internal_revenue_service number release date index numbers ------------------------ ------------------------------------- --------------------------------------- -------------------------- in re ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- ---------------------- telephone number --------------------- refer reply to cc fip plr-138607-11 date date legend company foreign_country n n ------------------------ ------------------------------------ -------- -- individual a ------------------------- --------------------------------------------------------------------------------- date a year b c d e f g foreign_country h number i -------------------------- ------- ----- ------- --------- -------------------------- ------------------------------- -------- ---- plr-138607-11 number j number k p x -------- ---- ----------------------------- ----------- insured sole_proprietorship ------------------------------------------------------------------------------------------ -------------------------------- insured corporation ------------------------------------------------------------------------------- ---------------------------------- insured corporation ------------------------------------------------------------------------------- ------------------------------------------------ insured corporation ------------------------------------------------------------------------------ --------------------------------------------------------------- insured corporation ------------------------------------------------------------------------------- ------------------------------------- insured corporation ------------------------------------------------------------------------------- ------------------------------------------ insured entity ------------------------------------------------------------------------------- ---------------------------- independent insurer ------------------------------------------------------------------------------- ------------------------------- independent insurer ------------------------------------------------------------------------------- --------------------------------- independent insurer ------------------------------------------------------------------------------- --------------------------------------------------------------- independent insurer ------------------------------------------------------------------------------- ------------------------------------------ independent insurer ------------------------------------------------------------------------------- --------------------------------------------- plr-138607-11 independent insurer ------------------------------------------------------------------------------- ----------------------------------------- independent insurer ------------------------------------------------------------------------------- ------------------------------------------------- independent insurer ------------------------------------------------------------------------------- ------------------------------ independent insurer ------------------------------------------------------------------------------- ---------------------- independent insurer ------------------------------------------------------------------------------- ---------------------- independent insurer ------------------------------------------------------------------------------- ------------------ independent insurer ------------------------------------------------------------------------------- --------------------------------------------- independent insurer ------------------------------------------------------------------------------- ---------------------------------------------------- independent insurer --------------------------------------------------------------------------------- ----------------------------------------------- dear ----------------- this is in response to the letter submitted by company dated date primarily requesting a ruling under sec_831 relating to company’s status as an insurance_company for federal_income_tax purposes additional information was provided in correspondence dated date january and facts company was incorporated in foreign_country n on date a company has been licensed by the insurance regulators of foreign county n as a general insurance captive effective for year b also effective for year b company has made an election under sec_953 to be taxed as a domestic_corporation the stock of company is owned percent by individual a plr-138607-11 insured sole_proprietorship is the personal e surgery and f practice of individual a individual a is the sole owner of the proprietorship insured corporation owns the patent rights and all licensing rights to a c medical appliance developed by individual a all of the stock of insured corporation is owned by individual a insured corporation operates d labs and performs its own billing to insurance plans and collects co-pays and deductibles from patients covered by a plan all of the interests in insured entity are owned by individual a insured corporation performs all hiring staffing and training as well as all out of plan billing all of the stock of insured corporation is owned by individual a insured corporation doing business as g currently performs all united_states assembly of sub-components manufactured in foreign_country h all of the stock of insured corporation is owned by individual a insured corporation is engaged in marketing and providing customer support to affiliated doctors offices who perform the c medical appliance procedure and use individual a’s c medical appliance all of the stock of insured corporation is owned by individual a company offers the insured sole_proprietorship insured corporations and insured entity the following four types of contracts p policy employment related practices liability policy executive liability policy and commercial crime policy the most significant policy is the p policy this policy is a package policy that contains coverage for buildings business personal_property business income and extra expense legal defense and other business related coverages the employment-related practices liability policy provides coverage for liability arising out of claims for injury to an employee because of an employment-related offence as well as a duty to defend the executive liability coverage policy provides two coverages one applies to liability arising out of claims for wrongful acts or interrelated wrongful acts committed by the named company’s directors or officers the other is a corporate reimbursement coverage that applies to claims for which the named company is legally obligated to indemnify its directors or officers when such claims involve wrongful acts or interrelated wrongful acts committed by them the commercial crime policy covers business losse sec_1 insured entity manufactures the c medical appliance in foreign_country h and performs warehousing and distribution in the united_states all of the interests in insured entity are owned by individual a insured entity is a disregarded_entity for federal_income_tax purposes and its income and expenses will be reported on a schedule c profit or loss from business of the form_1040 u s individual_income_tax_return of individual a plr-138607-11 due to employee theft of money securities other_property of the insured including client’s property on the client’s premises in order to assist in achieving its overall risk_distribution company participates in a reinsurance pool consisting of number i independent insurers independent insurer sec_1 through in addition to company these other insurers and their insureds are unrelated to company and company’s insureds insured sole_proprietorship insured corporation sec_1 through and insured entity thus while company as a direct writer receives premiums from its insurers under coinsurance agreement a a pro_rata indemnity_reinsurance treaty it cedes number j percent of these directly written premiums on each line it insures to the reinsurance pool further using coinsurance agreement b another pro_rata indemnity_reinsurance agreement company will then assume a quota share of the premiums from the reinsurance pool which is roughly equivalent in dollar terms to the amount it ceded on each line of insurance the following applies to all of the insurers participating in the reinsurance pool all insurers issue insurance contracts and charge premiums for the insurance coverage provided under their respective insurance contracts all insurers use recognized actuarial techniques based in part on commercial rates for similar coverage to determine the premiums charged to an individual insured each of the insurers pools all the premiums it receives in its general funds and pays claims out of those funds each insurer investigates any claim made by an insured to determine the validity of the claim prior to making payment on that claim each insurer conducts no business other than the issuing and administering of insurance contracts no insured has any obligation to pay any insurer additional premiums if that insured’s actual losses during any period of coverage exceed the premiums_paid by that insured premiums_paid by any insured may be used to satisfy claims of the other insureds no insured that terminates its insurance coverage is required to make additional premium or capital payments to that insurer to cover losses in excess of its premiums_paid there is a real possibility that an insurer will sustain a loss in excess of the premiums it has received from its insureds finally company is not related to any other of the number i insurers participating in the reinsurance pool nor is company related to any of the number k independent insureds who are directly insured by any of the number i other insurers participating in the reinsurance pool as a result of company’s participation in the reinsurance pool the written premiums of company will generally have the following characteristics on each line of