internal_revenue_service _---- -_- appeals_office -----_- capitol street suite fresno ca department of the treasury wee ee employer_identification_number pate jul number release date a b certified mail dear person to contact employee id number tel fax uil 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 our revocation was made for the following reason s a primarily performs activities which are substantially commercial in nature operational_test under code sec_501 as it conducts activities which have characteristics of a trade_or_business thus the organization is not operated exclusively for one or more exempt purposes as set forth in sec_501 of the code a does not meet the contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov if you were a private_foundation as of the effective date of the adverse determination you are considered to be taxable private_foundation until you terminate your private_foundation_status under sec_507 of the code in addition to your income_tax return you must also continue to file form_990-pf by the 15th day of the fifth month after the end of your annual_accounting_period processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code we will make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you ina separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c see also publication ce re you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matters that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours joseph k phegley appeals team manager enclosure publication and or ai department of the treasury internal_revenue_service tax exempt and government entities irs exempt_organizations examinations date april taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax manager's name id number manager's contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal revenue cade code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in section c after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also letter rev catalag number 34809f may file a protest with the irs appeats office by submitting a written request to the contact person ai the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn't apply after we issue this letter you aiso may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn'ta substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that _ hasn't 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 internal_revenue_service office_of_the_taxpayer_advocate for additional information 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 enclosures report of examination form_6018 publication publication paul a marmolejo acting director eo examinations letter rev catalog number 34809f - form_886 a name of taxpayer schedule no or exhibit year period ended revision dated explanation of items department of the treasury - taemal revenuc sonex issue june should the tax exempt status of the be revoked because it is not operated exclusively for charitable purposes under sec_501 of the internal_revenue_code facts _ original incorporation dated april the center’ initially filed articles of organization dated april with the secretary the organization's purpose in article was of the to provide improved and advanced education programs and methods in educational human services and like institutions organizations and agencies through the development and implementation of cooperative educational programs encompassing a broad range of education areas and matters to identify education needs and problems of said educational human services institutions organization and agencies and sponsor collaborative efforts to meet such needs and problems to receive and administer financial support assistance grants and or appropriations in support to new or ongoing programs of the corporation or in support of new or ongoing programs of educational centers institutions or agencies engaged in the providing of education and or human services whether of a public or private character to foster and implement the distribution of needed and requested educational_services to foster develop and implement the establishment of exemplary education programs to serve as models for said educational and human services organizations to provide educational materials_and_supplies to said education and human services organizations and to do all those things necessary and carry on all those activities deemed proper and incidental to effect the aforecited purposes and generally to carry on any other activities which may be advantageously pursued in conjunction with and in support of the corporation __ the irs received application_for charitable status received february form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code from the center on february to receive a definitive ruling as to the their status under sec_509 the organization completed part vii of form_1023 stating that it is not a private_foundation because it operates solely for the benefit or in connection with one or more exempt the center filed form - organizations the form_1023 instructions for part il question state give a narrative description of the activities presently carried on by the organization and also those that will be carried on the center attached a schedule with the detailed activities which is included as attachment page sec_1 through the form_1023 listed -_ city and town school systems in northeastern organizations the list of city and town systems is on page of attachment i as the qualifying supported porm 886-a preva -68 department of the treasury - internal_revenue_service page -1- porm r86 a - deparment of the treasury ternal revenue service explanation of items name of taxpayer revision dated schedule no or exhibic year period ended june determination_letter dated june on june the irs office in issued a letter signed by district_director determining the organization’s status the organization was granted exemption under sec_501 because they are an organization described in a a footnote to the determination_letter stated this letter is conditioned on the submission within days of a conformed copy of the april amendment to the articles of incorporation _ the center filed articles of amendment articles of amendment dated april with the secretary of the changed its purpose the amended purpose in article was the corporation is organized exclusively for charitable religious education and scientific purposes including for such purposes the making of distributions to organizations that qualify as exempt_organizations under lr c sec_501 or as such law may be amended in the future further it is the purpose of the corporation to serve and perform its services on the behalf among others certain public organizations to wit committee school committee dated april that school committee school committee schoo committee school committee school committee school committee school committee school committee school committee school committee school committee school committee scholl committee school committee the irs office issued district_director superseding the letter of june the center was granted exemption under sec_501 because they are an determination_letter dated september a letter signed by organization described in a the determination_letter states based on information supplied and assuming your operations will be as stated in your application_for recognition of exemption we have determined you are exempt from federal_income_tax under sec_501 of the internal_revenue_code we have further determined that you are not a private_foundation within the meaning of sec_509 of the code because you are an organization described in sec_509 if your sources of support or your purposes character or method of operation change please let us know so we can consider the effect of the change on your exempt status and foundation status restated articles of organization dated january restated articles of organization with the secretary of the _ the center filed dated january that changed the purpose of the corporation in article the amended purpose is programs and methods in educational human services and like institutions organization and agencies through the development and implementation of cooperative to provide improved and advanced educational form 886-a rev department of the treasury internal_revenue_service page -2- form b86 a name of taxpayer schedule no or exhibit year period ended revision dated explanation of items deparment of the tseasury - internal revenue sonvice - june educational programs encompassing a broad range of educational area and matters to identify educational needs and problems of said educational and humans services institutions organizations and agencies and sponsor collaborative efforts to meet such needs and problems to receive and administer financial support assistance grants and or appropriations in support of new or ongoing programs of the corporation or in support of new or ongoing programs of educational centers institutions or agencies engaging in the providing of educational and or human services whether of a public or private character to foster and implement the distribution of needed and requested educational_services to foster develop and implement the establishment of exemplary educational programs to serve as models for said educational and human services organizations to provide educational materials_and_supplies to said educational and human services organizations and to do all those things necessary and to carry on all those activities deemed proper and incidental to effect the aforecited purposes and generally to carry on any other activities which may be advantageously pursued in conjunction with and in support of the corporation and which are not in conflict with chapter of the organization described in sec_501 of the internal_revenue_code general laws or with the corporation's status as an current aatiyities and operational information-foarm part il question of part ill of form_990 for tax_year ending june _ states briefly describe the organization’s mission the center answered that it is a diversified educational and technological resource for schools cities and towns and other non- rofit organizations offers a broad range of professional development facilities ‘nanagement transportation services and technology programs and solutions -auestion of part ill of form_990 for tax_year ending june the organization’ program service accomplishments for each of its three largest program services as measured by expenses’ the following chart details the center's answer _ states describe department of the treasury - internal_revenue_service