internal_revenue_service number release date index number -------------------------------------- ----------------------------------------- ------------------------------------------------------------- -------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-129498-09 date date legend x -------------------------------------- ---------------------------- trust --------------------------------------------------- --------------------------------- trustee ------------------------------------ a ------------------------ ------------------------ country1 --------------------------- country2 ---------------------- date1 ----------------------- date2 --------------------- dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an entity classification election the information submitted states that x was formed under the laws of country1 on date1 x has been entirely owned by trust since date2 trust was created by a on plr-129498-09 date2 under the laws of country2 and trustee serves as the sole trustee of trust a is a tax resident_of_the_united_states x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity for federal tax purposes however x did not timely file a form_8832 entity classification election electing to be treated as a disregarded_entity sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301 b by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election 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_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government plr-129498-09 based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date2 a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index no p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi - plr-123545-00 date september re legend date taxpayer trust agreement bank x y academy dear this is in response to a letter dated date and subsequent correspondence submitted on behalf of the taxpayer requesting rulings regarding the transfer of taxpayer’s unitrust_interest in a charitable_remainder_unitrust in exchange for an annuity as described below facts the facts submitted and representations made are as follows on date taxpayer executed trust agreement establishing a charitable_remainder_unitrust trust with bank as trustee taxpayer transferred to trust assets with an aggregate adjusted_basis of dollar_figurex and an aggregate fair_market_value of dollar_figurey under the terms of trust taxpayer is to receive for life a unitrust_interest equal to percent of the net fair_market_value of trust assets determined as of the first day of the taxable_year of trust the unitrust_interest is payable in equal quarterly installments first from income and to the extent income is insufficient from principal any trust income in excess of the unitrust_amount is to be added to corpus as of the end of the quarter preceding taxpayer’s death the trustee is to distribute the trust corpus to academy an organization described in sec_170 sec_170 sec_2055 and sec_2522 plr-123545-00 academy is currently in need of funds to be used for the construction of an academic building taxpayer proposes to transfer his unitrust_interest in trust to academy in consideration for taxpayer’s transfer of his unitrust_interest academy will pay taxpayer an annuity for taxpayer’s life it is represented that the annuity will be paid from academy’s general funds and not from the specific property received by the academy from trust as a result of taxpayer’s transfer the annuity will be nonassignable or will be assignable only to academy taxpayer will be the only annuitant taxpayer’s right to receive annuity payments from academy will be transferred to taxpayer on the date that he transfers his unitrust_interest to academy and will commence on that date it is represented that the annuity payable to taxpayer will provide for a specified sum payable not less often than annually for taxpayer’s life the annuity will terminate on taxpayer’s death and no additional payments will be due the terms of the annuity will prohibit any commutation prepayment or refund taxpayer represents that he did not divide his interest in the property transferred to trust on date in order to avoid the partial interest rule_of sec_170 we assume that the trust is a charitable_remainder_unitrust within the meaning of sec_664 you have asked that we rule as follows for the year in which taxpayer transfers the entire balance of his unitrust_interest to academy taxpayer will be entitled to a charitable income_tax deduction under sec_170 of the internal_revenue_code to the extent the date of transfer present_value of taxpayer’s unitrust_interest exceeds the date of transfer present_value of the annuity payments to be made by academy to taxpayer for the year in which taxpayer transfers the entire balance of his unitrust_interest to academy taxpayer will be entitled to a charitable gift_tax deduction under sec_2522 to the extent the date of transfer present_value of taxpayer’s unitrust_interest exceeds the date of transfer present_value of the annuity payments to be made by academy to taxpayer to the extent that trust realized capital_gains income that was not included in the unitrust amounts paid to and recognized by taxpayer in prior years taxpayer’s transfer of his unitrust_interest to academy will not cause that capital_gains income to be included in taxpayer’s gross_income for the taxable_year of the transfer for purposes of applying sec_1011 to the calculation of the gain realized upon taxpayer’s receipt of payments from the charitable_gift_annuity purchased from academy taxpayer’s adjusted_basis in the unitrust_interest being transferred will be determined by allocating taxpayer’s aggregate adjusted_basis in the property transferred to the trustee at trust’s formation between i taxpayer’s unitrust_interest and ii academy’s remainder_interest in proportion to the respective values of those interests as those values were determined on the date of transfer to the trustee plr-123545-00 law and analysis ruling_request sec_170 allows an income_tax deduction for any contribution to or for_the_use_of organizations described in sec_170 sec_170 allows a charitable_contribution_deduction for the contribution of a partial interest in property only to the extent that the value of the interest contributed would be allowable as a deduction if such interest had been transferred in trust sec_170 allows a charitable_contribution_deduction for the contribution in trust of a unitrust_interest that is a fixed percentage distributed yearly of the fair_market_value of the trust property to be determined yearly sec_1 170a- a i of the income_tax regulations provides however that a deduction will not be allowed where the property in which a partial interest exists was divided in order to create such interest and thus avoid sec_170 sec_1_170a-1 of the income_tax regulations provides that in the case of an annuity purchased from an organization described in sec_170 a taxpayer is allowed a deduction for the excess of the amount_paid over the value of the annuity at the time of the purchase sec_1_170a-1 states that the value of the annuity is determined in accordance with sec_1_101-2 sec_170 requires a contemporaneous written acknowledgment for all contribution deductions of dollar_figure or more the acknowledgment must be obtained by the taxpayer on or before the earlier of the date on which the taxpayer files a return for the taxable_year in which the contribution was made or the due_date including extensions for filing such return when the amount of the deduction for noncash gifts exceeds dollar_figure the donor must complete the relevant portions of form_8283 and include form_8283 with the return for the year of the contribution according to sec_1_170a-13 of the regulations a donor who contributes property other than certain publicly_traded_securities and claims a charitable_contribution_deduction in excess of dollar_figure must satisfy additional substantiation requirements sec_1_1011-2 provides that the reduction provisions of sec_170 and the percentage limitations of sec_170 apply in determining whether a taxpayer entering into a bargain sale with a charitable entity is entitled to a charitable_contribution_deduction revrul_86_60 1986_1_cb_302 holds that the transfer by the grantor life- interest beneficiary of the retained annuity interest in a charitable_remainder_annuity_trust that the grantor held for four years to the charitable_remainder beneficiary qualifies for a charitable_contribution_deduction under sec_170 we accept taxpayer’s representation that the trust property in which taxpayer’s partial interest exists was not divided in order to avoid the rules of sec_170 thus sec_1_170a-7 of the regulations does not cause disallowance of the charitable_contribution_deduction in this case plr-123545-00 as stated above sec_1_170a-1 provides that in the case of an annuity purchased from an organization described in sec_170 a taxpayer is allowed a deduction for the excess of the amount_paid over the value of the annuity at the time of the purchase in the instant case the amount_paid by taxpayer for the annuity is the value of his unitrust_interest a reductions in charitable_contribution deductions sec_170 reduces the amount allowable as a charitable_contribution_deduction by the amount of gain that would not be long-term_capital_gain if the property were sold sec_170 further limits a charitable_contribution_deduction by the amount of gain that would be long-term_capital_gain for certain contributions of tangible_personal_property and contributions to or for_the_use_of certain private_foundations a life interest in a_trust is a right in the estate itself and thus is a capital_asset 157_f2d_235 2d cir cert_denied 330_us_826 revrul_72_243 1972_1_cb_233 in the instant case the sale of taxpayer’s unitrust_interest would result in long- term capital_gain because the unitrust_interest is not tangible_personal_property and will not be contributed to a private_foundation sec_170 does not apply accordingly the deductible amount is not reduced under sec_170 b percentage limitations sec_170 provides that in the case of a contribution of capital_gain_property to an organization described in sec_170 to which sec_170 does not apply the total amount of contributions of such property which may be taken into account for determining the income_tax deduction shall not exceed percent of the taxpayer’s contribution_base for the year