department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions instructions in notice action if you agree with our deletions you do not need to take any further if you disagree with our proposed deletions follow the in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely holly o paz director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date legend d name of farm e director of operations j name of foreign organization n country y date x state dear contact person identification_number contact number fax number employer_identification_number vil we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issue sec_1 do your activities cause you to fail the operational_test disqualifying you from exemption under sec_501 of the code yes for the reasons described below do your activities primarily serve to the private benefit of your director of operations e precluding you from exemption under sec_501 of the code yes for the reasons described below do the payments made for the expenses of the farm owned by your director of operations e and his wife constitute prohibited private_inurement of income under letter cg catalog number 47630w sec_501 of the code therefore precluding you from exemption yes for the reasons described below does your method of writing large checks payable to cash demonstrate your lack of control and discretion over your funds therefore precluding you from exemption under sec_501 of the code yes for the reasons described below does your lack of adequate and detailed responses to our inquiries cause you to fail the operational_test precluding you from qualifying for exemption under sec_501 of the code yes for the reasons described below facts you were formed as a corporation in the state of x on date y your articles of incorporation in part state you are formed to provide youth empowerment and community education programs you filed form_1023 requesting exemption under sec_501 of the code you were formed after your board members went to the foreign_country n and saw firsthand the need for peace in the region you visited organization j located in the foreign_country n and selected you name based on j’s name you selected the name because you liked the name of the group you were inspired by what j had done and you wanted to help in a similar way you did not choose your name to fund only j but to give that same kind of inclusiveness and togetherness that the name implies j is not an exempt_organization per your website e is a farmer whose large farm called d is your director of operations is e ringed by religious settlements e’s family has been offered money for the land but will not sell due to their commitment to peace and coexistence e’s family has established j to provide arts drama and education to the children in the villages and refugee camps of the region your website states that you are working on several critical projects on e's land located in foreign_country n the projects you have supported include a new generator solar power a cistern a women’s education center and the planting of olive trees you also indicate e has made trips to various locations around the world to set up friends of’ organizations to support his farm regarding the farm you said the profits go towards their operational expenses but more importantly to their efforts for peace and co-existence in the region the farm is unable to legally build permanent infrastructure to public water be cut off from the rest of the area n’s government can seize uncultivated land which is why there has been an effort to cultivate the farm further foreign_country n is building a concrete barrier and the land will soon n’s government is attempting to seize the land owned by e in addition the farm is not connected to the power grid or one of your newsletters states every dime you donate goes to support foreign organization j your website indicates you had a one-time-only drive to help e’s family purchase farm equipment you distributed funds to e’s family but later said this statement was poorly worded you meant to say the funds went to j you further asserted e and his wife manage the finances of j and are the signatures for the checking account for j you said all financial letter cg catalog number 47630w dealings regarding j are done through e and his wife list of distributions made in your first year of operations ten out of the eleven you provided a distributions you made were to j you asserted you will fund organizations other than j but you later you said j will be your primary recipient simply have not named another recipient yet your website is soliciting funds for specific requests made by e for the farm the requests for funds are to cover kitchen needs a wine press cafeteria improvements for the maintenance workshop a first aid station water pumps and a part-time cook and dishwasher further your website says that e’s family has incurred large legal bills to fight the battle still going on in the courts today specifically if they could build on their own property if they could get access to clean water and electricity if they could get their produce to market if they had clear access to their own road leading to the farm if they weren't being harassed by the military and settlers if they could do lots of other things we all take for granted every day in this country - they wouldn't need this financial support you agreed that money donated to j for capital improvements cannot be exempt from income_tax you claimed no capital improvements were made to e's farm after a specific date and agreed to exemption effective that date however a year later you are still soliciting and expending funds for capital improvements for j you also submitted board meeting minutes after this specific date stating that e is planning new infrastructure for the land including an increase in the irrigation piping installation installation of a waste water recycling system and installation of a wind turbine you submitted copies of your bank statements the statements included numerous payments made to your directors there were many checks written for thousands of dollars to cash there were also thousands of dollars worth of transfers between your bank account into the bank account of your directors there were also thousands of dollars worth of checks written to cash with a memo line including that e would be taking the money to j another of the checks indicated on the memo line that it was for an iphone for e and another check indicating it was for e’s phone use additionally there were several checks written to your directors for airfare no documentation was provided to substantiate these expenses in all you were sent requests for additional information of those requests your case was administratively suspended for failure to respond timely to our requests times law sec_501 of the code describes corporations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual letter cg catalog number 47630w sec_1_501_a_-1 of the regulations provides that the terms private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section organization fails to meet either the organizational_test or the operational_test it is not exempt if an sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as it engages primarily in activities operated exclusively for one or more exempt purposes only if which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals as defined in sec_1_501_a_-1 sec_1_501_c_3_-1 of the regulations provides that an exempt_organization must serve a public rather than a private interest the organization must demonstrate that it is not organized or operated to benefit 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 thus if an organization is operated to benefit private interests rather than for public purposes or is operated so that there is prohibited inurement of earnings to the benefit of private shareholders or individuals it may not retain its exempt status it can be shown that the gift is revrul_63_252 1963_2_cb_101 states that contributions to certain domestic charitable in fact to or for_the_use_of the organizations are deductible if domestic organization and that the domestic organization is not serving as an agent for or channel for a foreign charitable_organization in reaching this conclusion the revenue_ruling states that it seems clear that the requirements of sec_170 of the code would be nullified if contributions inevitably committed to go to a foreign organization were held to be deductible solely because in the course of transmittal to the foreign organization they came to rest momentarily in a qualifying domestic organization in such cases the domestic organization is only nominally the donee the real donee is the ultimate foreign recipient revrul_66_79 1966_1_cb_48 amplifies revrul_63_252 to provide that contributions to a domestic charity that are solicited for a specific project of a foreign charitable_organization are deductible under sec_170 of the code if the domestic charity has reviewed and approved the project as being in furtherance of its own exempt purposes and has control and discretion as to the use of the contributions this conclusion is reached because the contributions received by the domestic charity are regarded as for_the_use_of the domestic organization and not the foreign organization receiving the grant from the domestic organization in better business bureau of washington d c inc v united_states 326_us_179 the supreme court held that the presence of a single non-exempt purpose if substantial in nature letter cg catalog number 47630w will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 30_tc_642 affd 272_f2d_168 5th cir the officers of the school leased property owned by them to the school and caused