form 886-a rev page -3- form_886 a name of taxpayer schedule no or exhibit yeat period ended revision dated explanation of items department of the freasory internal revence service - june expenses revenue revenue percentage description of program services transportation services provided to dollar_figure special needs students on behalf of local school districts and other human service agencies continuing professional education programs including programs offering college credits to teachers and administrators form local school districts and throughout eastern dollar_figure total dollar_figurel _ approximately additional information provided in the center’s response management of technology networks implementation of school based technology systems primarily for local public school districts various programs retated to public private and special needs education the majority of which is real_estate services including rental of facilities to educational organizations expenses related to these programs are not separately identified but are included in management and general_expenses corporate structure ini9 a regional organization for education and innovation which operated until split into two entities fhe center and the the collaborative’ the collaborative operated as a government_entity providing direct student services while the center provided the support services listed in the chart above plus human resources and administrative support for the collaborative as of may _ the partnership between the center and the collaborative ended due to a statute passed by the relative to improving accountability and oversight of ed ucation collaborative this legislation mandated separation between an education collaborative and any related for-profit or non-profit organization during this timeframe and ongoing the u s department of justice and the several employees who have since been terminated the investigations and separation from the collaborative generated multiple changes to the center's senior personnel contracts and agreements board members by-laws and organizational structure school districts formed when it attorney_general have investigated department of the treasury - internal_revenue_service farm 886-a rev anact page -4- _ form_886 a departenent of the treasury - internal revenuc service name of taxpayer revision dated explanation of items schedule no or exhibit yeat period ended june law an organization described in subsection c or d or sec_501 shall be exempt from taxation under this subtitle unless such exemption is denied under sec_502 or sec_503 section sec_501 of the code the following organizations are exempt 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 to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office section sec_501 of the code in order to be exempt as an organization described in section sec_501 of the code ‘an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1 c - a an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 an organization is operated exclusively for charitable purposes only if it engages primarily in one or more of the following activities religious charitable scientific testing for public safety literary educational fostering national or international sports competition but only if no parts of its activities involve the provision of athletic_facilities or equipment prevention of cruelty to children or animals it is not so operated if more than an insubstantial part of its activities do not further these purposes sec_1 -1 c t form 886-a rev deparunent of the treasury - internal revenue secvice page -5- form g r36 a name of taxpayer - revision dated explanation of items schedule no or exhibit yeat period ended depactment of the treasury - incr evenne sonics june 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 sec_1_501_c_3_-1 an organization may be exempt as an organization described in sec_501 if itis organized and operated exclusively for one or more of the following purposes a religious b charitable c scientific d testing for public safety e literary f educational or g prevention of cruelty to children or animals sec_1_501_c_3_-1 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 sec_1 c - a - the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes the promotion of education and lessening the burdens of government sec_1_501_c_3_-1 the term educational as used in sec_501 of the code relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 d exemption was denied to an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations on the ground that it was not operated exclusively for exempt purposes under sec_501 the ruling states providing managerial and consulting services on a regular basis for a fee is trade_or_business ordinarily carried on for profit the fact that the services in this case are provided at cost and solely for exempt_organizations is not sufficient to characterize this activity as charitable within the meaning of sec_501 of the code furnishing the activity as services at cost lacks the donative element necessary to establish this charitable rev_rul c b however an organization providing investment management services to other exempt_organizations at substantially below cost was granted exempt status rev_rul c b department of the treasury - internal_revenue_service form 886-arev 4-ca page -6- form 886a name of taxpayer revision dated explanation of items schedule no or exhibit year period ended department of the treasury - tatemal revenue service june exemption was granted to an organization formed to initiate and develop plans and programs to reduce vehicle deaths and injuries by providing free expert opinion to local_government officials regarding hazardous traffic conditions in the community and conducting programs to inform the public about traffic safety the organization was supported by contributions from the public performing certain services for the benefit of federal state or local governments has been recognized as a charitable activity and traffic control and safety are universally recognized as a governmental responsibility the relationship between the government and the organization also indicates the existence of a burden of government in that the organization's services are requested by local governments and delivered to the government free of charge based on the a burden of government by providing expert opinion to local facts the activity is government officials the organization relieved the government of an activity it would otherwise have to perform therefore the activities of the organization actually lessen the governmental burden rev_rul c b of the activities organization lessening the burdens of government occurs only if the governmental_unit formally recognizes the objective manifestation may be evident in the interrelationship between the organization and the larger governmental_unit the organization's activities were an governmental program and the organization funded governmental expenses the fact that a governmental_unit expresses approval of an organization's activities does not establish that the organization is lessening the burdens of government rev_rul c b burden part of integral this be its to a two requirements are set forth for an organization to qualify for exemption under sec_501 c by lessening the burdens of government these requirements are an organization’s activities must be activities that a governmental_unit considers to be its burdens and the activities of the organization must actually lessen such governmental burdens rev_rul c b the united_states supreme court held that for an organization to qualify for tax-exempt status the organization must be exclusively devoted to an exempt_purpose and the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes 326_us_279 in one case the united_states court of claims held that since the plaintiff was providing information and services purchased by subscribers the plaintiff was in direct competition with other commercial organizations providing similar services the court stated that the plaintiff has chosen to compete in this manner and consequently the plaintiff's activities acquire a commercial hue it was readily apparent that those operations emphasized by the plaintiff were more analogous to commerce than to form 886-a rev department of the treasury - internal_revenue_service page -7- forn a name of taxpayer revision dated explanation of items schedule no or exhibit year petiod ended doparnent of the treasury - tancinal revenue service june education by the sale of these services the plaintiff entered unwittingly or not into a business the court concluded that the business_purpose was primary and not incidental to any educational purpose that may be present american institute for economic research v united_states ct_cl f 2d taxpayer's position the center disagrees with the government that its tax exempt status should be revoked because it is not operated exclusively for charitable purposes under sec_501 of the internal_revenue_code the center states that its school transportation and technology activities lessen the burdens of government which is a charitable purpose the center states that the transportation of schoolchildren is an established core function of local_government because districts to provide transportation for special needs students and chdollar_figure imposes regulations for transporting students in vehicles other than school buses also under the local school districts are required to transport children to their original school if they move out of the district due to homelessness or other economic displacement such as domestic violence situations requires school g l the center provides three reasons why their transportation activities’ lessen the government's burden the first reason is that they preserve governmental resources by saving school districts money because many smaller districts cannot afford to buy and maintain the specially equipped vehicles the second reason is that the center fills the void left by for-profit transportation companies because they will work with the school districts and accept unprofitable routes assignments third the center's transportation activities have operated at a loss because of accepting these unprofitable assignments the center indicated that their technology services are essential to the communities because municipalities recognize internet services are crucial and step in to provide these services indicating that securing technology access is a government function the center’s technology services were developed specifically