sec_170 defines capital_gain_property as a capital_asset the sale of which at its fair_market_value at the time of the contribution would result in long-term_capital_gain in the instant case taxpayer proposes to contribute his unitrust_interest which is capital_gain_property to an organization described in sec_170 sec_170 does not apply accordingly taxpayer’s contribution deduction is subject_to the percent limitation of sec_170 accordingly based on the facts submitted and the representations made we rule that for the year in which taxpayer transfers the entire balance of his unitrust_interest to academy taxpayer will be entitled to a charitable income_tax deduction under sec_170 to the extent that the date of transfer present_value of taxpayer’s unitrust_interest exceeds the date of transfer present_value of the annuity payments to be made by academy to taxpayer subject_to the percentage limitations of sec_170 and any other requirements and limitations under sec_170 ruling_request plr-123545-00 sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible under sec_2512 if a gift is made in property the value of the property on the date of the gift is the amount_of_the_gift sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money or money’s worth the amount by which the value of the property exceeds the value of the consideration received shall be deemed a gift under sec_25_2512-5 of the gift_tax regulations the fair_market_value of an annuity or unitrust_interest is its present_value determined in accordance with sec_25_2512-5 sec_2522 provides that in computing taxable_gifts for the calendar_year there shall be allowed as a deduction the amount of all gifts made during such year to or for_the_use_of a corporation or trust or community chest fund or foundation organized and operated exclusively for religious charitable scientific literary or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_2522 disallows the gift_tax_charitable_deduction where a donor transfers an interest in property other than an interest described in sec_170 to a person or for a use described in sec_2522 and an interest in the same property is retained by the donor or is transferred or has been transferred for less than an adequate_and_full_consideration in money_or_money's_worth from the donor to a person or for a use not described in sec_2522 unless-- a in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 or b in the case of any other interest such interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly a unitrust_interest under sec_25_2522_c_-3 of the gift_tax regulations the present_value of a unitrust_interest is determined by subtracting the present_value of all interests in the transferred property other than the unitrust_interest from the fair_market_value of the transferred property under sec_25_2522_c_-3 the present_value of a remainder_interest in a charitable_remainder_unitrust is to be determined under sec_1_664-4 revrul_80_281 1980_2_cb_282 considers a situation where a purchases an annuity from n an organization described in sec_170 and sec_2522 the annuity is plr-123545-00 payable out of the general funds of n charity the ruling holds that a is allowed a gift_tax_charitable_deduction under sec_2522 for the excess of the amount_paid by a to n charity over the value of the annuity received by a the value of the annuity received is determined under the actuarial_tables contained in sec_25_2512-5 see revrul_84_162 1984_2_cb_200 the ruling further states that because the annuity was paid from the general funds of n charity a has not retained an interest in the funds transferred to charity and sec_2522 does not apply situation of revrul_86_60 1986_1_cb_302 considers a situation where a in creates a charitable_remainder_annuity_trust pursuant to which a retained the right to receive an annuity interest for life on a’s death the trust corpus is to pass to charity in a transfers a’s entire annuity interest to the charitable_remainder beneficiary following the transfer a did not retain any interest in the trust and neither at that time nor at any prior time did a make a transfer of trust property for private purposes although the transfer of the remainder_interest to charity divided a’s prior interest that transfer was for charitable not private purposes consequently a’s transfer of the annuity interest to charity was not required to be in a form described in sec_2522 and sec_25_2522_c_-3 in order to qualify for the charitable deduction accordingly a’s transfer of the annuity interest to charity qualifies for a deduction under sec_2522 the facts in this case are substantially identical to those described in situation of revrul_86_60 taxpayer proposes to transfer his entire unitrust_interest to academy after the transfer he will not retain any interest in trust further taxpayer has not made a transfer for private purposes either before or at the time of his transfer of his unitrust_interest to academy although taxpayer’s date transfer to academy of the remainder_interest in trust divided taxpayer’s prior interest in the property that funded trust that transfer was for charitable not private purposes further taxpayer’s transfer of his entire unitrust_interest in exchange for an annuity paid from academy’s general funds is substantially_similar to the exchange of a sum of money for an annuity paid from a charity’s general funds described in revrul_80_281 accordingly based on the facts submitted and the representations made we rule that for the year in which taxpayer transfers the entire balance of his unitrust_interest to academy taxpayer will be entitled to a charitable gift_tax deduction under sec_2522 to the extent the date of transfer present_value of taxpayer’s unitrust_interest exceeds the date of transfer present_value of the annuity payments to be made by academy to taxpayer the present_value of the unitrust_interest and annuity are determined in accordance with sec_7520 and sec_25_2512-5 ruling_request we conclude that to the extent the trustee of trust realized capital_gain income in prior years which income was not included in the unitrust amounts paid to taxpayer plr-123545-00 and thereby recognized by taxpayer that capital_gain will not be currently included in taxpayer’s income by reason of his transfer of his unitrust_interest to academy ruling_request sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of any property received sec_1001 provides that the entire amount of the gain_or_loss determined under that section on the sale_or_exchange of property shall be recognized sec_1011 provides that if a charitable_contribution_deduction is allowed by reason of a sale then the adjusted_basis for determining gain shall be that portion of the adjusted_basis which bears the same ratio to the adjusted_basis as the amount_realized bears to the fair_market_value of the property sec_1001 provides that in determining gain_or_loss from the sale_or_other_disposition of a term_interest_in_property that portion of the adjusted_basis of such interest which is determined pursuant to sec_1014 sec_1015 or sec_1041 to the extent that such adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded under sec_1001 a term_interest_in_property includes an income_interest in a_trust sec_1001 provides that the general_rule of sec_1001 does not apply to a sale that is a part of a transaction in which the entire_interest in property is transferred to any person or persons sec_1_1001-1 of the income_tax regulations provides that sec_1001 does not apply to a sale of a term_interest_in_property as part of a single transaction in which the entire_interest in the property is transferred to a third person see example of sec_1_1014-5 of the income_tax regulations sec_1_1014-5 of the regulations defines the term adjusted uniform basis as the uniform basis of the entire property adjusted as required by sec_1016 and sec_1017 to the date of sale_or_other_disposition of any interest in the property example in sec_1_1014-5 of the regulations illustrates the above principles in a factual situation analogous to the one present in this case in example a decedent left property to h for life then to d for life with the remainder passing to g two years after the decedent’s death h sells his life_estate to d for dollar_figure h recognized gain of dollar_figure the amount_realized from the sale because the portion of the adjusted uniform basis assigned to h’s life_estate is disregarded pursuant to sec_1001 three years later d sells both life estates to g for dollar_figure for purposes of determining gain_or_loss on the sale by d the portion of the adjusted uniform basis plr-123545-00 assigned to h’s life interest and the portion assigned to d’s life interest are not taken into account under sec_1001 however d’s cost_basis in h’s life interest minus deductions for the amortization of such interest is taken into account sec_1015 provides that the basis_of_property acquired by transfer in trust other than by transfer in trust by a gift bequest or devise is the same as it would be in the hands of the grantor under sec_1_1015-2 the uniform basis rules under sec_1_1015-1 apply where more than one person acquires an interest in property transferred in trust under sec_1_1015-1 property acquired by gift has a single or uniform basis although more than one person may acquire an interest in the property the portion of the basis attributable to an interest such as the interest of a life_tenant at the time of its sale_or_other_disposition is determined under sec_1_1014-5 in determining gain_or_loss from the sale_or_other_disposition of a term_interest_in_property as defined in sec_1_1001-1 the adjusted_basis of which is determined by reference to sec_1015 that part of the adjusted uniform basis assignable to the interest sold or otherwise_disposed_of will be disregarded to the extent and in the manner provided by sec_1001 and sec_1_1001-1 sec_1_1011-2 of the regulations provides that sec_1011 and sec_1 apply where property is sold or exchanged in return for an annuity and a charitable_contribution_deduction is allowed by reason of the sale_or_exchange sec_1_1011-2 of the regulations provides that gain on an exchange described in sec_1_1011-2 of the regulations is reported as provided in example of sec_1_1011-2 if the annuity received in exchange for property is nonassignable or is assignable to the charitable_organization to which the property is