the school to erect improvements hereon which benefited them individually the officers shared in the schools net_earnings as the result of the payment to them of excessive and unreasonable rent for the physical plant leased by the school and as a result of the construction by the petitioner of buildings which became part of their real_estate the court_of_appeals in 365_f2d_792 8th cir affirmed the findings of tax_court that foundation was pursuing a substantially nonexempt purpose in the publication and commercial exploitation of the writings of the founder director and prime functionary of foundation the founder had contro of the foundation’s day to day activities complete control of its finances and the founders personal funds were to a degree commingled with the funds of the foundation and that the evidence clearly supported the finding that the foundation was pursuing a substantial non-exempt purpose in 73_tc_196 the tax_court held that although separate requirements the private inurement' test and the operated exclusively for exempt purposes test often overlap substantially the petitioner's only activities were some individual counseling and distribution of a few grants to needy individuals the petitioner's failure to keep adequate_records and its manner of operation made it impossible to trace the money completely but the court found it clear that money passed back and forth between petitioner and its director and his for-profit businesses the court held that petitioner had not shown it was operated exclusively for exempt purposes or the no part of its earnings inured to the benefit of its officer in 74_tc_507 it was held that the prohibition against inurement or private benefit is absolute the amount or extent not being determinative petitioner's financial decisions are controlled by one of petitioner's ministers and his wife the minister received widely fluctuating parsonage allowances over a 3-year period as compensation_for leading services and for being available for pastoral counseling there is no evidence in the administrative record of any differing duties that he performed over these years there is also insufficient evidence in the record regarding some of the travel_expenses paid to the minister and his wife and regarding two loans made to the minister’s secular employer parsonage allowances of fluctuating amounts were also paid in some years to petitioner's other two ministers yet there is no evidence in the record about any services they performed for petitioner the tax_court concluded that petitioner is not entitled to exemption because a part of its net_earnings inures to the benefit of private shareholders or individuals in 74_tc_846 the sixth circuit_court found that although the organization did serve religious and 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 thus the need to be open and candid which the applicant failed to do letter cg catalog number 47630w in 82_tc_18 the tax_court denied a petition for declaratory_judgment that the organization qualified for exempt status as achurch in addition to evidence of a pattern of tax-avoidance in its operations the court noted that the organization had failed to respond completely and candidly to irs during administrative processing of its application_for exemption an organization may not declare what information or questions are relevant in a determination process it cited a number of declaratory relief actions that upheld adverse rulings by the service because of the failure of the applicants to provide full and complete information on which the service could make an informed decision in kj's fund raisers v commissioner t c memo affd 166_f3d_1200 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders application of law you are not organized and operated exclusively for charitable purposes under sec_501 of the code as your net_earnings inure to the benefit of e the provision of inurement can be direct or indirect meaning of sec_1_501_a_-1 of the regulations and your net_earnings inure to his benefit an organization will be denied exemption if any of its net_earnings inure to the benefit of private individuals per sec_1_501_c_3_-1 of the regulations even a small amount of inurement will prevent exemption to be granted e is a private individual as he is your director of operations within the pursuant to sec_1_501_c_3_-1 of the regulations if an organization fails to meet either the organizational_test or the operational_test it is not exempt you are soliciting funds for and supporting a farm owned by e the private interests of e and his family are being served e has control_over your operations and has a personal_interest in your activities as a result you do not meet the requirements of the regulations sec_1_501_c_3_-1 of the regulations states that an organization is not organized exclusively for any of the purposes specified in sec_501 of the code unless it serves public rather than private interests your activities serve the private interests of e therefore you do not meet this requirement of the regulations as in western catholic church v commissioner supra although separate requirements the private_inurement test and the operated exclusively for exempt purposes test often overlap substantially in your case the payments made to operate and improve e’s farm constitutes private_inurement therefore precluding you from being operated exclusively for exempt purposes you are similar to texas trade school because you too will make improvements to property owned by individuals causing your earnings to inure to the benefit of e and his family and therefore precluding you from exemption in your case you will fund improvements to property owned by e letter cg catalog number 47630w sec_501 -1 d ii of the regulations further clarifies that it is necessary for an organization to establish that it is not organized and 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 interest you were set up to benefit e and his family through the funding of j as stated in better business bureau of washington d c inc v united_states supra the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes e continues to own the farm that you are funding creating private_inurement which destroys your claim for exemption a number of courts have held that unaccounted for diversions of a charitable organization's resources by one who has complete and unfettered control can constitute inurement further you are funding a privately owned farm through your contributions to j furthering a non-exempt purpose see parker v commissioner supra e who is also your director of operations and his wife hold signatory authority of your j’s checking account you make most of your donations to j funds you donate to j much like basic bible church v commissioner supra even if you do serve some level of charitable purpose you have existed to serve the private benefit of your director and thus failed the operational_test of sec_501 control_over financial affairs by e and his wife have created an opportunity for inurement e and his wife have control_over the in unitary mission church v commissioner supra it was held that the prohibition against inurement or private benefit is absolute the amount or extent not being determinative e continues to own the farm you are supporting through j and your funds are being used to pay for the related expenses you are not entitled to exemption because your net_earnings inure to the benefit of e kj's fund raisers v commissioner supra an applicant for exempt status must provide sufficient information for the service to make an informed decision as indicated in national association of american churches supra in the course of the processing of your application_for exemption you failed to respond timely to our request for additional information six times the responses you did provide caused us to ask the same questions multiple times and we often received minimal details regarding your operations when we did receive information it led us to the conclusion that you are not operating exclusively for exempt purposes causing you to fail the operational_test under sec_501 of the code like the organizations in rev_rul and you collect donations in support of j these donations come to rest temporarily with you and are then forwarded on to j you do not review and approve the project and you also do not have any control or discretion as to the use of these contributions some of which are indicated to be used where most needed applicant’s position you will have specific requests for funding and you require reporting of the use of funds if you find your funds are not being used as they should be you will discontinue distribution of funds you will support only educational and humanitarian programs and you understand that you letter cg catalog number 47630w cannot provide charitable distributions for infrastructure improvements to the farm service response to applicant’s position despite your claim that you will have specific requests for funding require reporting of the use of funds and discontinue distribution if you find funds are not being used as they should be you have not provided any substantiation to support this claim the facts clearly show that you were formed to distribute funds to j and to benefit e your website continues to solicit donations for e's farm the facts do not show support of only educational and humanitarian programs conclusion based on the above facts and law we conclude you fail the operational_test because you are not operated exclusively for sec_501 c purposes specifically you are operated to protect the farm_land owned by e and his family by providing funds which are used to support a privately-owned farm in country n you are operating for the private benefit of e you made payments for the expenses of the farm and for the personal expenses of e who is your director thereby allowing your funds to inure to the benefit of e your income and activities relating to protecting the land owned by e and his family result in inurement to e and his family by transferring funds directly to e’s account making payments in cash and to e personally and providing no substantiation of the use of such funds and cash payments you also do not maintain control and discretion over your funds you frequently failed to submit a timely response to our inquiries and the responses often lacked sufficient detail therefore you fail the operational_test disqualifying you from exemption under sec_501 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal’ must be accompanied by the following declaration the statement of facts item under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my letter cg catalog number 47630w knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh if you fax you may fax your statement using the fax number shown in the heading of this letter your statement please call the person identified in the heading of this letter to confirm that he or she received your fax letter cg catalog number 47630w if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely holly o paz director exempt_organizations rulings agreements enclosure publication letter cg catalog number 47630w