coverage it insures a company will assume in total risks from more than independent coinsurance agreements a and b state that these agreements including attachments or amendments signed and dated in writing by a duly authorized insurance manager agent or officer of the parties constitutes the entire contract between the parties plr-138607-11 policyholders with respect to insured businesses of these policyholders and b no single insured will account for more than percent of the total risks assumed by company also it is represented that there are no guarantees of company’s obligations by individual a or any other related_person in addition company states that it is well capitalized in the amount of dollar_figurex company does not make any loans to its affiliated insureds law and analysis sec_831 of the internal_revenue_code provides that taxes computed as provided in sec_11 are imposed for each taxable_year on the taxable_income of each insurance_company other than a life_insurance_company sec_831 provides that for purposes of sec_831 the term_insurance company has the meaning given to such term by sec_816 under sec_816 the term_insurance company means any company more than half of the business of which during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies neither the code nor the regulations define the terms insurance or insurance_contract in the context of property and casualty insurance the supreme court of the united_states has explained that in order for an arrangement to constitute insurance for federal_income_tax purposes both risk shifting and risk_distribution must be present 312_us_531 the risk transferred must be risk of economic loss 572_f2d_1190 7th cir the risk must contemplate the fortuitous occurrence of a stated contingency 183_f2d_288 2d cir and must not be merely an investment or business risk revrul_2007_47 2007_2_cb_127 in addition the arrangement must constitute insurance in the commonly accepted sense see eg 988_f2d_1135 fed cir 979_f2d_162 9th cir risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer risk_distribution incorporates the statistical phenomenon known as the law of large numbers distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set_aside for the payment of such as claim by assuming numerous relatively small independent risks that occur randomly over time the insurer smooths out losses to match more closely its receipt of premiums 811_f2d_1297 9th cir courts have recognized that risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks 881_f2d_247 6th cir see also ocean drilling and plr-138607-11 exploration co f 2d pincite risk_distribution involves spreading the risk of loss among policyholders 797_f2d_920 10th cir r isk distributing means that the party assuming the risk distributes his potential liability in part among others on the other hand a purported insurance arrangement where an issuer who contracts with only one policyholder and retains the risk under such contract does not qualify as an insurance_contract for federal_income_tax purposes see revrul_2005_40 2005_2_cb_4 revrul_2002_89 2002_2_cb_984 set forth circumstances under which arrangements between a domestic parent_corporation and its wholly owned subsidiary constitute insurance and explained that a parent wholly owned subsidiary arrangement does not constitute insurance if the parent accounts for percent of the risk but does if other insureds constitute more than percent of the risk revrul_2002_90 2002_2_cb_985 holds than an arrangement between a licensed insurance subsidiary of parent and each of the of parent’s operating subsidiaries where inter alia no one subsidiary accounts for less than percent nor more than percent of the total risk insured by the insurance subsidiary constitutes insurance revrul_2002_91 2002_2_cb_991 holds that an arrangement involving a group of unrelated businesses of which inter alia none accounted for more than percent of the total insured risk constitutes insurance revrul_2005_40 applies the principles of rev ruls and to situations involving corporations and single member limited_liability companies as pointed out in the law background of revrul_2009_29 2009_38_irb_366 the internal_revenue_code_of_1986 and administrative guidance treat reinsurance in a manner similar to direct insurance for example both direct insurance and reinsurance business may qualify a taxpayer as an insurance_company under sec_816 or sec_831 as applicable in 373_f2d_336 ct_cl a large finance company formed a wholly-owned subsidiary_corporation alinco which qualified as a life_insurance_company under the laws of indiana customers of the finance company borrowers purchased credit life_insurance from an unrelated insurance_company which in turn reinsured a fixed proportion of those contracts with alinco even though alinco reinsured risks underwritten by only one insurance_company those risks aggregated nearly one billion dollars of business with a large number of customers for which alinco was required by the state insurance department to maintain reserves interpreting regulatory language that was identical to what now appears in on the other hand sec_845 which grants to the secretary explicit authority to reallocate recharacterize or make other adjustments with respect to certain reinsurance arrangements does not refer to direct insurance plr-138607-11 sec_816 the court concluded that alinco was in the business of reinsuring risks underwritten by insurance_companies sec_162 of the internal_revenue_code provides in part that there shall be allowed as a deduction all of the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-1 of the income_tax regulations provides in part that among the items included in business_expenses are insurance premiums against fire storms theft accident or other similar losses in the case of a business the present situation involves company directly writing a small number of policies to related insureds more importantly however under coinsurance agreement a company contributes a substantial amount of its direct consideration received from its insureds and associated risks to the pool and under coinsurance agreement b receives a quota share of the consideration and associated risks from the pool roughly equal in dollar terms to number j percent of the amount company ceded to the pool on each line of coverage the result is that there are a significant number of unrelated covered entities such that none is paying for a significant portion of its own risk accordingly given that insurance risks are covered the arrangement achieves adequate risk shifting and risk_distribution such that the contracts issued by company to its insureds constitute insurance for federal_income_tax purposes for the year for which the predicate facts were represented this appears to be more than half of company’s business conclusion based solely on the information submitted and the representations made and provided that company is adequately capitalized and continues to operate as a participant in the pool in the matter described above we conclude that the arrangement between the insureds and company constitutes insurance for federal_income_tax purposes such that consideration paid_by the insureds to company is an insurance premium under sec_1 a of the income_tax regulations and company would qualify under part ii of subchapter_l for the taxable_year if it were a domestic_corporation except as expressly provided herein no opinion is expressed in this letter_ruling under the provisions of any other section of the code or regulations no opinion is expressed as to whether or not the amount of premiums charged by company has been calculated correctly or whether other requirements under sec_162 have been met see eg revrul_2007_3 2007_1_cb_350 further no opinion has been requested and none has been expressed as to whether the reinsurance pool is an entity for federal_income_tax purposes this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-138607-11 a copy of this letter should be attached to any federal_income_tax return to which it is relevant in accordance with the power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative sincerely yours sheryl b flum chief branch office of the associate chief_counsel financial institutions products


internal_revenue_service number release date index number -------------------------------------- ------------------------------------ ------------------------------------------- ------------------------------------------ department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 - plr-157551-05 date date --------- --------------------- ------------------------- -------------------------------------- legend x ------------------------ ---------------- a ------------------------------------------ state d1 dear -------------- submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 a the sole shareholder of x intended for x to be an s_corporation effective d1 however no form_2553 election by a small_business_corporation was timely filed for x any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year sec_1362 provides that if -- a an election under sec_1362 is made for this responds to a letter dated date and additional correspondence except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer who requested it sec_6110 based solely on the facts and the representations submitted we conclude that x plr-157551-05 has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning d1 a copy of this letter should be attached to the form_2553 federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 provides that it may not be used or cited as precedent being forwarded to x’s authorized representative enclosures cc bradford r poston senior counsel branch associate chief_counsel passthroughs and special industries pursuant to a power_of_attorney on file with this office a copy of this letter is copy of this letter copy for sec_6110 purposes sincerely yours


