department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enciosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely holly o paz director rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c date date contact person uil code identification_number contact number fax number employer_identification_number legend state program state office medical practice dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we have concluded that you do not qualify for exemption under sec_501 the basis for our conclusion is set forth below facts you were incorporated in as a nonprofit corporation under state law your articles of incorporation state that your purposes are to redesign healthcare delivery around the patient-centered medical home model thereby improving quality of healthcare while reducing healthcare cost your bylaws state that you are organized exclusively for charitable and educational_purposes more specifically to provide health and human services to adults and children you state that your mission is to create value for your members while redesigning the delivery of medical_care around the patient centered medical home pcmh model which may in time create opportunities for further integration with other organizations including independent groups of physician specialists hospitals pharmaceutical companies regional extension centers and entities that share similar interests in delivering accountable high quality and reduced cost medical_care as value-added opportunities become evident you will pursue integrating models of growth and transformation that serve your members sic independence focusing on the proliferation of private practice while providing supplemental support to address cost-effective operational responsibilities and services that will enhance their financial viability your members are medical practices that contract with you for your services also referred to as engaged practices you are not a membership_organization per se you state that your member services will include membership education and collaboration sharing of operating efficiencies and successfully implementing pcmh principles a forum to capitalize on economies of scale engaging products and services that enhance practice performance and increase the financial performance of member practices analytical technologies to assess member performance and provide opportunities to enhance billing practices while providing compliance and documentation standards that meet all regulatory requirements enhanced payments by payors for services provided by members and a fair sharing of cost savings realized by payors specifically o o o o o o o o o o conduct an initial overview assessment of each member's practice develop standards that meet ncqa requirements assisting members to level three certification while expanding operational compliance to meet government and payor expectations develop standards that meet ehr meaningful use criteria to meet government and payor expectations develop a best practices repository from existing members and other leading organizations develop the patient data accumulation repository within each member practice needed to conduct outcomes research develop data analysis relationships with research organizations interpreting relevant information for publication generate a publication outlining the successful delivery of health care using the pcmh model negotiate on behalf of the members’ insurance_companies for higher reimbursement using the principles of pcmh below negotiate on behalf of the members a sharing of the cost savings realized by payors rewarding members for the efforts negotiate with business and industry rewarding members for their cost- saving efforts your proposed activities to develop the pcmh concept also include recruiting medical practices setting clinical standards data collection and analysis staff training and practice to practice consultation your will use the data to provide feedback to your engaged medical practices to identify potential areas for improvement you state that you are organized and operated exclusively for the purpose of educating medical professionals in implementation and use of the medical home model to improve the quality of healthcare while reducing healthcare costs you also state that as you implement and spread medical home concepts into medical practices the resulting improvements in healthcare quality and reductions in healthcare costs will create a desirable network of engaged practices in order to achieve significant and permanent changes in america’s healthcare namely improved quality and reduced cost health insurers must recognize practices that provide such care and increase reimbursement to such practices to fund ongoing improvements once practices engaged by you demonstrate improved healthcare quality and reduced healthcare costs you will advertise these improvements to business and industry to attract greater interest from insurers other lines of business and patients as demand for medical_care by your engaged practices increases engaged practices can command better reimbursement additional resources and other funding sources although you state that you will contract with your members for your services it appears that you will provide such services for free you state that you hope to fund your activities solely through private state and federal grants you state that you are an outgrowth of state program which is overseen by state office you state that you intend to contract with medical practices participating in state program to continue developing the patient-centered medical home concept after state program ends however you do not have any direct relationship with state program you have not yet contracted with any medical practices participating in state program but you were created by individuals within practices who participate in state program for this purpose you have a close relationship with medical practice a taxable corporation although you did not disclose this information on your form_1023 application we attempted to contact you then reached the phone number of medical practice medical practice’s sole shareholder is married to your president who is also an employee of medical practice your president and two other medical practice employees comprise your board_of directors although your correspondence dated july space your correspondence dated september provides you with office space telephone fax internet office support and office supplies for no - charge but that you have no formal agreement with medical practice for_the_use_of such items medical practice is also a participant in state program states that your management activities will be conducted in rented office _ states that in fact medical practice law sec_501 describes a corporation organized and operated exclusively for charitable educational and other purposes provided that no part of its net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 states that to be described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 states that an organization is not organized exclusively for one or more exempt purposes if its articles of organization expressly empower it to carry on as more than an insubstantial part of its activities activities which are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if accomplish one or more of such exempt purposes specified in sec_501 an organization will not be regarded as exempt if more than an insubstantial part of its activities further a non- exempt_purpose it engages primarily in activities that sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest to meet the requirements of this subsection an organization must establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 provides that the term charitable is used in sec_501 in its generally accepted legal sense and includes such purposes as relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science and lessening of the burdens of government a determination of whether an organization is lessening the burdens of government requires consideration of whether the organization’s activities are ones that a government unit considers to be its burden and whether such activities actually lessen that burden based on all the facts and circumstances see revrul_85_1 organization that assists a county’s law enforcement agencies in policing illegal narcotics traffic lessens burdens of government revrul_85_2 organization that provides legal counsel and training to volunteers who serve as guardians ad litum in a juvenile court dependency program lessens the burdens of government in addition the promotion of health has long been recognized as a charitable purpose see restatement second of trusts sec_368 