internal_revenue_service appeals_office p o box fresno ca 93779-401e stop release number release date date date a b certified mail dear department of the treasury person to contact employee id number tel fax refer reply to in re eo revocation form required to be filed ein d tax period s ended cc vil sol a final adverse determination regar this is is determined that you do not qualify c of the internal revenue cod as exempt from federal_income_tax under sec_501 effective date our adverse determination was made for the following reason s ding your exempt status under section e irc it organizations exempt from federal_income_tax under sec_501 of the internal_revenue_code are required to operate exclusively for charitable education or other exempt purposes organizations are not operated exclusively for exempt purposes if the net_earnings of the organization inure in whole or in part to the benefit of private shareholders or individuals of the organization see treas reg big_number c -1 c during and we have determined that your net_earnings inured to the benefit of your founders through a series of transactions whereby substantial sums were withdrawn from your business bank account by your founders without sufficient demonstration that such amounts were expended to further your exempt purposes and through further transactions directly benefitting only your founders such as expenditures_for their personal clothing and travel the funds inuring to your founders were substantial in comparison to your total operations and were multiple or repeated over a pattern of years you have not implemented safeguards to prevent a recurrence of funds inuring to your letter rev founders and lack sufficient operational controls as such you have not operated exclusively for exempt purposes and have operated for the benefit of private interests of individuals in contravention of the requirements of sec_1_501_c_3_-1 contributions to your organization are not deductible under sec_170 of the code you are required to file forms u s_corporation income_tax return for tax periods beginning on and after date file the returns in accordance with their instructions and do not send them to this office processing of income_tax returns and assessment of any taxes due will not be delayed because you have filed a petition for declaratory_judgment under irc code sec_7428 if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed within days from the date this determination was mailed to you 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 we will notify the appropriate state officials of this action as required by code sec_6104 you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements 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 is not able to reverse legally correct_tax determinations nor extend the time fixed by law that you have to file a petition in the u s tax_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 if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter see the enclosed notice helpful contacts for your notice_of_deficiency for taxpayer_advocate telephone numbers and addresses if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely karr a bendirs karen a skinder appeals team manager enclosure notice helpful contacts for your notice_of_deficiency letter rev department of the treasury internal_revenue_service te_ge division eo group flair dr 2nd floor el monte ca tara gir ee government entities division taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we issue a determination_letter to you based on technical_advice no letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at n los angeles st room mail stop los angeles ca if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely sunita b lough director eo examinations letter catalog number 34809f form 886-a explanation of items schepule or exhibit no name of taxpayer org ein years ended 20xx- 20kx legend org - organization name president - president companies co-1 through co-33 director - director state - state citvy'- city through - date xx issues should org daycare’s tax-exempt status under internal_revenue_code sec_501 be revoked because of inurement facts the subject organization is recognized as a sec_501 tax-exempt_organization the organization was granted exempt status in december 19xx in 20xx the organization had two daycare centers in city and city state to date the organization has expanded to include two more locations in city and city state according to its articles of incorporation the specific purpose of the organization is to operate a nonprofit corporation daycare that will provide a quality daycare environment for infants and toddlers the organization will provide the proper love and care and high self-esteem to become accepted in today’s society educational as well as recreational activities will be provided along with in-center activities the care of the children will allow parents to be gainfully_employed a tour of the facilities revealed the typical attributes and activities of a daycare center the organization provides both educational and recreational activities in the center daily along with occasional field trips to the beach movies zoo etc the daycare is open monday through friday from am - pm and accepts infants toddlers and school age children the organization participates in government and subsidized tuition and food programs and therefore a large majority of its revenue is derived from these programs the organization does not participate in any fundraising activities per director’s oral testimony the organization was audited for the tax_year 20xx and assessed unpaid employment_taxes and related interest and penalties agreement to repay outstanding amounts owed per director she was not aware that the previous accountant was not filing the required employment_tax returns it currently is on an installment director is both the director of the daycare and the vice-president of the organization her husband president is listed as the president the only salaried board member is director there are very limited internal controls established and president and director are the only board members with signing privileges on the checking account they write all of the checks and deposit the income themselves department of the treasury - internal_revenue_service page of form 886-a form 886-a explanation of items schedule or exhibit no name of taxpayer org ein 20xx- 20xx years ended an examination of the organization’s bank account for the three years ending december 20xx through december 20xx revealed that there is a significant amount of large unusual and questionable debits a breakdown of these items are as follows large unusual and questionable debits from the organization’s checking acct year 20xx year 20xx year 20xx in-branch cash withdrawals clothing travel atm cash withdrawals electronic transfers to savings account co-1 co-2 co-3 co-4 restaurants co-5 co-6 - president co-7 co-8 city co-9 demo co-10 miscellaneous bank charges automobile expenses leasing services co-11 payments co-12 director president storage florists co-13-director return item return item fee nix check fee on-line co-14 -director co-15 director total department of the treasury - internal_revenue_service page of form 886-a schedule or form 886-a explanation of items exhibit no name of taxpayer org ein years ended 20xx- 20xx a detailed spreadsheet listing the large unusual and questionable debits was provided to the eo director for the three years ending december 20xx through december 20xx a review of the bank statements revealed a similar pattern of large unusual and questionable debits and or withdrawals i e in-branch w drawls atm withdrawals clothing purchases travel etc throughout the years to date the eo director has only provided documentation as it relates to the calendar_year ending december 20xx the organization made frequent large in-branch withdrawals each month additionally the organization frequently withdrew cash from atms each month initially per the director's written response in-branch and cash withdrawals were made to pay for playground equipment since the organization was new and did not have credit established copies of estimates were provided by the organization but no substantiation was provided to