' department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil dear this is our final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code sec_501 as an organization described in code sec_501 we made this determination for the following reason s you are not operated exclusively for promotion of social welfare within the meaning of sec_501 you protested our proposed adverse_ruling however you subsequently withdrew your protest at the time that you withdrew your protest we notified you of the opportunity to have your case reviewed by the office of appeals and gave you days to request referral of your case to the office of appeals as we did not receive a request to transfer your case to office of appeals within the requisite days the proposed adverse_ruling is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file file the returns in accordance with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty we will max this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions instructions in notice if you agree with our deletions you do not need to take any further action if you disagree with our proposed deletions follow the if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely matthew a weir director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uniform issue list numbers necem her legend a parent faculty practice exchange e h g hospital medical school nursing school aco o i i s i o i l i l i o o - s o n n a o o g o o s i d o n o o o o a o i i o o o o x o l o o o o n n t n r n p l n dear this letter supersedes our letter dated date 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 bases for our conclusion are set forth below facts formation and history you filed articles of incorporation under state statutes pertaining to nonprofit insurance corporations your articles of incorporation provide that you were created exclusively to promote social welfare by offering prepaid health care services that support the missions of research education community service and clinical expertise of a to the people of state and beyond by operation of a health_maintenance_organization and other activities incidental thereto you are a new corporation that will acquire the assets and assume the business of f by merging with f and leaving you as the surviving entity e was formed in year as a for-profit hmo parent acquired f in year parent will continue to control you except that after your merger with fe instead of holding shares in f parent will be your sole member a is an affiliated_group of healthcare entities your relationship to other components of a can be graphically represented as follows medical school faculty practice hospital aco j parent you parent is a membership_organization that is exempt under sec_501 parent has the following three members e medical school a governmental_unit within the meaning of sec_170 and e e sec_170 faculty practice an organization described in sec_501 hospital a public corporation which the state legislature created it is also recognized as an organization described in sec_501 a operates a medical school clinics and hospitals in county f serves a 20-county area in southern state which includes county f’s subscribers have access to over hospitals and clinics in the 20-county service area you will assume and maintain f's service area and provider network management you have a seven-member board_of directors hospital appoints three directors faculty practice appoints two directors an unrelated federally qualified health center within the meaning of section of the public health service act uscs 254b appoints one director parent appoints one director from the community at large your president will concurrently serve as an officer of faculty practice and will devote percent of his or her time to duties performed for you and percent to duties performed for faculty practice you and faculty practice will share the president's compensation ratably your officers will be compensated for their services in accordance with policies and procedures employed by a and its constituent entities other than the president who divides his or her time as described above you will exclusively employ your other officers they will not receive compensation from any other constituent of a your activities healthcare plans you will continue the business of f the exchange which implements the health insurance exchanges under patient protection and affordable_care_act p l as amended aca your healthcare plans will be available to subscribers residing throughout the existing county area served by f in addition you will offer healthcare plans through you allocated your estimated healthcare revenue for year among the following healthcare plans table plan revenues you also described the allocation of f’s subscribers as follows dollar_figure xx dollar_figurex xx dollar_figure dollar_figure xx xx xx dollar_figure share total dollar_figure table type of subscriber hmo preferred provider organization plans point of service plans medicare select medicaid individual non-group subscribers medicaid-eligible subscribers medicare supplement subscribers subscribers under employer_provided group plans state and local_government school districts -__ for-profitemployer- not-for profit employer - total you further explained that you anticipate some reallocation among your plan offerings when the aca takes effect in year and individuals begin purchasing plans through the exchange you described the anticipated allocation of your subscribers after implementation of the aca as follows table year year6 year year subscribers subscribers under employer_provided group plans subscribers to individual plans sold through the exchange - not qualifying for a subsidy low-income subscribers to individual plans sold through the exchange - qualifying for a subsidy ‘medicaid-eligible subscribers medicare supplement subscribers no distinction is made among hmo ppo and pos plans your specific activities in connection with the administration of your healthcare plans will include the following i ii arranging for prepaid healthcare services for subscribers through employer group plans and individual policies arranging for healthcare services to be provided to subscribers through point of service pos and preferred