sold or exchanged and if the transferor is the only annuitant or the transferor and a designated survivor annuitant or annuitants are the only annuitants in the instant case because taxpayer’s basis in his unitrust_interest is in a_trust that basis is determined pursuant to sec_1015 thus in determining taxpayer’s basis in his unitrust_interest upon his transfer of the unitrust_interest to the academy in exchange for an annuity interest from the academy the portion of the adjusted uniform basis assigned to taxpayer’s unitrust_interest will be disregarded pursuant to sec_1001 the exception to sec_1001 in sec_1001 is not applicable because the remainder beneficiary is not receiving the entire_interest in trust in a single transaction as stated above taxpayer’s unitrust_interest is a capital_asset the annuity taxpayer will receive from academy will be nonassignable or will be assignable only to academy and taxpayer will be the only annuitant accordingly upon the transfer of his unitrust_interest in the trust to the academy in exchange for an annuity payable by the academy taxpayer will have long-term_capital_gain in the amount of the value of the annuity reported as provided in example of sec_1_1011-2 of the regulations plr-123545-00 except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent chief branch george l masnik sincerely yours office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc dom p si 2-plr-101788-00 date date number release date index number x a b_trust a_trust b trustee state date date date date date dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x is a corporation incorporated under the laws of state on date x elected to be an s_corporation effective date on date trust a and trust b each purchased one quarter of a share of x stock on the subscription agreements between x and the trustee of trust a and trust b trustee identified trust a and trust b as revocable grantor trusts on date b the beneficiary of trust b died pursuant to the terms of trust b_trust b terminated on date and the x stock held by trust b was transferred to trust a following the death of the b it was discovered that trust a and trust b were mistakenly identified on the subscription agreements trust a and trust b were not revocable grantor trusts but were instead intended to be qualified subchapter_s trusts qssts for which timely qsst elections were not made with respect to the x stock upon discovering that qsst elections should have been but were not made with respect to the x stock a qsst election was submitted to the appropriate internal_revenue_service center for trust a effective date trustee of trust a and trust b represents that trust a and trust b are qssts within sec_1362 and that trust a and trust b have been administered as qssts since their inception moreover a the beneficiary of trust a represents that a has included in gross_income trust a’s allocable share of x’s income and loss trustee represents that trustee as b’s father took responsibility for assuring that b included in gross_income trust b’s allocable share of x’s income and loss and that b did in fact include in gross_income trust b’s allocable share of x’s income and loss c the president of x represents that x’s officers directors and advisors believed trust a and trust b were revocable grantor trusts and that they were unaware that qsst elections were required to be filed to qualify trust a and trust b as shareholders of x thus the circumstances resulting in x’s termination were inadvertent c represents further that the transfer of the x stock to trust a and trust b was not part of a plan to terminate x’s s election and that x and all of its shareholders have consistently treated x as an s_corporation since date x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 as in effect for taxable years beginning on or before date provided that a small_business_corporation cannot have as a shareholder a person other than an estate and other than a_trust described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that in the case of a qualified_subchapter_s_trust qsst with respect to which a beneficiary makes an election under sec_1361 such trust shall be treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the representations made and the information submitted we conclude that x’s s election terminated on date under sec_1362 of the code because the beneficiaries of trust a and trust b failed to timely file an election under sec_1361 we also conclude that the termination of x’s s election was an inadvertent termination within the meaning of sec_1362 we further hold that under the provisions of sec_1362 x will be treated as an s_corporation during the period date to date and thereafter provided that x’s election to be an s_corporation was valid and was not otherwise terminated under sec_1362 from date trust a will be treated as a_trust described in sec_1361 and a will be treated as the owner of that portion of trust a that consists of x stock from date until b’s death on date trust b will be treated as a_trust described in sec_1362 and during that period b will be treated as the owner of that portion of trust b that consists of x stock except as specifically ruled above we express no opinion concerning the federal_income_tax consequences of the transactions described above under any other provision of the code including whether trust a and trust b are qssts under sec_1361 this ruling letter is directed only to the taxpayer who requested it and may not be used of cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours j thomas hines acting branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service ‘appeals office marrows road suite newark de date jun number release date a b uil - certified mail department of the treasury person to contact employee id number tel fax refer reply to in re eo revocation tax perlod s ended ‘ form number employer_identification_number c dear this is a final adverse determination as to your exempt status under sec_501 a of the intemal revenue code it is determined that you are no longer recognized as exempt from federal_income_tax as an organization described in sec_501 of the intemal revenue code effective date our adverse determination was made for the following reason s it was determined that your activities are not exclusively charitable and that assets of the organization have inured to the benefit of private individuals le your founders and or officers through the issuance of loans therefore you are not operated exclusively for exempt purposes pursuant to sec_501 of the interna revenue code furthermore you have agreed to revocation of recognition of your exempt status under sec_501 contributions to your organization are not deductible under code sec_170 of the intemal revenue code you are required to file federal_income_tax returns on form_1120 for any years that are stil open under the statute_of_limitations if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter ‘you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures formal appeals process etc the ‘taxpayer advocate is not able to reverse legally correct_tax determinations nor extend the time fixed by law that you have to file petition in 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 ‘thank you for your cooperation - sincerely charles fisher team manager enclosures notice i tax rremet and government entities bivision department of the treasury intemal revenue sarvica bast 7th strest st paul mn sfp ong taxpayer_identification_number form tax_year s ended and person to contactid number contact numbers telephone fax certified mail - return recelpt 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 intemal revenue code code is necessary fyou accept our findings take no further action we will issue a final revocation letter f you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number irs will consider it to be a failure exhaust your available ‘administrative remedies sec_7428 of the code provides in part declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court ar the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative temedies within the internal_revenue_service we wilt then issue a finat revocation letter we will aiso natify the appropriate state officials of the evocation in accordance with sec_6104 of the code enclosures publication publication report of examination marsha a ramirez director eo examinations letter catatog number ‘ipa ofthe tesi feral revere sevier explanation of items schedule no or exhibit ‘year period ended om 886a ‘name of taxpayer a primary issue whether the sec_501 tax exempt status of a should be revoked ecause it is not operated exclusively for tax exempt purposes facts trust document the organization was created with a declaration of trust declaration by b and c each ‘a trustee on x the declaration provides that the ‘organization was being a founder and b created for the purpose of establishing an organization which is described in sec_501 and sec_509 the declaration provides that the founder renounces any power to determine of control by alteration amendment revocation termination or otherwise the income or principal of the trust estate and that the founder renounces any interest either vested or contingent including any reversionary_interest or possibility of reverter in the income or principal of the trust estate of the adjusted net ‘the declaration requires that each year the trustee shall distribut income of the organization to d the named primary charity in addition to this distribution _ of the adjusted_net_income to one or more each year the trustee shall distribute a total of organizations listed on schedule a there are organizations listed on schedule a and some of them state and affiliated organizations such as the e and affiliated organizations f and affiliated organizations some organizations listed on schedule a are not c organizations for example g h and are among the organizations listed on schedule a but not found in publication listing organizations to which contributions are deductible in addition there is no evidence in the administrative record that establishes that the affiliated organizations are public_charities ‘the original declaration provided that the board shell be the governing body of the organization and that the members of the board shall be determined as follows one board member shail be appointed by the d or its designated agent two