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date uil contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax under r c sec_501 as an organization described in sec_501 we made this determination for the following reason s you failed to establish that you are organized and operated for purposes described in r c sec_501 you are not organized for an exempt_purpose do not operate exclusively for an exempt_purpose and do not engage primarily in activities that accomplish an exempt_purpose you have also failed to establish that you serve a public rather than a private interest within the meaning of sec_1_501_c_3_-1 you are operated to benefit private interests more than incidentally accordingly you are not an organization exempt from tax under ilr c sec_501 because you do not qualify for exemption as an organization described in sec_501 donors may not deduct contributions to you under sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file not send them to this office failure_to_file the returns timely may result in a penaity file the returns in accordance with their instructions and do if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 you must initiate a suit in the united_states tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia before the day after the date that we mailed this letter to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment filing a declaratory_judgment suit under r c sec_7428 does not stay the requirement to file returns and pay taxes we will make this letter and our proposed adverse determination_letter available for public inspection under sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should 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 pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely karen schiller acting director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number tax_exempt_and_government_entities_division date uil e e e dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below facts you were incorporated in state on date for charitable purposes within the meaning of sec_501 of the internal_revenue_code your purpose as stated in your articles of incorporation is to support the fundraising efforts of non-profit organizations your website states that you were established to you state that your mission you state that your sources of support will come from contributions conferences and membership fees in your letter of date you state that you solicit contributions from private_foundations public_charities corporations and individual donors that are interested in promoting mobile giving and fundraising using other technology platforms to encourage engagement in charitable giving by younger donors your purpose as described in more detail in your form_1023 application is to facilitate the distribution of contributions made by wireless mobile telephone customers to charities sponsoring fundraising projects wireless mobile carriers do not choose to deal directly with the sponsoring charities because of the administrative burden your role is to act as an ‘aggregator’ and administrative intermediary between the carriers and sponsoring charities to collect and distribute the donations in your role as an aggregator and administrative intermediary between wireless mobile phone companies and their customers wanting the convenience of making contributions to charity over the phone you certify that the charity is recognized as exempt under sec_501 in addition you state that the mobile telephone carriers require evidence that the charity is properly registered to solicit contributions in the states where it is soliciting and that it satisfies established standards for accountability transparency and good governance you require charities to complete a checklist indicating all the states in which the charity is registered to solicit funds once approved an eligible charity will be able to receive donations through donor text messaging and possibly other electronic means in the future the donor sends a text message indicating the amount he or she wants to donate and receives an automated message from you to confirm the donation the carrier charges the amount to the donor's next cellular phone bill and sends the stated donation to you you direct of the donation to the charity conducting the mobile phone campaign and provide the donor with a gift receipt you charge no fees to the donor the non-profit organizations that you support may change each month depending on the wireless carrier approvals for mobile campaigns you generate and keep records regarding all transactions between donors charities and the wireless carriers via software designed maintained and owned by application service providers you also keep records of attempted donations by each consumer's cell phone number noting the time of day the wireless carrier and whether or not the consumer confirmed the donation at the time you submitted your application you had arrangements with two mobile phone companies to administer charitable campaigns your agreement with company allows you and other nonprofit_organizations to use the wireless phone system to send content and messages directly to its subscribers the agreement permits you to deliver messages and collect charitable_contributions from the donors in addition it allows permitted third parties to use your connection to deliver messages to and collect charitable_contributions from their own customers your agreement with company is similar and allows you to offer a service or act as an aggregator for multiple services involving transmission of content through short messaging service or multimedia messaging service to company 2’s subscribers you also have the ability to bill subscribers monthly for that content your services provide company 2's subscribers with the ability to contribute to charitable organizations using company 2's mobile devices for the approved charities to participate in fundraising campaigns using your services they must contract separately with an application service provider this service provider provides short codes and software to create the structure for the various programs and advertising of other mobile giving initiatives application service providers generally charge a donation transaction fee for each successful donation they also charge an application fee managing fees and other associated fees a charity cannot participate in mobile giving campaigns without the services of an application service provider you do not specify which application service provider an approved charity must use to establish its mobile campaign you are a direct outgrowth of llc llc is an application service provider founded and a and b are also your founding board members llc develops operated by a and b patented web-based software technology that enables non-profit organizations to facilitate communication with prospective donors llc also provides consulting services to charities to manage their relationships with donors and conduct their fundraising campaigns you initially represented that your board_of directors consisted solely of individuals who were partners of llc after further development from this office you expanded your board to include three unrelated individuals these additional board members represent academia community foundations and the mobile marketing arena you state that no one receives any compensation in connection to their board duties you submitted meeting minutes from seven board meetings showing decisions made and members attending there were never more than four members in attendance a and b attended and voted at all the meetings llc’s mobile-based wireless software technologies allow corporations to engage in mobile and on-line branding and marketing llc receives payments from clients based upon the services they purchase they provide you leased space within their building for a nominal yearly rent no written lease between you and llc has been provided llc also provides you with software free of charge this software is developed and maintained by llc the software is designed to allow you to keep track of sms records received via wireless carriers aggregators and intermediaries you represent that there are no written contracts between you and llc there appears to be a substantial number of your clients that are using llc as their application service provider you also state that you have no employees and your officers and directors donate their services all of your officers and directors receive direct compensation from llc you state that in addition to the aggregator role you also conduct educational conferences two times a year these conferences are intended to raise awareness of the use of wireless options for fundraising broadcasting branding and provide a marketplace for providers to connect with interested parties you charge a conferences based upon time of registration additional funding for your conferences will be provided by companies that provide services related to mobile giving and marketing you will spend approximately three months in the preparation and delivery of these conferences the conferences will be open to the general_public but due to the nature of the content most attendees will be connected with wireless carriers and other businesses that are interested in the collection of charitable_contributions through mobile technologies llc isa primary sponsor of your conferences and is listed in all promotional materials and has a booth and signage at the conferences representatives from llc have delivered presentations during the conferences other application service providers also are listed in the promotional materials and have a presence at the conferences sliding scale fee structure to attend your is law it sec_501 provides that an organization is exempt from federal_income_tax if organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 provides that in order to be exempt under sec_501 an organization