sec_372 4a austin w scott and william f fratcher the law of trusts sec_368 sec_372 4th ed sec_1_501_c_3_-1 includes in the definition of educational activities the instruction or training of the individual for the purpose of improving or developing his capabilities and the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 states that a scientific_organization must be organized and operated in the public interest research is not synonymous with scientific and the nature of particular research depends on the purpose which it serves scientific research does not include activities incidental to commercial or industrial operations scientific research is treated as being carried on in the public interest if among other things the results of such research are made available to the pubic on a nondiscriminatory basis revrul_69_545 1969_2_cb_117 holds that a non-profit hospital that benefits a broad cross section of its community by having an open medical staff and a board_of trustees broadly representative of the community operating a full-time emergency room open to all regardless of ability to pay and otherwise admitting all patients able to pay either themselves or through third party payers such as private health insurance or government programs such as medicare may qualify as an organization described in sec_501 revrul_71_529 1971_2_cb_234 holds that a nonprofit organization that provides assistance in the management of participating colleges’ and universities’ endowment or investment funds for a charge substantially below cost qualifies for exemption under sec_501 by providing such services to its members the organization is performing an essential function for charitable organizations by performing this function for the organizations for a charge that is substantially below cost the organization is performing a charitable activity within the meaning of sec_501 revrul_72_369 1972_2_cb_245 holds that an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations does not qualify for exemption under sec_501 the organization enters into agreements with unrelated nonprofit_organizations to furnish managerial and consulting services on a cost_basis the services consist of writing job descriptions and training manuals recruiting personnel constructing organizational charts and advising organizations on specific methods of operation these activities are designed for the individual needs of each client organization providing managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fact that the services in this case are provided at cost and solely for exempt_organizations is not sufficient to characterize this activity as charitable within the meaning of sec_501 furnishing the services at cost lacks the donative element necessary to establish this activity as charitable revrul_74_614 1974_2_cb_164 describes an organization that was created and controlled by tax-exempt colleges and universities the organization devised and operated a regional computer network to enable its member institutions including faculties and students to benefit from research and scientific information developed by other member institutions and the federal government it conducts an information clearinghouse responsive to the research needs of its member-users the computer network is not used for administrative matters such as class scheduling billing or processing applications the organization is supported by governmental grants contributions and membership dues the ruling concluded that the organization is advancing education revrul_76_455 1976_2_cb_150 involves a nonprofit that was organized to encourage and assist in the establishment of nonprofit regional health data systems to conduct scientific studies with regard to quality utilization and effectiveness of health care agencies to educate those involved in health care as to the deficiencies in the quality utilization and effectiveness of health care and health care agencies and to make proposals to remedy such deficiencies it provided all services to health care institutions government bodies and the general_public without charge the ruling concludes that the research and study are carried on to provide educational and scientific benefits to the general_public and therefore it qualifies for exemption under sec_501 revrul_77_69 1977_1_cb_143 describes an agency that was organized and operated pursuant to federal statute to establish and maintain a system of health planning and resource development aimed at providing adequate health care for a specified geographic area it was funded by federal grants and managed by government officials and members of the public the organization gathered and analyzed health data established health system plans and goals coordinated activities with professional standards review organizations reviewed and approved grant applications for federal funds and assisted states in reviewing health services capital expenditures the organization promoted the health of the residents of the area in which it functioned and met the requirements of lessening the burdens of government and therefore operated for charitable purposes under sec_501 revrul_80_287 1980_2_cb_185 provides that a nonprofit lawyer referral service does not qualify for exemption under sec_501 the organization aided persons who did not have an attorney by helping them select one in exchange for a nominal service charge any attorney who was a member of a local bar association could apply for placement on the referral list in exchange for an application fee because a substantial purpose of the organization was aiding the legal profession the organization was not organized or operated exclusively for charitable purposes even though its lawyer referral service did provide some public benefit its members include historical societies and libraries of colleges and revrul_81_29 1981_1_cb_329 describes an organization that otherwise qualified for exemption under sec_501 it assists academic research libraries and agencies and other library organizations in exchanging bibliographic information through a computer network the organization did not provide other services such as routine administrative services to its member libraries universities which are exempt under sec_501 and libraries of state and federal governmental agencies as well as non-exempt libraries of business entities the organization derives its income from each of its member libraries for the cost of computer time used plus service charges this ruling concluded that by making bibliographic information available to researchers the organization advances education within the meaning of sec_501 and sec_1_501_c_3_-1 the fact that the information is furnished to non-exempt libraries does not detract from the educational value of the information itself revrul_81_276 1981_2_cb_128 describes a professional standards review organization established pursuant to a federal statute to review health care practitioners’ and institutions’ provision of health care services and items for which payment is made under medicare and medicaid and determine whether the quality of services met professionally recognized standards of care the irs ruled that by taking on the government's burden of reviewing the quality of services provided under medicare and medicaid the organization lessened the burdens of government within the meaning of sec_1_501_c_3_-1 any benefit to members of ‘the medical profession from such activities was incidental to the benefit the organization provided in lessening the burdens of government therefore the organization qualified for exemption under sec_501 revrul_85_110 1985_2_cb_166 holds that the performance of diagnostic laboratory testing on referred specimens from private patients of hospital staff physicians by a hospital exempt under sec_501 is unrelated_trade_or_business if such services are otherwise available in the community in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes 302_f2d_934 ct_cl cert_denied 372_us_976 described an organization that had a stated aim of teaching and disseminating economic knowledge published two semi-monthly periodicals available for subscription and provided investment advice services for a fee the court held that this organization did not qualify for exemption under sec_501 because its commercial purpose of selling investment advice was primary and not incidental to its educational purpose in 70_tc_352 the tax_court considered the qualification for exemption under sec_501 of an organization formed to provide consulting services for a fee to nonprofit and tax exempt_organizations in the areas of health and health delivery systems housing vocational skills and cooperative management in concluding that the