department of the treasury internal_revenue_service te_ge eo examination fulton street room breoklyn ny date date tax_exempt_and_government_entities_division number release date uil legend org organization name address address xx date org address dear taxpayer_identification_number person to contact identification_number contact telephone number last date for filing a pleading with the tax_court the claims_court or the united_states district_court for the district of columbia this is a final_determination regarding your exempt status under sec_501 of the internal_revenue_code irc recognition of your exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 is retroactively revoked to october 19xx because it is determined that you are not operated exclusively for an exempt_purpose sec_501 exempts from taxation organizations which are organized and operated exclusively for charitable or educational_purposes no part of the net_earnings of which inure to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which do not participate in or intervene in any political campaign on behalf of or in opposition to any candidate for public_office we have determined that you are not operating exclusively for charitable or educational_purposes our examination reveals that you did not operate exclusively for exempt purposes because your assets inured to and it served the private interests of your creators and other disqualified persons we are revoking your exemption from federal_income_tax as an organization described in sec_501 of the internal_revenue_code effective october 19xx contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1041 these returns should be filed with the appropriate service_center for all years beginning january 19xx processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must file a pleading seeking a declaratory_judgment in the united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia before the day after the date this final_determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing pleadings for declaratory judgments and refer to the enclosed publication you may write to these courts at the following addresses 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 too-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code lf you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations enclosure publication tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service 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 an adjustment of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you enclosed for your convenience an envelope is if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues ifa determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status will process your case on the basis of the recommendations shown in the report of in that event you will be required to file examination and this letter will become final federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and letter catalog number 34801v thank you for your cooperation enclosures publication publication form_6018 report of examination envelope sincerely m pembroke internal revenue_agent letter catalog number 34801v department of the treasury - internal_revenue_service form_886 a name of taxpayer schedule no or exhibit year period ended xx-12 xx explanation of items org legend org organization name xyz state co-16 companie sec_1 14th companies director -1 xx date -3 -2 4t 5th eth founders founders 18t g gth directors co-1 thru oth city city qoth fm-1 fm-21 family_member sec_1 7th primary issue whether the irs sec_501 tax exempt status of org should be revoked because the foundation did not have an exclusively exempt_purpose and the foundation’s income inured to private shareholders and individuals facts during 19xx founders became clients of co-1 co-1 in association with co-2 co- corporations with domestic subsidiary units in city xyz with the purpose both to reduce or eliminate income and capital_gains taxes while providing annual income to maintain your current standard of living organize business entities to protect your retirement assets from frivolous_litigation and predatory taxation organize an estate for generational transfer that will be free from estate taxation a plan was devised dated september 19xx which the founders were advised to implement by following specific step by step instructions provided by co-1 this plan involved the creation of domestic corporations complex trusts living trusts a charitable foundation partnerships including a family limited_partnership a domestic entity for the repatriation of foreign funds foreign_corporations and several foreign bank accounts founders played active roles in the formation and implementation of this plan noteworthy is the cover page of the analysis and recommendations prepared for founders by co-2 dated september 19xx which contained the following language it is strongly recommended that upon implementation of a master_plan this document be sent offshore to the administrative offices of the individual named below or to the offshore offices of co-1 or destroyed the charitable vehicle recommended by co-1 was a supporting_organization described in sec_501 and sec_509 of the internal_revenue_code as described by co-1 the purpose of the supporting_organization was to accept appreciated assets so as to create a tax deduction for the donor and eliminate capital_gains_tax in turn the supporting_organization could then loan the assets to controlled domestic and foreign_corporations for a minimal market rate of around providing the donors capital for domestic investments and a foreign tax-free environment suitable for repatriation of assets form 886-acrev department of the treasury - internal_revenue_service page -1- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org org foundation was created on october 19xx via a declaration of trust declaration by and between founders founder and founder trustee of city xyz pursuant to the declaration the foundation was established for the purpose of establishing an organization which is described in sec_501 and sec_509 of the internal_revenue_code founder-1 director-1 director-2 and director-3 were listed as directors of the foundation the declaration provides that the founder renounces any power to determine or control by alternation amendment revocation termination or otherwise the income or principal of the foundation estate and that the founder renounces any interest either vested or contingent including any reversionary_interest or possibility of reverter in the income or principal of the foundation estate required distributions declaration sec_2 and each year the trustee shall distribute co-2 net_income shall be determined pursuant to the xyz revised uniform principal and income act section of the net_income of the trust to the percent trustee shall also distribute sec_501 organizations listed on schedule a or to co-2 as is directed by the board in writing signed by at least three members of the board about organizations are listed on schedule a of the net_income to one or more of the percent discretionary distributions declaration sec_2 in addition to the required distributions under sec_2 and the trustee may make such discretionary distributions of the income in excess of eighty-five of the net_income and principal of the foundation to one or more of the organizations listed in schedule a or to co-2 as is directed by the board in writing signed by at least three board members final distribution declaration sec_2 in the event the trustee determines in trustee’s sole and complete discretion that the foundation is too small to economically administer then the trustee shall distribute the foundation fund in its entirety outright and free of trust to such organization or organizations as described in sec_170 of the code as the trustee in trustee’s total and complete discretion shall determine dissolution declaration sec_2 upon winding up and dissolution of this foundation after paying or adequately providing for the debts and obligations of the foundation the remaining assets shall be distributed to a non-profit form 886-arev department of the treasury - internal_revenue_service page -2- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org fund foundation or corporation which is organized and operated exclusively for charitable educational religious and or scientific purposes and which has established its tax exempt status under sec_501 of the code in the event that the foundation does not obtain tax exempt status under sec_501 and sec_509 of the