t c memo united_states tax_court michael keller petitioner v commissioner of internal revenue respondent docket no 7530-04l filed date asher b bearman jaret r coles jennifer a gellner terri a merriam and wendy s pearson for petitioner gregory m hahn and thomas n tomashek for respondent memorandum findings_of_fact and opinion haines judge petitioner filed a petition with this court in response to a notice_of_determination concerning collection action s under sec_6320 and or for and pursuant to sec_6330 petitioner seeks review of respondent’s determination the sole issue for decision is whether respondent abused his discretion in sustaining the proposed levy action findings_of_fact some of the facts have been stipulated and are so found the first and second stipulations of fact and the attached exhibits are incorporated herein by this reference petitioner resided in escondido california when he filed his petition unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar respondent reserved relevancy objections to exhibits attached to the first stipulation of facts and to exhibits attached to the second stipulation of facts fed r evid provides the general_rule that all relevant evidence is admissible while evidence which is not relevant is not admissible fed r evid defines relevant evidence as evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence while the relevancy of some exhibits and portions of petitioner’s testimony is certainly limited we find that the exhibits and testimony meet the threshold definition of relevant evidence and are admissible the court will give the exhibits and testimony only such consideration as is warranted by their pertinence to the court’s analysis of petitioner’s case respondent also objected to many of the exhibits on the basis of hearsay even if we were to receive those exhibits into evidence they would have no impact on our findings_of_fact or on the outcome of this case petitioner is married he has a bachelor of science degree in marine transportation and management and has been employed by military sealift command since date petitioner timely filed federal_income_tax returns for and and reported the following year total income total_tax tax withheld refund due dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number respondent assessed the tax as reported and issued the refunds petitioner claimed in petitioner became a partner in durham genetic engineering j v dge a partnership organized and operated by walter j hoyt iii hoyt from about through hoyt organized promoted and operated more than cattle breeding partnerships hoyt partnerships hoyt also organized promoted and operated sheep breeding partnerships from to his subsequent removal by the tax_court in through hoyt was the tax_matters_partner of each hoyt partnership from approximately through hoyt was a licensed enrolled_agent and as such he represented many of the hoyt partners before the irs in hoyt’s enrolled_agent status was revoked hoyt was convicted of various criminal charges in although petitioner did not invest in dge until he began claiming hoyt-related deductions on his return despite receiving from dge schedules k-1 partner’s share of income credits deductions etc for and petitioner claimed the hoyt-related deductions on schedules f profit or loss from farming on his and returns petitioner petitioner asks the court to take judicial_notice of certain facts in other hoyt-related cases and apply judicial estoppel to facts respondent has asserted in previous hoyt- related litigation we will do neither a judicially noticeable fact is one not subject_to reasonable dispute in that it is either generally known within the territorial jurisdiction of the trial_court or capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned fed r evid b petitioner is not asking the court to take judicial_notice of facts that are not subject_to reasonable dispute instead petitioner is asking the court to take judicial_notice of the truth of assertions made by taxpayers and the commissioner in other hoyt-related cases such assertions are not the proper subject of judicial_notice the doctrine_of judicial estoppel prevents a party from asserting a claim in a legal proceeding that is inconsistent with a position successfully taken by that party in a previous proceeding new 532_us_742 among the requirements for judicial estoppel to be invoked a party’s current litigating position must be clearly inconsistent with a prior litigating position id pincite petitioner has failed to identify any clear inconsistencies between respondent’s current position and his position in any previous litigation reported schedule f losses of dollar_figure anddollar_figurerespectively in date petitioner filed a form_1045 application_for tentative refund seeking to carry back a hoyt-related net_operating_loss realized in to and as a result of the carryback petitioner reported decreases in tax of dollar_figure dollar_figure and dollar_figure respectively respondent issued refunds in those amounts plus interest on date on date respondent reversed petitioner’s tentative net_operating_loss carrybacks claimed on the form_1045 and reassessed tax due of dollar_figure dollar_figure and dollar_figure for and respectively plus interest to secure payment of the assessed tax a federal_tax_lien was placed on petitioner’s property on date on date respondent sent petitioner a settlement proposal respondent offered to not impose any sec_6662 penalties if petitioner conceded that he is not entitled to petitioner’s and tax years were before the court at docket no see keller v commissioner tcmemo_2006_131 the details of the reassessment are not in the record and the parties do not raise any procedural issues regarding it the federal_tax_lien is not at issue in the present case petitioner received a sec_6330 hearing with regard