organization did not qualify for exemption the court noted that t he critical inquiry is whether petitioner's primary purpose for engaging in its sole activity is an exempt_purpose or whether its primary purpose is the nonexempt one of operating a commercial business producing net profits for petitioner factors such as the particular manner in which an organization's activities are conducted the commercial hue of those activities and the existence and amount of annual or accumulated_profits are relevant evidence of a forbidden predominant purpose in 72_tc_687 afftd 625_f2d_804 cir the court held that while selling prescription pharmaceuticals to elderly persons at a discount promotes health the pharmacy did not qualify for recognition of exemption under sec_501 on that basis alone because the pharmacy operated for a substantial commercial purpose it did not qualify for exemption under sec_501 in washington research foundation v commissioner t c memo the tax_court held that an organization that facilitates transfer of technology from nonprofit organizations’ labs for public use through licensing arrangements with private industry did not qualify for exemption under sec_501 because the immediate benefit of its activities rebounds to private industry and the nonprofit research institutions and only indirectly to the general_public and because these activities are commercial in nature and not in direct furtherance of exempt purposes in 765_f2d_1387 9th cir affg t c memo the court in affirming the tax court's finding that it was unnecessary to consider the reasonableness of payments made by the applicant to a business owned by its officer stated t he critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the church in iit research institute v united_states cl_ct the claims_court determined that contracts between an organization and various federal government agencies or federal government contractors constituted scientific research within the meaning of sec_1 c - d because they involved the use of observation or experimentation to formulate or verify facts or natural laws could only have been performed by an individual with advanced scientific or technical expertise added to knowledge within a particular scientific field involved the application of mathematical reasoning and or involved attempts to systemize or classify a body of scientific knowledge by collecting information and presenting it in a useful form the claims_court also concluded that the term research as used in sec_1_501_c_3_-1 __ was intended to include not only fundamental research but also applied research such as testing and experimental construction and production cl_ct pincite in 92_tc_1053 the tax_court held that an organization that as its primary activity operated a school to train individuals for careers as political campaign professionals was not operated exclusively for exempt purposes as described in sec_501 because the school’s activities conferred impermissible private benefit the court defined private benefit as nonincidental benefits conferred on disinterested persons that serve private interests living faith inc v commissioner f 2d cir involved an organization established by the seventh day adventist church to carry out its health ministry through operation of two vegetarian restaurants and health food stores the court sustained the irs's denial of tax exemption under sec_501 because the organization was operated for a substantial non-exempt commercial purpose the court found that the organization's activities were presumptively commercial because the organization was in competition with other restaurants engaged in marketing and generally operated in a manner similar to commercial businesses in 985_f2d_1210 cir the court held that a pre-paid health care organization that arranges for the provision of health care services only for its members benefits its members not the community as a whole under the community benefit standard the organization must benefit the community as a whole to be recognized as promoting health in the charitable sense of sec_501 325_f3d_1188 cir involved an operator of health maintenance organizations that served approximately one-quarter of utah’s residents and approximately one-half of its medicaid population the court held that the organization failed to meet the community benefit standard to qualify for exemption under sec_501 because its sole activity was arranging for health care services for its members in exchange for a fee the court said that providing health-care products or services to all in the community is necessary but not sufficient to meet the community benefit standard rather the organization must provide some additional benefit that likely would not be provided in the community but for the tax exemption and that this public benefit must be the primary purpose for which the organization operates analysis organizational_test organizations applying for exemption under sec_501 must be organized and operated exclusively for charitable educational and other purposes sec_4 c -1 b iii states that an organization is not organized exclusively for one or more exempt purposes if its articles of organization expressly empower it to carry on as more than an insubstantial part of its activities activities which are not in furtherance of one or more exempt purposes your articles of incorporation as filed with the state corporation authority in your state of incorporation specifically state that you are organized to r edesign healthcare delivery around the patient- centered medical home model thereby improving quality of healthcare while reducing healthcare cost redesigning healthcare delivery is not itself a charitable purpose within the meaning of sec_501 such activity could be conducted in a manner that would not further charitable purposes see ihc health_plans inc v commissioner supra although your bylaws mention you are organized for charitable and educational_purposes your articles of incorporation do not include any exempt_purpose therefore your organizational language does not sufficiently limit your permitted activities to charitable activities described in sec_501 and you do not meet the requirements of sec_1_501_c_3_-1 accordingly you fail the organizational_test operational_test to satisfy the operational_test under sec_1_501_c_3_-1 an organization must establish that it is operated exclusively for one or more exempt purposes an organization will be regarded as operated exclusively for one or more exempt purposes only if that accomplish one or more of such exempt purposes specified in sec_501 under the operational_test the purpose towards which an organization’s activities are directed and not the nature of the activities themselves is ultimately dispositive of the organization’s right to be classified as a sec_501 organization b s w group supra your activities are not directed toward one or more exempt purposes such as the promotion of health education or scientific purposes it engages primarily in activities promotion of health the promotion of health has long been recognized as a charitable purpose under common_law however not every activity that generally promotes health furthers exclusively charitable purposes under sec_501 for example selling prescription pharmaceuticals promotes health but pharmacies cannot qualify for recognition of exemption under sec_501 on that basis alone federation pharmacy services inc supra nor does a hospital primarily further a charitable purpose solely by offering health care services to the public in exchange for a fee see revrul_69_545 supra rather a hospital must be organized and operated primarily for the benefit of the community as evidenced by such factors as a board that represents the community operation of an emergency room provision of charity care medical training or medical_research for example a health_maintenance_organization that is operated primarily for the purpose of benefiting its paying subscribers does not qualify for exemption solely because the community also derives health benefits from its activities see geisinger health plan supra and ihc health_plans inc supra you do not provide healthcare services directly to patients unlike the hospital in revrul_69_945 your activities consist of gathering healthcare and business practice data from your engaged practices analyzing this data and making the results of your analysis available to your engaged practices through your consulting services in essence you are providing information so that the engaged practices can implement a more efficient business model save costs and negotiate with business and industry to reward your engaged practices for their cost-saving efforts furthermore these