code the assets of the foundation shall go to the founders as defined herein as a contingent_remainder bond and compensation declaration sec_2 the trustee shall not be required to furnish any bond or surety the trustee shall be entitled to a reasonable fee for trustee’s services commensurate with fees charged by corporate trustees in xyz for similar services liability of trustee declaration section dollar_figure trustee shall not be answerable for loss in investments made in good_faith trustee shall not be answerable for any_action taken in good_faith the board declaration sec_3_1 the board shall be the body that has the authority power and discretion as described herein the board shall consist of five members the members of the board shall be determined as follows one board member appointed by co-2 or its designated agent two board members shall be from the class consisting of founders and each of their descendants the founders remaining member shall be appointed by a majority vote of the remaining members of the board initial remaining members shall be director-1 and director-2 the latter associated with co-1 factual background regarding specific income assets and liabilities the foundation filed form_1023 in april 19xx based on its representations on the form_1023 on june 19xx the foundation was granted exemption from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 the foundation was classified as not a private_foundation within the meaning of sec_509 of the code because it is described in sec_509 subsequent to the creation of the trust and prior to the foundation receiving tax exemption from the service other org master_plan entities previously described were created whether as a result of haste or by actual design org assets which were supposed to have been transferred into the possession of the foundation as contributions were never legally or physically moved into the foundation most of the org’s assets in fact were transferred to the various other form 886-a rev department of the treasury - internal_revenue_service page -3- department of the treasury - internal_revenue_service explanation of items form_8 a name of taxpayer org schedule no or exhibit year period ended xx-12 xx entities created this non transference oversight resulted in the misrepresentation of the foundation’s income assets and liabilities on its forms from the initial filing in 19xx through 20xx co-5 note receivable co-3 to co-5 inc on july 19xx for dollar_figure of this amount dollar_figure was founder sold his in cash and dollar_figure in the form of a note receivable pincite for months with monthly payments of dollar_figure payable to founder on december 19xx as step in co-1’s plan for org implementation a dollar_figure cd stemming from the co-3 sale with a value of dollar_figure was cashed in and the resulting funds deposited in co-4 - one of the other entities created by the founders co-1 and co-2 on february 19xx founder assigned all right title and interest in the bill of sale and purchase agreement dated july 19xx to org the only asset of the co-3 sale left to be affected by this assignment was the note receivable with a value of dollar_figure at the time of transfer and a year end value of dollar_figure dollar_figure per form_990 from the time of assignment the foundation received dollar_figure per month until the bankruptcy of co-5 in 20xx the last payment was received in july 20xx and the balance owed of dollar_figure was written off on the foundation’s 20xx form_990 co-8 insurance_policy payable founder took out a dollar_figure whole_life_insurance policy on october 19xx with the beneficiary being founder-1 his wife per step of co-1’s master_plan the founders personally took out a dollar_figure loan on the policy on january 19xx bills for the interest were sent in the name of founder- pera co-1 memo the money was deposited directly into co-4 account on january 19xx the foundation carried the loan on its form_990 balance_sheet as a liability from 19xx until 20xx when the loan was paid off with personal funds per founder-1 the foundation made interest payments on the loan in the amounts of dollar_figure on december 19xx dollar_figure on september 20xx and dollar_figure on november 20xx actually repaid co-4 which originally made the payment on october 20xx co-6 loan payable and co-7 note receivable on january 19xx founders received a promissory note from their daughter fm-1 and her husband fm-2 in the amount of dollar_figure ostensibly for the purchase of an co-7 in city xyz per founder’s response to a co-1 inquiry founders made two additional loans to fm-1 and fm-2 on november 19xx in the amounts of dollar_figure and dollar_figure on december 19xx founders took out a personal loan in the amount of dollar_figure for years from co-6 using the co-7 and another piece of property they owned as collateral for the loan as part of the co-1 strategy the foundation paid the dollar_figure monthly loan payment to co-6 from september 19xx until the property was sold on september 20xx fm-1 and fm-2 made payments to founders on their loans from 19xx until 19xx - no payments were made after that time until the property was sold form 886-a rev department of the treasury - internal_revenue_service page -4- form_8 a name of taxpayer schedule no or exhibit year period ended xx-12 kx explanation of items department of the treasury - internal_revenue_service org the foundation carried the co-6 loan on its form_990 balance_sheet as a liability and the co-7 note receivable as an asset on its balance_sheet from 19xx until 20xx when the property was sold this was done in spite of the fact that all of the loans were personal loans of founders the property in question co-7 was in the fm-1 and org’s names and no note receivable to nor payable by the foundation was ever found per the org’s responses to idr ’ sec_1 and dated april 20xx and july 20xx respectively per the records of co-4 the co-7 note receivable was also carried on their books the foundation made payments on founders’s personal loan with co-6 in the years 19xx and 20xx in the amounts of dollar_figure and respectively and received no reciprocal income benefit the property was sold in september 20xx with dollar_figure in proceeds of these proceeds dollar_figure went to the retirement of the co-6 loan dollar_figure went to settlement costs dollar_figure went to the fm-1 and the balance went to founders summary of the foundation’s financial activity since inception in 19xx relating to accounting practices charitable intent form_990 reporting accuracy inurement and private benefit is as follows interest_income of reflected on line of part could not be verified based on available 19xx form_990 the dollar_figure cash contribution as reflected on line 1d of part never occurred this money was actually deposited in the account of co-4 another of the entities created in accordance with the master_plan and owned by founders the dollar_figure in noncash contributions reflected on line 1d of part also could only be verified to the extent of dollar_figure dollar_figure represented by the co-5 note receivable and dollar_figure in stock the balance of dollar_figure claimed as a contribution did not exist as an asset of the foundation - these funds were actually the property of other entities created in the plan the charitable deduction of dollar_figure taken by the founders on their personal 19xx form_1040 could therefore only be verified to the amount of dollar_figure information the foundation also reported dividend income of dollar_figure total assets reported on line of part 1v of dollar_figure were overstated by dollar_figure this is partially due to the fact that the dollar_figure reported as savings and temporary cash investments did not exist - these assets belonged to co-4 with no related obligation to the foundation founder-1 indicated in her response to idr that the foundation had no information relative to the dollar_figure savings and temporary cash investments for this year or any other year - all handled by co-1 the balance of the dollar_figure discrepancy was due to the inclusion of a note receivable of dollar_figure from co-7 when no note to the foundation existed the foundation in actuality had no liabilities but founder chose to list dollar_figure on form_990 this number was comprised of the dollar_figure co-8 loan and the balance of the co-6 loan both of which were personal liabilities of founders 19xx form_990 the misrepresentation of assets and liabilities was carried over the foundation paid co-6 dollar_figure for the