to the filing of the lien and respondent sustained the collection action however the details of the lien and the related hearing are not in the record claim any of the hoyt-related expenses claimed on his returns agreed that the higher rate of interest applicable to tax- motivated transactions will apply and waived any claim for the abatement of interest petitioner did not accept the settlement offer on date respondent sent petitioner a final notice_of_intent_to_levy and notice of your right to a hearing relating to and on date petitioner submitted a form request for a collection_due_process_hearing petitioner indicated he would pursue offers-in-compromise based on doubt as to collectibility and effective tax_administration and would provide financial information upon request on date a sec_6330 hearing was held by phone between settlement officer kathleen lee ms lee and terri a merriam ms merriam petitioner’s attorney ms merriam indicated that petitioner would most likely be able to pay the tax in full and thus he wished to pursue only an effective tax_administration offer-in-compromise however ms merriam did not provide ms lee with form_656 offer_in_compromise or with form 433-a collection information statement for wage earners and self-employed individuals on date ms merriam sent ms lee a letter indicating that petitioner had not yet completed a form 433-a but one would be obtained shortly because petitioner would likely be able to pay his tax_liability in full ms merriam asked ms lee to consider the effective tax_administration offer- in-compromise the letter set out in detail petitioner’s position regarding an effective tax_administration offer-in- compromise but a form_656 was not enclosed on date respondent sent petitioner a notice_of_determination sustaining the proposed collection action respondent stated that we are unable to determine whether or not an offer_in_compromise is the appropriate resolution because you failed to provide the financial information necessary to make a collection determination in response to the notice_of_determination petitioner filed his petition with this court on date petitioner argued that respondent erred by determining that petitioner did not qualify for an effective tax_administration offer-in- compromise and failing to allow petitioner sufficient time to provide additional information this case was initially calendared for trial beginning date however the parties’ joint motions for continuance and remand were granted at calendar call the case was remanded to respondent’s appeals_office to give petitioner an petitioner also alleged that respondent erred by not finding that there was doubt as to collectibility however petitioner did not present information to substantiate this claim and does not argue it on brief we conclude that petitioner has abandoned this argument opportunity to present information that he did not present in the first sec_6330 hearing on remand the case was assigned to settlement officer john vander linden mr vander linden in connection with the second sec_6330 hearing petitioner provided respondent with forms 433-a and that indicated that petitioner was requesting an offer-in-compromise based only on effective tax_administration petitioner offered to compromise his outstanding tax_liabilities not only for the years subject_to the proposed collection action but also for those arising from his and tax years petitioner offered to pay dollar_figure to compromise an estimated income_tax_liability of dollar_figure inclusive of penalties and interest the dollar_figure represented petitioner’s total income_tax_liability exclusive of penalties or interest however petitioner’s offer-in-compromise did not set forth any grounds on which an effective tax_administration offer could be accepted the second sec_6330 hearing was held on date because the offer-in-compromise did not include any grounds for accepting the offer mr vander linden considered ms merriam’s petitioner actually completed two offers-in-compromise one for and the other for petitioner’s arguments are not particular to one offer or the other and respondent considered both together to avoid confusion we refer to the offers-in-compromise as a single offer at the time of the second sec_6330 hearing the taxes penalties and interest for petitioner’s and tax years were unassessed date letter outlining petitioner’s position in his review of this case mr vander linden considered all of the information and arguments presented by petitioner at the hearing in the letter and contained in the administrative record on date respondent sent petitioner a supplemental notice_of_determination concerning collection action s under sec_6320 and or supplemental notice_of_determination respondent determined that petitioner did not qualify for an effective tax_administration offer-in-compromise and any compromise relating to and could not be considered because the taxes penalties and interest for those years had not been assessed as a result respondent sustained the proposed collection action opinion sec_7122 provides that the secretary may compromise any civil case arising under the internal revenue laws whether to accept an offer-in-compromise is left to the secretary’s discretion 447_f3d_706 9th cir affg tcmemo_2004_13 sec_301_7122-1 proced admin regs the regulations set forth three grounds for the compromise of a tax_liability doubt as to liability doubt as to collectibility or promotion of effective tax_administration sec_301_7122-1 proced admin regs as pertinent here the secretary may compromise a tax_liability on the ground of effective tax_administration when exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner and compromise of the liability would not undermine compliance by taxpayers with the tax lawsdollar_figure petitioner proposed an effective tax_administration