must be both organized and operated exclusively for one or more of the exempt purposes specified in that section sec_1 a -1 c defines a private shareholder or individuals as persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 provides that an organization will be regarded as it engages primarily in operated exclusively for one or more exempt purposes only if 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 sec_1_501_c_3_-1 provides that a n 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 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 requirement of this subsection the burden_of_proof is on the organization to show 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 r c sec_501 in its generally accepted legal sense and includes the relief of the poor and distressed or of the under privileged advancement of religion and advancement of education or science sec_1_501_c_3_-1 provides that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in r c sec_513 determining the existence or nonexistence of such primary purpose all the circumstances must be considered including the size and extent of the trade_or_business and the size and extent of the activities which are in furtherance of one or more exempt purposes an organization which is organized and operated for the primary purpose of carrying on an unrelated_trade_or_business is not exempt under sec_501 in in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions revrul_71_529 c b describes a nonprofit organization that provides assistance in the management of participating colleges’ and universities’ endowment or investment funds because the organization is performing an essential function for tax exempt_organizations for a charge substantially below cost it qualifies for exemption under ilr c sec_501 in revrul_72_369 1972_2_cb_245 an organization was formed to provide managerial and consulting services for sec_501 organizations to improve the administration of their charitable programs the organization enters into agreements with unrelated sec_501 organizations to furnish managerial and consulting services on a cost_basis this revenue_ruling stated that an organization is not exempt merely because its operations are not conducted for the purpose of producing a profit to satisfy the operational_test the organization’s resources must be devoted to purposes that qualify as exclusively charitable within the meaning of sec_501 of the code and the applicable regulations 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 of the code furnishing the services at cost lacks the donative element necessary to establish this activity as charitable in 326_us_279 the supreme court stated that the presence of a single nonexempt purpose if substantial in nature will preclude exemption under sec_501 regardless of the number or importance of statutorily exempt purposes thus the operational_test standard prohibiting a substantial nonexempt purpose is broad enough to include inurement private benefit and operations that further nonprofit goals outside the scope of ilr c sec_501 in 70_tc_352 the court found that a corporation formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational nor scientific but rather commercial the court found that the corporation had completely failed to demonstrate that its services were not in competition with commercial businesses the court found that the organization’s financing did not resemble that of the typical 501_c_3_organization it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees for services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost t he critical inquiry is whether the 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 the court in est of hawaii v commissioner t c found that an organization formed to educate people in hawaii in the theory and practice of est was a part ofa franchise system which is operated for private benefit and therefore may not be recognized as exempt under sec_501 of the code the applicant for exempt status was not formally controlled by the same individuals controlling the for-profit organization owning the license to the est body of knowledge publications methods etc however the for-profit exerted considerable control_over the applicant’s activities by setting pricing the number and frequency of different kinds of seminars and training and providing the trainers and management personnel who are responsible to it in addition to setting price for the training the court found that the fact that the applicant's rights were dependent upon its tax-exempt status showed the likelihood that the for-profit corporations were trading on that status the question for the court was not whether the payments made to the for-profit were excessive but whether it benefited substantially from the operation of the applicant the court determined that there was a substantial private benefit because the applicant was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations in p l l scholarship v commissioner t c an organization operated bingo at a bar for the avowed purpose of raising money for scholarships the board included the bar owners the bar’s accountant also a director of the bar as well as two players the board was self-perpetuating the court reasoned that because the bar owners controlled the organization and appointed the organization’s directors the activities of the organization could be used to the advantage of the bar owners the organization claimed it was independent because there was separate_accounting and no payments were going to the bar the court was not persuaded when reasoning that a realistic look at the operations of these two entities however shows that the activities of the taxpayer and the pastime lounge were so interrelated as to be functionally inseparable separate accountings of receipts and disbursements do not change that fact the court went on to conclude that because the record did not show that the organization was operated for exempt purposes but rather indicated that it benefited private interest exemption was properly denied tn church by mail inc v commissioner t c memo aff'd 765_f2d_1387 cg cir the tax_court found that a church was operated with a substantial purpose of providing a market for an advertising and mailing company owned by the same people who controlled the church the church argued that the contracts between the two were reasonable but the court_of_appeals pointed out that the 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 international postgraduate medical foundation v commissioner t c memo the court found an organization that ran tours aimed at doctors and their families was operated to benefit the private interests of both an individual who controlled the organization and a for-profit travel agency h c tours that handled all of its tour arrangements the organization used the h c tours exclusively for all travel arrangements there was no evidence that the organization solicited competitive bids from any travel agency for travel arrangements for its tours other than h c tours the organization physically located its office within the offices of h c tours which provided it secretarial clerical and administrative personnel for a fee equal to h c tours’ costs the organization spent percent of its revenue on travel brochures prepared to solicit customers for tours arranged by the travel agency the brochures emphasized the sightseeing and recreational component of the tours but did not describe the medical curriculum for the seminars and symposia that was the basis for exemption educational activities occurred on less than one-half of the days on a typical tour the court found that a substantial purpose of the organization’s operations was to increase the income of h c tours the president of h c tours controlled the organization and exercised that control for the benefit of h c tours and himself moreover the administrative record supported the finding that the organization was formed to obtain customers for h c tours the court in 113_tc_47 stated that merely entering a partnership with private parties in which they receive a return on a capital_investment does not impermissibly confer private benefit however a detailed examination of the redlands surgery center venture convinced the court that the petitioner had ceded control to private parties having an independent economic_interest in the activity and no obligation to promote charitable purposes ahead of profit making therefore the applicant was not operated exclusively for exempt purposes the court pointed to the long-term management_contract with a party related to the for-profit with broad discretion and a fee based upon gross revenue furthermore the record did not show that the nonprofit had any role in negotiating the contract and that it was executed for both parties by the same individual indicating self-dealing nor did the record show that the petitioner had any informal control as it did not have the resources or the ability to oversee the operations in 283_fsupp2d_58 d d c the court concluded that an organization did not qualify for tax-exemption under r c sec_501 because it was operated for nonexempt commercial purposes rather than for exempt purposes among the major factors the court considered in reaching this conclusion was the organization’s competition with for-profit commercial entities the extent and degree of below cost services provided the pricing policies and the reasonableness of financial reserves additional factors included whether the organization used commercial promotional methods such as advertising and the extent to which the organization received charitable donations analysis based on your submission we cannot conclude that you are properly organized and operated under sec_501 of the code your articles of incorporation are defective furthermore the information in the file shows you do not operate for an exempt_purpose but rather in a commercial