board members shall be from the class consisting of b and c and their descendants the i family the other members of the board shall be appointed by a majority vote of the board the initial remaining board members shall be k and l effective x the declaration was amended to provide that three board members shall be appointed by d or its designated agent initial board members appointed by d shall be m k and l ‘the declaration provides that upon winding up and dissolution of the organization the assets shall be distributed to a non-profit fund foundation or corporation which is organized and form ajrev department of the treasury - haternal revenue service page -f fom 886a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasany tverd reverie see a operated exclusively for charitable educational religious and or scientific purposes and which has established its tax exempt status under sec_501 c the declaration provides that the trustee at his sole and complete discretion can determine the trust corpus is too small to economically administer and can distribute it to any sec_170 c organization he selects the declaration also states that in the event that the organization does not obtain tax exempt status under sec_501 and sec_509 of the code the assets of the trust shall go to the i family as a contingent_remainder determination of exempt status based on the information provided in its exemption application by letter dated n the organization was recognized by the service as exempt from federal_income_tax under seotion a as an organization described in sec_501 and classified as a supporting_organization described in sec_509 a evidence in the administrative record reveals that the organization made at least twenty one joans to a limited_liability corporation owned by its founder most of these loans occurred shortly after the organization received a contribution of a corresponding amount some of these loans were made before and during the application process the application did not contain august any information regarding the promissory notes dated april is found in the application november no mention of the loan made on april filed in z or loan amount ca dollar_figure dollar_figure date 14a ‘that is to say that although the records of the organization show that a loan was made prior to the date of the application_for exemption and two additional loans were made before the determination was made none of these transactions are disclosed on form_1023 application_for exemption activities and loans ‘the evidence in the administrative record establishes that the organization’s founder b made all decisions concerning its operations the other members of the organization's board had form 886-ajrev s department of the treasury - internal revere service page foun 886a name of taxpayer schedule no or exhibit year penoa f department of de treanuy inver revenue senice explanation of items a minimal if any involvement with the organization the organization reported that it kept no minutes b stated that a meeting is held once or twice a year and the investments and income are discussed the organization made the following loans to o a limited_liability_company owned by b amount date - loan co ho 4f2ar s s bit 12h 2h anger 4nof 8f2t 1014f 52f uae 12n6f ‘of the organization's funds have been distributed to its founder’s limited that is dollar_figure fiability company beginning in the year the organization was created through the year of examination the organization ha sec_21 promissory notes which are the same except for the date and the amount promissory note dated january spells out the words but uses the figure dollar_figure which is the amount withdrawn from the bank promissory note dated november again spells out the works but uses the figure dollar_figure promissory note was for dollar_figure public information on the p webpage shows that llc is a limited_liability_company its registered agent is b and it has no additional principals the bank statements show a withdrawal of forn 886-arrev 6s page -3- ‘department of the ‘treasury - internal revestue service fom 896a tdepatnn of we tasty lend revee se0iee explanation of items name of taxpayer a schedule no or exhibit ‘year period ended in response to a request to provide information about its relationship with the borrower a stated that the borrower o llc is an llc used for investing by b the following shows when contributions to the organization were made and when promissory notes were signed ‘transfers to organization from ‘orb s1126 marc gr24y2c so t3i2 sec_2its sziter2e loans to while the organization has characterized the transactions with its founder's limited_liability corporation as loans the evidence in the record shows that these transactions are not loans for example the loans lack a specific date for the repayment of principal the transactions were not at arms’ length the organization had an insufficient recordkeeping system to track the loans to ensure that interest payments were made and the organization took no action to enforce the notes when interest payments were not made of dollar_figure ‘the notes are demand notes they do not designate a term for repayment they do say that interest at the rate of prime as stated by the r is payable at the end of december of each year interest for during the course of the examination the organization stated that was paid january itt realized that interest on one of the notes had not been paid for a year under examination however it did not impose any penalty on the borrower for failure to pay the proper interest wea was paid december and interest for of dollar_figure ‘is one of b’s businesses public information on the p webpage shows that q is a domestic profit corporation its registered agent is b and has no additional principals form acrev ssi page -4- ‘department of the treasury - internal_revenue_service form 886a of he treasury eternal rrvenoe senda deparment explanation of items name of taxpayer a ‘schedule no or exhibit ‘year period ended each note says that it is for the sole purpose of providing interest_income to a each note also states that it is secured_by real_estate the organization stated that the loans are secured_by c and b’s personal_residence with an unencumbered appraised value greater than loans made information available to the public on the webpage of s gives the _narket value for real_estate tax purposes of the residence as grants a the limited lability company owned by its while the organization distributed over dollar_figure founder the organization appears to have provided only dollar_figure during the years under examination ‘the velidity of some these grants are questionable because of the organization’s inadequate recordkeeping and because the organization failed to substantiate some of the grants that it reported on its forms and it failed to substantiate that it limited it grants to the public_charities that it designated on its declaration as supported organizations in grants to public_charities the organization made five grants in written by the organization are not used in numerical order this is bec use the trustee stated he kept a checkbook at home and one at work none were reported on the form_990 the checks t u v d f dollar_figure t is a 501_c_3_organization not named in the declaration or schedule a v is not found in publication however the a provided a letter from the director of v dated april 2c any goods or services for its donations _ stating that v falls under the u office of development and that a has not received a reported two grants on its form_990 in the organization also made other grants in reported on reported on u w heck made to dated no documentation provided for 886-acrevss8 page -5- of the treasury - intemal revenue service_department tom 886a ‘name of taxpayer tcheduke novo exhibit ‘year period ended tear of te tis tenal ravens serine explanation of items a not reported on 80-check not reported on 90-check d f sn7 ven b reported that he made a contribution to the u and the w by his personal american express card and a paid the american express bill on his personal retum also stated thet he did not deduct the contribution form_998 reporting on the form_990 filed by the organization for the years under examination only one person b is listed on part v for officers directors and trustees the form_990 for _ reported the organization's assets at year end consisted of dollar_figure investments that were not described as required by the form and the cash dollar_figure instructions thereto and other assets of s with none of the details required by the instructions provided that were described as -note receivable-o form_990 for charitable grants made by the organization the income on the _also understated inoome for the year by dollar_figure and failed to report any return was overstated by minutes no minutes were kept by the organization law sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation ‘organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals no part of the net eamings of which ‘nures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in of any candidate for public including the publishing or distributing of statements any political campaign on behalf office tee the organization checked no to tha question about whether it lent money or onits form_990 for ‘other extension of credit to its substantial contributors or with any taxable organization with which any _ the organization checked yes to the such person is affiliated as an officer question and stated organization has loaned money to a related_person note was executed and interest note receivable at that time - the actual loans were paid the organization reported that ithad adollar_figure dollar_figure on its form_990 for at the end of form ajrev s ‘department of the treasury - internal_revenue_service page -6 form 886a name of taxpayer explanation of items ‘schedule no or exhibit year period ended he tesany- lael revenue serie departreat of a regulation sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one of more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of ins activities is not in furtherance of an exempt_purpose regulation sec_1 c -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 sec_1 -1 regulation sec_1 -1 4i provides an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision itis necessary for an organization to establish that itis not organized or operated