offer- in-compromise arguing that exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner respondent rejected petitioner’s argument and determined that the offers in compromise under eta provisions are not appropriate given the circumstances of this case because the underlying tax_liability is not at issue our review under sec_6330 is for abuse_of_discretion see 114_tc_604 114_tc_176 this standard does not ask us to decide whether in our own opinion petitioner’s offer-in- compromise should have been accepted but whether respondent’s rejection of the offer was arbitrary capricious or without the regulations also provide that the secretary may compromise a liability on the ground of effective tax_administration when collection of the full liability will create economic hardship see sec_301_7122-1 proced admin regs petitioner does not argue that collection of the full liability will create economic hardship sound basis in fact or law 112_tc_19 fowler v commissioner tcmemo_2004_163 a exceptional circumstances petitioner asserts that there are so many unique and equitable facts in this case that this case is an exceptional circumstance and respondent abused his discretion by not accepting those facts as grounds for an offer-in-compromise in support of his assertion petitioner argues that the longstanding nature of this case justifies acceptance of the offer-in-compromise respondent’s reliance on an example in the internal_revenue_manual was misplaced and respondent failed to consider petitioner’s other equitable facts longstanding case petitioner asserts that the legislative_history requires respondent to resolve longstanding cases by forgiving penalties and interest which would otherwise apply petitioner argues that because this is a longstanding case respondent abused his discretion by failing to accept his offer-in-compromise petitioner’s argument is essentially the same argument considered and rejected by the court_of_appeals for the ninth circuit in fargo v commissioner supra pincite see also barnes v commissioner tcmemo_2006_150 we reject petitioner’s argument for the same reasons stated by the court_of_appeals we add that petitioner’s counsel participated in the appeal in fargo v commissioner supra as counsel for the amici on brief petitioner suggests that the court_of_appeals knowingly wrote its opinion in fargo in such a way as to distinguish that case from the cases of counsel’s similarly situated clients eg petitioner and to otherwise allow those clients’ liabilities for penalties and interest to be forgiven we do not read the opinion of the court_of_appeals in fargo to support that conclusion see barnes v commissioner supra respondent’s rejection of petitioner’s longstanding case argument was not arbitrary or capricious the internal_revenue_manual example petitioner argues that respondent erred when he determined that petitioner was not entitled to relief based on example in internal_revenue_manual sec_5 petitioner asserts that many of the facts in this case were not present in the example and therefore any reliance on the example was misplaced petitioner’s argument is not persuasive internal_revenue_manual sec_5 discusses effective tax_administration offers-in-compromise based on equity and public policy grounds and provides the example in the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment immediately upon investing the taxpayer claimed investment tax_credits that significantly reduced or eliminated the tax_liabilities for the years through in the irs opened an audit of the partnership under the provisions of the tax equity and fiscal responsibility act of tefra after issuance of the final_partnership_administrative_adjustment fpaa but prior to any proceedings in tax_court the irs made a global_settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the irs’s determinations were upheld by the court the taxpayer rejected the settlement offer after several years of litigation the partnership level proceeding eventually ended in tax_court decisions upholding the vast majority of the deficiencies asserted in the fpaa on the grounds that the partnership’s activities lacked economic_substance the taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer arguing that tefra is unfair and that the liabilities accrued in large part due to the actions of the tax_matters_partner tmp during the audit and litigation neither the operation of the tefra rules nor the tmp’s actions on behalf of the taxpayer provide grounds to compromise under the equity provision of paragraph b i b of this section compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of tefra administration internal_revenue_manual cch sec_5 at big_number in the supplemental notice_of_determination respondent states we have also considered the provision of the internal_revenue_manual irm sec_5 example this example involves circumstances similar to the circumstances presented in the taxpayer’s case from this example it is clear the government does not consider on sic offers like this to acceptable sic under eta considerations we agree with respondent that the example presents similar circumstances to those in petitioner’s case the similarities include petitioner’s outstanding tax_liability is related to his investment in dge a tefra partnership respondent proposed a settlement offer in in which respondent offered to forgo penalties petitioner rejected the settlement offer petitioner now proposes a compromise on terms more beneficial than those in the settlement offer and petitioner argues that the penalties and interest have accumulated as a result of the length of the case petitioner is correct in asserting that all of the facts in his case are not present in the example however it is unreasonable to expect that facts in an example be identical to facts of a particular case before the