for and often at the request of and with significant input and direction from the school districts and do not have widespread commercial applicability the center provides three reasons why their technology services lessen the government's burden the first reason is that they work as an extension of the government's it departments by providing managed services to towns without sufficient it staff the second reason is that the center provides essential government services not provided by for-profit technology companies because they provide storage and department of the treasury - intecnal revenue service form 886-ax rev 4-g8 page -8- form_886 a naine of taxpayer schedule no or exhibit year period ended revision dated explanation of items department of the treasury - internal_revenue_service june maintenance of the electronic records as required by the third the center permits flexibility in payment terms for the school districts that are unable to meet the payment schedules government's position the center's activities have changed substantially since it applied for exempt status attachment lists the educational activities programs and partnerships included in their form_1023 exemption application currently the center only generates its revenue from continuing professional education programs sec_1 c - d and sec_1_501_c_3_-1 i require that a charitable organization's educational activities promote education and the instruction of the public on subjects useful to the individual and beneficial to the community the center does not operate exclusively for educational_purposes as required in sec_1_501_c_3_-1 and accordingly does not qualify for exemption for educational_purposes of building leases generate approximately of revenue and the leases are the same in nature as any commercial real_estate lease and consequently the leasing activity does not qualify the center for tax exemption under rc c that statute and specifically a governmental_unit the transportation services and technology networks comprise of revenue respectively the determination of whether an organization’s activities lessen the burden of government requires two tests per revrul_85_2 first it is necessary to requisite showing of an objective determine whether the center has made the manifestation by its activities a burden of government by considering the following questions a does a organization's structure and purposes b are the activities an integral part of a larger governmental program or performed jointly with a governmental_unit c do governmental units control the activities of the organization such as appointing ail the board members d does the organization pay governmental expenses e are payments to the center from regular government funding through grants or general obligation bonds backed with the full faith and credit of the governmental_unit as opposed to general revenue bond financing f is the governmental_unit prohibited from performing the particular activity clearly define creates the organization constitute and the a review of the center's organization and activities indicates the following a a statute did not create the center rather it split from the collaborative because a statute mandated the separation of an educational collaborative from related form 886-a crev department of the treasury - internal revenuc service page -9- form 886a - name of taxpayer revision dated explanation of items schedule no or exhibit year period ended department of the ‘treasury - internal_revenue_service for- profit and non-profit entities b the city and town schools districts use the center to provide both transportation and technology networks services the center uses the standard contract form for technology network services which are regulated by the june and the federal communications commission the federal schools and libraries e-rate program sets the reimbursement rates for on technology transportation agreements in the same manner as other commercial entities the center is not freeing up government fiscal assets because the school districts are paying for their services provided schools services center public bids the to ' c since the center's corporate restructuring and revision of not have representation on the articles of the organization the center's board or any control_over its activities local school districts do d the center does not pay any governmental expenses rather the local school districts pays the center for its services e the school districts pay the center fees for services covered by contractual agreements general grants or obligation bonds are not used to fund the center constitution and statutes do not prohibit the the school districts from directly performing the transportation and technology activities themselves a's based on the above facts and circumstance there is not an objective manifestation by the governmenta units that the center’s activities are burdens of the government the secand test per revrul_85_2 is whether the center's activities actually lessen the burden of the government the center's activities do not differ from those of taxable corporations throughout the state that also serve as transportation and technology providers the school districts contract with the center to perform those activities associated with its burden of transporting students and providing technology access the relationship between the center and the school districts is more in the nature of a commercial contract for services as opposed to a lessening of a governmental burden are satisfying their burdens by because the facts show that the school districts contracting on a commercial basis with the center for transportation and technology services then the center is not lessening their governmental burden conclusion the exempt from federal_income_tax under sec_501 as described in sec_501 therefore its exempt status under c of the internal_revenue_code will be revoked no longer meets the requirements to qualify as form 886-acicv department of the treasury internal_revenue_service page -10-


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 number info release date uil dollar_figure date dear concerning request for exemption from filing form_990 the information submitted indicates that you are seeking a ruling which would require us to consider facts and circumstances particular to please note that in order for us to issue such a ruling you would need to remit a dollar_figure fee thank you for the information you provided in your communication dated for your information because charter schools generally do not qualify as governmental units or affiliates of governmental units they do not meet the requirements of revproc_95_48 1995_2_cb_418 and are therefore required to file form_990 a continuing professional education article titled charter schools highlights this position see item on page of the enclosed copy we have also enclosed a copy of revproc_95_48 you should note that a ruling or determination_letter issued by the internal_revenue_service is directed only to the organization that requested it and has no precedential value with respect to any other organization at note that our records have been updated to reflect the new name of the organization if you have any further questions please do not hesitate to contact gerald v sack manager exempt_organizations sincerely technical group


internal_revenue_service number release date index number ------------------------ -------------------------------- ------------------ ---------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-107642-06 date date ------------------- --------------------- ------------------------- -------------------------- --------------------------- legend x ------------------------ y ------------------------ month d1 d2 d3 d4 state dear -------------- this responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d1 in accordance with the laws of state y was incorporated on d2 in accordance with the laws of state x elected to be an s_corporation effective d3 additionally x made an election to treat y -------------------------- ------------------------- ---------- plr-107642-06 as a qualified_subchapter_s_subsidiary qsub effective d3 in month x discovered that x did not own percent of the stock of y therefore x’s election to treat y as a qsub was ineffective because y was ineligible to be a qsub under sec_1361 x represents that it was not aware that it did not own percent of the stock of y at the time x elected to treat y as a qsub from d3 and thereafter x and its shareholders treated y consistent with being a qsub on d4 the outstanding shares in y that were not held by x were redeemed after this action was taken x owned percent of the stock of y x represents that the circumstances resulting in the ineffectiveness of x’s election to treat y as a qsub were inadvertent and that x and x’s shareholders did not intend to engage in tax_avoidance or retroactive tax planning x x’s shareholders and y have agreed to make any adjustments that the commissioner may require consistent with the treatment of y as a qsub law and analysis sec_1362 generally provides that a small_business_corporation may elect to be treated as an s_corporation sec_1361 defines a qsub as a domestic_corporation that is not an ineligible_corporation if percent of the stock of the corporation is owned by an s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1362 provides that if an election under sec_1361 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1361 b by reason of a failure to meet the requirements of sec_1361 the secretary determines that the circumstances resulting in such ineffectiveness were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness steps were taken so that the corporation for which the election was made is a qsub and the corporation for which the election was made and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation or a qualified_subchapter_s_subsidiary as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness such corporation shall be treated as a qualified_subchapter_s_subsidiary during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that x’s election to treat y as a qsub was ineffective for the taxable_year beginning on d3 because y failed to meet the requirements of sec_1361 we further conclude plr-107642-06 that x’s election to treat y as a qsub was an inadvertent ineffective election within the meaning of sec_1362 therefore under the provisions of sec_1362 y will be treated as a qsub of x from d3 and thereafter provided that the qsub election was otherwise valid and has not otherwise terminated except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed on whether x is a valid s_corporation or whether y is otherwise eligible to be treated as a qsub this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely audrey w ellis senior counsel branch passthroughs special industries cc