services directly and substantially benefit your engaged practices to the extent the general_public benefits from your activities these benefits are based on and derived from the manner in which the engaged practices choose to use the data they receive from you the healthcare provider performance data are merely information that your engaged practices may use to reduce the cost of providing healthcare thus to the extent the community may realize benefits from these data is similar to the benefits a community derives when healthcare providers use more effective and efficient medical_supplies equipment and current health information to diagnose illnesses and diseases and treat their patients the provision of such tools to healthcare providers generaily does not serve exclusively tax-exempt purposes as the court noted in ihc health_plans inc supra pincite in giving form to the community-benefit standard we stress that ‘not every activity that promotes health supports tax exemption under sec_501 for example selling prescription pharmaceuticals certainly promotes health but pharmacies cannot qualify for exemption under sec_501 on that basis alone ’ revrul_98_15 in other words engaging in an activity that promotes health standing alone offers an insufficient indicium of an organization's purpose numerous for-profit enterprises offer products or services that promote health in several revenue rulings the internal_revenue_service concluded that an organization was promoting health within the meaning of sec_501 even though it was not directly providing medical_care to patients because it improved the effectiveness of health care provided by others see revrul_77_69 supra and revrul_81_276 supra however the organizations in these revenue rulings were created pursuant to federal statutes and worked closely with the government to support its health care responsibilities you were not established pursuant to any federal statute and no government agency supports your activities although you state that you are an outgrowth of state program which is overseen by state office you do not have any direct relationship with state program you have not yet contracted with any medical practices participating in state program but you were created by individuals within practices who participate in state program for this purpose therefore although your activities may indirectly promote health in a general sense they do not primarily promote health in a charitable manner within the meaning of sec_501 and sec_1_501_c_3_-1 education furthering education is an exempt_purpose within the meaning of sec_501 see sec_1_501_c_3_-1 the regulations explain that the term educational in sec_501 includes the instruction of the public on subjects useful to the individual and beneficial to the community see sec_1_501_c_3_-1 you will be giving practice consultation information exclusively to your engaged practices you will not be providing educational_services to individuals or to the community you will not be informing individuals or the public on a topic to develop their capabilities within the meaning of sec_1_501_c_3_-1 in addition your activities will not constitute instructing the public on subjects that are beneficial to the community within the meaning of sec_1_501_c_3_-1 you are unlike the organization in revrul_74_614 supra because you are not controlled by tax-exempt educational organizations and you do not operate as a regional computer network which these organizations and their students and faculties can use to share research and scientific information also unlike the organization in revrul_74_614 supra you will provide administrative services to assess member performance and provide opportunities to enhance billing practices while providing compliance and documentation standards that meet all regulatory requirements therefore your primary activities do not further education within the meaning of sec_1 c - d scientific research the advancement of science is an exempt_purpose within the meaning of sec_501 see sec_1_501_c_3_-1 the term scientific as used in sec_501 includes the carrying on of scientific research in the public interest not all research or study is scientific for purposes of sec_1_501_c_3_-1 scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations although you expect to develop a patient data accumulation repository within each member practice needed to conduct outcomes research to share with your other engaged practices and will analyze these data extensively to develop performance data that you will distribute to your engaged practices these activities are not scientific in nature you will not be conducting any scientific studies similar to those conducted in revrul_76_455 supra where one of the organization's principal activities was to conduct scientific studies with regard to the quality utilization and effectiveness of health care agencies in this ruling the organization studied existing health care facilities determined methods and practices that would provide better medical services to the general_public and disseminated the results of such studies to the general_public unlike the organization in revrul_76_455 supra your activities involve the analysis of healthcare data to evaluate your engaged practices’ performance your activities do not resemble any of the characteristics of scientific research articulated in iit research institute v united_states supra rather your activities are beyond the testing or demonstration phase furthermore you will distribute the acquired performance data to your engaged practices but you have not established that you will disseminate these data to the general_public accordingly your activities do not constitute scientific research within the meaning of sec_1_501_c_3_-1 and in any event research is not your primary purpose substantial non-exempt purpose an organization is operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose see sec_1_501_c_3_-1 providing services of an ordinary commercial nature regardless of whether the undertaking is conducted on a nonprofit basis and is beneficial to the community does not further a charitable purpose unless the service directly accomplishes a tax-exempt purpose see revrul_80_287 supra the sale of health-related goods and services eg laboratory services pharmaceuticals hmo services consulting services does not exclusively further charitable purposes because such activities serve a substantial non-exempt commercial purpose see eg federation pharmacy services supra sale of pharmaceuticals to senior citizens was presumptively commercial because such activity was normally pursued by commercial enterprises revrul_85_110 supra exempt hospital’s provision of laboratory testing services to non-patients served non-charitable purposes washington research foundation supra facilitating transfer of technology from nonprofit_organizations to the public through licensing arrangements with for-profit companies is commercial in nature and american institute for economic research supra primary purpose of securities analysis publication was commercial you were founded by employees of medical practice which also covers your overhead costs including shared administrative staff you are managed by your board_of directors all of whom are employees of medical practice you will provide to medical practice and your other engaged practices services such as education to provide operating efficiencies for your engaged members’ business practices a forum to capitalize on economies of scale to engage products and services that enhance practice performance and increase the financial performance of member practices enhance billing practices enhance payments by payors for services provided by members and a ‘fair’ sharing of cost savings realized by payors develop a best practices repository and negotiate on behalf of your engaged practices with business and industry to reward your members for their cost-saving efforts thus your activities are not inherently charitable but are more like activities carried on by for- profit businesses a factor that supports the commercial nature of your activities see eg living faith inc supra organization's health food stores and restaurants were in competition with for-profit organizations and ihc health_plans supra health_plans resembled and competed with commercial insurance providers thus your primary activities are providing consulting services for the benefit of medical practice and your other for-profit engaged practices this is a commercial business and is a cooperative enterprise that primarily benefits your engaged practices therefore your activities serve a substantial non-exempt purpose under sec_1_501_c_3_-1 the provision of