example can be relied upon the internal_revenue_manual example was only one of many factors respondent considered given the similarities to petitioner’s case respondent’s reliance on that example was not arbitrary or capricious petitioner’s other equitable facts petitioner argues that respondent abused his discretion by failing to consider the other equitable facts of this case petitioner’s equitable facts include reference to petitioner’s reliance on bales v commissioner tcmemo_1989_ petitioner’s reliance on hoyt’s enrolled_agent status bales v commissioner tcmemo_1989_568 involved deficiencies determined against various investors in several hoyt partnerships this court found in favor of the investors on several issues stating that the transaction in issue should be continued hoyt’s criminal conviction hoyt’s fraud on petitioner and other letters and cases the basic thrust of petitioner’s argument is that he was defrauded by hoyt and that if he is held responsible for penalties and interest incurred as a result of his investment in a tax_shelter it would be inequitable and against public policy petitioner’s argument is not persuasive while the regulations do not set forth a specific standard for evaluating an offer-in-compromise based on claims of public policy or equity the regulations contain two examples see sec_301_7122-1 examples and proced admin regs the first example describes a taxpayer who is seriously ill and unable to file income_tax returns for several years the second example describes a taxpayer who received erroneous advice from the commissioner as to the tax effect of the taxpayer’s actions neither example bears any resemblance to this case unlike the exceptional circumstances exemplified in the regulations petitioner’s situation is neither unique nor continued respected for federal_income_tax purposes taxpayers in many hoyt-related cases have used bales as the basis for a reasonable_cause defense to accuracy-related_penalties this argument has been uniformly rejected by this court and by the courts of appeals for the sixth and tenth circuits see eg 440_f3d_375 6th cir affg tcmemo_2004_279 439_f3d_1243 10th cir affg tcmemo_2004_275 sanders v commissioner tcmemo_2005_163 hansen v commissioner tcmemo_2004_269 exceptional in that his situation mirrors those of numerous other taxpayers who claimed tax_shelter deductions in the 1980s and 1990s see barnes v commissioner tcmemo_2006_150 of course the examples in the regulations are not meant to be exhaustive and petitioner has a more sympathetic case than the taxpayers in fargo v commissioner f 3d pincite for whom the court_of_appeals for the ninth circuit noted that no evidence was presented to suggest that taxpayers were the subject of fraud or deception such considerations however have not kept this court from finding investors in the hoyt tax_shelters to be liable for penalties and interest nor have they prevented the courts of appeals for the sixth and tenth circuits from affirming our decisions to that effect see 440_f3d_375 6th cir affg tcmemo_2004_279 439_f3d_1243 10th cir affg tcmemo_2004_275 mr vander linden testified that he considered all of ms merriam’s and petitioner’s assertions but that the equitable facts did not affect his final_determination mr vander linden also testified that he considered ms merriam’s date letter in which ms merriam addresses petitioner’s equitable facts at length additionally mr vander linden read and considered many of the cases cited in that letter likewise the supplemental notice_of_determination reflects consideration of the arguments raised in the letter the mere fact that petitioner’s equitable facts did not persuade respondent to accept petitioner’s offer-in-compromise does not mean that those assertions were not considered the supplemental notice_of_determination and mr vander linden’s testimony demonstrate respondent’s clear understanding and careful consideration of the facts and circumstances of petitioner’s case we find that respondent’s determination that the equitable facts did not justify acceptance of petitioner’s offer-in-compromise was not arbitrary or capricious and thus was not an abuse_of_discretion b compromise of penalties and interest in an effective tax_administration offer-in-compromise petitioner advances a number of arguments focusing on his assertion that respondent determined that penalties and interest could not be compromised in an effective tax_administration offer-in-compromise petitioner argues that such a determination is contrary to legislative_history and is therefore an abuse_of_discretion these arguments are not persuasive the regulations under sec_7122 provide that if the secretary determines that there are grounds for compromise under this section the secretary may at the secretary’s discretion compromise any civil liability arising under the internal revenue laws sec_301_7122-1 proced admin regs in other words the secretary may compromise a taxpayer’s tax_liability if he determines that grounds for a compromise exist if the secretary determines that grounds do not exist the amount offered or the way in which the offer is calculated need not be considered petitioner’s arguments regarding the compromise of penalties and interest do not relate to whether there are grounds for a compromise instead these arguments go to whether the amount petitioner offered to compromise his tax_liability was acceptable as addressed above respondent’s determination that the facts and circumstances of petitioner’s case did not warrant acceptance of his offer-in-compromise was not arbitrary or capricious and was thus not an abuse_of_discretion because no grounds for compromise exist we need not address whether respondent can or should compromise penalties and interest in an effective tax_administration offer-in-compromise c petitioner’s other