benefit of founders on their personal loan form 886-a crev department of the treasury - internal_revenue_service page -5- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org the foundation paid co-8 dollar_figure for the benefit of founders on their personal policy loan the foundation made grants to charity in the amount of all to the co-2 the foundation reported interest and dividend income in the amount of 20xx form_990 the misrepresentation of assets and liabilities continued the foundation paid dollar_figure to co-6 for the benefit of founders on their personal loan the foundation paid co-8 dollar_figure for the benefit of founders on their personal policy loan the foundation paid dollar_figure in charitable grants to co-2 and dollar_figure to co-9 and paid dollar_figure for founder to travel to the foundation reported interest and dividend income in the amount of dollar_figure foundation reported a net_loss of dollar_figure for sale of assets in addition the with co-10 20xx form_990 the misrepresentation of assets and liabilities continued the foundation paid co-4 dollar_figure to reimburse co-4 for its payment to co-8 for the benefit of founders on their personal policy loan the foundation paid dollar_figure in charitable grants to co-11 and paid dollar_figure for a trip to xyz for founder with co-12 the foundation reported dollar_figure in dividend income 20xx form_990 the misrepresentation of assets and liabilities continued the foundation made grants to charities in the amount of dollar_figure as follows dollar_figure to co-12 dollar_figure to co- dollar_figure to co-13 dollar_figure to co-14 the foundation reported interest and dividend income in the amount of dollar_figure 20xx form_990 the misrepresentation of assets and liabilities ceased the foundation made grants to charities in the amount of dollar_figure as follows dollar_figure to co-2 dollar_figure to co- dollar_figure to co-9 dollar_figure to co-14 the foundation reported interest and dividend income in the amount of and revenue from a settlement in the amount of dollar_figure law sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in form 886-acrev department of the treasury - internal_revenue_service page -6- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office regulation sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose regulation sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization regulation sec_1_501_c_3_-1 provides an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests in 326_us_279 the united_states supreme court held that regardless of the number of truly exempt purposes the presence of a single substantial non-exempt purpose will preclude exemption under sec_501 in 412_f2d_1197 ct_cl the court stated that loans to an organization’s founder or substantial_contributor can constitute inurement that is prohibited under sec_501 in that case the church made loans to its founder and his family and failed to produce documentation that demonstrated that the loans were advantageous to the church the church also failed to produce documentation to show that the loans were repaid significantly the court stated that the very existence of private source of loan credit from an organization’s earnings may itself amount to inurement of benefit in revrul_67_5 1967_1_cb_123 it was held that a foundation controlled by the creator’s family was operated to enable the creator and his family to engage in financial activities which were beneficial to them but detrimental to the foundation it was further held that the foundation was operated for a substantial non-exempt purpose and served the private interests of the creator and his family therefore the foundation was not entitled to exemption from federal_income_tax under sec_501 governments position form 886-a cev department of the treasury - internal_revenue_service page -7- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no ot exhibit year period ended xx-12 kx org in order to qualify for exemption under sec_501 of the internal_revenue_code an organization must be organized and operated exclusively for charitable purposes 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 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 the burden_of_proof is upon the organization to establish that it is not organized or operated for the benefit of private interests org is not operated exclusively for a public charitable purpose but rather for the private interest of the creators of the foundation the founders were active participants in the creation and implementation of the master_plan a part of which was the creation of org the foundation never operated exclusively for exempt purposes its grants to other public_charities were minimal at best the founders took a large personal charitable_contribution_deduction in 19xx for a contribution to the foundation much of which was never actually made the founders spent significant sums of foundation funds for their own personal benefit while acting in the capacities of sole trustee board member and in actuality the only functioning officials of the foundation they initially and continuously misrepresented the financial status of the foundation to the public as well as to the internal_revenue_service in essence the foundation was created in conjunction with numerous other entities to serve as a financial vehicle for the interests and benefit of founders specifically as previously noted founders used dollar_figure of the foundation’s assets to make payments on their personal dollar_figure loan with co-8 the proceeds of which were used by the founders personally also at the same time the dollar_figure loan was misleadingly carried on the foundation’s balance_sheet as a liability the founders also used dollar_figure of the foundation’s assets to make payments on a personal loan founders had with co-6 at the same time misleadingly recording this loan as liability on the foundation’s balance_sheet and recording the co-7 note receivable as an asset - neither of which was true 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 charitable assets are dedicated to exclusively furthering public purposes an organization is not operated exclusively for exempt purposes if its net_earnings inure to the benefit of private shareholders or individuals a charity’s assets are required to be irrevocably dedicated to charitable purposes sec_1_501_c_3_-1 the inurement prohibition serves to prevent the individuals who operate the charity from siphoning off any of a charity’s income or assets for personal_use see 165_f3d_1173 cir 19xx by transferring its assets to or form 886-a ev department of the treasury - internal_revenue_service page -8- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no ot exhibit year period ended xx-12 kx org for the benefit of the founders for no consideration the foundation breached the dedication requirement and its net_earnings have inured to the benefit of the founders although the inurement prohibition is stated in terms of net_earnings it applies to any of a charity’s assets that serve the interests of its private shareholders 505_f2d_1068 cir the foundation has operated since inception primarily for the benefit of its creators and their family conclusion for these reasons it is the government’s position that the org does not qualify for exemption under internal_revenue_code sec_501 as an organization described in sec_501 and its exempt status should be revoked effective october 19xx because it did not operate exclusively for exempt purposes and because its assets inured to and it served the private interests of its creators and other disqualified persons the foundation’s operations were materially different from the representations that it made in its application_for exemption it did not disclose in its exemption application that it would transfer its assets to and for the benefit of its founders thus retroactive revocation is appropriate form_1041 u s income_tax return for estates and trusts should be filed for tax years ending subsequent returns are due no later than the day of the month following december the close of the trust’s accounting_period returns should be sent to the following mailing address internal_revenue_service for tax_year ending december 20xx the form_1041 is due april 20xx and should be sent to the following address internal_revenue_service center ogden ut alternative position whether org should be reclassified as a private_foundation facts of the adjusted the declaration of trust provides that each year the trustee shall distribute