a cash payment to an insider when the organization has no obligation to pay put simply inurement is the use of an exempt organization's assets to benefit an individual s connected to it on a personal level as a result such use means the organization does not exclusively serve the public note that the payment of personal expenses of an insider that the organization did not characterize as compensation at the time of payment may constitute inurement even when if added to compensation the total amount of compensation would be reasonable as in the case of john marshall law school v u s the assets of org inured to the private benefit of dir-1 dir-2 officers of org the internal_revenue_code and regulations provide that an organization exempt under sec_501 cannot allow its assets to benefit private interests an organization that allows their assets to benefit private interests is not exempt the not more than an insubstantial part of its activities standard of sec_1 c i c of the regulations can be understood by reference to better business bureau v united_states 316_us_279 which held that an organization which engaged in some educational activity but pursued nonprofit goals outside the scope of the statute was not exempt under sec_501 of the code the court stated that an organization is not operated exclusively for charitable purposes if it has a single non charitable purpose that is substantial in nature this is true regardless of the number or importance of the organization's charitable purposes thus the operational_test standard prohibiting a substantial nonexempt purpose is broad enough to include inurement private benefit and operations which further goals outside the scope of sec_501 dir-1 dir-2 used orgs debit card everyday of the 20xx calendar_year except for a total of days no debit card statements were available for review for the month of september 20xx while the number of days the card was used is not the issue the types of transactions are there was no calendar of events no client listings no billing information and no log books were kept as to where and when the outings took place and how many individuals participated sec_6001 requires that every person liable for any_tax imposed by the code shall keep adequate_records org failed to keep such records as required by this code section also sec_6033 requires every organization exempt from tax under sec_501 a shall file an annual return stating specifically the items of gross_income receipts and disbursements in the 20xx form 990-ez the organization filed stated that they had dollar_figure in accounts_receivable but there was no explanation as to what it involved in idr we asked to list the dollar_figure in assets we did not get a response to this question in idr in idr we again asked as to the nature of the dollar_figure in assets and their department of the treasury - internal_revenue_service form 886-a page form 886-a u s treasury department-internal revenue service schedule no or explanation of items exhibit name of taxpayer org year period ended december 20xx response was on the 20xx form 990-ez the dollar_figure in assets listed would have been outstanding accounts_receivable due to org at the time the return was filed this was not specifically explained nor was the client incentives such as who the clients were when they met and what was discussed conclusion in the case of org the primary activity is to use the assets of the organization for personal gain org does not qualify for exemption from federal_income_tax as an organization described in sec_501 c of the code because of the egregious nature as to which the assets of the organization were used for personal gain consequently we are proposing org's exemption from federal_income_tax be revoked as of for tax periods january 20xx please file u s_corporation income_tax return form ending december 20xx december 20xx december 20xx december 20xx and december 20xx contributions to your organization are not deductible under irc code sec_170 if you agree with our decision please sign and return form in the enclosed envelope if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position please refer to the attached letter and publications enclosed for specific details of this process department of the treasury - internal_revenue_service form 886-a page


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person telephone number identification_number number release date date date uil no employer_identification_number legend a b dear --------------- this is in response to a letter from your authorized representative requesting a ruling on your behalf that you meet the requirements of revproc_95_48 1995_2_cb_418 facts a is controlled by a governmental_unit b a is exempt from federal_income_tax under sec_501 of the internal_revenue_code its board_of trustees is composed of thirteen members twelve of which are selected by the county commis sioners of b based upon nominations submitted by a’s board the remaining trustee must be one of the county commissioners the county exercises control_over and oversees all of a’s expenditures as the board_of trustees is approved by the county commissioners and has authority over the budget and all expenditures upon dissolution a’s assets after liabilities will be distributed to b ruling requested a satisfies the requirements of being an affiliate of a governmental_unit of revproc_95_48 1995_2_cb_418 and therefore is not required to file form_990 law sec_501 of the code provides an exemption from federal_income_tax for organizations described in sec_501 including organizations that are organized and operated exclusively for charitable educational or scientific purposes sec_6033 of the code generally requires the filing