argument sec_1 information sufficient for the court to review respondent’s determination petitioner argues that respondent failed to provide the court with sufficient information so that this court can conduct a thorough probing and in-depth review of respondent’s determinations petitioner’s argument is without merit generally a taxpayer bears the burden of proving the commissioner’s determinations incorrect rule a 290_us_111 dollar_figure the burden was on petitioner to show that respondent abused his discretion the burden was not on respondent to provide enough information to show that he did not abuse his discretion nevertheless we find that we had more than sufficient information to review respondent’s determination unassessed years petitioner argues that respondent abused his discretion by failing to consider his offer-in-compromise as it relates to petitioner’s unassessed tax years and respondent has proposed collection action for only and the ultimate issue in this case is whether respondent may proceed with the proposed collection action whether respondent can or should compromise petitioner’s tax_liability for years outside of those for which collection action has been proposed is not relevant to our determination petitioner’s argument is without merit while sec_7491 shifts the burden_of_proof and or the burden of production to the commissioner in certain circumstances this section is not applicable in this case because respondent’s examination of petitioner’s returns did not commence after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 efficient collection versus intrusiveness petitioner argues that respondent failed to balance the need for efficient collection_of_taxes with the legitimate concern that the collection action be no more intrusive than necessary see sec_6330 petitioner’s argument is not supported by the record petitioner has an outstanding tax_liability in his second sec_6330 hearing petitioner proposed only an effective tax_administration offer-in-compromise in the notice respondent states the only other alternative is to pay his accounts by means of an installment_agreement through his authorized representative he has indicated he does not want to consider this alternative at this time respondent concludes since we are unable to resolve his accounts by mutually agreeable collection alternatives the only alternative is to sustain the levy action proposed to collect his accounts this action balances the need for efficient collection_of_taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary the supplemental notice_of_determination indicates that respondent sought to collect petitioner’s outstanding tax_liability through less intrusive means an installment_agreement but petitioner rejected it because no other collection alternatives were proposed there were not less intrusive means for respondent to consider we find that respondent balanced the need for efficient collection_of_taxes with petitioner’s legitimate concern that collection be no more intrusive than necessary d conclusion petitioner has not shown that respondent’s determination was arbitrary or capricious or without sound basis in fact or law for all of the above reasons we hold that respondent’s determination was not an abuse_of_discretion and respondent may proceed with the proposed collection action in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we find them to be moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service appeals_office elim street suite cincinnati oh number release date date date a b cc d certified mail dear department of the treasury taxpayer_identification_number person to contact tel fax tax period ending uil this is our final adverse determination as to your application_for recognition of exempt status under sec_501 of the internal_revenue_code the code as an organization described in sec_501 it is determined that you do not qualify as exempt from federal_income_tax under sec_501 of the code effective date the date of your incorporation in the state of f our adverse determination was made for the following reason s you do not satisfy the operational_test for recognition of exemption as an organization described in sec_501 of the code the manner in which your activities are conducted results in more than an insubstantial degree of private benefit to individuals controlling your organization in doing so you further a nonexempt purpose since more than an insubstantial part of your activities further this nonexempt purpose you are not operated exclusively for exempt purposes within the meaning of sec_501 of the code contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms for the tax periods stated in the heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c see also publication you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling lf you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours appeals team manager enclosure publication department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date fee legend c officer board member d officer board member e officer board member o state p city q date r compensation contact person identification_number contact number fax number employer_identification_number uil dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues e do you qualify for exemption under sec_501 of the code no for the reasons described below letter cg catalog number 47628k - facts you were formed as a corporation on date q in the state of o your articles of incorporation state your purpose is as an educational home daycare and afterschool care services organization for children ages years your governing body is comprised of three individuals including a ceo board member c and two individuals just listed as board members board members d and e board members c and d are related it is not clear if board member e