net_income of org foundation to the co-2 primary charity the declaration also provides that the board_of directors the board shall consist of five members including one member appointed by the primary charity form 886-a crev department of the treasury - internal_revenue_service page -9- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended kx-12 xx org there is no evidence that representatives of the primary charity ever attended or participated in any meetings of the board_of the foundation there is no evidence that any financial reporting’s were made to the primary charity the gross revenue of the co-2 the supported_organization that is the primary charity is as follows dollar_figure 19xx 19xx 20xx 20xx 20xx the foundation made grants to the co-2 the supported_organization that is the primary charity as follows dollar_figure none none 19xx 19xx 20xx 20xx 20xx 20xx law under sec_509 any organization described in c which does not demonstrate that it falls within the definition of a publicly_supported_organization will be treated as a private_foundation thus an organization described in sec_501 is a private_foundation unless it demonstrates that it is described in sec_509 through sec_509 provides that the term private_foundation does not include an organization that is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 or if the organization is operated supervised or controlled by or in connection directly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more organizations described in sec_509 or income_tax regulations sec_1_509_a_-4 regarding the organizational_test a a organization must meet provides form 886-a crev department of the treasury - internal_revenue_service page -10- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org in general -an organization is organized exclusively for one or more the purposes specified in sec_509 only if its articles of organization as defined in sec_1_501_c_3_-1 i limit the purposes of such organization to one or more of the purposes set forth in sec_509 ii do not expressly empower the organization in engage in activities which are not in furtherance of the purposes referred to in subdivision i of this subparagraph iii state the specified publicly supported organizations on whose behalf such organization is to be operated within the meaning of paragraph d of this section and iv do not expressly empower the organization to operate to support or benefit any organization other than the specified publicly supported organizations referred to in subdivision iii of this subparagraph income_tax regulations sec_1_509_a_-4 regarding the operational_test a a organization must meet provides permissible beneficiaries -a supporting_organization will be regarded as operated exclusively to support one or more specified publicly supported organizations herein referred to as the operational_test only if it engages solely in activities which support or benefit the specified publicly supported organizations such activities may include making payments to or for_the_use_of or providing services or facilities for individual members of the charitable_class benefited by the specified publicly_supported_organization a supporting_organization may also for example make a payment indirectly through another unrelated organization to a member of a charitable_class benefited by a specified publicly_supported_organization but only if such a payment constitutes a grant to an individual rather than a grant to an organization in determining whether a grant is indirectly to any individual rather than to an organization the same standard shall be applied as in sec_54 a of this chapter similarly an organization will be regarded as operated exclusively to support or benefit one or more specified publicly supported organizations even if it supports or benefits an organization other than a private_foundation which is described in sec_501 and is operated supervised or controlled directly by or in connection with such publicly supported organizations or which described in sec_511 however an organization will not be regarded as operated exclusively if any part of its activities is in furtherance of a purpose other than supporting or benefiting one or more specified publicly supported organizations permissible activities -a supporting_organization is not required to pay over its income to the publicly supported organizations in order to meet the operational_test test by using its income to carry on an independent activity or program which supports or benefits the specified publicly supported organizations all such support must however be limited to permissible beneficiaries in accordance with subparagraph of this paragraph the supporting_organization may also engage in fund raising activities such as solicitations department of the treasury - internal_revenue_service it may satisfy the form 886-a ev page -11- department of the treasury - internal_revenue_service explanation of items form_886 a name of taxpayer org schedule no or exhibit year period ended xx-12 xx fund raising dinners and unrelated_trade_or_business to raise funds for the publicly supported organizations or for the permissible beneficiaries income_tax regulations sec_1_509_a_-4 regarding the nature of relationships required for a organizations provides in general - sec_509 describes the nature of the relationship required between a sec_501 organization and one or more publicly supported organizations in order for such sec_501 organization to qualify under the provisions of sec_509 to meet the requirements of sec_509 an organization must be operated supervised or controlled by or in connection with one or more publicly supported organizations if an organization does not stand in one of such relationships as provided in this paragraph to one or more publicly supported organizations it is not an organization described in sec_509 types of relationships - sec_509 sets forth three different types of relationships one of which must be met to meet the requirements of subparagraph of this paragraph thus a supporting_organization may be i operated supervised or controlled by ii supervised or controlled in connection with or iii operated in connection with one or more publicly supported organizations requirements of relationships -although more than one type of relationship may exist in any one case any relationship described in sec_509 must insure that i the supporting_organization will be responsive to the needs or demands of one or more publicly supported organizations and ii the supporting_organization will constitute an integral part of or maintain a significant involvement in the operations of one or more publicly supported organizations general description of relationships -in the case of supporting organizations which are operated supervised or controlled by one or more publicly supported organizations the distinguishing feature of this type of relationship is the presence of a substantial degree of direction by the publicly supported organizations over the conduct of the supporting_organization as described in paragraph g of this section in the case of the supporting_organization which are supervised or controlled in connection with one or more publicly supported organizations the distinguishing feature is the presence of common supervision or control among the governing bodies of all organizations involved such as the presence of common directors as described in paragraph h of this section in the case of a supporting ’ organization which is operated in connection with one or more publicly supported organizations the distinguishing feature is that the supporting_organization is responsive to department of the treasury - internal_revenue_service form 886-acrev page -12- department of the treasury - internal_revenue_service form_886 a name of taxpayer schedule no or exhibit year period ended xx-12 xx explanation of items org and significantly involved in the operations of the publicly_supported_organization as described in paragraph of this section income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of operated supervised or controlled by as follows each of the items 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 relationships required 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 members of the governing body officers acting in their official capacity or the membership of one or more publicly supported organizations ii a supporting_organization may be operated supervised or controlled by one or more publicly supported organizations within the meaning of sec_509 