t c memo united_states tax_court scott p lysford and patti d lysford petitioners v commissioner of internal revenue respondent docket no filed date daniel j frisk for petitioners christina l cook for respondent memorandum findings_of_fact and opinion swift judge respondent determined dollar_figure and dollar_figure deficiencies in petitioners’ respective and federal income taxes plus accuracy-related_penalties under sec_6662 after concession of some issues the issues for decision are for purposes of recapture and current_expense deductions under sec_179 and depreciation under sec_167 relating to a cessna airplane the extent to which petitioners have substantiated their business use of the airplane whether petitioners have substantiated their business use of various other assets whether petitioners have substantiated their tax bases in an s_corporation and a limited_liability_company and whether petitioners are liable for the sec_6662 accuracy-related_penalties the trial of this case was held on date in st paul minnesota findings_of_fact some of the facts have been stipulated and are so found 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure from to approximately date petitioners lived in detroit lakes minnesota in date petitioners sold their home in detroit lakes but they stayed in the detroit lakes home as renters until their new home in frazee minnesota was completed in date at the time the petition was filed petitioners resided in frazee minnesota for many years petitioner scott lysford worked for united airlines as a commercial airline pilot and was an active officer in the u s air national guard national guard sometime in the 1990s mr lysford earned an m b a degree in when he was furloughed from united airlines and apparently became a reserve officer in the national guard mr lysford began working as an independent mortgage broker in petitioners incorporated northshore holdings inc northshore an s_corporation owned by each petitioner northshore apparently owned a number of real_estate investment properties and mr lysford conducted some mortgage activity through northshore for the office of northshore petitioners used space in their home in detroit lakes late in mr lysford and two other individuals incorporated trinity mortgage inc trinity as an s_corporation to conduct a mortgage loan business mr lysford and the other investors each owned a one-third interest in trinity trinity’s principal office was in forest lake minnesota approximately miles from petitioners’ residence in detroit lakes in addition to the office of trinity’s being in forest lake mr lysford’s mother and apparently other lysford family members lived in forest lake from through part of mr lysford worked for northshore and trinity as an independent mortgage broker generally mr lysford conducted his day-to-day mortgage activity for both northshore and trinity from either his home in detroit lakes or his home in frazee mr lysford’s mortgage activity involved finding loan customers processing loan applications and communicating with customers banks lenders title companies and appraisers to conduct his work as an independent mortgage broker for trinity mr lysford was not required to be physically present at trinity’s office in forest lake from through part of mr lysford apparently had some responsibility for establishing and supervising maintenance of a computer network that allowed trinity’s independent mortgage brokers to work remotely from their homes these responsibilities also did not require mr lysford to be physically present at trinity’s office in forest lake in date in northshore’s name mr lysford purchased for dollar_figure and placed into service a cessna airplane during that year mr lysford also paid an additional dollar_figure to overhaul the airplane during and from either his detroit lakes home or his frazee home mr lysford made weekly trips--usually for one day but occasionally overnight--to forest lake a distance of approximately miles to make the round trips to forest lake mr lysford would drive his car from his home to the local detroit lakes airport a distance of approximately miles when petitioners lived in detroit lakes and a distance of approximately miles when they lived in frazee from the detroit lakes airport mr lysford personally and alone would pilot the cessna airplane to the airport in forest lake mr lysford testified that his typical flights between detroit lakes and forest lake took approximately one hour and that for each flight his gas cost for the airplane was approximately dollar_figure at the forest lake airport mr lysford’s mother generally would pick mr lysford up in her car mr lysford would drop his mother off at her home and he would use his mother’s car to get around while in forest lake occasionally in bad weather mr lysford would make the trip to forest lake in his personal automobile to document his frequent flights to and from forest lake mr lysford kept in his cessna airplane a small spiral notebook what he refers to as a flight log in this spiral notebook mr lysford would jot down only the date and general destination ie the city of each flight for example in noting that on date mr lysford flew to and from forest lake mr lysford’s entry in the notebook indicates only the following apr f l to document his automobile mileage in another spiral notebook mr lysford jotted down similar sparse information relating to his automobile trips indicating only the date and city to which he was driving neither mr lysford’s two notebooks nor any other evidence at trial including mr lysford’s testimony describes or identifies any loan customer bank title company business meeting or contact in or around forest lake that mr lysford met with or had relating to his mortgage activity during the years in issue in petitioners apparently incurred dollar_figure in additional unspecified airplane maintenance_expenses relating to the cessna airplane during and mr lysford conducted on behalf of northshore an activity called hockey heroes in which he took developed and sold photographs of members of his son’s youth ice hockey team during and part of mr lysford was an investment partner with three other individuals in a real_estate investment_partnership by the name of lakebreeze estates llc lakebreeze in mr lysford received dollar_figure cash for the sale apparently to the other partners of his interest in lakebreeze in trinity ceased operating and mr lysford surrendered his one-third interest therein on its federal_income_tax return northshore claimed a depreciation deduction under sec_167 relating to the dollar_figure cost of the cessna airplane and expensed currently under sec_179 the dollar_figure airplane overhaul expenses mr lysford paid in also on its federal_income_tax returns for and prior years northshore claimed deductions under sec_179 for miscellaneous costs associated with a camera computer_software dvd studio equipment furniture tools a pressure 2the record is unclear as to whether the interest in lakebreeze was owned by mr lysford or by northshore this distinction is immaterial 3the record is unclear as to whether mr lysford received any cash or other_property upon termination of his interest in trinity washer a generator a trailer and various other items of equipment hereinafter generally referred to simply as other assets northshore also claimed depreciation_deductions under sec_167 relating to the use of space in mr lysford’s home for his office northshore’s federal_income_tax returns for and reported income relating to mr lysford’s mortgage loan activity hockey heroes and other activities of mr lysford all of the income and expense deductions reported on northshore’s and tax returns were passed through to petitioners on schedules k-1 shareholder’s share of income deductions credits etc and reported on their individual joint federal_income_tax returns on audit for and respondent determined that petitioners had not substantiated the business use of the cessna airplane and the other assets accordingly respondent disallowed many of the above-claimed business_expense and depreciation_deductions relating thereto and under sec_280f respondent required recapture on petitioners’ tax_return of airplane and other costs petitioners claimed as current_expense deductions under sec_179 for and prior years respondent also determined that for petitioners had not substantiated their bases in lakebreeze and trinity respondent disallowed the capital losses petitioners claimed relating to both entities and respondent charged petitioners with capital_gain relating to the termination of their investment in lakebreeze with regard only to the few adjustments respondent made that are still in dispute the table below compares the sec_179 expense recapture the capital_gains_and_losses the sec_167 depreciation and the sec_179 current expenses as reflected on petitioners’ filed and federal_income_tax returns with those items as redetermined by respondent note that in the table for each income adjustment we show the amount of respondent’s increase for each expense deduction we show the amount respondent allowed not the amount disallowed 4on audit and as a partial concession to petitioners respondent allowed of the business_expenses and depreciation petitioners claimed relating to the cessna airplane and several other assets 5to the extent respondent’s adjustments have been conceded or are not contested by petitioners they are not reflected in the schedule claimed on respondent’s increase in claimed on respondent’s increase in tax_return deductions allowed return deductions allowed income or expense income or expense tax income recapture under sec_280f of sec_179 expenses - - dollar_figure n a n a capital_loss gain lakebreeze trinity expense deductions sec_167 depreciation airplane cost office n a n a n a dollar_figure n a big_number dollar_figure big_number - - big_number n a sec_179 current expenses airplane maintenance big_number other n a - - n a n a big_number dollar_figure - - big_number n a n a - - finally respondent determined accuracy-related_penalties under sec_6662 for both and opinion taxpayers have a responsibility to maintain records sufficient to determine their correct federal_income_tax liability sec_6001 116_tc_438 deductions are