establish how and when payments were made third party letters were sent to the vendors provided by the eo co-16 provided copies of paid invoices for equipment purchased by the eo but the invoices are related to the year 20xx there were no unpaid balances carried over to subsequent years no invoices were provided for the year 20xx which is the year being audited no other explanation or documentation was provided for the large withdrawals refer to exhibit a for a schedule of detailed debits related to in-branch and atm withdrawals the director stated that cash was used to purchase various items for the daycare refer to exhibit b for a detailed listing of items purchased with cash on may 20xx the eo provided invoices estimates and or receipts to substantiate the detailed listing in exhibitb a thorough review of the substantiation revealed that the majority of the purchases were food related items from co-17 co-18 and co-19 third party verification idrs were sent to the three vendors and a response was received from co-17 stating that it did not accept cash as a form of payment further the account was not current as there is an outstanding balance owed the invoices related to co-18 and co-19 list amounts due but the agent is unable to in addition if payments were made it could not be determine if the amounts were ever paid determined the method of payment per director the eo purchased food from the three vendors for the daycare and the co-22 program third party idrs were sent to the vendors with the largest amounts since the majority of the invoices do not indicate if the invoices were paid in full or the method of payment responses were received from co-20 co-21 co-22 co-23 and co-24 none of the responses indicated that a service was provided or a sales transaction was actually completed they all appear to be estimates further the response from co-22 did not provide verification of bou’s involvement with the program and a substantial portion of the expenditures were related to boj’s involvement with co-22 they were food purchases misc supplies equipment etc therefore the invoices provided above failed to establish how the expenditures furthered the organization's exempt_purpose department of the treasury - internal_revenue_service page of form 886-a schedule or form 886-a explanation of items exhibit no name of taxpayer org ein years ended 20xx- 20xx some invoices provided actually list the method of payment as check and indicates the check number invoices were provided for educational supplies purchased from vendors such as co-25 the invoices from co-25 list a completely different organization for billing purposes further there is no indication that the amount was paid_by boj or the method of payment a bill of sale from co-26 was provided but the bill of sale indicates that the vehicle was to be used for personal purposes proof of insurance was not provided further there is no indication of the method of payment and the agent is unable to reconcile the date on the bill of sale to the in-branch cash withdrawal date additionally the invoice provided above failed to establish how the expenditure furthered the organization's exempt_purpose the review of questionable debits also revealed purchases made to clothing retailers such as chadwick’s lerner’s nordstrom’s ann taylor motherhood maternity dukes men’s store gods woman co urban underground outlet hollywood suit outlet laredoute and van heusen purchases were also made at big sporting goods and the jewelry exchange some purchases were also made on-line store purchases were clothes allowances for marketing purposes some were for parent donations for referring children to its facility and others for attending parent training meetings no substantiation for the clothing purchases other than the written explanation was provided the director who is married to the president and board member of the organization was pregnant in 20xx when purchases were made to motherhood maternity and has a teen age son the clothing appears to be personal in nature since the officers were the only individuals that had full control and authorization of the organization’s checking account it appears that expenditures were used for the benefit of the officers refer to exhibit a for a detailed schedule of debits related to the above stated purchases per the director’s written explanation the clothing purchases were made for airline tickets and related hotel accommodations for travel to states per the director's written explanation the director head teacher and such as state and state teacher’s aide traveled to these states to observe another daycare and get new marketing ideas the exempt_purpose in addition to the necessity to travel out of state to observe daycares has not been established moreover a review of the organization’s checking account reveals that the account was debited dollar_figure on july 20xx for travel related expenditures to city state clothes were purchased the same day at ann taylor and dukes men’s store both clothing department stores for dollar_figure and dollar_figure respectively lodging accommodations at the hotel co-27 in city state for dollar_figure was debited from the organization's checking account the account was also debited the same day for co-28 photography local photography retailer in city state in the amount of dollar_figure on august 20xx dollar_figure to co-29 and dollar_figure to department of the treasury - internal_revenue_service page of form 886-a form 886-a explanation of items schedule or exhibit no name of taxpayer org ein years ended 20xx- 20xx tommy hilfiger outlet in city state no substantiation for the travel other than the written explanation was provided refer to exhibit a for a detailed schedule of debits related to the above stated purchases purchases were made from co-2 which is a children’s retail store three separate purchases were made in october 20xx for dollar_figuredollar_figure and dollar_figure purchases were for baby shower gifts but no substantiation to support this statement has been provided the director was pregnant in 20xx and subsequently had her baby in early 20xx per the director's written explanation these the organization has failed to provide contemporaneous documentation and explanations for the remaining expenses the charitable purpose of the expenses has not been established refer to exhibit a for a detailed schedule of debits related to the above stated purchases subsequently on may 20xx director provided a handwritten receipt indicating that the purchase from co-2 represented a one time purchase for infant cribs the receipt does not represent a valid receipt from co-2 and therefore it can not be determined that the associated funds were used to further the organization’s exempt_purpose the director director is the only salaried board member but the bank statements revealed an electronic funds transfer to president on june 20xx for dollar_figure an explanation or documentation of the exempt_purpose of this transfer has not been provided the examination of the organization determined that no one other than president and director had access to the organization’s checking account a review of the minutes did not reveal that the other board members were aware of the large in-branch and atm withdrawals there was no discussion of playground equipment purchases further the only asset listed on the balance_sheet of the as-filed is cash and no depreciation has been claimed this is not consistent with the purchase of depreciable assets such as playground equipment there were numerous monthly debits from the checking account for purchases made to various gas stations for gas and for oil changes although the organization did have a company van used to transport the children to and from activities and school the amounts appear to be excessive further per director's oral testimony the organization did not provide any board members with a vehicle the director resides in city state and commutes daily to the daycare centers in city state the frequency of the gasoline purchases and oil changes is more consistent with the director’s long commute refer to exhibit a for a detailed schedule of debits related to automobile expenses there were also numerous purchases made to co-30 co-31 co-32 co-33 and various grocery stores that were not included in the agent's workpaper of large unusual and department of the treasury - internal_revenue_service page of form 886-a form 886-a explanation of items schedule or exhibit no name of taxpayer org ein years ended 20xx- 20xx questionable debits the director's written explanations for these purchases were that they were for various supplies that the individual daycare centers needed and that personal and business purchases were not co-mingled the review of the cancelled checks reveals checks written to various vendors for supplies in addition to these debit card purchases although the in question and no substantiation has been provided to credibility of the director's testimony is support the claim that business and personal purchases were not co-mingled it appears that the purchase of supplies from those retailers is reasonable the review of the organization’s bank statements also reveal frequent debits for overdraft non- sufficient funds and bank card fees the amounts are excessive in nature and the exempt_purpose of the expenses has not been verified refer to exhibit a for a detailed schedule of debits related to bank fees a review of the organization's cancelled checks reveals that the organization appears to be incurring and paying for normal expenditures such as utilities supplies food tax and licenses etc although there appears to be legitimate business_expenses paid from the