even though its governing body is not comprised of representatives of the specified publicly supported organizations for whose benefit it is operated within the meaning of sec_509 a supporting_organization may be operated supervised or controlled by one or more publicly supported organizations within the meaning of sec_509 and be operated for the benefit of’ one or more different publicly supported organizations within the meaning of sec_509 only if it can be demonstrated that the purposes of the former organizations are carried out by benefiting the latter organizations income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of supervised or controlled in connection with as follows in order for a supporting_organization to be supervised or controlled in connection with one or more publicly supported organizations there must be common supervision or control by the persons supervising or controlling both the supporting_organization and the publicly supported organizations to insure that the supporting_organization will be responsive to the needs and requirements of the publicly supported organizations therefore in order to meet such requirement the control or management of the supporting_organization must be vested in the same persons that control or manage the publicly supported organizations a supporting_organization will not be considered to be supervised or controlled in connection with one or more publicly supported organizations if such organization merely makes payments mandatory or discretionary to one or more named publicly supported organizations even if the obligation to make payments to the named beneficiaries is enforceable under state law by such beneficiaries and the supporting organization’s governing instrument contains provisions whose effect is described in sec_508 and b form 886-acrev department of the treasury - internal_revenue_service page -13- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 kx org such arrangements do not provide a sufficient connection between the payor organization and the needs and requirements of the publicly_supported_organization to constitute supervisions or control in connection with such organizations income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of operated in connection with as follows general_rule i except as provided in subdivisions ii and iii of this subparagraph and subparagraph of this paragraph a supporting_organization will be considered as being operated in connection with one or more publicly supported organizations only if it meets the responsiveness test which is defined in subparagraph of this paragraph and the integral part test which is defined in subparagraph of this paragraph responsiveness test i for purposes of this paragraph a supporting_organization will be considered to meet the responsiveness test if the organization is responsive to the needs or demands of the publicly supported organizations within the meaning of this subparagraph in order to meet this test either subdivision ii or subdivision iii of this subparagraph must be satisfied ii a one or more officers directors or trustees of the supporting_organization are elected or d by reason of a b or c of this subdivision the officers directors or trustees of the b one or more members of the governing bodies of the publicly supported organizations c the officers directors or trustees of the supporting_organization maintain a close and appointed by the officers directors trustees or membership of the publicly supported organizations continuous working relationship with the officers directors or trustees of the publicly supported organizations and are also officers directors or trustees of or hold other important offices in the supporting organizations or publicly_supported_organization have a significant voice in the investment policies of the supporting_organization the timing of grants the manner of making them and the selection of recipients of such supporting_organization and in otherwise directing the use of the income or assets of such supporting_organization iii a the supporting_organization is a charitable_trust under state law b each specified publicly_supported_organization is a named beneficiary under such charitable trust’s governing instrument and department of the treasury - internal_revenue_service form 886-acrev page -14- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org c the beneficiary organization has the power to enforce the trust and compel an accounting under state law integral part test general_rule i for purposes of this paragraph a supporting_organization will be considered to meet the integral part test if it maintains a significant involvement in the operations of one or more publicly supported organizations and such publicly supported organizations are in turn dependent upon the supporting_organization for the type of support which it provides in order to meet this test either subdivision ii or subdivision iii of this subparagraph must be satisfied ii the activities engaged in for or on behalf of the publicly supported organizations are activities to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves iii a the supporting_organization makes payments of substantially_all of its income to or for_the_use_of one or more publicly supported organizations and the amount of support received by one or more of such publicly supported organizations is sufficient to insure the attentiveness of such organizations to the operations of the supporting_organization in addition a substantial amount of the total support of the supporting_organization must go to those publicly supported organizations which meet the attentiveness requirement of this subdivision with respect to such supporting_organization except as provided in b of this subdivision the amount of support received by a publicly_supported_organization must represent a sufficient part of the organization’s total support so as to insure such attentiveness in applying the preceding sentence if such supporting_organization makes payments to or for_the_use_of a particular department or school of a university hospital or church the total support of the department or school shall be substituted for the total support of the beneficiary organization b even where the amount of support received by a publicly supported beneficiary organization does not represent a sufficient part of the beneficiary organization’s total support the amount of support received from a supporting_organization may be sufficient to meet the requirements of this subdivision if it can be demonstrated that in order to avoid the interruption of the carrying on of a particular function or activity the beneficiary organization will be sufficiently attentive to the operations of the supporting_organization this may be the case where either the supporting_organization or the beneficiary organization earmarks the support received from the supporting_organization for a particular program or activity even if such program or activity is not the beneficiary organization’s primary program or activity so long as the program or activity is a substantial one d all pertinent facts including the number of beneficiaries the length and nature of the relationship between the beneficiary and supporting_organization and nature of the form 886-acrev department of the treasury - internal_revenue_service page -15- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org relationship between the beneficiary and the supporting_organization and the purpose to which the funds are put as illustrated by subdivision iii b and c of this subparagraph will be considered in determining whether the amount of support received by a publicly supported beneficiary organization is sufficient to insure the attentiveness of such organization to the operations of the supporting_organization normally the attentiveness of a beneficiary organization is motivated by reason of the amounts received from the supporting_organization thus the more substantial the amount_involved in terms of a percentage of the publicly supported organization’s total support the greater the likelihood that the required degree of attentiveness will be present however in determining whether the amount received from the supporting_organization is sufficient to insure the attentiveness of the beneficiary organization to the operations of the supporting_organization including attentiveness to the nature and yield of such supporting organization’s investments evidence of actual attentiveness by the beneficiary organization is of almost equal