a matter of legislative grace and taxpayers generally bear the burden of proving their entitlement to claimed deductions rule a 292_us_435 respondent argues that petitioners have not established that the cessna airplane and the other assets were used predominately in a qualified_business_use as defined in sec_179 and sec_280f and therefore that petitioners must recapture expenses claimed for and prior years relating thereto respondent also argues that petitioners are not entitled to the current_expense deductions claimed under sec_179 for with regard to the airplane we agree taxpayers may elect to deduct as current expenses the cost of sec_179 property acquired and used in the active_conduct_of_a_trade_or_business and placed_in_service during the year sec_179 b d sec_1_179-4 income_tax regs however to be eligible for current_expense deductions under sec_179 taxpayers must show that the business use of such property exceed sec_50 sec_1_179-1 income_tax regs relating to sec_179 property see also sec_280f relating to listed_property if in any year taxpayers’ business use of property falls to or less deductions previously claimed under sec_179 are subject_to recapture under sec_280f if listed_property or under sec_179 if not listed_property taxpayers are required to substantiate the business use of sec_274 listed_property such as an airplane used for transportation for any year for which recapture under sec_280f may be required even if the taxpayers have fully depreciated the listed_property in a prior year sec_1_280f-3t temporary income_tax regs fed reg date sec_274 requires taxpayers to substantiate by adequate_records or by sufficient evidence corroborating the taxpayers’ own statements the amounts of the expenses the time and place of the expenses or use of the property and the business_purpose of the expenses sec_1_274-5t temporary income_tax regs fed reg date provides that in order to constitute an adequate record of business_purpose within the meaning of sec_274 a written_statement of business_purpose generally is required however where the business_purpose is evident from the surrounding facts and circumstances a written_statement of business_purpose may not be required see id for example in the case of a sec_1_274-5t temporary income_tax regs fed reg date provides in pertinent part for example a taxpayer who uses a truck for both business and personal purposes and whose only business use of a truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number of miles driven during the taxable_year the length of the delivery route once and the date of each trip at or near the time of the trips salesman calling on customers on an established sales route a written explanation of the business_purpose of such travel ordinarily will not be required with respect to the use of the cessna airplane petitioners urge us to infer from the facts and circumstances that mr lysford’s flights to and from forest lake constituted a routine established route by which he conducted mortgage-related business and that a written_statement of the business_purpose for his flights is not required mr lysford testified that all of his airplane flights and his automobile trips to forest lake were for business and that he did not describe in detail his use of the cessna airplane because as a pilot with an airline transport pilot rating he had no reason to log flight hours on the evidence before us we conclude that while mr lysford may have conducted some mortgage business in or around forest lake petitioners have not substantiated the level of business use and purpose required under sec_274 other than mr lysford’s very general testimony petitioners provided no credible_evidence that mr lysford sold any mortgages or met with specific clients mortgage brokers or title companies in or around forest lake neither mr lysford’s general business_purpose nor his specific business_purpose for making specific trips to forest lake from his home miles away is evident from the facts and circumstances mr lysford’s entries in his spiral notebooks are wholly inadequate they merely list the date and destination of airplane and automobile trips no business_purpose for the trips no names of clients visited and no description of business scheduled conducted or attempted is provided a list of dates representing mr lysford’s airplane and automobile trips with no identification of the people visited the locations visited the nature or purpose of the trips or the business actually conducted falls well short of the substantiation required by sec_274 for petitioners have failed to show that their business use of the cessna airplane exceeded and we sustain respondent’s determination that the dollar_figure in airplane overhaul expenses deducted for under sec_179 relating to the cessna airplane is subject_to recapture for the same reason we sustain respondent’s disallowance of petitioners’ dollar_figure claimed sec_179 current expenses for relating to the cessna airplane petitioners provided no evidence of the cost or business use of the other assets for which they claimed expense deductions under sec_179 for years before we therefore sustain respondent’s determination that petitioners’ sec_179 expense deductions claimed for prior years relating to these other assets are subject_to recapture for sec_167 and sec_168 allow depreciation and accelerated_cost_recovery only for property used in a trade_or_business or held_for_the_production_of_income as noted petitioners have failed to demonstrate a business use for the cessna airplane in excess of the respondent allowed on audit petitioners also have failed to provide any evidence of the costs of the home_office used in connection with mr lysford’s mortgage activity for we sustain respondent’s disallowance of the claimed depreciation_deductions under sec_167 relating to the cessna airplane for and and to the home_office for with regard to the deductions for expenses claimed for under sec_179 relating to the camera lens computer and other assets petitioners have provided no documentation to reflect the existence let alone cost or business_purpose of these items and petitioners offered no testimony with regard thereto we sustain respondent’s disallowance of these claimed deductions as stated respondent determined that petitioners were required to recognize a dollar_figure gain on the sale of mr lysford’s interest in lakebreeze because lakebreeze was treated as a partnership for federal tax purposes the provisions of subchapter_k of the code and the regulations thereunder apply loss to a distributee may be recognized in an amount equal to the distributee’s adjusted_basis over the amount of any money distributed to him sec_731 sec_1 a income_tax regs at trial petitioners offered various loan documents deposit receipts and bank statements along with copies of their schedules k-1 attached to their and joint federal_income_tax returns in an effort to substantiate their basis in lakebreeze petitioners have the burden to substantiate through adequate_records their basis in lakebreeze see rule a welch v helvering u c the only credible_evidence establishing petitioners’ basis in lakebreeze is a photocopy of a signed check from northshore to lakebreeze for dollar_figure dated date all other documents offered in support of petitioners’ basis in lakebreeze are inadequate they are unsigned they fail to identify the source of the funds and in the case of documents purporting to show loans obtained by or on behalf of lakebreeze they fail to identify the borrower and are unsigned the lakebreeze schedules k-1 are not credible_evidence of petitioners’ basis in lakebreeze see 71_tc_633 petitioners have substantiated a basis of only dollar_figure in lakebreeze and are required to recognize a dollar_figure capital_gain in connection with the termination of mr lysford’s interest therein see sec_732 sec_1_731-1 income_tax regs sec_6662 and b imposes an accuracy-related_penalty of on any portion of an underpayment_of_tax attributable to a substantial_understatement_of_income_tax an understatement of income_tax for a year is substantial if it exceeds of the amount required to be shown on the federal_income_tax return or dollar_figure sec_6662 petitioners present no credible argument with regard to their liability for the sec_6662 substantial_understatement_penalty and we sustain respondent’s imposition thereof we have considered all of petitioners’ arguments and to the extent not addressed herein we conclude they are moot irrelevant or without merit 7dollar_figure is equal to the excess of cash distributed to petitioners from the sale of their interest dollar_figure over the dollar_figure basis 8petitioners provided no documentation to substantiate a tax basis in trinity further petitioners failed to address this issue on brief accordingly petitioners are deemed to have waived or conceded any argument as to the correctness of respondent’s disallowance of the dollar_figure claimed capital_loss relating to trinity see 87_tc_698 citing rule a for the proposition that because petitioners have made no argument with respect to deductions claimed they are deemed to have conceded their nondeductibility aff’d 832_f2d_403 7th cir to reflect the foregoing decision will be entered under rule 9at trial petitioners conceded that they are unable to substantiate the business use of several assets for thus triggering recapture of deductions that were claimed under sec_179 with regard thereto in and prior years petitioners however suggest that several of the assets subject_to recapture of deductions claimed in prior years are not listed_property as defined in sec_280f and thus are not subject_to the recapture rules of sec_280f but rather are subject_to the recapture rules of sec_179 and the regulations thereunder we expect the parties to resolve any questions regarding what constitutes listed_property in their rule_155_computations