for the benefit of private interests such at the creator or his family shareholders of the organization ot persons controlled directly or indirectly by such private interests in 326_us_279 the united_states supreme court held that regardless of the aumber of truly exempt purposes the presence of a single substantial noz-exempt purpose will preclude exemption vader sec_501 412_f2d_1197 ct_cl the court stated that loans to sn its founder and his family and failed to produce documentation that in founding church of scientology v u s organization's founder or substantial_contributor can constitute inusement that is prohibited under sec_501 cx3 in that case the church made loans to the church also failed to produce documentation to demonstrated that the loans were advantageous to the church show that the loans were repaid significantly the court stated that the very existence of private source of loan credit from an organization's earings may itself amount to inurement of benefit in revrul_67_5 1967_1_cb_123 it was held that a foundation controlled by the creator's family was operated to enable the creator and his family engage in financial activities which were beneficial to thera 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 creatot and his family exemption from federal_income_tax under sec_501 church of scientology v a private source of loan credit may amount to inurement 412_f2d_1197 ct_cl ‘church in boston v commissioner t c disqualified persons promote private rather than charitable purposes best lock comporation v comspissioner therefore the foundation was not entitled to t c facts that show a charity's investments that are decided in part by the needs of private interests indicate the charity may not be operated exolusively for exempt purposes wester ev commissioner t c ‘treas reg sec_1_501_a_-1 e ginsburg v comumissionss 46_tc_47 government’s position ‘the sec_501 tax exempt status of a the organization should be revoked because it is not operated exclusively for tax exempt charitable purposes more than an insubstantial part of the organization’s activities served the private interests of its founder b additionally the net earings of the organization have inured to the benefit of an insider b form 886-acgev cs department of te treasury insernal revenue service page form 886a ‘name of taxpayer explanation of items scheduke no or exhibit ‘year pesiod foo a a a ‘asa substantial_contributor b is a disqualified_person and an insider he has operated the organization for his own personal benefit he stated that the checks were not used in numerical order because he keeps one checkbook at work and one at home there is no indication that the terms of the loans to his business were considered by the entire board that alternative investments for the organization were considered or that the promissory notes were reviewed ‘by anyone acting in the interests of charity it does not appear that any attempt was made to ensure the organization’s assets were protected ‘the organization made numerous transactions characterized as loans where no repayment of principal was required there is no indication that any altemative investments were considered there is no evidence that establishes that any of the loans have been repaid other evidence suggests that the foundation will never seriously demand repayment on the loanst after all b is on both sides of the loan he as trustee of the organization and without board approval lent almost all of the organization’s money to his business there is no attempt by the board to ensure that the organization receives the correct amount of interest in addition when the borrower failed to make the interest payments as they became due the organization took no action to enforce the terms of the notes grants to charity by the organization are insignificant compared to the interest-only loans made to the business interests of b ‘the organization is not attentive to the interest payments due it only after replying to questions raised by the examination did the organization realize that interest on one loan had not been paid for a year under examination the organization is controlled by b he is the only person listed on the forms he writes all the checks of the organization he has two checkbooks for the organization’s bank account and also controls the brokerage account of the organization the fact that a loan is made the same day as a contribution’ or a few days after a contribution suggests that the intent of the contribution was to made funds available for a loan the organization which is controlled by b is operated to enable b to engage in financial activities which are beneficial to him and or entities with whom he is transacting business but detrimental to the organization accordingly it is operated for a substantial non-exempt purpose see revrul_67_5 tee contribution is being used to describe the transfers made by b and or q to the organization itis not meant to imply that there was a contribution made for sec_170 purposes form 886-ayrev s8 page -8 ‘department of the treasury - internal reveaus service pom b86a name of taxpayer a depart fie tia eral reveae sone explanation of items schedule no or exhibit ‘year period ended the organization's net_earnings have inured to the benefit of insiders an organization is described in section dollar_figure only if no part of its net_earnings inures to the benefit of any private sharcholder the inurement prohibition is designed to insure that charitable assets are dedicated to exclusively furthering public purposes an organization is not operated exclusively for exempt purposes if its net_earnings inure to the benefit of private shareholders or individuals a charity's assets are required to be irrevocably dedicated to charitable purposes sec_1_501_c_3_-1 the inurement prohibition serves to prevent the individuals who operate the charity from siphoning off any of a charity’s income or assets for personal_use by transferring the assets back to disqualified persons purportedly as loans but as loans that do not need to be paid back until the organization requests repayment if ever and or loans that the disqualified persons do not comply with the terms of the organization breached the dedication requirement and its net_earnings have inured to the benefit of the disqualified persons although the inurement prohibition is stated in terms of net eamings it applies to any of a charity’s assets that serve the interests of its private shareholders 505_f2d_1068 cir the transfer of funds directly to the disqualified persons and to their business served the financial interests of the disqualified persons and or their business facts that show a charity's investments are decided in part by the needs of private interests indicate the charity may not be operated exclusively for exempt purposes 73_tc_196 aff'd 631_f2d_736 cir even if characterized as an investment when a charity’s investments are decided in part by the needs of private interests the charity is not operating exclusively for exempt purposes 73_tc_196 aff'd 631_f2d_736 cir the transacti inurement can take the form of questionable transactions that have no causal relationship to the organization's exempt purposes but result in some benefit to an insider the insider is in a position to exercise control_over the organization's net_earnings as if they were his her own by using them at will rather than within the limitations of a fiduciary capacity in effect the insider is using the public's net_earnings for his her own benefit the facts show that b is able to use the organization’s funds as if they were his own ‘the organization’s net_earnings have inured to the benefit of insiders sec_1 a - ginsburg v commissioner 46_tc_47 the very presence of a private source of joan credit may amount to inurement 412_f2d_1197 ct_cl church in boston v commissioner c loans to disqualified persons promote private rather than charitable purposes best lock corporation v commissioner t c form 886-ajrev t-e page -9- ‘department of the treasury - internal revesme service ‘deparircat ofthe tieaniry- intzral revere servis explanation of items form 886a om ‘name of taxpayer a schedule no or exhibit ‘year pannd frded conclusion ‘accordingly the organization’s status as an organization described under sec_501 should be revoked because it did not operate exclusively for exempt purposes because its assets inured to and it served the private interests of its creators this determination is effective x the organization did not inform the service in its exemption application that it had made loans to its founders’ business or the terms of the loans the organization transferred most of its assets to its trustee's business as they were acquired therefore the organization failed to operate exclusively for exempt purposes when its net_earnings inured to the benefit of its insiders beginning in in addition the organization's operations were materially different from the representations that it made in its application_for exemption therefore retroactive revocation is appropriate form_1041 u s income_tax retum for estates and trusts should be filed for tax years ending december dollar_figure month following the close of the trust's accounting_period subsequent returns are due ne later than the day of the and20 returns should be sent to the following maiting address internal_revenue_service east street 1130-b st paul mn for tax_year ending december the following address internal_revenue_service center ogden utah form_1041 is due april _ and should be sent to alternative issue whether a should be reclassified as a private_foundation facts ‘the facts concerning the organizing document and the financial activities of the organization are described above there is no evidence that representatives of any of the supported organizations ever attended or participated in any meetings of the board_of the organization or had any input or oversight over form 886-acrev s -10- of the treasury - tnternal revenue service ‘department page porm 886a ‘departs of che tesury-tnvem revenss sere explanation of items ‘name of taxpayer a schedule no or exhibit ‘year period ended the investments of the organization there is no evidence that any financial reportings were made to any of the supported organizations in20 the a made grants to the t the u d and the f in ’ the a made grants to the u d and the f law income_tax regulations sec_1_509_a_-4 c