importance an example of acceptable evidence of actual attentiveness is the imposition of a requirement that the supporting_organization furnish reports at least annually for taxable years beginning after date to the beneficiary organization to assist such beneficiary organization in insuring that the supporting_organization has invested its endowment in assets productive of a reasonable rate of return taking appreciation into account and has not engaged in any activity which would rise to liability for a tax imposed under sec_4941 sec_4943 sec_4944 or sec_4955 if such organization were a private_foundation the imposition of such requirement within days after date will be deemed to have retroactive effect to date for purposes of determining whether a supporting_organization has met the requirement of this subdivision for its first two taxable years beginning after date the imposition of such requirement is however merely one of the factors in determining whether a supporting_organization is complying with this subdivision and the absence of such requirement will not preclude an organization from classification as a supporting_organization based on other factors e however where none of the beneficiary organizations is dependent upon the supporting_organization for a sufficient amount of the beneficiary organization’s support within the meaning of this subdivision the requirements of this subparagraph will not be satisfied even though such beneficiary organizations have enforceable rights against such organization under state law revrul_76_32 1976_1_cb_160 held that an agreement to voluntarily submit reports so long as the agreement is observed is considered evidence of actual attentiveness within the meaning of sec_1_509_a_-4 of the regulations for purposes of determining whether the attentiveness requirement of the integral part test of sec_1_509_a_-4 is satisfied however while the agreement will not be considered evidence of actual attentiveness under sec_1_509_a_-4 it will not in itself satisfy the attentiveness requirement of the integral part test of sec_1_509_a_-4 rather in order to satisfy that requirement all of the factors mentioned in the regulations must be taken into consideration form 886-a rev department of the treasury - internal_revenue_service page -16- department of the treasury - internal_revenue_service explanation of items form_886 a name of taxpayer org schedule no or exhibit year period ended xx-12 kx income_tax regulations sec_1_509_a_-4 regarding control by disqualified_person provides in general -under the provisions of sec_509 a supporting_organization may not be controlled directly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more publicly supported organizations if a person who is a disqualified_person with respect to a supporting_organization such as a substantial_contributor to the supporting_organization is appointed or designated as a foundation_manager of the supporting_organization by a publicly supported beneficiary organization to serve as the representative of such publicly_supported_organization then for purposes of this paragraph such person will be regarded as a disqualified_person rather than as a representative of the publicly_supported_organization an organization will be considered controlled for purposes of sec_509 if the disqualified persons by aggregating their votes or positions of authority may require such organization to perform any act which significantly affects its operations or may prevent such organization from performing such act this includes but is not limited to the right of any substantial_contributor or his spouse to designate annually the recipients from among the publicly supported organizations of the income attributable to his contribution to the supporting_organization except at provided in subparagraph of this paragraph a supporting_organization will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of such persons i sec_50 percent or more of the total voting power of the organization’s governing body or if one or more of the total voting power of the organization’s governing body or if one or more such persons have the right to exercise veto power over the actions of the organization thus if the governing body of a foundation is composed of five trustees none of whom has a veto power over the actions of the foundation and no more than two trustees are at any time disqualified_person such foundation will not be considered to be controlled directly or indirectly by one or more disqualified persons by reason of this fact alone however all pertinent facts and circumstances including the nature diversity and income yield of an organization’s holdings the length of time particular stocks securities or other assets are retained and the manner in exercising its voting rights with respect to stocks in which members of its governing body also have some interest will be taken into consideration in determining whether a disqualified_person does in fact indirectly control an organization government ’s position it is the government’s position that org’s exempt status should be revoked alternatively it should be reclassified as a private_foundation due to congressional concerns about wide-spread abuses of their tax-exempt status by private_foundations private_foundations were defined and subjected to significant regulations and controls by the tax reform act of the definition of a private_foundation was form 886-a ev department of the treasury - internal_revenue_service page -17- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org intentionally inclusive so that all organizations exempted from tax by sec_501 are private_foundations except for those specified in sec_509 through roe - foundation charitable_trust v commission tcmemo_1989_566 58_tcm_402 603_f2d_1274 cir based on the representations made in its application_for exemption the foundation received a determination_letter from the service that classified it as a supporting_organization described in sec_509 rather than as a private_foundation the foundation however has never met the requirements for supporting_organization classification publicly supported organizations as defined in sec_509 and are excepted from private_foundation_status on the theory that their exposure to public scrutiny and their dependence on public support keep them from the abuses to which private_foundations are subject supporting organizations are similarly excepted from private_foundation_status because congress believed the public_charities that they support would provide sufficient oversight and keep supporting organizations from the types of abuses to which private_foundations are prone quarrie charitable fund f 2d pincite sec_509 organizations must meet all three of the following tests organizational and operational tests under sec_509 relationship_test under sec_509 lack of disqualified_person control test under sec_509 organizational and operational tests overall these tests are meant to ensure that a supporting_organization is responsive to the needs of a public charity and intimately involved in its operations and that the public charity or publicly_supported_organization is attentive to the operations of the supporting_organization and that the supporting_organization is not controlled directly or indirectly by disqualified persons the foundation does not meet the organizational_test because the foundation is not organized to benefit one or more publicly supported organizations pursuant to sec_1_509_a_-4 and iv an organization’s governing instrument must state the specified publicly_supported_organization s on whose behalf the organization is to be operated and cannot expressly empower the organization to support or benefit any organization other than the specified publicly_supported_organization s the foundation’s dissolution clause allows distributions to organizations other than the specified publicly supported organizations upon termination of the foundation the possible beneficiaries are not limited to the co-2 or the organizations specified in schedule a of the organization’s declaration of trust therefore the organizational_test is not met see quarrie supra holding that the organizational_test was not satisfied where the trustee had the power to substitute beneficiaries when in the judgment department of the treasury - internal_revenue_service form 886-acrev page -18- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org of the trustee the uses of the named beneficiaries became unnecessary undesirable impracticable impossible or no