commercial services may serve primarily charitable purposes when those services are provided exclusively to tax-exempt organizations are an essential function of such organizations and are provided for a fee that is substantially below cost see revrul_71_529 an organization that provides assistance in the management of participating colleges’ and universities’ endowment or investment funds for a charge substantially below cost qualifies for exemption under sec_501 supra and revrul_72_369 an organization that provides managerial and consulting services at cost to unrelated exempt_organizations does not qualify for exemption under sec_501 supra however you are not a membership_organization providing services exclusively to its member exempt_organizations rather you are a non- membership_organization providing services solely to non-affiliated non-exempt organizations any charitable or educational benefits the public may derive from your consulting services are merely incidental to your principal purpose of benefiting your engaged practices thus your activities do not primarily further an exempt_purpose therefore you are not operated exclusively for one more exempt_purpose under sec_501 see sec_1_501_c_3_-1 an organization will not be regarded as operated exclusively for one or more exempt purposes under sec_501 if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose better business bureau of washington d c inc supra private benefit organizations seeking exemption under sec_501 must be organized and operated exclusively for exempt purposes pursuant to sec_1_501_c_3_-1 an entity that is organized or operated to serve private rather than public interests cannot be recognized as operating exclusively for exempt purposes see sec_1_501_c_3_-1 and american campaign academy supra the tax_court explained that prohibited private benefits may include an advantage profit fruit privilege gain or interest see american campaign academy pincite in determining whether an organization’s activities confer an impermissible private benefit the court in american campaign academy supra looked to whether the beneficiaries of the organization's activities are also the parties who founded fund and direct the organization you state that although you have no direct relationship with state program you intend to contract with medical practices participating in state program after such program ends medical practice is a current participant in state program all of your officers and directors are employees of medical practice and your president is married to medical practice’s sole shareholder medical practice also provides you with office space telephone fax internet office support and office supplies for no charge and you have no formal agreement with medical practice for_the_use_of such items the activities of state program and by extension your proposed activities are presumably intended to promote the health of each engaged practice participants’ patients however not every activity that promotes health supports tax exemption under sec_501 an institution for the promotion of health is not a charitable institution if it is privately owned and is run for the profit of the owners 4a austin w scott and william f fratcher the law of trusts sec_372 ed see also restatement second of trusts as currently structured your activities are primarily beneficial to medical practice and your other engaged practices because you are focused on providing them with information that can be used in their private business activities for example your consulting activities seem focused on providing financial benefit to your engaged practices you state that as value-added opportunities become evident you will pursue integrating models of growth and transformation that serve your members sic independence focusing on the proliferation of private practice while providing supplemental support to address cost-effective operational responsibilities and services that will enhance their financial viability thus any benefit to the patients of your engaged practices is incidental relative to the private benefit to your engaged medical practices in addition your board_of directors is composed of only three persons all employees of medical practice the fact that your board lacks public participation of any kind indicates that you are operated for the benefit of your directors and medical practice rather than the public because your operations substantially benefit your directors and medical practice you have not demonstrated that your operations serve a public rather than a private interest as required under sec_1_501_c_3_-1 see also better business bureau of washington d c inc supra and church by mail inc supra inurement organizations seeking exemption under sec_501 are also subject_to the inurement provision contained in sec_1_501_c_3_-1 which states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or it part to the benefit of private shareholders or individuals often referred to as insiders the inurement proscription applies to persons who because of their particular relationship with an organization have an opportunity to control or influence its activities the owner and employees of medical practice are insiders because they are in a position to have control_over your activities through participation in and influence over the board_of directors and your activities your primary purpose is providing training consulting and cost-saving programs for your engaged medical practices including medical practice you will provide such services for no charge to medical practice a commercial business this transfer of your financial resources to the owner of medical practice is in violation of the inurement proscription and is also sufficient to defeat exemption under sec_501 conclusion we have concluded that you are not organized and operated exclusively for charitable purposes under sec_501 in addition your activities violate the prohibition against private benefit under sec_1_501_c_3_-1 and the prohibition against private_inurement under sec_1 c - c therefore we cannot recognize you as an exempt_organization under sec_501 you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration unaer penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you if you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice before the rs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations


internal_revenue_service number release date index number ------------------------------ ------------- -------------------------------- ------------------- ----------------------- ------------------------------------ tin ---------------- - department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc ita b04 plr-133195-04 date date ------- ------- - taxpayer ------------------------------------------------------------ year year dear ------------------ this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending december to a taxable_year ending november effective november year the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending november was due before march ------ the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding section of revproc_2002_39 2002_1_cb_1046 provides that a taxpayer must file a form_1128 no earlier than the day following the end of the first effective year and no later than the due_date not including extensions of the federal_income_tax return for the first effective tax_year sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the situation you present must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government plr-133195-04 based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and the taxpayer's late filed form_1128 requesting permission to change to a tax_year ending november effective for the short_period of november year is considered timely filed except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely robert a berkovsky branch chief branch income_tax accounting cc ------------------------