manner for a significant non-exempt purpose and to provide private benefit to a related for-profit enterprise and to the mobile wireless carriers addition there is the possibility that your income may inures to your founders because they exercise control_over your operations in organizational_test sec_1_501_c_3_-1 of the regulations explains that an entity will only be considered to be organized exclusively for one or more exempt purposes if its articles of incorporation limit its purposes to one or more purposes listed as exempt in sec_501 your articles state that you are organized to support the fundraising efforts of nonprofit_organizations supporting fundraising efforts by collecting and transmitting donations made by donors via mobile devices is not an inherently exempt_purpose under sec_501 and can be conducted in a manner that furthers nonexempt purposes nothing in your articles of incorporation restricts you to conduct your activities in a manner that will exclusively further charitable educational or other exempt purposes therefore you are not properly organized under the code operational_test substantial nonexempt purpose only an insubstantial portion of the activity of an exempt_organization may further a non- exempt_purpose as the supreme court held in 326_us_279 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 even if we agreed that you were organized and operated for an exempt_purpose the fact that you also have a substantial non-exempt purpose would be sufficient to deny recognition to you specifically the court in better business bureau_held that if education is conducted for a non-exempt purpose the organization will not be recognized as exempt based on the information in the file it appears that you operate in a commercial manner for the substantial non-exempt purpose of furthering the business of llc other application service providers and the wireless mobile phone carriers participating in campaigns you conduct your operations in a manner that is consistent with a commercial firm seeking to maximize sales of services rather than in the manner that would be consistent with a charitable or educational_organization seeking to serve a charitable_class or the public at large see 283_fsupp2d_58 d d c thus the way in which you go about your activities indicates that you are operating for the purpose of providing customers for application service providers the way in which you go about your activities also indicates that you are operating for the purpose of relieving the administrative burdens of the wireless mobile phone carriers who participate in the campaigns first you lack the public support and public control that are characteristic of a charitable_organization seeking to serve the public you state in your application that you will receive contributions from the general_public government or private_foundation grants however you do not even have a fundraising program to solicit such contributions you included income from mobile donations via wireless carriers as part of your revenues however you have no legal right to those funds and are merely a conduit for the distribution of the funds from the wireless mobile phone carriers to specified charities excluding the revenues from mobile donations you receive about half of your remaining revenues from the conferences that you conduct most of the revenues from the conferences are from fees charged to for- profit sponsors and other participants who are in the mobile communication business you are similar to the organization described in 70_tc_352 in which the court cited lack of solicitation and sole support from fees as factors disfavoring exemption in addition to your lack of public financial support your organization shows none of the public involvement that characterizes organizations serving a public interest your conference activities are carried out exclusively by paid contractors in addition the same directors who are members of your governing board also serve as your officers moreover you share the same board members and officers with those of llc a for-profit entity with which you do business in fact two of your board members are partners of llc you are unlike the organization described in revrul_69_441 supra in which the organization’s board_of directors is comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the provision of commercial services may serve primarily charitable purposes when those services are provided exclusively to exempt_organizations are an essential function of such organizations and are provided for a fee that is substantially below cost see rev ruls and supra however you have not established that your services are an essential function to your tax exempt partners by collecting and storing data regarding transactions between donors charities and the mobile carriers you are providing a service that is commercial in nature thus you serve a substantial non-exempt purpose 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 your relationship to llc suggests that you operate to further its business each charity that participates in a campaign is required to pay a fee to llc or another application service provider a substantial number of the charities that participate in campaigns are also clients of llc although you are organized as a separate_entity llc conducts all of your activities relating to the campaigns like the organization in church by mail t c memo cir you have chosen without any competition aff'd 765_f2d_1387 one for-profit entity to manage every aspect of your business as the court held in church by mail the critical inquiry is whether the whole enterprise is carried out in such a way that the for-profit benefits substantially conducting conferences where you market mobile communication technology and consulting services does not promote exempt purposes under sec_501 you state that you plan to conduct two conferences a year open to the public you also maintain that due to the specific nature of the content most attendees will be connected with wireless carriers and other businesses that are interested in the collection of charitable_contributions through mobile technologies these conferences are intended to raise awareness of the use of wireless options for fundraising broadcasting branding and provide a marketplace for providers to connect with interested parties you plan to encourage and host social networking activities during and following your seminars between exempt_organizations and businesses offering services to these charities some of these lectures and activities are more akin to marketing and networking than educational by informing application service providers wireless carriers and other technology related businesses of the channels of fundraising available you market llc’s offerings and your services while there may be some educational content these conferences and networking sessions primarily foster future commercial business transactions for the for-profits see american institute for economic research f 2d pincite the court held that the organization did not qualify for exemption under r c sec_501 because its commercial purpose was primary and not incidental to its educational purpose furthermore even if your conferences were considered to be educational they comprise of less than percent of your overall time and thus are an insubstantial portion of your activities operation for private benefit even if you had an exempt_purpose you would still have to show that you benefit the general_public rather than the private interests of a select few sec_1_501_c_3_-1 of the regulations provides that private interests are those such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by them private individuals may receive incidental_benefits that are a necessary concomitant to achieving an exempt_purpose for example doctors paid to treat patients however the benefits you provide to the private interests of llc other application service providers and the mobile phone companies to whom your clients subscribe are not incidental but actually prevent you from achieving an exempt_purpose control is an important factor in determining whether an organization operates for the benefit of private interests when private individuals or for-profit entities have either formal or effective_control of a non-profit organization it raises questions concerning whether the organization furthers the profit-seeking motivations of those private individuals or entities see 113_tc_47 you were founded by representatives of llc at the behest of the mobile carriers with business interests in generating revenue from the mobile giving campaigns the founders of the llc for a significant period of time were the sole members of the board_of directors of your organization even after your board was expanded to include three additional individuals your minutes show that these original partners maintain strong control_over your operations you have ceded control_over your business to the for-profit management company llc although you do not have an agreement with llc llc manages your business and administrative affairs you have not negotiated at arm’s length for services with other mobile communications service providers because llc’s owners and officers also control you asaresult llc is able to promote its services through you at prices that serve the private interests of its owners who are your board members and in a manner that furthers its private business interests as in est of hawaii t c you are totally dependent upon one for-profit company for all of your operations it provides employees offices equipment and services if you terminated the management agreement you would cease to function although you do not have the long-term management agreement that the court objected to in 113_tc_47 the effect of ceding all control to llc effectively keeps you from being independent as the court pointed out in redlands you have no ability