longer adapted to the needs of the public moreover the operational_test set forth in sec_1_509_a_-4 is not satisfied a supporting_organization will be regarded as operated exclusively to support a specified publicly_supported_organization s only if it engages in activities which support or benefit the specified publicly_supported_organization s as was discussed under the primary issue above the foundation has served private interests and has made payments for the benefit of founders therefore it has not established that it operated exclusively for the benefit of the publicly_supported_organization the operational_test requires the foundation to exclusively engage in activities that benefit specified publicly supported organizations in this case the foundation has made distributions to entities not specified in the declaration of trust in 20xx and 20xx it made grants to co-9 in 20xx it made a grant to co-11 in 20xx it made grants to co-12 co-15 and co-13 in 20xx it also made a grant to co-16 none of these organizations are listed in its declaration of trust or on schedule a these grants violate the operational_test set forth at sec_1_509_a_-4 relationship_test under sec_509 operated supervised or controlled by and supervised or controlled in connection with as set forth in income_tax regulations sec_1_509_a_-4 there are three permissible relationships a operated supervised or controlled by b supervised or controlled in connection with and c operated in connection with one or more publicly supported organizations the relationships operated supervised or controlled by and supervised or controlled in connection with presuppose a substantial degree of direction over the policies programs and activities of the supporting_organization by a publicly_supported_organization the operated supervised or controlled by relationship is established by the fact that a majority of the officers directors or trustees of the supporting_organization are appointed by or elected by the governing body members of the governing body officers acting in their official capacity or the membership of the publicly_supported_organization the supervised or controlled in connection with relationship requires common supervision or control by the persons supervising or controlling both the supporting and the publicly supported organizations ie that control or management of the supporting_organization is vested in the same persons that control or manage the publicly_supported_organization in the present case the facts indicate that there was no substantial control or direction over the policies or activities of org by the specified publicly_supported_organization the co-2 department of the treasury - internal_revenue_service form 886-a cev page -19- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org supported_organization pursuant to the declaration of trust the specified publicly_supported_organization could only appoint one member of the five member board the majority of the members of the governing body board_of trustees consisted of the family members founders founders director-1 and director-2 appointed by the founders thus org fails to meet either the operated supervised or controlled by or the ’supervised or controlled in connection with tests required by sec_509 operated in connection with the third and final relationship possible for sec_509 organizations is the operated in connection with relationship which requires that the supporting_organization be responsive to the needs or demands of the publicly_supported_organization and constitute an integral part of or maintain a significant involvement in the affairs of the publicly_supported_organization this relationship is satisfied where the supporting_organization meets both the responsiveness test and the integral part test this case neither of these tests has been met in in order to meet the responsiveness test org does not satisfy the responsiveness test responsiveness test either sec_1_509_a_-4 or iii must be satisfied income_tax regulations sec_1_509_a_-4 requires a supporting_organization to demonstrate that one or more of the officers director or trustees of the supporting organizations either a be appointed or elected by specified representatives of the publicly supported organizations or b be members of the governing body of the publicly supported organizations or c maintain a close and continuous working relationship with the officers directors or trustees of the publicly supported organizations there is no evidence that the officers directors or trustees of org satisfy any of these relationships even if such a relationship existed by virtue of the relationship the officers directors or trustees of the publicly supported organizations would have to have a significant voice in the investment policies of the supporting_organization the timing of grants the manner of making grants the selection of recipients by the supporting_organization and in otherwise directing the use of the income or assets of the supporting_organization there is no evidence that the co-2 supported_organization has a significant voice in org’s operations the board did not exercise oversight - it did not realize that assets reported on the form_990 did not belong to org it did not assure grants were only made to specified public_charities it did not oversee org’s operations to prevent its income and assets from benefiting disqualified persons in short the board acted as a rubber stamp for actions taken by the founders and appeared to have no role other than responding to a fax from the founders and signing the minutes if this test is not met there is a second way to satisfy the responsiveness test that is set forth in income_tax regulations sec_1_509_a_-4 the second method requires that a the supporting_organization be a charitable_trust under state law b each specific publicly_supported_organization be a named beneficiary under the trust’s governing instrument and c the beneficiary organization have the power to enforce the trust and compel an accounting form 886-a ev department of the treasury - internal_revenue_service page -20- department of the treasury - internal_revenue_service explanation of items form_886 a name of taxpayer org schedule no or exhibit year period ended xx-12 xx of the net of the net_income to one or more of the under state law the declaration of trust requires the trustee to distribute income of the trust to the co-2 anda total of organizations listed on schedule a there are over organizations listed on schedule a that the trustee can select as grant recipients only the co-2 is entitled to receive a specified portion of the foundation’s net_income the foundation is not required to make any specified distributions to any of the other organizations therefore the foundation has not established that any of these organizations are beneficiaries to the trust or that they have the power to enforce the trust under state law thus this test is also not satisfied by org integral part test while the responsiveness test ensures that the publicly_supported_organization has the ability to influence the activities of the supporting_organization the integral part test ensures that the publicly_supported_organization will be attentive to the operations of the supporting_organization the integral part test is considered to have been satisfied if the supporting_organization maintains a significant involvement in the operations of one or more publicly supported organizations and the publicly supported organizations are in turn dependent upon the supporting_organization for the type of support which it provides income_tax regulations sec_1 i ii or iii must be satisfied integral part test activities sec_1_509_a_-4 provides that the activities engaged in for or on behalf of the publicly supported organizations must be activities to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves thus this part of the integral part test applies in those situations in which the supporting_organization actually engages in activities which benefit the publicly supported organizations as opposed to simply making grants to the publicly supported organizations compare to sec_1_509_a_-4 which sets forth the rules of the integral part test applicable to supporting organizations that make payments to or for_the_use_of publicly supported organizations see also roe foundation tcmemo_1989_566 cuddeback memorial fund v commissioner t c memo 20xx-300 the foundation does not meet this test because while it made some grants to publicly supported organizations it did not