is related to the other board members as you failed to address this issue board member c will receive compensation of dollar_figurer per year you were asked to explain how this amount was determined but failed to provide any detail based on the budgets provided with your application compensation will make up the majority of your expenses your application bylaws and articles of incorporation states that board member c will not be able to be removed by the board_of directors board member c stated that this was done to insure that she can protect her interest in the organization your organization was asked to expand the board_of directors multiple times which you failed to do you were formed to provide a daycare and afterschool program primarily for children of board members family members and the general_public the daycare program will run from am to pm with the afterschool program offered from 00pm to am the daycare conducts various educational activities such as arts and craft programs along with group play activities the afterschool program offers similar activities all activities are conducted at the home of board member c expenses will include meals supplies and transportation to and from the day care as well as personal home expenses such as utilities and phone service you indicate that services are advertised to the general_public by word of mouth through friends and families and also by providing fliers we requested copies of advertising materials demonstrating how you publicize your services and these were not provided you will charge fees for your services parents with low income will have a co-payment to pay and a person with higher income has to pay the full fee you were asked to provide more details regarding your fee structure but failed to explain your fees you will also be supported by grants and by the state of o in receiving direct subsidies for child care services you did not however provide a detailed breakdown of what percentage of fees are from grants the state of o or from fees directly from parents you are currently licensed by the state of o department of children and family services to have a maximum capacity of eight children for the daycare program and five children for the afterschool program the license is in c’s name currently only four children are enrolled in the program all of which are relatives of board members you letter cg catalog number 47628k have indicated the department of children and family services will allow you to have up to twenty children with the help of an assistant however you provided no documentation stating this policy law sec_501 of the internal_revenue_code provides in part for exemption from federal_income_tax of organizations organized and operated exclusively for charitable religious or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations states that in order to qualify under sec_501 of the code an organization must be both organized and operated exclusively for one or more exempt purposes if an organization fails to meet either the organizational or operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net eamings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 of the regulations states that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revenue_procedure a favorable determination_letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal_income_tax is claimed a determination_letter is issued based solely upon the facts and representations contained in the administrative record the applicant is responsible for the accuracy of any factual representations contained in the application the failure to disclose a material fact or misrepresentation of a material fact on the application may adversely affect the reliance that would otherwise be obtained through issuance by the service of a favorable determination_letter or ruling exempt status may be recognized ‘in advance of the organization's operations if the proposed activities are described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements for exemption pursuant to the section of the internal_revenue_code under which exemption is claimed a mere restatement of exempt purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement the organization must fully describe all of the activities in which it letter cg catalog number 47628k expects to engage and the nature of contemplated expenditures where the _ organization cannot demonstrate to the satisfaction of the service that it qualifies for exemption the service will generally issue a proposed adverse determination_letter or ruling in revrul_69_175 1969_1_cb_149 a nonprofit organization formed by parents of pupils attending a private school that provides school_bus transportation for its members’ children serves a private rather than a public interest and does not qualify for exemption under sec_501 of the code 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 of the code regardless of the number or importance of statutorily exempt purposes thus the operational_test standard prohibiting a substantial non-exempt purpose is broad enough to include inurement private benefit and operations that further nonprofit goals outside of the scope of sec_501 in 477_f2d_340 4th cir cert_denied 413_us_910 the fourth circuit held that operating for the benefit of private parties constitutes a substantial nonexempt purpose application of law you are not organized and operated exclusively for charitable educational or religious purposes consistent with sec_501 c of the code nor sec_1 c -1 a of the income_tax regulations and therefore fail to meet the operational_test specifically the facts above indicate that you are not operated for exempt purposes but rather for the private benefit to c d and e by providing child care services for their relatives you are not described in sec_1_501_c_3_-1 as your