to oversee your activities because you have no independent employees or resources your operations also substantially benefit the mobile carriers llc and other application service providers by providing a client base for these organizations to charge fees for services based upon charitable giving by verifying that charities are eligible to participate in mobile giving campaigns you are providing a direct client stream for llc llc will then charge the charities for_the_use_of their programming and short codes you were created to allow llc to offer a variety of services to charities engaging in mobile technologies many of your clients end up using llc for the management of their online presence and mobile campaigns your activities dovetail with the very nature of the services offered by llc this integration with llc and other for profit entities is similar to relationships between exempt_organizations and for profits in est of hawaii and church by mail supra those courts found that the exempt_organizations were operated to provide substantial benefit to the commercial entities and therefore were not entitled to exempt status you assert that you have taken steps to avoid private benefit by explaining the differences between the services you provide and those provided by the llc you also explain that once charities are deemed eligible to participate by you they may take that certification to any one of several application service providers however this does not eliminate the benefit of the client stream to llc you lease your space from llc for a nominal yearly sum use llc’s software free of charge use its staff to conduct your validation process and use its equipment to conduct your business these facts suggest that you are not separate from llc thus your operations may substantially benefit llc and the founders of your organization who are also the principals of llc they are in a position to gain financially from your activities in addition to llc you also benefit the private interests of the mobile carriers that participate in campaigns you provide a benefit to the mobile carriers benefit by relieving them of the administrative burden involved in verifying eligibility of charities applying to participate in campaigns also you increase their business profits because they charge fees to donors for the convenience of enabling donors to contribute funds to specified charities permitting them to market their services to attendees in addition mobile carriers participate in and sponsor your conferences thus also other application service providers will benefit directly from services you provide through your verification of eligibility and conferences agency another consequence of your relationship with the mobile carriers and llc is that it appears that you are acting as an agent of the for-profits the service rarely questions separate status if the subsidiary actively conducts business observes basic corporate formalities and does not observe the formalities of an agent you are separately organized from llc but you do not actively conduct business you state that you generate no revenues from the continued verification of the charities beyond the initial fee charged you are not able to continue to operate but for your relationship with llc you lease office space from llc but provided no copy of a written lease nor do your minutes indicate that one exists you rely on the staff software and equipment to do the day to day functions of your programs you have overlapping board members with llc like the organization in p l l scholarship v commissioner t c your activities are so interrelated with llc as to be functionally inseparable it is well established that an impermissible private benefit results when for-profit entities are functionally interrelated with exempt_organizations see also international postgraduate medical foundation v commissioner t c memo here you are functionally interrelated with llg your initial officers remain on the board_of directors and have substantial influence over your operations even after expansion of the board at no point were llc’s principals less than of members in attendance voting power on your board is vested in persons who will benefit financially directly or indirectly therefore you are not entitled to tax exempt status under i r c from your activities c lack of control of funds you will receive donations from individuals through mobile giving campaigns the donor will designate the charity to receive their donations through the use of short code you deliver of the donation to the designated charity however at no point do you have legal control of the funds you have not provided any examples of contracts or documents provided to donors or charities of what happens should a charity become ineligible to receive donations at some point in the campaign you have not established that you may exercise any rights to redirect any portions of the donations should the need arise you are not receiving any portion of the donations to designate to charities of your selection nor have you explained who will be providing substantiation of the donation you or the charity absent appropriate contro of the funds you operate as a conduit to direct charitable donations an activity that has not been recognized as charitable within the meaning of ilr c sec_501 conclusion based on the information provided in your form_1023 and supporting documentation we conclude that you are not organized and operated exclusively for purposes described in sec_501 accordingly you do not qualify for exemption as an organization described in sec_501 and you must file federal_income_tax returns contributions to you are not deductible under r c sec_170 you have the right to file a protest if you believe this ruling 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 ruling your protest statement should be accompanied by the following declaration under 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_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this ruling you do not need to take any further action 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 if we please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service 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 holly o paz director rulings and agreements


t c memo united_states tax_court william c and elaine gaskins petitioners v commissioner of internal revenue respondent pasquale t quinn and sabina a quinn petitioners v commissioner of internal revenue respondent docket nos filed date james j riley for petitioners keith l gorman for respondent memorandum opinion parker judge this consolidated case is before the court on petitioners' motion for litigation costs pursuant to sec_7430 and rules through unless otherwise indicated all section references are to the internal_revenue_code in effect for the relevant taxable years and all rule references are to the tax_court rules_of_practice and procedure the parties submitted memoranda and affidavits in support of their positions neither party requested a hearing we decide the motion based on the pleadings petitioners' motion for litigation costs respondent's objection to that motion the supporting memoranda and affidavits and the record in these cases the primary issues in the underlying opinion gaskins v commissioner tcmemo_1995_511 filed date were whether petitioner elaine gaskins and petitioner sabina a quinn were entitled to relief as innocent spouses under sec_6013 we held that both petitioner wives were entitled to such relief however the path to that result was long and winding with unnecessary obstacles and delays along the way background on date respondent mailed notices of deficiency to petitioners william c and elaine gaskins the gaskins and pasquale t and sabina a quinn the quinns determining deficiencies in income_tax for the taxable years and and determining against petitioner husbands additions to tax for fraud for those years on date the gaskins and the quinns through their attorney james j riley attorney riley filed their respective petitions with this court those petitions assigned as errors the determination of unreported income and fraud on the part of the petitioner husbands for each year rule b on date respondent filed her respective answers denying petitioners' allegations and making affirmative allegations in support of the fraud issues as to which respondent had the burden_of_proof by notice of trial setting dated date the cases were calendared for trial during the trial session in philadelphia pennsylvania commencing on date attached to that notice of trial setting was the court's standing pre-trial order on date respondent filed unopposed motions for continuance to permit petitioners to have a second opportunity to resolve their cases with respondent's appeals_office without the necessity of trial the court granted those motions attorney riley failed to provide the appeals officer with the financial information or other documents to support petitioners' claims including any innocent spouse claims the appeals officer made repeated and unsuccessful attempts to contact attorney riley about the cases however in the statement of facts in support of the assignments of error the petitions asserted that each petitioner wife was an innocent spouse under sec_6013 rule b had the petitions clearly raised innocent spouse claims attorney riley would have had a conflict of interest in representing both petitioner husbands and petitioner wives innocent spouse status requires the alleged innocent spouse to establish among other things that the understatement_of_tax is attributable to grossly_erroneous_items of the culpable spouse by notice of trial setting dated date the cases were again calendared for trial during the trial session in philadelphia pennsylvania commencing on date again the court's standing pre-trial order was attached to the notice of trial setting on date attorney riley filed motions