regarding the organizational_test a a organization must meet provides jt general -an organization is organized exclusively for one or more of the purposes specified in sec_509 only if its articles of organization as defined in sec_1 -1 b meet provides g limit the purposes of such organization to one or more of the purposes set forth in section s09 a ka i do not expressly empower the organization to engage in acti ss which are not in furtherance of the purposes referred to in subdivision of this subparagraph iii state the specified publicly supported organizations on whose behalf such organization is to be operated within the meaning of paragraph d of this section and giv do not expressly empower the organization to operate to support or benefit any organization ‘other than the specified publicly supported organizations referred to in subdivision ii of this subparagraph income_tax regulations sec_1_509_a_-4 regarding the operational_test a a organization must permissible beneficiaries -a supporting orgenization will be regarded as operated exclusively to support one or more specified publicly supported organizations hereinafter referred to as the operational_test only if it engages solely in activities which support or benefit the specified publicly supported organizations such activities may include making payments to or for_the_use_of or providing services or facilities for individual members of the charitable_class benefited by the specified publicly_supported_organization a supporting_organization may also for example make a payment indirectly through another unrelated organization to a member of a charitable_class benefited by a specified publicly supported ‘organization but only if such a payment constitutes a grant to an individual rather than a grant to an ‘organization in detennining whether a grant is indicectly to an individual rather than to an onganization the same standard thall be applied as in sec_53_4945-4 of this chapter similarly an organization will be regarded as operated exclusively to support or benefit one or more specified publicly supported organizations even if it supporta or benefits an organization other than a private_foundation which is described in sec_501 and is operated supervised or controlled directly by or in connection with such publicly supported organizations or which is described in sec_511 b however an organization will not be regarded as operated exclusively if any part of its activities is in furtherance of a purpose other than supporting or benefiting one or more specified publicly supported organizations q permissible activities -a supporting_organization is not required to pay over its income to the publicly supported organizations in order to meet che operational_test it may satisfy the test by using its income to carry deparment of the treasury - internal_revenue_service form agere page -11- fom 886a name of taxpayer schedule no or exhibit ‘year period ended fe tra nepal revene sener explanation of items ep on an independent activity or program which supports or benefits the specified publicly supported organizations all such support must however be limited to permissible beneficiaries in accordance with subparagraph of this paragraph the supporting_organization may also engage in fund raising activities such as solicitations fund raising dinners and unrelated wade or business raise funds for the publicly supported organizations or for the permissible beneficiaries tacome tax regulations sec_1_509_a_-4 regarding the nature of relationships required for sec_509 organizations provides jn general - sec_509 describes the nature of the relationship required between a sec_501 c organization and one or more publicly supported organizations in order for such sec_501 organization to qualify under the provisions of section dollar_figure a to meet the requirements of section dollar_figure a an organization must be operated supervised or controlled by or in connection with one ‘of more publicly supported organizations if an organization does not stand in one of such relationships as provided in this paragraph to one or more publicly supported organizations it is not an organization described in sec_509 types of relationships sec_509 a b sets forth three different types of relationships one of ‘which must be met in order to meet the requirements of subparagraph of tis paragraph thus a supporting_organization may be operated supervised or controlled by ii supervised ot controlled in connection with ot ii operated in connection with one or more publicly supported organizations requirements of relationships -although more than one type of relationship may exist in any one ease any relationship described in sec_509 must insure thet the supporting_organization will be responsive fo the needs or demands of one or more publicly supported organizations and gi the supporting_organization will constitute an integral part of or maintain a significant involvement in the operations of one or more publicly supported organizations a general description of relationships -in the case of supporting organizations which are operated a substantial degree of direction by the publicly supported supervised of controlled by one or more publicly supported organizations the distinguishing feamure of ‘this type of relationship is the presence of ‘organizations over the conduct of the supporting_organization as described in paragraph g of this section in the case of supporting organizations which are supervised of coatrolled in connection with one or more publicly supported organizations the distinguishing feature is the presence of common supervision or control among the governing bodies of all organizations involved such as the presence of common directors as described in paragraph h of this section in the case of a supporting_organization which is operated in connection with one or more publicly supported organizations the distinguishing feature is that the supporting_organization is responsive to and significantly involved in the operations of the publicly_supported_organization as described in paragraph i of this section income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of operated supervised or controlled by 2s follows ‘department of the treaswry - intemal revenue service form 886-acrev page -12- tom dearie af he teas tal rovcve seve 886a explanation of items om name of taxpayer a schedule no or exhibit i bach of the items operated by supervised by and controlled by as used in sec_509 presupposes a substantial degree of direction over the policies programs and activities of a supporting_organization by one or more publicly supported organizations the relationship required under any one of these tetms is comparable to that of a parent and subsidiary where the subsidiary is under the direction of and accountable or responsible to te parent organization this relationship is established by the fact that a raajority of the officers directors or tnstees of the supporting_organization are appointed or elected by the governing body members of the governing body officers acting in their official capacity or the membership of one or more publicly supported organizations gi a supporting_organization may be operated supervised or controlled by one or more publicly supported organizations within the meaning of sec_509 even though ite governing body is not comprised of representatives of the specified publicly supported organizations for whose benefit itis operated within the meaning of sec_509 a a a supporting_organization may be operated supervised or controlled by one or more publicly supported organizations within the meaning of section '509 a b and be operated for the benefit of one or more different publicly supported organizations within the meaning of sec_509 3xa only if it can be demonstrated that the purposes of the former organizations are carried out by benefiting the latter organizations income_tax regelations sec_1_509_a_-4 provides guidance on the meaning of supervised or controlled in connection with as follows in order for a supporting_organization to be supervised or controlled in connection with one or more publicly supported organizations there must be common supervision or control by the persons supervising of controlling both the supporting_organization and the publicly supported organizations to insure that the supporting_organization will be responsive to the needs and requirements of the publicly supported organizations therefore in order to meet such requirement the control or management of the supporting_organization must be vested in the same persons that control or manage the publicly supported organizations a supporting_organization will not be considered to be supervised or controlled in connection with one or more publicly supported organtizations if such organization merely makes payments mandatory or discretionary to one or more named publicly supported organizations even if the obligation to make payments to the named beneficiaries is enforceable under state law by such beneficiaries and the supporting organization's governing instrument contains provisions whose effect is described in sec_508 and b such arrangements do not provide a sufficient connection between the payor organization and the needs and requirements of the publicly_supported_organization to constitute supervisions or control in connection ‘with such organizations income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of operated in connection with as follows general_rule ‘6 except as provided in subdivisions i and ii of this subparagraph and subparagraph of this paragraph a supporting_organization will be considered as being operated in connection with one or more publicly supported organizations only if it meets the responsiveness test which is defined in subparagraph of this paragraph and the integral part test which is defined in subparagraph of this paragraph responsiveness test form 886-apwvas page -13- of the treasury intemal revenue service deparanent sega saw name of taxpayer schedule no or exhibit ‘year period ended a tt rt explanation of items om a for purposes of this paragraph a supporting_organization will be considered to meat the responsiveness test if the organization is responsive to the needs ot demands of the publicly supported organizations within the meaning of this subparagraph in order to meet this test either subdivision i ot subdivision iii of this