earnings will inure to insiders you are providing compensation to c to take care of c’s own relatives and are operating out of the residence of c for which you pay a share of the costs further you are providing care for relatives of all board members including d and e which is being subsidized with public funding you are not described in sec_1_501_c_3_-1 of the regulations your organization currently has four children enrolled all of whom are related to board members even though your application states that you are open to the public at this time you are only benefitting the board members by providing daycare services for their relatives you are licensed to supervise eight children at a minimum of the children who make up your program will still be relatives of your board members at letter cg catalog number 47628k night you are only licensed to supervise five children which would mean that at minimum of the children participating in your afterschool program would be relatives of the board members twice you were asked to modify your board_of directors and place control in the hands of unrelated individuals and both times you stated that you are unable to modify your board while you did eventually provide procedures for the removal of a board member it still appears unlikely that board member c would be removed from her position this is based on your statement that c would protect herself and her interest in the program by being assured she could not be eliminated from the board for the above reasons you are serving substantially private rather then public interests in revrul_69_175 the organization is providing a service to only certain individuals that belong to a certain school you are similar to this organization in that you are only providing services for relatives of your board members while members of the general_public are not prohibited from participation in your programs the majority of participants are and or will be children who are related to board members even though you have indicated you advertise services you have been unable to substantiate how you recruit additional enrollees from the general_public and your entire enrollment is comprised of four related children an organization is not operated exclusively for charitable purposes and thus will not qualify for exemption under sec_501 if it has a single non-charitable purpose that is substantial see haswell v united_states in nature this is true regardless of the number or importance of the organization's charitable purposes as specified in better business bureau v united_states although you are conducting child care services in and of itself a qualifying exempt activity your organization is serving private rather then public purposes the substantial personal benefits outweigh any public good and for this reason you are serving non charitable purposes as seen in old dominion box co because you are operating for the benefit of private parties specifically c d and e your directors through the provision of personal services you do not meet qualification for exemption under c you have failed to provide sufficient details regarding certain activities expenditures and publicity of services per revproc_2011_9 a favorable determination_letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements for the section under which exemption is claimed since you have been unwilling or unable to provide requested details it can only be concluded based on the present facts that you are serving private rather then public interests in operating your child care letter cg catalog number 47628k applicant’s position you state that you qualify under sec_501 of the code because you are open to recruitment of children both inside and outside of your community you can serve up to twenty children with the help of an assistant and you will expand your board_of directors service response to applicant’s position you have failed to show how you serve a public rather than a private interest all children participating in your program are relatives of board members you were asked to expand your board_of directors and failed to do so and have structured your board so that private interests are protected conclusion based on the above we conclude that you are operated for private rather then public purposes and do not qualify for exempt status under sec_501 of the code the facts show that you operate primarily for the benefit of your founders board members and the majority of your expenses are in compensation to your ceo you were formed and are operating to benefit insiders rather then the public at large 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 that information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal these items include o n o p a o the organization’s name address and employer_identification_number a statement that the organization wants to appeal the determination the date and symbols on the determination_letter a statement of facts supporting the organization’s position in any contested factual issue a statement outlining the law or other authority the organization is relying on and a statement as to whether a hearing is desired letter cg catalog number 47628k the statement of facts item must be declared true under penalties of perjury this may be done by adding to the appeal the following signed declaration under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process to be represented during the appeal process you must file a proper power of attomey 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 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 to you that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this letter cg catalog number 47628k if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois lerner director exempt_organizations enclosure publication letter cg catalog number 47628k