to continue the trial of the cases to permit petitioners to avail themselves of the opportunity to submit offers in compromise after confirming that petitioners had submitted to respondent such offers in compromise the court granted petitioners' motions for continuance on date respondent notified attorney riley that the offers in compromise could not be processed due to missing information and because the offers of dollar_figure were unacceptable the letter rejecting the quinns' offer indicates that no documentation supporting the innocent spouse claim had been submitted with the offer and thus respondent was not able to consider that claim by notice of trial setting dated date the cases were again calendared for trial during the philadelphia pennsylvania trial session commencing date on date respondent sent a letter to attorney riley suggesting a meeting on date respondent followed the letter with a telephone call on date attorney riley generally offers in compromise presuppose liability for the tax such offers deal with collectability a matter in which this court has no role never responded to either the letter or the telephone call on september and respondent mailed to attorney riley interrogatories for the gaskins and for the quinns respectively by letter dated date respondent reminded attorney riley of the outstanding interrogatories and of the attempts to schedule a meeting on date respondent mailed to attorney riley requests for production of documents on date respondent filed with the court and mailed to attorney riley her first sets of requests for admissions on date attorney riley mailed the respective answers to respondent's first sets of requests for admissions attorney riley having failed to respond to the requests for answers to interrogatories and production of documents respondent on date filed motions to compel responses to respondent's interrogatories and to impose sanctions and motions to compel responses to respondent's requests for production of documents and to impose sanctions by orders dated october and the court granted these motions as to the quinns and the gaskins respectively the sanctions portions of those motions were deferred to the trial session attorney riley had mailed responses to respondent's interrogatories and requests for documents on date in such responses petitioners objected to answering most of respondent's interrogatories designed to elicit information on the innocent spouse claim on the ground that providing such responses would be burdensome and oppressive petitioners did respond to interrogatories in regard to petitioners' educational level marital status and responsibility for household finances they provided limited employment histories in response to respondent's requests for documents petitioners indicated they possessed no records regarding bank accounts investments household expenses information and automobiles on date the cases were consolidated for trial briefing and opinion by order dated date the cases were continued upon petitioners' unopposed motion based upon a medical emergency by notice of trial setting dated date the cases were calendared for trial during the trial session in philadelphia pennsylvania commencing on date again a copy of the court's standing pre-trial order was attached to the notice on date and date respondent's counsel telephoned attorney riley's office was unable to speak with him and left messages for him to return the calls attorney riley did not return such telephone calls on date respondent's counsel wrote to attorney riley seeking to discuss the cases respondent received no response to this letter on date respondent's counsel again telephoned attorney riley's office and received no return call on date respondent's counsel wrote to attorney riley reminding him of the trial date and indicating respondent would seek a default judgment or move to dismiss for failure properly to prosecute if attorney riley continued to fail to cooperate on date respondent mailed her trial memorandum to the court and to attorney riley attorney riley did not prepare a trial memorandum on date attorney riley contacted respondent's counsel indicating he would be out of town until late on date respondent's counsel offered to meet during the weekend of june and but attorney riley failed to contact him at the calendar call of the trial session on date there were no stipulations of fact by the parties no exchanges of documents and no trial memorandum from petitioners the court's standing pre-trial order requires the parties to meet and to stipulate under rule to the maximum extent possible the standing pre-trial order also requires the parties to exchange trial memoranda including their witness lists and copies of all documents to be offered at trial that have not been stipulated to days before the calendar call of the trial session respondent's counsel had complied to the extent that he could do so unilaterally attorney riley appeared at the calendar call but had not complied with the court's standing pre-trial order instead attorney riley filed a motion for continuance which the court denied also on date respondent filed a motion to dismiss for failure properly to prosecute as to all issues upon which petitioners had the burden_of_proof the court orally granted respondent's motion on that date and set the case for trial on date on the fraud issues as to which respondent had the burden_of_proof on date attorney riley filed a motion to set_aside the default in an affidavit attached to the memorandum in support of this motion attorney riley stated that his representation of petitioners was on a pro bono basis and that he had not billed the petitioners nor did he intend to be compensated by them for his time or expenses in connection with these cases during a recess of the oral argument on petitioners' motion to set_aside the default the parties met privately and agreed to a partial settlement petitioner husbands conceded the deficiencies in income_tax for all years at issue and the additions to tax for fraud for and respondent conceded the fraud additions for these concessions left only the innocent spouse issues remaining and also resolved attorney riley's conflict of interest so that he could represent petitioner wives on their innocent spouse claims see supra note attorney riley agreed to provide documents in regard to the actually attorney riley had mailed the motion for continuance to the clerk's office in washington d c where it was received on the morning of date innocent spouse issues and a trial memorandum to respondent by date the parties agreed to file status reports with the court by date the court accepted the parties' settlement after the settlement and attorney riley's agreement to cooperate in the trial preparations the court vacated its oral direction granting respondent's motion to partially dismiss and deemed both respondent's motion to dismiss and petitioners' motion to set_aside the default to be moot the court issued an order dated date requiring petitioners to provide the documents relating to the innocent spouse issues and trial memorandum to respondent and for the parties to file status reports with the court as agreed that order expressly provided that all documents relating to the innocent spouse issues in this case must be furnished to counsel for respondent by petitioners on or before date respondent's motion to compel production of documents including those documents on the innocent spouse issues had been granted by the court in october of and petitioners still had not complied with the court's orders on or about date attorney riley provided respondent with copies of various documents many of the copies were illegible and many were items that petitioners previously had denied possessing respondent ascertained that attorney riley had other documents in his possession that had not been provided documents that petitioners had earlier denied possessing attorney riley agreed to produce the additional documents by date respondent also wished to review the original documents from which the illegible copies had been made on july and the parties filed their status reports with the court indicating they had not resolved the innocent spouse issues by order dated date the court officially calendared the cases for trial during a special trial session of the court in philadelphia pennsylvania beginning on date and ordered that all exhibits not stipulated to be exchanged on or before date on date attorney riley's law clerk the law clerk arrived at respondent's office with six boxes of records for respondent's review respondent's counsel was able to review only three boxes in the time the law clerk made himself available the law clerk declined to leave the remaining documents with respondent's counsel but agreed to return on date on date attorney riley sent a letter to respondent's counsel indicating the documents would be available for review only in his office a 2-hour drive from respondent's office in philadelphia in a conference call on date the court directed attorney riley to have the remaining boxes delivered to philadelphia for respondent's review this delivery occurred on date on date attorney riley provided respondent with documents relating to mr gaskins' social_security and worker's compensation payments the trial took place on august and late in the day on the first day of trial attorney riley produced an additional box of documents that had not previously been furnished to respondent's counsel this box contained items that respondent had requested in september of and that petitioners had denied having the trial was recessed until p m the following day to permit respondent's counsel to review these documents these financial records were particularly important in the court's ultimate finding that the quinns' substantial accumulated savings came from petitioner wife's frugality and careful management of her earnings rather than