tax_exempt_and_government_entities_division release number release date uil code department of the treasury internal_revenue_service te_ge eo examinations commerce street mc dal dallas tx date taxpayer_identification_number person to contact identification_number contact telephone number certified mail - return receipt requested dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated july 19xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s you are not operating exclusively for any charitable purpose educational purpose or any other exempt_purpose our examination reveals that you are not engaged primarily in activities which accomplish charitable educational or other exempt purposes as required by sec_1_501_c_3_-1 your activities including your financial transactions more than insubstantially furthered non-exempt purposes moreover you failed to establish that you were not operated for the benefit of private interest of your founder and president as required for continued recognition of exemption pursuant to sec_1_501_c_3_-1 contributions to your organization are no longer deductible under sec_170 after january 20xx you are required to file form_1120 u s_corporation income_tax return the return should be filed with the appropriate service_center for tax years ended december 20xx and december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to these courts at the following addresses united_states tax_court second street nw washington d c united_states court of federal claims madison place nw washington d c united_states district_court for the district of columbia constitution avenue nw washington d c the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit taxpayeradvocate irs gov or call if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely margaret von lienen director eo examinations publication enclosure department of the treasury yi internal_revenue_service tax exempt and government entities irs exempt_organizations examinations commerce street ms dal dallas tx date date taxpayer_identification_number form tax_year s ended december 20xx december 20xx person to contact id number contact numbers telephone fax manager’s name id number manager’s contact number response due_date may 20xx certified mail - return receipt requested we propose to revoke our recognition of your exempt status as an organization described in sec_501 of the internal_revenue_code the code we enclose our report of examination explaining why we are proposing this action dear if you accept our proposal please sign and return the enclosed form_6018 consent to proposed action - sec_7428 unless you have already provided us a signed form_6018 we will issue a final revocation letter determining you are not an organization described in sec_501 after the issuance of the final revocation letter we will publish an announcement that you have been deleted from the cumulative list of organizations contributions to which are deductible under sec_170 of the code if you do not respond to this proposal we will similarly issue a final revocation letter failing to respond to this proposal may adversely impact your legal standing to seek a declaratory_judgment because you may be deemed to have failed to exhaust administrative remedies if you do not agree with our proposed revocation and wish to protest our proposed revocation to the appeals_office of the internal_revenue_service then you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision this written request is called a protest for your protest to be valid it needs to contain certain specific information which generally includes a statement of the facts the applicable law and arguments in support of your mod letter position for the specific information needed for a valid protest please refer to page of the enclosed publication the examination process and page of the enclosed publication how to appeal an irs decision on tax-exempt status if you do submit a valid protest then an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication and publication explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation services referred to in publication generally do not apply after issuance of this letter you may also request that we refer this matter for technical_advice as explained in publication and an annual revenue_procedure please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the eo rulings and agreements function then no further administrative appeal will be available to you within the irs on the matter if you receive a final revocation letter you will be required to file federal_income_tax returns for the tax period s shown above as well as for subsequent years 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 internal_revenue_service office_of_the_taxpayer_advocate 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 mod letter thank you for your cooperation sincerely paul a marmolejo acting director exempt_organizations examinations enclosure publication publication form_6018 report of examination mod letter form 886-a name of taxpayer explanation of items schedule or exhibit no page of year ended 20xx12 20xx12 issue should the organization’ sec_501 status be revoked on the grounds that it is not operating within the scope of internal_revenue_code sec_501 facts per the organization’s filed form_990 for tax_year ending december 20xx their mission is to a per the organization’s articles of incorporation filed august 19xx their purpose is ac the president in advised that the organization is no longer affiliated with the on july 19xx the organization’s articles of incorporation were amended to include the following paragraph which states in part 6c per the president the organization performs perform social services for individuals and families at the time of the tour of the facilities they were not providing any housing they identify individuals and families in need and they network with different organizations and businesses in the community to find the resources to meet that need that their activities have greatly been reduced since governmental agencies now provide the majority of the services they used to offer and they the president advised during 20xx the organization reported that they received a total of dollar_figurexxx xxx in fair_market_value from a combination of donated furniture food and toys the president advised that the majority of these items are donated to those in need throughout the year on the filed form_990 and calendar years ending 20xx and 20xx the organization reported that they own properties the organization reported gross rents part viii of form_990 related to this property totaling dollar_figurexx xxx for tax_year 20xx the amount reported totaled dollar_figurexx xxx when asked about this property and the related rental income the president advised that this property and rental income was actually department of the treasury - internal_revenue_service form 886-a form 886-a name of taxpayer explanation of items schedule or exhibit no page of year ended 20xx12 20xx12 hers and it should not have been reported on the forms because the organization does not own the property nor do they directly receive the rental income she advised that she reports this rental income on her personal tax_return she advised that is was mistake to have included in on the forms due to this the president advised that the forms are incorrect and that most of the income and expenses reported on the returns are actually related to her and not the organization therefore the forms filed for 20xx and 20xx and materially incorrect the president advised that her personal checking account is also used as the organization’s bank account the president advised that she makes all deposits into this account which includes the rental income her retirement pension which is unrelated to the organization and all charitable_contributions the organization receives since the organization's bank account is commingled with the president’s personal funds it is impossible to discern any purported organization expense from the president’s personal expenditures the organization's assets ie its bank account are readily available for the president’s immediate and personal_use the majority of the expenditures were personal in nature or unexplained an information_document_request idr dated august 20xx was provided to the organization this idr requested source documentation pertaining to questionable transactions identified in the checking account such as out of state and out of country atm withdrawals and debit card transactions at casinos a follow up idr was provided to the organization on september 20xx no response was provided by the organization to either idrs the president is in complete control_over the organization's financial activities the president does not have to substantiate or provide accounting for any expenditure made from the organization's bank account the audit reveals that the president never relinquishes control_over the funds there is a board_of directors listed on the filed forms but there is no indication that they act as an independent body responsible for reviewing approving co-signing financial transactions or preventing organizational assets bank account from inuring to its founder transactions are not recorded there is no segregation of duties there are no outside parties overseeing the organization there is no annual independent audit the president is the sole controller of the organization law sec_501 of the code exempts from federal_income_tax organizations organized and operated exclusively for charitable educational and other exempt purposes provided that no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 of the code the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section sec_1_501_c_3_-1 of the regulations provides that an organization will not be regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt purposes the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test 326_us_279 department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items page of schedule or exhibit no name of taxpayer year ended 20xx12 20xx12 regulation sec_1 c - c defines the operational_test regulation sec_1501 -1 c primary activities provides in part 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 c c distribution of earnings expands on the definition of an activity that is not in furtherance of an exempt_purpose it states 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 for the definition of the words ‘private shareholder or individual’ see paragraph c of sec_1_501_a_-1 sec_1_501_c_3_-1 of the regulations provides that 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 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 prohibited private interests include those of unrelated third parties as well as insiders 70_tc_1037 92_tc_1053 private benefits include an advantage profit privilege gain or interest 78_tc_280 better business bureau v united_states 316_us_279 holds that the existence of a single non-exempt purpose if substantial in nature will destroy the exemption under sec_501 an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such purposes in 74_tc_846 the court found that although the organization did serve charitable purposes it existed to serve