subparagraph must be satisfied a one or more officers directors or trustees of the supporting_organization are elected or appointed by the officers directors trustees or membership of the pubiioly supported organizations b one or more members of the governing bodies of the publicly supported organizations are also officers directors or trustees of ot hold other important offices in the supporting organizations or the officers directors or trustees of the supporting_organization maintain a close and continuous working relationship with the officers directors or trustees of the publicly supported ‘organizations and by reason of a ot c of this subdivision the officers directors or trustees of the publicly supported organizations have a significant voice in the investment policies of the supporting_organization the timing of grants the manner of making them and the selection of recipients of sch supporting orgenizatfon and in otherwive directing the use of the income or assets of such supporting_organization gi a the supporting_organization is a charitable_trust under state law each specified publicly_supported_organization is a named beneficiary under such charitable trust's governing instrument and the beneficiary organization fias the power to enforce the trust and compel an accounting under state law integral part test general_rule ‘g for purposes of this paragraph a supporting_organization will be considered to meet the integral part test if it maintains a significant involvement in the operations of one or more publicly supported organizations and such publicly supported organizations are in tum dependent ‘upon the supporting_organization for the type of support which it provides in order to meet this ‘est either subdivision i or subdivision ii of this subparagraph must be satisfied i the activities engaged in for or on behalf to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves of the publicly supported organizations are activities gi a the supporting_organization makes payments of substantially_all of its income to or for_the_use_of one or more publicly supported organizations and the amount of support received by one of more of such publicly supported organizations is sufficient to insure the attentiveness of such organizations to the operations of the supporting_organization in addition a substantial amount of the otal support of the supporting_organization must go to those publicly supported organizations which meet the attentiveness requicement of this subdivision with respect to such supporting_organization except es provided in b of this subdivision the amount of support received by a publicly_supported_organization must represent a sufficient part of the organization's total support form dollar_figure-acney department of the treasuzy - internal_revenue_service page -14- form 886a name of taxpayer explanation of items schedule no or exhibit ‘year period ended depart of tay late reve soe a as to ingure such attentiveness in applying the preceding sentence if such supporting_organization makes payments to or for_the_use_of a particular department or school of a university hospital or cburch the total support of the department or schoo shall be substituted for the total support of the beneficiary organization even where the amount of support received by a publicly supported beneficiary organization does not represeat a sufficient part of the beneficiary organization's total suppor the amount of of this support received from a supporting_organization may be sufficient to meet the requirements subdivision if it oan be demonstrated that in order to avoid the imerruption of the carrying on of a particular function or activity the beneficiary organization will be sufficiently attentive to the operations of the supporting_organization this may be the case where either the supporting ‘organization or the beneficiary organization earmarks the support received from the supporting orgsnization for a particular program or activity even if such program or activity is not the beneficiary organization's primary program or activity so long as such program or activity i sec_2 substantial one the beneficiary and ii and of this subparagraph will be considered supporting_organization and the purpose to witich the q all pertinent factors including the mmber of beneficiaries the length and namure of the relationship between funds are put as illustrated by subdivision in determining whether the amount of support received by a publicly supported beneficiary organization is sufficient to insure the attentiveness of such organization to the operations of the a beneficiary organization is motivated by supporting_organization normally the attentiveness of reason of the amounts received from the supporting_organization thus the more substantial the amount_involved in terms of a percentage of the publicly supported organization's total support the greater the likelihood that the required degree of attentiveness will be present however in determining whether the amount received from the supporting_organization is sufficient to insure of the supporting_organization the attentiveness of the beneficiary organization to the operations inclading attentiveness to the nature and yield of such supporting organization's investments evidence of actual attentiveness by the beneficiary organization is of almost equal importance an example of acceptable evidence of actual attentiveness is the imposition of a requirement that the supporting_organization furnish reports at least annually for taxable years beginning after date to the beneficiary organization to assist such beneficiary organization in insuring that the supporting_organization has invested its endowment in assets productive of a reasonable rate of retura taking appreciation into account and bas not engaged in any activity ‘which would give rise to liability for a tax imposed under sec_4941 sec_4943 sec_4944 or sec_4945 if such organization were a private_foundation the imposition of such requirement within days after date will be deemed to have retroactive effect to date for purposes of determining whether a supporting orgenization has met the requirements of this subdivision for its first two taxable years beginning after date the imposition of such requirement js however merely one of the factors in determining whether a supporting ongenization is complying with this subdivision and the absence of such requirement will not preclude an organization ffor classification as a supporting_organization based on other factors e however where none of the beneficiary organizations is dependent upon the supporting_organization for a sufficient amount of the beneficiary organization's support within the meaning of this subdivision the requirements of this subparagraph will not be satisfied even though such beneficiary organizations have enforceable rights against such organization under state law form 886-acnev ‘department of the treasury - internat revenue service page -15- from 886a name of taxpayer scheu noof exhibia year period ended oe try tr even sea explanation of items paren a rev_rul 1976_1_cb_161 held that a charitable rust described in section dollar_figure did not satisfy the substantially_all requirement of the integcal part test set forth in sec_1 -4gi ii a of the regulations and was therefore not a supporting_organization the trust instrument provided that percent of the trust income was to be distributed annually to a specified church with the remaining percent to accumulate until the original corpus doubled at which time the entice annual income was to be distributed to the church the service also stated that for purposes of the integral part test the term substantially_all mean sec_85 percent or more income_tax regulations sec_1_509_a_-4 regarding control by disqualified persons provides general -under the provisions of section dollar_figure 3x c a supporting_organization may not be controlled dircctly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more publicly supported organizations ifa person who is a disqualified_person with respect to a supporting_organization such as a substantial_contributor to the supporting_organization is appointed or designated as a foundation_manager of the supporting_organization by a publicly supported beneficiary organization to serve as the representative of such publicly_supported_organization thea for purposes of this paragraph such person will be regarded as a disqualified_person rather than as a representative of the publicly_supported_organization an organization will be considered controlled for purposes of sec_509 c if the disqualified persons by ageregating their votes or positions of authority may equire euch organization to perform any act which significantly affects its operations or may prevent such organization from performing such act this includes but is not limited to the right of any substantial_contributor or his spouse to designate annually the recipients from among the publicly supported organizations of the income attributable to his contribution to the supporting_organization except as provided in subparagraph of this paragraph a supporting_organization will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of such persons i sec_50 percent or more of the total voting power of the organization's governing body or if one or more of the total voting power of the organization's governing body or if one or more of such persons have the right to exercise veto power over the actions of the organization thus if the governing body of a foundation is composed of five trustees none of whom has a veto power over the actions of the foundation and no mors than two trustees are at any time disqualified persons such foundation will not be considered to be controlled directly or indirectly disqualified persons by reason of this fact alone however all pertinent facts and circumstances including the nature diversity and income yield of an organization's holdings the length of time particular stocks securities or other assets are retained and its manner of exercising its voting rights ‘with respect to stocks in which members of its governing body also have some interest will be taken into consideration in determining whether a disqualified_person does in fact indireotly control an organization by one or more government’s position as set forth above it is the government's primary position that the tax