organization's checking account the charitable purposes of the questionable items have not been well established further no documentation has been provided to support the director's explanation for the amounts the eo has not provided any explanations or substantiation for the large unusual and or questionable items for calendar years ending december 20xx through december 20xx financial information org daycare’s form_990 for the year ending december 20xx through december 20xx reported revenue and expenses as follows revenue program service revenue total revenue expenses compensation of officers other salaries other employee_benefits accounting fees legal fees telephone 20xx 20xx 20xx dollar_figure dollar_figure department of the treasury - internal_revenue_service page of form 886-a form 886-a_ explanation of items sele ule sn exhibit no name of taxpayer org ein years ended 20xx- 20xx postage and shipping occupancy printing and publications travel interest depreciation depletion etc other expenses total expenses dollar_figure 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 regulation sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization the term private_shareholder_or_individual is defined in regulation sec_1_503_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 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 is necessary for an organization to establish that it is not organized or regulation sec_1_501_c_3_-1 interaction with sec_4958 provides for the application of five factors when revocation is pursued on inurement grounds in determining whether to department of the treasury - internal_revenue_service page of form 886-a form 886-a explanation of items schedule or exhibit no name of taxpayer org ein years ended 20xx- 20xx continue to recognize the tax-exempt status of an applicable_tax-exempt_organization as defined in sec_4958 and sec_53_4958-2 described in sec_501 that engages in one or more excess_benefit transactions as defined in sec_4958 and sec_53_4958-4 that violate the prohibition on inurement under sec_501 the commissioner will consider all relevant facts and circumstances including but not limited to the following - a the size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess_benefit_transaction or transactions occurred b the size and scope of the excess_benefit_transaction or transactions collectively if more than one in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes c whether the organization has been involved in multiple excess_benefit transactions with one or more persons d whether the organization has implemented safeguards that are reasonably calculated to prevent excess_benefit transactions and e whether the excess_benefit_transaction has been corrected within the meaning of sec_4958 and sec_53_4958-7 or the organization has made good_faith efforts to seek correction from the disqualified_person s who benefited from the excess_benefit_transaction the presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes 326_us_279 90_led_67 66_sct_112 am campaign acad v commissioner 92_tc_1053 see also old dominion box co inc v united_states f2d cir cert_denied 413_us_910 operating for the benefit of private parties who are not members of a charitable_class constitutes a substantial nonexempt purpose when an organization operates for the benefit of private interests such as designated individuals the creator or his family or persons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes am campaign acad v commissioner supra pincite6 in 222_fsupp_151 e d wash net profits were found to inure to private individuals where refreshments goods and services amounting to dollar_figure representing some of gross revenues were furnished to members department of the treasury - internal_revenue_service page of form 886-a form 886-a explanation of items schedule or exhibit no name of taxpayer oe in revrul_67_5 1967_1_cb_123 it was held that a foundation controlled by the creator's family was operated to enable the creator and his family to engage in financial activities which were beneficial to them but detrimental to the foundation it was further held that the foundation was operated for a substantial non-exempt purpose and served the private interests of the creator and his family therefore the foundation was not entitled to exemption from federal_income_tax under sec_501 years ended 20xx- 20xx regulation sec_31_6001-1 states in part that organizations shall keep such permanent books of account or records including inventories as are sufficient to establish the amount of gross_income deductions credits or other matters required to be shown by such persons in any return of such tax or information regulation sec_1_6033-2 states every organization which is exempt from tax is required to file an annual information_return shall submit such additional whether or not it information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status and administering the provisions of subchapter_f sec_501 and following chapter of subtitle a of the code sec_6033 and chapter of subtitle d of the code revrul_59_95 provides that a failure_to_file required information_return or comply with the provision of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it continuation of an exempt status is observing the conditions required for the in 640_fsupp_96 d dc the court ruled that a failure to keep and present accurate and adequate_records prevented the church from meeting its burden of showing that its operations were primarily for charitable purposes and did not inure to the private benefit of its officers the court also stated that _ the lack of adequate_records or receipts makes operated for the private benefit of its members and provides independent grounds for rejecting its claim to tax-exempt status it impossible for cgm to establish that it is not being tp’s position tp’s position is unknown at this time government’s position regulation sec_1_501_c_3_-1 interaction with sec_4958 provides for the application of five factors when revocation is pursued on inurement grounds factors for consideration department of the treasury - internal_revenue_service page of form 886-a form 886-a explanation of items paneenlee exhibit no name of taxpayer org ein 20xx- 20xx years ended include the size and scope of the organization’s ongoing activities that further exempt purposes before and after the excess_benefit_transaction s occurred the size and scope of the excess_benefit_transaction s in relation to the size and scope of the organization’s activities that further exempt purposes whether the organization was involved in multiple excess_benefit transactions whether the organization has implemented any safeguards to prevent any excess_benefit transactions and whether the excess_benefit_transaction has been corrected based on the facts of the examination the organization does not qualify for exemption since the excess_benefit_transaction has risen to a level where the organization’s exempt_function on the whole is called into question there appears to be a pattern of large unusual and questionable withdrawals and debits from the organization's bank accounts that have not been adequately substantiated further there are virtually no internal controls as the director of the daycare director and her spouse are the only ones with signing privileges on the checking account they write all of the checks and deposit the income themselves no other safeguards have been implemented and correction has not been made although the purpose in operating the daycare centers may arguably benefit the public and community as a whole it appears that the director of the organization is using the organization’s funds for personal purposes the charitable purpose of the large unusual and questionable withdrawals and debits have not been established conclusion based on the foregoing reasons the organization does not qualify for tax exemption under sec_501 due to inurement of the organization’s funds to director therefore org’s tax exempt status should be revoked effective january 20xx department of the treasury - internal_revenue_service page of form 886-a


internal_revenue_service number release date index number ------------------------------------- ----------------------------------------------------- ---------------------------- ----------------------------------------- ----------------------------- - department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc fip b03 plr-146115-04 date date legend taxpayer corporation subsidiary a subsidiary b subsidiary c subsidiary d subsidiary e subsidiary f subsidiary g subsidiary h ----------------------------- -------------------------- --------------------------------- -------------------------- ---------------------------- -------------------------- --------------------------------- -------------------------- ------------------------------------ -------------------------- ------------------------------------- -------------------------- --------------------------- -------------------------- ------------------------------- -------------------------- --------------------------- -------------------------- ------------------------------- -------------------------- ---------------------- ---------------------- ----------------------- ------------------------- -------------------------- -------------------------------------------- -------------------------- plr-146115-04 subsidiary i date date date date date dear ------------------ this is in reply to a letter requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer and subsidiaries a-i collectively the subsidiaries to file an election under sec_856 of the internal_revenue_code to treat each of the subsidiaries as a taxable_reit_subsidiary