the private benefit of its founders and thus failed the operational_test of sec_501 control_over financial affairs by the founder created an opportunity for abuse and the need to be open and candid about financial matters the applicant failed to provide information concerning financial affairs taxpayer's position the organization’s president advised that she disagrees with certain portions of this report she stated that she has never misused the organization’s funds she stated that she has never personally benefited from her involvement with the organization and that the organization would not have existed without her financial support she is very proud of the work the organization has done on the behalf of the community over the roughly xx years they have been in existence governing charitable organizations were done in ignorance and were not intentional she advised that any errors they might have made by not properly abiding by the laws with a letter dated april 20xx the organization’s president concerning this report see attached exhibit accompanying this letter was form_6018 signed by her also attached further explained her position department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items page of schedule or exhibit no name of taxpayer year ended 20xx12 20xx12 government's position though some exempt_purpose activity has occurred the organization does not appear to operate exclusively exempt purposes as required by sec_501 and sec_1_501_c_3_-1 similar to the organization in 74_tc_846 the foundation appears to exist to serve the private benefit of its founder and thus fails the operational_test of sec_501 even though it may operate for some exempt purposes as in that case control_over financial affairs by the founders creates an opportunity for abuse more than an insubstantial part of the president's activities appear to benefit the president rather than the general_public since the organization does not operate exclusively for exempt purposes and operates to the private benefit of the president to a more than insubstantial extent the organization is not described by sec_501 conclusion the above facts demonstrate that the foundation is not operated exclusively for exempt purposes described within internal_revenue_code sec_501 a b c the organization is not engaged primarily in activities that accomplish an exempt_purpose more than an insubstantial part of the organization's activities are in furtherance of a non-exempt purpose the organization was operated for the purpose of serving a private benefit rather than public interests based on our audit and in light of the applicable law we have determined that you are not operated for exempt purposes rather you are primarily operated for the non-exempt purpose operating in furtherance of private interests of the president accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 of the code department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items schedule or exhibit no page of name of taxpayer year ended 20xx12 20xx12 department of the treasury - internal_revenue_service form 886-a name of taxpayer form 886-a explanation of items schedule or exhibit no page of year ended 20xx12 20xx12 department of the treasury - internal_revenue_service form 886-a


department of the treasury internal_revenue_service washington d c cc el gl br1 number release date date uilc memorandum for district_counsel houston from alan c levine chief branch general litigation subject legend taxpayer donor x donee y amount dollar_figurez this is in response to your memorandum of date regarding the above subject the questions you raised concern the application of sec_6324 issues whether donee liability under sec_6324 may be imposed where the internal_revenue_service service has asserted a deficiency for additional gift_tax against the donor with respect to unreported transfers of property to third parties while the case is pending in the tax_court what is the service’s current policy with respect to the assertion of donee liability under sec_6324 conclusion the service may impose personal liability against a donee pursuant to sec_6324 while a deficiency proceeding is pending in the tax_court as a result of the service’s assertion of additional gift_tax liability against the donor but it will have to await the court’s decision to ascertain the amount of that liability it is the current policy of the service to pursue donee liability only where it appears that collection from the donor is not possible facts x the donor died on on date the service issued a notice_of_deficiency to the executor and temporary administrator of the estate of x for federal gift_tax relating to transfers made by x during the taxable_year the service had determined among other things that during x had made taxable_gifts of to y the service also determined that during that same year x made a taxable gift of real_property valued at dollar_figure to a married y subsequent to having made the taxable_gifts to her in the decedent filed his gift_tax_return on or about none of the above-mentioned gifts were reported on the gift_tax_return neither y or were listed as donees of any gift reported on the return although the amount of tax shown on the gift_tax_return was fully paid with the filing of the return the service however increased the amount of the decedent’s taxable_gifts and asserted a deficiency in gift_tax for the year the donor’s estate filed a petition with the tax_court in response thereto prior to the decedent’s death a great majority of his assets were transferred into the donor’s living_trust leaving his estate nearly devoid of assets the decedent’s son is the primary beneficiary of the trust and the decedent’s long-time is the trustee the service has not yet taken any steps to assert transferee_liability against the trust for the decedent’s unpaid gift_tax liabilities the estate contends that it has no funds and that the remaining assets of the living_trust are insufficient to satisfy the outstanding gift_tax liabilities consequently the estate believes that the service should assert donee liability under sec_6324 against both y and for the unpaid gift_tax liabilities y filed a petition in bankruptcy under chapter of the bankruptcy code on the bankruptcy case is currently pending and the service did not file a proof_of_claim for her gift_tax liability since the service was not asserting gift_tax liability against y at time her petition was filed the period for filing a proof_of_claim has expired and the plan has been confirmed bankruptcy code sec_507 governs the priorities of tax claims in bankruptcy unlike subsection a which refers to income or gross_receipts taxes subsection e provides for the priority of excise_taxes under which category gift_taxes fall in re grynberg f2 10th cir pursuant to subsection e i priority is awarded to a gift_tax where the transaction gift occurs within three years prior to the date the petition is filed in the instant case the gifts to y were made between and thus except for any gifts that may have been given to y between all the other gifts would fall within the three year period prior to the petition date and the gift_taxes arising therefrom would constitute nondischargeable taxes one caveat that must be considered is that b c sec_507 does not state that the priority afforded the government applies not only to the debtor who is usually the taxpayer but to transferees of the debtor as well however the legislative_history of that section leads us to believe that the same result would apply in the case of a transferee see statement of senator deconcini cong rec s17429 daily ed date as just stated it is too late for the service to collect these taxes from the bankruptcy_estate since no proof_of_claim was filed in addition the gift_tax lien provided by sec_6324 is an unrecorded lien unlike a notice_of_federal_tax_lien and can be avoided by the bankruptcy trustee b c sec_545 however the tax_liability will survive the bankruptcy and will be collectible from any after-acquired assets in this regard presently there is an adversary proceeding in which y has filed suit against the decedent’s son to contest the share of donor’s estate to which she claims to be entitled if she is successful in that litigation there may exist ample funds to satisfy her gift_tax liability after having satisfied all the bankruptcy claim creditors pursuant to b c d a the confirmation of y’s chapter plan entitled her to a discharge from her prepetition debts accordingly the automatic_stay was no longer in effect following confirmation of her plan b c sec_362 law and analysis issue sec_6324 provides another source of collection for the gift_tax when that tax cannot be collected from a donor ie it imposes personal liability upon the donee sec_6324 reads as follows except as otherwise provided in subsection c unless the gift_tax imposed by chapter is sooner paid in full or becomes unenforceable by reason of lapse of time such tax shall be a lien upon all gifts made during the period for which the return was filed for years from the date the gifts are made if the tax is not paid when due the donee of any gift shall be personally liable for such tax to the extent of the value of such gift any part of the property comprised in the gift transferred by the donee or by a transferee of the donee to a purchaser or holder of a security_interest shall be divested of the lien imposed by this subsection and such lien to the extent of the value of such gift shall attach to all the property including after-acquired property of the donee or the transferee except any part transferred to a purchaser or holder of a security_interest sec_6151 provides for the time and place for paying the tax shown on a return subsection a thereof states the following general_rule - except as otherwise provided in this subchapter when a return of tax is required under this title or regulations the person required to make such return shall without assessment or notice_and_demand from the secretary pay such tax to the internal revenue_officer with whom the return is filed and shall pay such tax at the time and place fixed for filing the return determined without regard to any extension of time for filing the return see also sec_25_6151-1 the liability of a donee arises as soon as the donor fails to pay the tax when due and the liability is not contingent upon a determination_of_a_deficiency against the donor 147_f2d_186 8th cir in that case the period of limitations for asserting a deficiency against the donor had expired the argument by the donee there was that the