exempt status of a the organization should be revoked alternatively the organization should be reclassified as a private_foundation due to congressional concerns about wide-spread abuses of their tax-exempt status by private_foundations private_foundations were defined and subjected to significant regulations and controls by the tax reform act of the definition of private_foundation is intentionally inclusive so that all organizations exempted from tax by sec_501 are private_foundations form dollar_figure-acrer -6 paget -16- of the treasury - intemal revenue service ‘department fom 886a tepaat of he tra tal ree sere explanation of items name of taxpayer a schedule no or exhibit ‘year peried ended except for those specified in sec_509 through roe foundation charitable_trust v commissioner tcmemo_1989_566 603_f2d_1274 cir the organization currently is excepted from private_foundation_status because it is currently classified as an organization described in sec_509 a which defines supporting organizations public_charities organizations described in sec_501 c that meet the requirement of sec_509 or are excepted from private_foundation_status on the theory that their exposure to public scrutiny and their dependence on public support keep them from the abuses to which private_foundations are subject supporting organizations are similarly excepted from private_foundation_status supporting organizations are excepted if they are subject_to the scrutiny of public_charities that provide sufficient oversight to keep supporting organizations from the types of abuses to which private_foundations are prone quarrie f 2d pincite to be classified as a section dollar_figure a supporting_organization the organization must meet all of the following tests organizational and operational tests under sec_509 relationship_test under sec_509 a b lack of disqualified_person control test under sec_509 3x c overall these tests are meant to ensure that a supporting_organization is responsive to the needs of a public charity and intimately involved in its operations and that the public charity or publicly_supported_organization is motivated to be attentive to the operations of the supporting_organization and that it is not controlled directly or indirectly by disqualified persons organizational and operational tests ‘the organization is not organized to benefit one or more specified publicly supported organizations pursuant to sec_1_509_a_-4 o iii and iv an organization’s governing instrument must state the specified publicly_supported_organization s on whose behalf the organization is to be operated and cannot expressly empower the organization to’ support or benefit any organizations other than the specified publicly_supported_organization s the organization's dissolution clause allows distributions to organizations other than the specified publicly supported organizations upon termination of the organization the possible beneficiaries are not limited to the d or to the organizations specified on schedule a of the organization’s declaration of trust furthermore the trustee has the power to determine the trust corpus is too small to economically administer and distribute the assets to any sec_170 organization therefore the organizational_test is not met see quarrie supra holding that the organizational_test was not satisfied where the trustee had the power to substitute beneficiaries when in the form 886-ajrevsss page -17- of the treasury - internal_revenue_service department foun 886a ‘departnene of the treaty toremal revere service name of taxpayer explanation of items schedule no or exhibit year period ended a judgment of the trustee the uses of the named beneficiaries became unnecessary undesirable impracticable impossible or no longer adapted to the needs of the public moreover the operational_test set forth in treas reg sec_1_509_a_-4 is not satisfied a supporting_organization will be regarded as operated exclusively to support a specified publicly_supported_organization s only if it engages in activities which support or benefit the specified publicly supported organizations s as was discussed under the primary issue above the organization has served private interests and has made loans that benefited b and his business therefore it has not established that it operated exclusively for the benefit of the publicly supported organizations in addition the operational_test is not satisfied because the organization made grants to organizations that were not specified in the original or the amended declaration of trust these distributions are in violation of sec_1_509_a_-4 e the organization gave a grant of dollar_figure this organization is not found on schedule a of the declaration totin20 relationship_test as set forth in sec_1_509_a_-4 there are three permissible relationships a operated supervised or controlled by b supervised or controlled in connection with and operated in connection with one or more publicly supported organizations the relationships operated supervised or controlled by and supervised ot controlled in connection with presuppose a substantial degree of direction over the policies programs and activities of the supporting_organization by a publicly_supported_organization the operated supervised or controlled by relationship is established by the fact that a majority of the officers directors or trustees of the supporting_organization are appointed or elected by the governing body members of the governing body officers acting in their official capacity or the membership of the publicly_supported_organization the supervised or controlled in connection with relationship is established by the fact that there is common supervision or control by the persons supervising or controlling both the supporting and the publicly supported organizations ie that control or management of the supporting_organization is vested in the same persons that control or manage the publicly_supported_organization in the present case the organizing document was amended to provide that a majority of the board members would be appointed by the primary supported_organization d a reported that m is a member of the board_of a and also a member of the board_of the supported_organization d a reported that the supported_organization d appointed m k and l to the board_of a and also reports that k and l are clients and friends of m thus the technical requirements to be a type supporting_organization operated supervised or controlled by have been satisfied form ajreva-st page -18- ‘deparonent of the treasury - intemaal revenue service 836a fom om name of taxpayer schedule no or exhibit year perind fadag deparment ofthe treasury tote revenue senze explanation of items a control test as noted above b is a disqualified_person because he is a substantial_contributor to the organization he is the only person listed on form_990 as an officer director trastee and key_employee he writes all the checks of the organization he has two checkbooks for the organization's bank account and also controls the brokerage account of the organization nothing shows that the board members appointed by d ever participated in any decisions made by the a board their names are not even reported on form_990 there are no minutes to show that any board members participated in the organization’s investments grants and other operations ‘additionally there is no evidence that any of the supported organizations are attentive to the operations of the organization there is no indication that any alternative investments to the loans to disqualified persons were considered there is no assurance that the organization will attempt to enforce collection should the loans secured_by the personal_residence of b become delinquent there is no attempt by the board or any of the supported organizations to ensure that the organization receives the correct amount of interest ‘the fact that a loan is made the same day as a contribution or a few days after a contribution suggests that the intent of the contribution was to made funds available for a loan the timing of the loans suggest there was no time for loans to be considered by anyone other than b no board member objected to almost all of the organization’s assets being transferred to b’s business in a series of demand loans almost all of the assets of the organization have been transferred to b and to entities he controls treas reg sec_1_509_a_-4 states that among the pertinent facts and circumstances to be considered are the nature of the organization's assets when almost all of the organization’s assets are under the control of disqualified persons that is an impermissible level of control in addition the trustee has the power to determine the organization is too small to economically administer and distribute its assets to any sec_170 organization that he chooses this is an impermissible level of control conclusion accordingly if its exempt status is not revoked the organization should be reclassified as a private_foundation because it does not qualify as a supporting_organization under the requirements set forth in sec_1_509_a_-4 through j ‘this classification to private_foundation_status is effective beginning x the organization did not state in its exemption application that it would lend almost all of its assets to disqualified persons it did not indicate that it would make grants to organizations other than those specified departatent of the treasury - internal_revenue_service form 886-acrev t68 page -19- fon 886a ‘name of taxpayer explanation of items schedule no or exhibit ‘year period ended ‘depa of we tuy tena ravens onic a it did not indicate that b would control its operations in its declaration and schedule a therefore retroactive reclassification is applicable the effect of this determination will be that the organization is required to file form_990-pf return of private_foundation form_990-pf should be filed for tax years ending december subsequent retums are due no later than the day of the month following the close of the organization’s accounting_period for tax_year ending december send your returns to the following mailing address form_990 pf is due may and december december intemal revenue service east street 1130-b st paul mn note form_990-pf is required for each tax_year until private_foundation_status is terminated under sec_507 form 886-acrevs6s ‘department of the treasury - interaal revenue service page -20-