from any unreported income of her husband during the trial attorney riley attempted to introduce copies of certain of the quinns' tax returns which the court declined to receive the court kept the record of the trial open until date so that copies of the original returns as filed could be obtained and filed with the court on date attorney riley filed a motion to extend time to keep the record open the court granted this motion extending the time until date on date the court having received no further documents closed the evidentiary record in the case discussion generally a taxpayer who has substantially prevailed in a tax_court proceeding may be awarded reasonable_litigation_costs incurred in connection with such court_proceeding sec_7430 to be entitled to an award of reasonable_litigation_costs the moving party must establish all of the following that the party exhausted the administrative remedies sec_7430 that the party did not protract the proceeding unreasonably sec_7430 that the position_of_the_united_states in the proceeding was not substantially justified sec_7430 that the party substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented sec_7430 that the party met the net_worth requirements of u s c sec d b sec_7430 and that the costs are reasonable as defined in sec_7430 the parties agree that administrative remedies have been exhausted that petitioner wives substantially prevailed as to the innocent spouse issues and that petitioner wives meet the net_worth requirements the parties disagree as to whether petitioner wives unreasonably protracted the proceedings whether respondent's position was substantially justified and whether the costs requested are reasonable unreasonable protraction of proceedings when this consolidated case was called from the calendar for trial on date that was the fourth time the case had been noticed for trial attorney riley's failure to comply with this court's standing pre-trial order and to prepare these cases for trial for that date trial session is detailed above respondent's motion to dismiss all issues as to which petitioners had the burden_of_proof for failure properly to prosecute was granted because of such failure the court set the case for trial on date on the fraud issues as to which respondent had the burden_of_proof attorney riley then filed a motion to set_aside the default which was heard on date in the course of oral argument on that motion the parties met during a recess and settled the deficiency and fraud issues involving petitioner husbands leaving only the innocent spouse issues remaining the court accepted the parties' settlement vacated the prior dismissal and set a schedule looking to the trial of the innocent spouse issues that did not however end the delays attorney riley's delays in furnishing documents continued right up to and even during the trial itself on or about date attorney riley began to provide the relevant documents and his production of documents continued intermittently up to and even during trial itself the court's intervention was required to effectuate this exchange of documents the trial in august of had to be recessed because of his delays in producing documents many of which he and petitioners had earlier denied possessing we find that petitioners and attorney riley unreasonably protracted this proceeding respondent's position the position_of_the_united_states for purposes of litigation costs refers to the position_of_the_united_states in a judicial proceeding sec_7430 a judicial proceeding in this court is commenced with the filing of a petition rule a generally respondent initially takes a position on the date she files her answer in response to the petition huffman v commissioner 978_f2d_1139 9th cir affg in part and revg in part tcmemo_1991_144 whether respondent's position is substantially justified turns on a finding of reasonableness based upon all the facts and circumstances as well as legal precedents relating to the cases see 487_us_552 construing similar language in the equal_access_to_justice_act u s c sec 900_f2d_655 3d cir affg in part and revg in part on other grounds 92_tc_510 huffman v commissioner supra pincite the fact that the commissioner eventually loses or concedes the case does not in itself establish that a position is unreasonable 991_f2d_359 7th cir 92_tc_760 86_tc_962 the reasonableness of respondent's position necessarily requires considering what respondent knew at the time she took the position and the events that occurred afterwards see 88_tc_1329 87_tc_847 85_tc_927 to establish eligibility for innocent spouse relief a taxpayer must establish that a joint federal_income_tax return was filed there is a substantial_understatement of tax attributable to grossly_erroneous_items of the other spouse in signing the return the alleged innocent spouse did not know and had no reason to know of the substantial_understatement and taking into account all the facts and circumstances it would be inequitable to hold the alleged innocent spouse liable for the deficiency attributable to such substantial_understatement sec_6013 at issue in these cases were items and above factors to be considered in determining whether the spouse had reason to know are the alleged innocent spouse's level of education the spouse's involvement in the family's business and financial affairs the presence of expenditures that appear lavish or unusual when compared to the family's past levels of income standard of living and spending patterns and the culpable spouse's evasiveness and deceit concerning the couple's finances 872_f2d_1499 11th cir affg tcmemo_1988_63 93_tc_355 factors to consider in determining whether it would be inequitable to hold the taxpayer liable include whether the taxpayer seeking relief significantly benefited from the erroneous items 9_f3d_290 3d cir affg tcmemo_1992_580 93_tc_672 whether the spouse seeking relief had been deserted by or divorced or separated from the culpable spouse sec_1 b income_tax regs and whether probable future hardships would be visited upon the innocent spouse if she is not relieved of liability 509_f2d_162 ndollar_figure 5th cir respondent's interrogatories and requests for documents were designed to elicit information concerning these factors in petitioners' date answers to respondent's interrogatories petitioners provided information on petitioners' educational levels and marital status and that petitioner wives handled the household finances petitioners declined to answer respondent's interrogatories regarding their assets and expenditures in their responses to respondent's requests for documents petitioners denied possessing most of the documents requested items that were necessary to determine petitioners' previous levels of income their lifestyles and whether petitioner wives benefited from the understatements petitioner wives produced these same documents over the period date up to the date of and during the trial on date at the end of the first day of trial the trial had to be recessed until p m the following day to afford respondent's counsel an opportunity to review a full box of documents that had not been produced prior to that time at trial petitioners provided testimony regarding petitioner wives' knowledge and involvement with petitioner husbands' business and petitioners' spending habits based on this testimony and a review of the multitude of documents belatedly submitted the court concluded that petitioner wives were entitled to innocent spouse relief the source of the quinns' substantial accumulated savings was a critical item particularly in view of mrs quinn's obvious astuteness in financial matters similarly mrs gaskins' involvement in her husband's business affairs raised credibility issues not all of which were resolved by the court in her favor prior to the exposition of these matters at the trial the court's analysis of all the facts and circumstances of the case and the court's resolution of credibility issues it would not have been unreasonable to conclude that petitioner wives were not eligible for such relief respondent was not required to concede this case before she received the documentation necessary to prove petitioner wives' contentions particularly when there were credibility issues to be resolved see brice v commissioner tcmemo_1990_355 affd without published opinion 940_f2d_667 9th cir we hold that respondent's position was substantially justified at the time the answers were filed and up through the trial and the court's final adjudication of the matter reasonable costs sec_7430 allows recovery for reasonable_litigation_costs incurred in connection with such court_proceeding sec_7430 reasonable_litigation_costs include reasonable fees paid_or_incurred for the services of attorneys in connection with the court_proceeding except that such fees shall not be in excess of dollar_figure per hour unless the court determines that an increase in the cost of living or a special factor such as the limited availability of qualified attorneys for such proceeding justifies a higher rate emphasis added sec_7430 respondent argues that petitioners have not paid_or_incurred attorney fees because attorney riley's representation was pro bono and in the alternative that the requested amounts are in excess of those allowable based on our findings that petitioner wives and attorney riley unreasonably protracted the proceeding and that respondent's position was substantially justified at all times throughout the proceeding it is not necessary for us to address these arguments in keeping with the above appropriate orders and decisions will be entered the question of awarding attorney's_fees under sec_7430 where taxpayer's counsel has agreed to provide representation pro bono seems to be one of first impression pro_se taxpayers are not entitled to an award for the value of their services since no fee is paid_or_incurred 27_f3d_436 9th cir 840_f2d_244 4th cir 87_tc_838