t c memo united_states tax_court helena culver fraser petitioner v commissioner of internal revenue respondent docket no filed date helena culver fraser pro_se andrew p crousore for respondent memorandum opinion gerber judge respondent determined deficiencies in petitioner's federal income and self-employment taxes and additions to tax as follows year deficiency dollar_figure dollar_figure big_number big_number big_number additions to tax sec_6651 sec_6654 dollar_figure big_number after concessions the issues for decision are whether petitioner failed to report wages from her employment interest_income and unemployment_compensation and whether petitioner is liable for additions to tax under sec_6654 a for her failure to pay estimated_taxes respondent has conceded that petitioner is not liable for the additions to tax under sec_6651 procedural background on date respondent filed a motion to show cause pursuant to rule f as to why facts and evidence set forth in her proposed stipulation of facts should not be accepted as established on date petitioner filed a response to this court's order to show cause after due consideration this court ordered on date that facts and evidence set forth in respondent's proposed stipulation of facts were deemed to be established for purposes of this case facts deemed admitted at the time the petition in this case was filed petitioner resided in visalia california during and petitioner all section and subtitle references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise designated worked as a physician's assistant for multiple employers and received wages in the amounts of dollar_figure and dollar_figure respectively during and petitioner earned nonemployee compensation from her self-employment as a physician's assistant in the amounts of dollar_figure dollar_figure and dollar_figure respectively in addition petitioner received unemployment_compensation in the amount of dollar_figure in and interest_income in the amount of dollar_figure in in total petitioner received income during the years in issue as follows year amount dollar_figure big_number big_number petitioner did not file income_tax returns for any of the years in issue nor was any_tax withheld or paid on income that she earned in those years discussion petitioner argues that her income was from her employment and falls under the provisions of subtitle c this court lacks jurisdiction in matters arising under subtitle c sec_7442 74_tc_651 accordingly petitioner contends that we lack subject matter jurisdiction over this case subtitle c imposes employment_tax on wages of individuals required to be withheld by employers which is in addition to income_tax imposed by subtitle a subtitle a imposes an income_tax on an individual's taxable_income determined from gross_income sec_61 defines gross_income as income from whatever source derived including compensation_for services and interest_income sec_61 in addition sec_85 includes unemployment_compensation in gross_income respondent determined petitioner's deficiencies for the years in issue under subtitle a to which the deficiency_notice procedures apply sec_6211 respondent issued a notice_of_deficiency and petitioner invoked the jurisdiction of this court by filing a petition in response to that notice_of_deficiency rule a c 97_tc_437 petitioner also contends that we lack jurisdiction because the notice_of_deficiency issued by respondent was invalid petitioner bases her claim of the invalidity of the deficiency_notice on the ground that respondent did not make a determination of her deficiency as required by sec_6212 citing 814_f2d_1363 9th cir revg 81_tc_855 sec_6212 authorizes the commissioner to mail a notice_of_deficiency to a taxpayer after determining a deficiency the commissioner must consider information relating to a particular taxpayer to make her determination_of_a_deficiency with respect to that taxpayer scar v commissioner supra pincite a presumption exists that the commissioner made a determination if the notice reveals that the deficiency was based on information relating to the taxpayer 875_f2d_1396 9th cir absent exceptional circumstances we will not look behind a notice_of_deficiency to examine the evidence used by the commissioner in her determination id respondent considered reliable information that related to petitioner in particular attachments to the deficiency_notice identify petitioner's employers and other sources of income nothing on the face of the notice_of_deficiency indicates that respondent failed to make a determination with respect to petitioner's tax_liability we find that respondent satisfied the requirements of sec_6212 and the notice_of_deficiency issued to petitioner is valid thus we have jurisdiction over this case despite petitioner's extensive and well-written arguments on brief the factual allegations deemed admitted under rule f establish that petitioner had income for the years in issue which she failed to report in addition petitioner did not present any evidence contesting respondent's determination that she is subject_to self-employment_tax under sec_1401 we sustain respondent's determination as to the deficiencies in petitioner's federal income and self-employment taxes sec_6654 imposes an addition_to_tax for failure to make timely estimated income_tax payments sec_6654 contains exceptions to the application of the addition_to_tax petitioner bears the burden of proving that she is not liable for additions to tax rule a petitioner received taxable_income during each of the years in issue and did not make any estimated_tax payments petitioner has not proven that any of the exceptions to sec_6654 apply thus petitioner is liable for the sec_6654 additions to tax for the years in issue to reflect the foregoing decision will be entered for respondent except as to the additions to tax under sec_6651


t c memo united_states tax_court david c roark and estate of irene roark deceased david c roark executor petitioners v commissioner of internal revenue respondent docket nos filed date earl s howell and timothy r simonds for petitioners edsel ford holman jr for respondent memorandum findings_of_fact and opinion holmes judge in david roark gave dollar_figure to a charity the national community_foundation ncf ncf sent him letters in return saying that no goods or services have been provided in connection with this gift and he took his contributions as a deduction but ncf used the money to pay the premiums on a dollar_figure million insurance_policy on roark’s life that was owned by a_trust benefiting the roark family both the trust and ncf were entitled to portions of the policy’s death_benefit the trust entitled to by far the larger share in 118_tc_528 and then again in weiner v commissioner tcmemo_2002_153 we ruled that the deductions in such arrangements--known as charitable split-dollar_life_insurance agreements --foundered on sec_170 this section requires substantiation of a charitable_contribution with a written acknowledgment by the charity stating whether the donor received any goods or services in consideration in whole or in part for his donation sec_170 in both addis and weiner we held that letters from a charity stating that no consideration was received were inadequate substantiation if the charity was paying premiums for life_insurance benefiting the donor or his family both addis and weiner have now been affirmed on appeal 374_f3d_881 9th cir 102_fedappx_631 9th cir in this case we follow those rulings and again uphold the commissioner’s disallowance of the claimed deduction findings_of_fact this case features three characters petitioner david section references are to the internal_revenue_code_of_1986 as amended roark american express and ncf the recipient of the disputed contributions david roark is a lifelong tennessean including when he filed the petition in this case his life has been marked by success in business and a consistent devotion to charity after graduating from college he worked for years at united hosiery mill in east chattanooga tennessee he came to recognize an untapped demand for fabric dyeing and in set out with a few colleagues to start a business to contract with manufacturers to dye their fabric the business later known as skyland international flourished mr roark and his wife who had tithed their gross_income every year for decades used their prosperity to increase their already generous donations to both their local church and other christian charities mr roark became especially generous with both time and money to the north chattanooga camp of the gideons american express is a well-known financial services company one of its subsidiaries is ids life_insurance_company robert pippenger is a senior financial adviser at american express and has long served as the roarks’ personal financial adviser he also managed the roarks’ investments and knew their financial goals and inclination toward charitable giving mr roark and his wife filed joint returns mrs roark died in and he filed the petition both for himself and in his capacity as executor of her estate ncf the third major player in this case is a sec_501 charitable_organization based in brentwood tennessee it receives money from both its own investments and donations one of the ways it receives donations is through donor-advised accounts also known as individual foundations donors to these foundations contribute money or other_property to a special individual_account and they can direct