of annual information returns by exempt_organizations sec_6033 of the code provides certain mandatory exceptions to filing annual information returns sec_6033 of the code provides discretionary exceptions from filing such returns where the secretary determines that such filing is not necessary to the efficient administration of the tax laws revproc_95_48 provides an exception from filing for governmental units or affiliates of governmental units that are exempt from federal_income_tax under sec_501 section dollar_figure of revproc_95_48 provides that an organization will be treated as an affiliate of a governmental_unit if it is described in sec_501 and either a it has a ruling from the service that its exempt_purpose income is excluded under sec_115 it is entitled to receive deductible contributions under sec_170 because the contributions are the for_the_use_of a governmental_unit or it is a wholly owned instrumentality of a state or political_subdivision for employment_tax purposes or b it meets the requirements of sec_4 b sec_4 b of revproc_95_48 provides the following criteria to be used to determine whether an organization meets the requirements of sec_4 b the organization is either operated supervised or controlled within the meaning of sec_1_509_a_-4 of the regulations by governmental units or by an organization's governing body that is elected by the public at large the organization possesses two or more affiliation factors listed under section dollar_figure of the revenue_procedure and the organization's filing of form_990 is not otherwise necessary to the efficient administration of the internal revenue laws section dollar_figure of revproc_95_48 describes among the affiliation factors the following a the organization was created by one or more governmental units organizations that are affiliates of governmental units or public officials acting in their official capacity b the organization is subject_to financial audit by the governmental_unit to which it reports or the governmental_unit or affiliate of a governmental_unit exercises control_over or oversees some or all of the organization's expenditures and c one or more governmental units or organizations that are affiliates of governmental units exercise control_over or oversee some or all of the organization’s expenditures section dollar_figure of revproc_95_48 provides that in making a ruling or determination whether the organization’s filing of form_990 is otherwise necessary to the efficient administration of the internal revenue laws under sec_4 b iii all relevant facts and circumstances shall be considered these include the extent to which the organization has taxable subsidiaries or participates in joint ventures with non-exempt entities whether it engages in substantial public fund-raising efforts and whether its activities provide significant benefits to private interests sec_1_509_a_-4 of the income_tax regulations provides in part that the terms operated by supervised by ' and controlled by as used in sec_509 presupposes a substantial degree of direction over the policies programs and activities of a supporting_organization by one or more publicly supported organizations the relationship described under any one of these terms is comparable to that of a parent and subsidiary where the subsidiary is under the direction of and accountable or responsible to the parent organization this relationship is established by the fact that a majority of the officers directors or trustees of the supporting_organization are appointed or elected by the governing body officers acting in their official capacity or the membership of one or more publicly supported organizations analysis you have stated that a does not have a letter that meets the criteria of sec_4 a of revproc_95_48 and therefore it must meet the requirements in sec_4 b the internal_revenue_service has determined that a is exempt from federal_income_tax under sec_501 of the code a is controlled by b a governmental_unit accordingly a meets the requirement of sec_4 b of rev_proc a possesses the affiliation factor in sec_4 a and b of revproc_95_48 since a is financially accountable to a governmental_unit a possesses the affiliation factor in sec_4 c of revproc_95_48 under a’s articles of incorporation if a is terminated its assets will be distributed to b therefore a possesses the affiliation factor in sec_4 e of revproc_95_48 therefore since a possesses two or more of the affiliation factors listed in section dollar_figure of revproc_95_48 a meets the requirements of sec_4 b ii a has no taxable subsidiaries does not participate in joint ventures with non-exempt entities does not engage in substantial public fund-raising efforts and does not provide significant benefits to private interests therefore since the filing of form_990 is not otherwise necessary to the efficient administration of the internal revenue laws a meets the requirement of sec_4 b iii of revproc_95_48 since a is described in sec_501 of the code and meets the requirements of sec_4 b of revproc_95_48 a is treated as an affiliate of a governmental_unit under section dollar_figure of revproc_95_48 ruling a satisfies the requirements of being an affiliate of a governmental_unit of revproc_95_48 and therefore is not required to file form_990 this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described please keep a copy of this ruling in your permanent records this ruling is based on the understanding that there will be no material changes in the facts upon which it is based this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter thank you for your cooperation enclosure notice sincerely yours lawrence m brauer acting manager exempt_organizations technical group