trs facts investment_trust reit under subchapter_m of chapter of the code for the taxable_year beginning date taxpayer is a calendar_year taxpayer and uses the accrual_method of accounting managing and leasing income producing real_estate projects taxpayer indirectly operates a diversified portfolio of retail projects office building projects mixed-use projects and other properties located throughout the united_states interest in corporation taxpayer owns all of the outstanding shares of corporation and corporation holds or held more than percent of the total voting power or value of the outstanding shares of each of the subsidiaries each of which is a domestic corporate entity subsidiary a subsidiary b subsidiary c subsidiary e subsidiary f subsidiary g and subsidiary h are or were as the case may be wholly-owned by subsidiary i taxpayer indirectly holds or held1 interests in the subsidiaries through its taxpayer is a domestic_corporation that elected to be taxed as a real_estate subsidiary i and subsidiary d are wholly owned directly by corporation taxpayer is engaged primarily in the business of acquiring developing subsidiary a was dissolved on date subsidiary b was dissolved on date subsidiary c was dissolved on date to make an election to treat a corporation held by the reit as a trs the in the ticket to work and work incentives improvement act of p l plr-146115-04 was enacted and contained the reit modernization act rma which included a number of modifications to the rules governing reits the rma which is effective for tax years beginning after date allows a reit to own up to percent of the stock of a trs a trs can perform activities that otherwise would result in impermissible income if performed by a reit as provided by the rma a corporation automatically is treated as a trs with respect to a reit if another trs holds more than percent of the total voting power or value of the outstanding shares of such corporation corporation and the reit use a form_8875 taxable_reit_subsidiary election form the instructions to form_8875 provide that a trs that own sec_35 percent of the total voting power or value of the outstanding securities of a corporation must attach a statement to form_8875 with the name and employer_identification_number of each such corporation following the enactment of the rma taxpayer and corporation timely filed a form_8875 to treat corporation as a trs with respect to taxpayer with an effective date of date at the time the election was filed taxpayer indirectly through corporation owned greater than percent of the total voting power or value of the outstanding shares of each of the subsidiaries accordingly as provided in the instructions to form_8875 taxpayer attached a statement to the form_8875 that included the name and employer_identification_number of each subsidiary agreement between taxpayer and another entity it was discovered that certain activities performed by another entity in which corporation holds an interest call into question the validity of corporation’s trs election this caused taxpayer and taxpayer’s counsel to reassess each subsidiary’s status as a trs and as a result taxpayer’s counsel determined that each subsidiary should have made an independent trs election on form_8875 under sec_301_9100-1 and -3 to make an election to treat each subsidiary as a trs effective date taxes in support of this requested ruling at all times from date through the present taxpayer intended for each subsidiary to qualify as a trs taxpayer has at all times treated each subsidiary as a trs law and analysis taxpayer submitted the affidavit of its senior vice president and director of as a result of the due diligence undertaken in connection with a proposed merger following this discovery taxpayer immediately requested an extension of time sec_856 provides that the term taxable_reit_subsidiary includes any plr-146115-04 sec_856 provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a trs with respect to a reit sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation both the election and the revocation of trs status may be made without the consent of the secretary corporation other than a reit with respect to which a trs of such reit owns directly or indirectly securities possessing more than percent of the total voting power or total value of the outstanding securities of such corporation service announced the availability of form_8875 taxable_reit_subsidiary election pursuant to the announcement this form is to be used for tax years beginning after for eligible entities to elect treatment as a trs the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the tax_year the effective date of the election however depends on when the form_8875 is filed specifically the instructions provide that the effective date of the election cannot be more than months and days prior to the date of the filing of the election or more than months after the date of the filing of the election if no date is specified on the form the election is effective on the date the form is filed with the service corporation’s form_8875 as filed contained an effective date of date in announcement 2001_1_cb_716 the internal_revenue_service sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i sets forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election plr-146115-04 applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion taxpayer and subsidiaries have satisfied the requirements for granting a reasonable extension of time to elect under sec_856 to treat each subsidiary as a trs of taxpayer as of date therefore taxpayer together with each of the subsidiaries is granted a period of time not to exceed days from the date of this letter to submit form_8875 based on the information submitted and representations made we conclude that this ruling is limited to the timeliness of the filing of the form_8875 this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether taxpayer otherwise qualifies as a reit under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of taxpayer and each of the subsidiaries is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely ___________________________ alice m bennett branch chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes


bot b ee j ae tax exempt and t ll ties nifarm dasue cit dollar_figure -00 department of the treasury internal_revenue_service washington d c oct aw bay q oj g q os legend company a plan x family m dear this letter is in response to a request for a ruling letter submitted on your behalf by your authorized representative on date concerning the classification of a disqualified_person for purposes of determining a nonallocation_year under sec_409 of the internal_revenue_code code your authorized representative has submitted the following facts and representations in support of this request for the benefit of its employees who company a established plan x effective january satisfy plan x’s eligibility and participation requirements plan x is a defined_contribution_plan which is intended to be qualified under code sec_401 and also to be an employee_stock_ownership_plan esop within the meaning of code sec_4975 established as a leveraged_esop and the related loan was intended to be an exempt loan within the meaning of sec_54_4975-7 of the excise_tax regulations the shares purchased with the loan proceeds were placed in a suspense_account in accordance with sec_54_4975-7 of the excise_tax regulations company a elected to be taxed as an s_corporation on january plan x was initially your authorized representative has represented that company a does not maintain any type of non-qualified deferred_compensation plan phantom_stock plan stock_option plan restricted_stock_plan stock appreciation rights plan or any other type of plan that would confer such rights 2008u4023 page upon any individual so as to constitute synthetic_equity as defined under code sec_409 company a is controlled by family m several members of familym‘_ _ cousins and a child of one of these cousins are participants in plan x and therefore have accounts under plan x holding shares of company a common_stock company a common_stock consistsof the total share ownership of family m members under plan x shares which are respectively allocated to the plan x accounts of and shares which are allocated to the plan x account of a child of the individual cousins and plan x currently holds shares of who has__ or more of the ‘ ‘deemed-owned shares within the meaning of code sec_409 shares your authorized representative has represented that no one owns percent based on the foregoing facts and representations your authorized representative has requested a ruling that there is no nonallocation_year in there are no disqualified persons within the meaning of sec_409 for purposes of code sec_409 because code sec_409 states that an employee_stock_ownership_plan holding employer_securities consisting of stock in an s_corporation shall provide that no portion of the assets of the plan attributable to or allocable in lieu of such employer_securities may during a nonallocation_year accrue or be allocated directly or indirectly under any plan of the employer meeting the requirements of sec_401 for the benefit of any disqualified_person code sec_409 states that for purposes of this subsection the term ‘nonallocation year means any plan_year of an employee_stock_ownership_plan if at any time during such plan_year such plan holds employer_securities consisting of stock in an s_corporation and disqualified persons own at least percent of the number of shares of stock in the s_corporation code sec_409 generally provides with certain exceptions that for purposes of determining a nonallocation_year the rules