ncf to contribute up to percent of the principal and interest from that account to other charities of their own choosing the remaining percent of each account goes to the charitable programs of ncf which focus on christian evangelical and humanitarian services pippenger first became aware of charitable split-dollar_life_insurance plans in a conscientious investment adviser he studied the arrangement by attending at his own expense seminars put on by american express he also performed his own due diligence independently he came to see these plans as an opportunity to benefit his clients who were interested in estate_planning since proceeds of a life_insurance_contract that are paid_by reason of the insured’s death are excluded from income sec_101 sharing the cost of the premiums with a charity in a way that created current tax deductions would obviously be attractive sometime in early pippenger met with the roarks to discuss the value of mr roark’s business and the potential taxes that his estate would face upon his death pippenger told the roarks that this charitable split-dollar arrangement would be a good fit for them since it would further their philanthropic goals as well as helping to provide for mr roark’s family after he died the roarks agreed and pippenger began putting the deal in place in date on date mr roark took the first step by opening a donor-advised account with ncf to be called the david c roark foundation in keeping with ncf’s practice mr roark was allowed to choose which charity would get percent of the distribution from his foundation and he picked the north chattanooga gideons camp the roarks then created the david roark revocable life_insurance_trust on date mr roark and mrs roark in her capacity as trustee applied to ids life for a dollar_figure million insurance_policy on mr roark’s life naming the trust as beneficiary mr roark was both the grantor of the trust and its beneficiary during his lifetime mrs roark was the trust’s beneficiary if she survived her husband the remainder beneficiaries were the roarks’ children mrs roark as trustee of the trust sent a letter to curtis calihan ncf’s executive director the letter offered ncf an option to buy a term_insurance death_benefit in the insurance_policy through the roark foundation ncf’s chief_counsel mark absher testified that ncf applied stringent criteria to the life_insurance investments it was offered--ncf insisted on a guaranteed right to a fixed permanent and primary portion of the death_benefit for instance the proposed rate of return on the investment also had to be acceptable the roarks’ proposal apparently met ncf’s criteria and so ncf and mrs roark signed a charitable legacy plan agreement shortly thereafter the plan agreement called for mr roark to donate large sums of money to the roark foundation at ncf ncf could then choose from among three options if ncf paid no premiums the plan agreement carefully gave ncf this option but made clear that ncf’s death_benefit would then be null and void if ncf chose to pay the premiums the plan agreement contemplated that ncf would pay the premiums on an accelerated timetable with all of them paid within five years if ncf chose to make all the payments it would be entitled to dollar_figure of the dollar_figure million death_benefit and the unearned_premium the plan agreement called for roark to donate the following sums to ncf dollar_figure big_number big_number big_number big_number each year ncf had the option of paying sums equal to roark’s donations as premiums on the insurance_policy amount value the dollar_figure death_benefit plus the unearned_premium account value would be paid to the roark foundation with percent ultimately going to the gideons but ncf would be able to use the remaining percent for its own programs the roark trust would receive at least the remaining dollar_figure1 million of the death_benefit if ncf made some of the payments but then stopped under this option ncf’s portion of the death_benefit would be fixed at dollar_figure until the accrued premiums earned were equal to ncf’s payments ncf’s interest in the policy would then end but if the trust and ncf agreed to terminate the policy while some of the premiums remained unearned ncf would at least get those premiums back pippenger was also involved in the arrangement whenever mr roark sent in money to ncf pippenger would fill out and send as is common with insurance_companies ids life earns its premiums by accepting risk for a given time it thus earns accelerated premiums only over that time the unearned_premium account value was the excess of the premiums ncf had paid over the amount ids life had earned the roark trust would actually receive the larger of the death_benefit or a percentage of the policy value in the early years of the policy the death_benefit would almost certainly be larger than the policy value however as with most universal life policies the longer the roarks’ policy was in effect the more likely it would be that the accounts into which the accelerated premiums were invested would grow in value and eventually exceed the death_benefit under the plan agreement this buildup in value would accrue entirely to the trust’s benefit not ncf’s in an ncf form identifying himself as charitable emissary and reminding ncf of the details of the insurance policy’s deadlines and mailing address for payment by late date then all the parts of a charitable split-dollar_life_insurance arrangement were assembled and in place the policy was purchased the trust formed the foundation created the plan agreement signed and even an emissary appointed roark began sending in his contributions everything went smoothly at first by date roark had contributed a total of dollar_figure after each payment ncf sent a letter to him acknowledging his contribution each was signed by either ncf’s chief financial officer or one of its vice presidents each contained this language i further acknowledge that new life corporation of america ncf’s legal name is a charitable_organization with the meaning of section c of the internal_revenue_code and is listed as such in the current revision of irs publication in accordance with irs regulations no goods or services have been provided in connection with this gift ncf used the money to pay dollar_figure to ids life for premiums on the policy in keeping dollar_figure in administrative fees with the first dollar_figure on may and the remaining dollar_figure on december roark then made one additional_contribution of dollar_figure on date he again received a letter from ncf acknowledging the contribution and the letter again stated that no goods or services had been provided in connection with the gift on date mrs roark passed away the roarks’ daughter connie r perrin became the successor trustee of the roark trust and the arrangement continued the only problem was that the roarks were far from alone split-dollar agreements had become so widespread that congress stepped in in date bills were introduced in both the senate and the house to force charities to pay a 100-percent excise_tax on any amounts they had paid on life_insurance policies covering their donors because of the possibility that the legislation would be made retroactive to the date it was introduced ncf stopped making payments on all the split-dollar agreements it had as a result ncf never made a premium payment corresponding to roark’s last dollar_figure contribution once ncf stopped paying premiums its death_benefit in the roark policy was fixed under the plan agreement at dollar_figure as ids life was continuously earning the accelerated payments however the amount of money that ncf stood to get if the policy were terminated began to shrink and once ids life earned all of the accelerated payments ncf’s dollar_figure interest would disappear ncf faced similar problems with the other split-dollar the legislation passed and can now be found in sec_170 tax relief extension act of publaw_106_170 113_stat_1936 parts of it were indeed made retroactive to date the date of introduction agreements it had made so it began sending letters to all its contributors encouraging them to terminate their policies if a contributor agreed ncf would be able to recover the unearned premiums but without a contributor’s agreement to terminate ncf’s investment was at risk if the contributor died quickly ncf would receive a great deal of money but if he outlived the time it took for the life_insurance_company to earn its premiums on ncf’s accelerated payments ncf would get nothing roark got such a letter but he never agreed to terminate the policy he also never contributed any more money to ncf once the legislation was introduced but he did make another