perform any activities for or on behalf of the publicly supported organizations because the trust did not perform any activities for or on behalf of publicly supported organizations that the publicly supported organizations would otherwise perform themselves the applicable rules for satisfying the integral part test are in sec_1_509_a_-4 this section of the regulation has the following basic requirements payment of substantially_all of its income to publicly supported organizations the amount received by one publicly_supported_organization must be sufficient to motivate it to pay attention to the operations of the supporting_organization and a substantial amount of the total support of the organization must go to those publicly supported organizations that meet the attentiveness requirement none of these requirements has been satisfied in the instant case form 886-a ev department of the treasury - internal_revenue_service page -21- form_886 a name of taxpayer schedule no or exhibit year period ended xx-12 xx explanation of items department of the treasury - internal_revenue_service org integral part test substantially_all requirement the supporting_organization must pay substantially_all of its income to or for_the_use_of one or more publicly supported organizations revrul_76_208 1976_1_cb_161 holds that substantially_all in this context means at least of the organization’s income all facts and circumstances are considered in determining whether the substantially_all requirement is satisfied where there is a permanent accumulation of income or where there is an accumulation of income for an extended period without apparent purpose the substantially_all requirement will not be met while there is no absolute rule with respect to the timing of the distributions in general a supporting_organization will satisfy the substantially_all requirement if it distribute sec_85 percent or more of its income to specified publicly supported organizations no later than the end of the year following the year the income is realized generally income for purpose of applying the percent test is reduced by related expenses and excludes contributions received and long-term gains also consistent with sec_53 a - e of the private_foundation_excise_tax regulations a supporting_organization may carryover excess distributions for five years following the year in which the excess_distribution was made the year 19xx was the first year of org during the year 19xx org had net_income of dollar_figure of this amount grants of dollar_figure were made all to the primary charity or of net_income in 19xx the foundation had net_income of dollar_figure no recipients of grants were identified on the 19xx form_990 though the foundation claimed to have made a grant of dollar_figure which its checkbook identified as a grant to the primary charity this grant constituted of the foundation’s net_income therefore the foundation did not meet the requirement that substantially_all of its income be paid to or for_the_use_of one or more publicly supported organizations because it failed to meet the percent requirement integral part test attentiveness requirement income_tax regulations sec_1_509_a_-4 provides that the amount of support received by a publicly_supported_organization must represent a sufficient part of the organization’s total support so as to insure its attentiveness income_tax regulations sec_1_509_a_-4 provides that a supporting_organization can meet the attentiveness requirement even where the amount of support received by the publicly_supported_organization does not represent a sufficient part of the publicly supported organization’s total support if it can be demonstrated that support is earmarked for a substantial program of the publicly_supported_organization that would be interrupted without the supporting organization’s support and finally income_tax regulations sec_1_509_a_-4 provides that all pertinent factors will be considered in determining whether the amount of support received by a publicly_supported_organization is sufficient to insure the attentiveness of such organization to the operations of the supporting_organization however the most important factor is the percentage of the publicly_supported_organization total support that is provided by the supporting_organization evidence of actual attentiveness however is almost as important form 886-acrev department of the treasury p ty - internal_revenue_service page -22- form_886 a name of taxpayer schedule no or exhibit year period ended xx-12 xx explanation of items department of the treasury - internal_revenue_service org income_tax regulations sec_1_509_a_-4 contains examples of organizations that meet the attentiveness test that have the following common factors the supporting_organization pays over all its income the supporting_organization provides all funds for the specific project and the expense of conducting the program is substantial org made grants to the co-2 supported_organization the primary charity as follows 19xx 19xx 20xx 20xx 20xx 20xx dollar_figure none none the gross revenue of the co-2 the primary charity was as follows dollar_figure 19xx 19xx 20kx 20xx 20kx in each of the years since its formation the foundation’s grants amounted to less that of the primary charity’s total support and are insufficient to insure that the primary charity would be attentive to the foundation’s operations the foundation did not produce any evidence that shows that the primary charity would be attentive to its operations because this requirement was not satisfied the third requirement a substantial amount of the total support of the organization must go to those publicly supported organizations that meet the attentiveness test cannot be satisfied disqualified_person control test under sec_509 internal_revenue_code sec_509 and income_tax regulations sec_1 a - j provides that a supporting_organization may not be controlled directly or indirectly by disqualified_person the founders were substantial contributors to org and are therefore disqualified persons to org their other family members are also disqualified persons see sec_4946 the declaration of trust provides that two board members shall be from the class consisting of founders and each of their descendents the founders one board member is appointed by the primary charity the other board members are appointed by a majority vote so the founders control the selection of the other two board members by virtue of their vote in addition the form_990 for 20xx shows a member board including the trustee of these seven members four are founders thus the founders had or more of form 886-acrev department of the treasury - internal_revenue_service page -23- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended xx-12 xx org the total voting power over the foundation in addition the founders control_over the foundation is reflected by the foundation’s payment of their personal loans a review of all the facts and circumstances shows org failed the operational_test and operational tests under internal_revenue_code sec_509 org fails the relationship_test under internal_revenue_code sec_509 and the lack of disqualified_person control test under internal_revenue_code sec_509 conclusion accordingly if the foundation’s exempt status is not revoked the foundation should be reclassified as a private_foundation because it does not qualify as a supporting_organization under the requirements set forth in sec_1_509_a_-4 through j the modification of private_foundation_status is effective october 19xx because the application did not disclose that the primary charity would not be involved with the activities of the foundation that grants would be made to other than specified public_charities that the foundation would operate for the benefit of the founders and that the founders would control the foundation’s activities retroactive re-classification is appropriate in this case the effect of this determination will be that the foundation is required to file form_990-pf return of private_foundation form_990-pf should be filed for tax years ending december xx please insert all open years subsequent returns are due no later than the day of the month following the close of the foundation’s accounting_period for tax_year 20xx form pf is due may 20xx send your returns to the following mailing address internal_revenue_service note form_990-pf is required for each year until private_foundation_status is terminated under sec_507 form 886-acrev department of the treasury - internal_revenue_service page -24-