of sec_318 shall apply for purposes of determining ownership code sec_409 a states that the term disqualified_person means any person if i the aggregate number of deemed-owned_shares of such person and the members of such person’s family is at least percent of the number of deemed-owned_shares of stock in the s_corporation or ii in the case of a person not described in clause i the number of deemed-owned_shares of such person is at least percent of the number of deemed-owned_shares of stock in such corporation code sec_409 states that the term deemed-owned_shares means with respect to any person i the stock in the s_corporation constituting employer_securities of an employee_stock_ownership_plan which is allocated to such person under the plan and ii such person’s share of the stock in such corporation which is held by such plan but which is not allocated under the plan to participants for purposes of ii sec_409 states that a person’s share of unallocated s_corporation stock held by such plan is the amount of the unallocated stock which page would be allocated to such person if the unallocated stock were allocated to all participants in the same proportions as the most recent stock allocation under the plan code sec_409 states that for purposes of sec_409 the term member_of_the_family means with respect to any individual i the spouse of the individual ii an ancestor or lineal descendant of the individual or individual’s spouse iii a brother or sister of the individual or individual’s spouse and any lineal descendant of the brother or sister and iv the spouse of any individual described in clause ii or iii sec_409 further states that a spouse of an individual who is legally_separated from such individual under a decree of divorce or separate_maintenance shall not be treated as such individual’s spouse for purposes of this subparagraph under the facts and representations described above the only family members who are aggregated under the rules of code sec_409 are the cousin who has _ plan x and that individual’s child who has shares held in the plan x accounts of these two individuals is less than percent of the number of the deemed-owned_shares constitutes a ‘disqualified person within the meaning of code sec_409 _ addition since neither of these individuals nor the other which are at least percent of the total number of deemed-owned_shares none of these individuals constitutes a disqualified_person within the meaning of sec_409 a ii _ of stock in company a neither of these two individuals cousins has deemed-owned_shares since the aggregate number of shares in plan x shares in in we note that under code sec_409 the attribution_rules of sec_318 apply only for purposes of determining whether there is a nonallocation_year under sec_409 a and do not apply for purposes of the ‘disqualified person definition provided in sec_409gi accordingly with respect to your requested ruling we conclude that the plan_year is not a nonallocation_year for purposes of code sec_409 because there are no disqualified persons within the meaning of sec_409 this ruling letter is based on the assumption that plan x is qualified under code sec_401 at all times relevant to the transaction described herein and that plan x is an esop as described in sec_4975 this ruling letter is also based on the assumption that there is no synthetic_equity as described in code sec_409 and its associated regulations as applicable this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent copies of this ruling letter have been sent to your authorized representatives in accordance with a power_of_attorney on file with this office page if you have any questions please contact please refer to se t ep ra t3 enclosures notice deleted copy of ruling letter sincerely yours dollar_figurertiu tts vu fleer frances v sloan manager employee_plans technical group


internal_revenue_service national_office technical_advice_memorandum date number release date tam-142763-04 cc pa apjp b index uil no case-mis no chief appeals_office john c lacoke taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ---------------------------------------------------- ------------------------------------ -------------------------------------------- ---------------- -------------------------------------- ------------------------- legend legend x state y year year year year year year year year year year year ---------------------------------------------------- ---------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- issue sec_1 are the estimated_tax remissions that x made during years through while under its mistaken view that it was subject_to tax_payments of estimated_tax or deposits in the nature of cash bonds tam-142763-04 does interest accrue on x’s overpayments of estimated_tax from the date x made the estimated_tax payments or from the due_date of the tax returns that x filed were x’s refund claims for tax years and timely filed conclusion sec_1 the estimated_tax remissions that x made while under its mistaken view that it was subject_to tax are payments of tax and not deposits interest accrues on x’s overpayments of estimated_tax for years and from the due_date of x’s income_tax returns for those years for years and interest accrues from the dates that x made the estimated_tax payments the sec_6511 statute_of_limitations applies to x for years and and the refund claims for those years were timely facts in year state y legislature created x to provide competitively priced workers’ compensation insurance to employers in state y the state y legislature created x as a nonprofit independent public corporation for the purpose of insuring employers against the risk of liability for payment of benefits claims to workers from it’s inception through year x made estimated income_tax payments and filed income_tax returns based on its view that it was a taxable entity in congress added sec_501 to the internal_revenue_code code to clarify the tax-exempt status of state-created workers’ compensation insurance providers sec_501 is effective for taxable years beginning after date in response to enactment of sec_501 x requested confirmation of its tax-exempt status from the internal_revenue_service service on october year the service issued a determination_letter to x recognizing its exemption under sec_501 beginning with year in addition the service ruled that x was not required to file annual information returns form_990 return of organization exempt from income_tax for taxable years after year following receipt of its notice of exemption x filed refund claims for years and at the same time x filed refund claims for years through asserting that its income was derived from an essential_governmental_function that accrues to state y and therefore did not receive gross_income pursuant to sec_115 of the code x filed refund claims for years and on september year and september year on march year the service refunded x’s estimated_tax payments in the amounts claimed along with overpayment interest the service computed the interest from the due dates of the corporate_income_tax returns on may year x filed a claim for tam-142763-04 additional interest arguing that overpayment interest should accrue from the date of actual payment rather than the due_date of the return since x is a tax-exempt_organization and does not have a filing obligation on march year the service sent a notice of disallowance informing x that its claims for additional interest for years through were disallowed in full the notice of disallowance stated that payments of estimated_taxes made by an entity that is later determined not to be subject_to tax are treated as deposits upon which no interest is paid during years and x contacted the service several times and filed a protest with the service when the case was ultimately transferred to appeals the service informed x that its refund claims for years and were barred by the statute_of_limitations issue discussion revproc_84_58 1984_2_cb_501 provides the service's procedures for determining whether a remittance constitutes a payment of tax or a deposit in the nature of a cash bond specifically sec_4 provides that a remittance made before the mailing of a notice_of_deficiency that is designated by the taxpayer in writing as a deposit in the nature of a cash bond will be treated as such by the service furthermore section dollar_figure provides that a remittance not specifically designated as a deposit in the nature of a cash bond will be treated as a payment of tax if it is made in response to a proposed liability accordingly the taxpayer’s written designation at the time of remittance will factor into whether a remittance is a deposit in the nature of a cash bond or a payment of tax courts adhere to the guidelines in revproc_84_58 when classifying a remittance as either a deposit or payment of tax in rodgers v united_states of america wl d nev plaintiff sent five checks to the service that included a notation estimated_tax payments on the check in after the statute_of_limitations had run taxpayer filed a claim_for_refund arguing that the remissions were cash bonds in the form of a deposit the court applied revproc_84_58 and held that absent a specific designation as deposits these remittances are properly treated as payments not deposits id see also 80_f3d_1360 9th cir x made estimated income_tax payments and filed income_tax returns for years through and designated each remittance as an estimated_tax payment in accordance with revproc_84_58 x’s remittances are payments of tax and not deposits issue tam-142763-04 sec_6611 provides that interest shall be allowed and paid upon any overpayment in respect of any internal revenue tax at the overpayment rate established under