payment to ids life in date to prevent the insurance_policy from lapsing then in date he reduced the policy’s death_benefit from dollar_figure million to dollar_figure million this guaranteed that the trust would receive at least some death_benefit even if he never paid another premium if the payments to ncf are counted the roarks contributed a total of dollar_figure to charity during due to rules that set an annual ceiling on charitable_contribution deductions sec_170 the roarks deducted only dollar_figure in and carried over the remainder to the irs issued a notice_of_deficiency for the and tax years that disallowed the dollar_figure in contributions to ncf the commissioner later reduced the disputed amount because ncf never made a payment on the insurance_policy with the last dollar_figure that roark sent it the dollar_figure that is still in dispute is the total of dollar_figure that ncf made toward the insurance_policy and the dollar_figure roark sent to ncf for administrative fees opinion the commissioner argues that the dollar_figure in dispute should be disallowed entirely because it was not properly substantiated by ncf under sec_170 and sec_1_170a-13 income_tax regs and because applying the step-transaction doctrine the series of interrelated transactions was in substance an attempted gift of a partial interest in a life_insurance_policy and so not deductible under sec_170 he also claims that the deduction must at the very least be limited to the excess of roark’s contributions over the economic benefit he received as we noted at the outset we have already decided two very similar cases on the first ground that the commissioner suggests and our decisions were in both cases affirmed 118_tc_528 and weiner v commissioner tcmemo_2002_153 unless these cases can be distinguished they govern roark argues in his brief that addis was not binding on this court while it was pending an appeal this is wrong we are bound by the reviewed decisions of this court 82_tc_793 ndollar_figure affd 771_f2d_269 continued in addis as here the taxpayer negotiated a charitable split-dollar_life_insurance contract the insurance_policy there also was owned by a_trust whose beneficiaries were also the taxpayer’s family the taxpayer in addis also set up a foundation with a charity she also donated money to the charity and the charity also issued an acknowledgment letter with language designed to meet sec_170's substantiation requirements ie that the charity did not provide any goods or services to the donor in return for the contribution that charity also used the donated funds to pay the premiums on a life_insurance_contract entitling it to a percentage of the proceeds upon the taxpayer’s death our analysis in addis centered on the substantiation requirement taxpayers may deduct cash contributions that are made to a qualified donee organization sec_170 if a taxpayer contributes dollar_figure or more at one time the donee organization must substantiate the donation in writing for the deduction to be allowed sec_170 this writing must specify whether the donor received or expected to receive any goods or services from the charity in continued 7th cir there are exceptions 54_tc_742 affd 445_f2d_985 10th cir but they do not apply here now that our previous opinions in addis and weiner have been affirmed we of course have no reason not to follow them consideration for the donation as well as an estimate of their fair_market_value sec_170 sec_1_170a-13 income_tax regs according to the commissioner the letters ncf sent roark fail to meet the terms of the statute and regulation because roark did expect that ncf would pay the premiums and the payment of those premiums was valuable to him--in other words it was not true as ncf wrote in its letter that no goods or services have been provided in connection with this gift in countering the commissioner roark first argues that ncf was not legally obliged to pay the premiums whether ncf was under a legal_obligation might be relevant here under the step- transaction doctrine though perhaps not even then see 697_f2d_473 2d cir affg tcmemo_1981_579 the regulation that applies here however makes clear that the key question is whether a donor expected to receive consideration not whether he was entitled to receive it a donee organization provides goods or services in consideration for a taxpayer’s payment if at the time the taxpayer makes the payment to the donee organization the taxpayer receives or expects to receive goods or services in exchange for that payment sec_1_170a-13 income_tax regs emphasis added we look for a quid pro quo not a possible cause of action perhaps anticipating this roark tries to distinguish his case from addis’s by stating--correctly--that addis admitted that she expected the charity in her case to pay the premiums addi sec_118 t c pincite roark in contrast testified that he had no idea what was going on with ncf and the charitable split-dollar_life_insurance plan and that every time he got information about it he simply turned it all over to pippenger we do not find this disavowal credible the idea for this deal after all came from pippenger--his financial not his charitable adviser roark had to have realized that the intricacy of the plan plus the fact that it was being marketed so extensively by american express suggested that as a practical matter ncf would of course use money it got under such plans to pay for insurance and not just add to its endowment failure to do so would have been a massive denial of its donors’ expectations as ncf itself recognized when it let loose with its letterwriting surge after congress began considering the excise_tax on premiums we also find that ncf’s payment of the premiums was something of value to roark of the policy’s dollar_figure million death_benefit a maximum of only dollar_figure would go to ncf the trust which was set up by roark and whose beneficiaries were his wife and children would receive the other dollar_figure1 million the trust would thus take percent of the total death_benefit while ncf would only get percent even if the trust had agreed to terminate the policy early ncf would merely get back the unearned premiums that it prepaid in addis we reasoned that if the charity’s premium payments were big enough to keep the policy viable and the family_trust itself would receive a significant portion of the death_benefit the value of those payments to the trust had to be greater than zero the facts of this case show that roark was getting an even better deal than the taxpayers in the other split-dollar cases that we’ve decided in both addis and weiner the charity would have received a greater proportion of the insurance proceeds than the families’ trusts here the proportions were reversed the roark family through the trust would actually receive more money than ncf and so we easily find that mr roark would receive value as a result of ncf paying the premiums and while it is true that after mrs roark’s death it was the roark’s daughter who was trustee we reasoned in weiner that this change in which relative would collect on the policy did not change our conclusion that the donor expected that he would benefit from his payments roark does of course have the letter that ncf sent him stating that he received nothing of value in exchange for his contributions and it is true that a taxpayer ordinarily may rely on a charity’s estimate of fair_market_value sec_1 170a- h i income_tax regs but if a taxpayer knew or should have known that a charity’s estimate of the fair_market_value of the consideration it provided was not reasonable he cannot take the deduction sec_1_170a-1 income_tax regs and that’s the situation here even if roark did not have actual knowledge that ncf would pay the policy premiums he should have known he was a sophisticated businessman and all the paperwork was available to him he signed much of it all the letters were sent to him it would have been simply unreasonable for him to conclude that this split-dollar agreement did not benefit him and his family at all in the end then this case is indistinguishable from addis though ncf wrote that no goods or services have been provided in connection with this gift each time roark sent in money he knew or should have known that he would receive some value in return since the donation was not properly substantiated under sec_170 and the roarks unreasonably relied on it contrary to the provisions of sec_1_170a-1 income_tax regs we hold that they may not deduct the dollar_figure he contributed to ncf we need not reach any other arguments but because the commissioner conceded a dollar_figure increase to the roarks’ charitable deduction decisions will be entered under rule