donor’s liability for the tax was primary and that of the donee secondary and that no liability should therefore exist against a donee for any part of a tax which a solvent donor has not admitted in his return until there has been a deficiency determination against the donor in the manner and time provided by the statute however as noted by the eighth circuit the statute itself imposes the tax fixes its amount and prescribes the date when the payment thereof is legally due if the full amount of the tax thus imposed is not paid_by the 15th day of march following the close of the calendar_year the tax has not been paid ‘when due ’ and the unpaid portion bears interest from that date and ‘if the tax is not paid when due the donee of any gift shall be personally liable for such tax to the extent of the value of such gift’ id pincite according to the court_of_appeals nowhere in its language does the statute make the liability of the donee contingent or dependent upon a formal determination of deficiency against the donor or upon any other steps to collect from him where there have been no proceedings against the donor the donee is afforded a full opportunity to contest the validity and the amount of the tax under the provision in the transferee section of the statute for assessing and collecting his liability in the same manner as in the case of a deficiency id pincite in the present case the service has alleged that the donor made gifts during that were not reflected on the gift_tax_return filed by his estate the tax_shown_on_the_return was paid in full with the return pursuant to sec_6151 the tax was due when the gift_tax_return was due to be filed i e on sec_6075 had the donor not paid the gift_tax shown on the return the donee here y would have been liable only to the extent of value of the gifts she received for the amount shown on that return assuming the service although the tax in mississippi valley was governed by the provisions of title iii of the revenue act of u s c a int rev act p et seq the result would be the same under sec_6324 had not asserted a deficiency however since the commissioner asserted a deficiency with respect to that return we believe that the words of the statute sec_6324 if the tax is not paid when due emphasis ours refer to the amount of the deficiency asserted although the court in mississippi valley held that the donee’s liability is not contingent upon a formal determination_of_a_deficiency against the donor or any other step to collect from him it would be more prudent to await the tax court’s decision regarding the amount of that deficiency if any prior to taking steps to collect the amount of the deficiency asserted by the service the period of limitations pursuant to sec_6901 for asserting transferee_liability against an initial transferee such as y is one year after the expiration of the period of limitations for assessment against the transferor the total_tax due at the time of filing of a gift_tax_return includes the amount shown on the return plus the amount of the deficiency as noted by the court in mississippi valley citing sec_1011 of the internal_revenue_code_of_1939 the term deficiency means ‘the amount by which the tax imposed by this chapter exceeds the amount shown as the tax by the donor upon his return’ id pincite until the tax_court redetermines the amount of gift_tax liability in the present case there has been no final_determination of the additional gift_tax due for the facts in mississippi valley do not reflect whether the donor actually paid the amount of gift_tax shown on the return either prior to or subsequent to the time the service alleged that a deficiency existed however as stated above in the present case the tax shown on the donor’s gift_tax_return for was paid prior to the issuance of the notice_of_deficiency in any event we do not view the fact of payment of the amount of gift_tax shown to be due on the return as negating the donee’s personal liability under sec_6324 or sec_6901 where the service could assert a deficiency pursuant to sec_6215 if the taxpayer files a petition with the tax_court the entire amount redetermined as the deficiency by the tax_court which has become final shall be assessed and paid upon notice_and_demand from the secretary no part of the amount determined as a deficiency by the service but disallowed as such by the decision of the tax_court which has become final shall be assessed or collected by levy or by a proceeding in court with or without assessment sec_6215 clearly is applicable to the donor’s liability not that of the donee since it was the donor here who petitioned the tax_court for review thus although y as donee is not the party who is contesting the notice_of_deficiency in the tax_court she is nevertheless pursuant to sec_6324 personally liable for the gift_tax but the amount of her liability generally should await the finality of the tax court’s decision based upon the foregoing discussion we are of the view that y the donee is liable to the extent of the value of the gifts she received during for the amount of gift_tax asserted as a deficiency for the gift_tax_return due for that year considering as stated earlier that the estate has challenged that deficiency in the pending tax_court case the extent of y’s liability will be determined by the outcome of the case ie as prescribed by sec_6324 she will be personally liable only to the extent of the value of the gifts she received assuming the service’s deficiency_notice is upheld by the court issue as a rule the service will not attempt to assert donee liability under sec_6324 until all efforts to collect from the donor have been exhausted irm dollar_figure states that except as provided every effort should be made to assert the tax_liability against the transferor within the period of limitation however if a deficiency in tax is determined in the case of the transferor and the period of limitation has expired the deficiency should be asserted against the transferees or fiduciary within the statutory period of limitation applicable to them sec_6324 renders the donee personally liable for the gift_tax if it is not paid_by the donor although there exist two separate methods for collecting gift_tax liability against a donee ie the foreclosure of the sec_6324 lien or the assertion of transferee_liability under sec_6901 the collection procedures set forth in the statute are not exclusive and mandatory but are cumulative and alternative to other methods of tax collection recognized and used prior to enactment of that statute and its predecessors united_states v russell f 2d 10th cir note that although russell involved estate_tax liability the result would be the same for gift_tax liability since sec_6324 and sec_6324 are similar for example in 102_tc_654 the service attempted to collect the gift_taxes owed from the donee pursuant to the liability established under sec_6324 simultaneously the service issued the donee a notice of transferee_liability pursuant to sec_6901 and the donee filed a petition with the tax_court for redetermination of the liability the donee filed a motion to restrain collection under sec_6213 sec_6213 permits the tax_court to restrain assessment and collection of a deficiency in cases where a timely petition for a redetermination of the deficiency has been filed and then only in respect of the deficiency that is the subject of such petition according to the ripley court normally the service’s collection efforts will be enjoined where it is attempting prematurely to collect a deficiency that is the subject of a timely filed petition for redetermination see meyer v commissioner 97_tc_555 however citing sec_301_6324-1 which provides that the general tax_lien under sec_6321 and the special_gift_tax_lien under sec_6324 are not exclusive of each other but are cumulative the tax_court in ripley concluded that the service could collect the gift_tax from the transferee donee without having made a prior transferee assessment pursuant to sec_6901 in 263_f2d_186 10th cir one of the issues concerned a question of transferee_liability for gift_taxes it was agreed that the donors were solvent but that the statute_of_limitations barred collection against them although all of the gift_tax cases had been consolidated in four of the cases presented the assessments were made against donees of gifts out of which none of the claimed deficiencies arose according to the tenth circuit the liability of the donee as transferee for unpaid gift_tax of his donor is clearly established by statute but such liability is limited to the value_of_the_gift received such liability has been repeatedly upheld by the courts solvency or insolvency of the donor is immaterial and assertion of a deficiency against the donor is not required the statute ie present sec_6324 clearly imposes the liability on any donee of a gift made during the year and the fact that a deficiency exists because of a gift to another makes no difference in la fortune the donees claimed that the notice of transferee_liability did not prorate the liability however in the tenth circuit’s view that is of no concern since the statute makes each donee liable to the extent of his gift see also 88_tc_590 the present situation is similar to that before the united_states claims_court now court of federal claims in 687_f2d_386 ct_cl in that case the plaintiffs who represented the estate of the donor believed that because the transferees donees represented an available source of payment somehow the estate was absolved of any responsibility for the delinquent gift_taxes according to the court the plaintiffs’ argument fails to recognize that even though the transferee_liability provision causes a donee to be immediately and directly liable for the gift_tax should the donor fail to pay the tax when due sec_6901 this does not prevent the irs from seeking payment from the donor as further stated by the court there is nothing in the code requiring the irs to obtain recovery from the donees in lieu of attempting to secure payment directly from the assets of the donor’s estate for this reason we find that the irs acted completely within its prerogative in assessing and collecting the unpaid gift_taxes from oliver’s estate id pincite thus based upon the foregoing discussion we conclude that a donor has no right to insist that the service pursue collection against a donee for the donor’s unpaid gift_taxes case development hazards and other considerations if you have any further questions please do not hesitate to 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