sec_6621 sec_6611 provides in part that for payments of estimated_tax the provisions of sec_6513 applicable in determining the date of payment of tax for purposes of determining the period of limitation on credit or refunds shall be applicable in determining the date of payment for purposes of subsection a accordingly for purposes of calculating interest on an overpayment_of_tax in accordance with sec_6611 a payment of estimated_tax will be overpaid for purposes of sec_6611 on the deemed paid date of sec_6513 in general sec_6513 of the code provides rules for determining when a return is deemed filed and when tax is considered paid however the code provides a specific rule for determining when payments of estimated_tax are deemed paid sec_6513 states that for purposes of sec_6511 or sec_6512 for prepaid_income tax any amount_paid as estimated income_tax for any taxable_year shall be deemed to have been paid on the last day prescribed for filing the return under sec_6012 for such taxable_year determined without regard to any extension of time for filing such return in state of 141_f3d_662 6th cir the issue was what date overpayment interest begins to accrue on overpayments that resulted from estimated_tax payments when the education trust met that made the estimated_tax payments is found to be exempt from federal_income_tax as an instrumentality of the state the sixth circuit relied on 123_f3d_1460 fed cir in concluding that sec_6611 and sec_6513 did not apply because met was exempt from federal taxation as an instrumentality of the state and therefore had no obligation to file a tax_return consequently the court concluded that interest should accrue from the date of each estimated_tax payment state of michigan f 3d pincite in mnopf trustees the issue was what date overpayment interest begins to accrue on taxes unnecessarily withheld from payments made to a tax exempt entity the service argued that based on the late return provision of sec_6611 interest should accrue from the date the refund claims were filed mnopf argued that interest should accrue from the date the withholdings were paid to the service the federal_circuit held that sec_6611 did not apply because mnopf was a tax-exempt_organization and therefore was not required to file tax returns the court also held that sec_6611 and sec_6513 did not apply because those sections only relate to taxable_income and the taxpayer was exempt from federal taxation instead the court held that pursuant to sec_6611 interest accrues on the organization’s overpayment from the date the returns reporting the withheld taxes were filed with the service because it is the date the overpayment was deemed paid overpayment interest for years through tam-142763-04 state y legislature created x to provide competitively priced workers’ compensation insurance to employers in state y the state y legislature created x as a nonprofit independent public corporation for the purpose of insuring employers against the risk of liability for payment of benefits claims to workers for years through x made estimated income_tax payments and filed income_tax returns based on its view that it was a taxable entity the service subsequently determined that x was entitled to refunds for years through on the grounds that x’s income was excludible from gross_income under sec_115 however the fact that income is excludible from gross_income does not necessarily provide an exception from the filing requirement of a corporation imposed by sec_6012 see revrul_78_316 1978_2_cb_304 accordingly x was required to file income_tax returns for years through because x was required to file returns for years through the deemed payment rule for estimated_tax payments under sec_6513 applies to those years therefore pursuant to sec_6611 interest on the overpayments for years through runs from the due dates of the returns for those years both mnopf trustees and state of michigan are distinguishable from the situation in the present case mnopf trustees case involved labor organizations exempt from tax under sec_501 and c accordingly the taxpayer was not required to file a return state of michigan involved an education trust that was held to be an instrumentality of the state of michigan and accordingly was not a taxable entity overpayment interest for years and in congress added sec_501 to the code to clarify the tax-exempt status of state-created workers’ compensation insurance providers sec_501 is effective for taxable years beginning after date in response to enactment of sec_501 x requested confirmation of its tax- exempt status from the service on october year the service issued a determination_letter to x recognizing its exemption under sec_501 beginning with the year in addition the service ruled that x was not required to file annual information returns form_990 return of organization exempt from income_tax for years after year for years and the issue is whether the deemed payment rule under sec_6513 applies for purposes of sec_6611 when a taxpayer is exempt from tax and not required to file an income_tax return for years and x was a tax exempt entity pursuant to sec_501 and was not required to file income_tax returns in light of state of michigan and mnopf trustees we conclude that the deemed paid provision of sec_6513 cannot be applied to x for years and accordingly interest on x’s overpayment for years and runs from the date that x made the actual payments of the estimated_taxes tam-142763-04 issue sec_6511 provides in general that a claim for credit or refund of an overpayment of any_tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within years from the time the return was filed or years from the time the tax was paid whichever of such periods expires the later or if no return was filed by the taxpayer within years from the time the tax was paid sec_6511 provides that if the claim was filed by the taxpayer during the year period prescribed in subsection a the amount of the credit or refund shall not exceed the portion of the tax paid within the period immediately preceding the filing of the claim equal to years plus the period of any extension of time for filing the return on october year the service issued a determination_letter concluding that x was a sec_501 tax-exempt_organization for years and for years through however x did not base its claims for refund on the fact that it was a tax- exempt_organization rather x based its claims for refund on the sec_115 gross_income exclusion the income exclusion under sec_115 does not necessarily except a corporation from the obligation to file an income_tax return pursuant to sec_6012 see revrul_78_316 because x properly filed income_tax returns for years and sec_6511 applies to those years in this case x filed its claims for years and within the 3-year period described in sec_6511 moreover the estimated_tax payments made for years and were made within the 3-year lookback period described in sec_6511 accordingly x’s claims for refund for year and were timely caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


o f f i c e o f t h e c h i e f c o u n s e l number info release date conex-113322-10 uil department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date the honorable richard lugar united_states senate washington dc attention -------------------------------------------------------------------- dear senator lugar i am responding to your letter dated date on behalf of your constituent ---- - ------------------ as a noncustodial_parent he wrote about the requirements for claiming a dependency_exemption for his two children regulations published in changed the irs’s practice of allowing a noncustodial_parent in certain circumstances to use pages of a divorce decree to show that the custodial_parent released a claim to exemption for a child sec_1_152-4 of the income_tax regulations a noncustodial_parent may claim an exemption for a child if the custodial_parent signs a written declaration in such form and manner as provided in regulations that he or she will not claim an exemption for the child and the noncustodial_parent attaches the declaration to his or her tax_return sec_152 of the internal_revenue_code effective for tax years beginning after date the custodial parent’s written declaration must be on form_8332 release revocation of release of claim to exemption for child by custodial_parent or other single-purpose document containing substantially the same information as form_8332 sec_1_152-4 of the income_tax regulations a noncustodial_parent may not except for certain decrees executed before the effective date of the regulations substantiate a custodial parent’s release of a claim to exemption by attaching pages of a divorce decree i am enclosing a copy of the preamble to the regulations that explains why we will not accept a court order or decree as proof of a custodial parent’s waiver in general divorce decrees are complex documents addressing statuses rights and obligations under state law we found that interpreting a divorce decree was burdensome caused conex-113322-10 uncertainty and led to disputes in contrast form_8332 clearly and specifically designates which parent is entitled to the dependency_exemption the rule adopted in the regulations requiring a noncustodial_parent to use form_8332 or a similar single- purpose document facilitates tax_administration provides more certainty to taxpayers about which parent is entitled to claim a dependency_exemption for a child and reduces tax controversies i hope this information is helpful if you have any questions please contact ---------------- -----------or me at --------------------- sincerely branch chief michael j montemurro associate chief_counsel income_tax accounting enclosure