provider organization ppo plans iii arranging for healthcare services to be provided to subscribers eligible for public health care assistance through programs administered by t medicaid plans iv arranging for medical services to be provided to subscribers through the exchange v monitoring effectiveness of delivery of services by contracting healthcare providers using the healthcare effectiveness data and information set to measure performance by healthcare providers and using the consumer assessment of health providers systems to measure patients’ and families’ satisfaction with healthcare provided vi designing and implementing pay-for-performance incentives with primary care providers you will continue to contract with medical service providers and facilities in a’s service area in county as well as the remaining counties of f’s service area outside of county in addition to your contracts with facilities and providers affiliated with a you will enter into agreements to arrange for healthcare services to be provided by over hospitals over primary care providers and over big_number specialty providers you estimated that approximately percent of your subscribers will reside within county with your remaining subscribers residing in the 19-counties you will serve that are outside the a service area social welfare activities the specific social welfare activities that you will undertake including the following i providing financial assistance to individuals and families who qualify for coverage through the exchange but who are unable to afford the premiums because federal regulations prohibit you from providing direct subsidies to qualifying subscribers through the exchange you will provide grant funds to s s will use those funds to provide subsidies to qualifying_individual subscribers through the exchange without regard to the provider chosen by the recipient of the subsidy ii making grants for the following purposes population health research support of a federally qualified health center and other community organizations capital projects and programs at medical school and nursing school ii iv hosting mammography screening events open to women age sec_40 to and similar wellness events providing access to clinically based education materials some or all of which will be available to the general_public through your website g a division internal to you will administer your social welfare activities other activities you will share health information that you obtain regarding your subscribers with r r is a data warehousing initiative that a formed you will use the data warehouse for your own purposes and accordingly you will bear a proportionate share of the operating_expenses related to the administration maintenance and development of the data warehouse in addition because data relating to your subscribers will reside in the data warehouse that data is available to researchers and clinicians affiliated with r e uses the same data warehouse as other entities affiliated with a whose core healthcare plan processing system resides within the same electronic health record system as a uses this connection facilitates delivery of data derived from f subscribers to medical school for use in its academic mission and to clinical faculty for use in their research however you disclose that the electronic health record system from which medical school derives health data for clinical and research purposes also receives data from payors other than f indicating that faculty practice obtains health f is the only payor data from many external sources supporting information provided by medical school specifically states that the electronic health records system that medical school uses does not differentiate among patients based upon their payors the patient data and de-identified data from f subscribers comprises a fraction of the data available to medical school for clinical and research purposes you will provide financial support to q through g q is conducted within medical school the goal of q is to design implement and evaluate strategies to improve health care delivery q obtains data about the medicare population from the centers for medicare services cms to include your private paying subscribers as well as your medicaid subscribers information that you provide broadens the pool of data available to q you will contribute to the education of students of medical school because a portion of your subscribers will obtain primary specialty or in-patient care at facilities affiliated with a coordinated through g in addition you make grants to medical school your financial contribution is we asked you to provide examples of marketing materials you would use to solicit subscribers you stated that such materials are not currently available contractual relationships among entities affiliated with a you state that in the years since f was acquired by parent f has integrated its mission management philosophy and approach to community health care in an effort to become part of a fully integrated health care delivery system when you merge with f you will enter into a broad range of contractual agreements with entities affiliated with a in general most of the contracts relate to administrative services that a provides to you to arrange for services to be provided to your subscribers the contracts with affiliates of a are based upon cost and are not designed to generate a profit for either contracting party you describe various ways in which your activities intersect with those of entities affiliated with a for example your medical director two associate medical directors and your director of health services will be shared with faculty practice or hospital each person’s compensation will be allocated ratably between you and the affiliate of a to which the individual devotes his or her remaining time in accordance with administrative services agreements between you and the applicable affiliate of a you contract with faculty practice for medical management services you state that contracting for medical management services from faculty practice instead of having those decisions made by one of your direct employees makes you similar to a tax-exempt staff model hmo you further state that you contract with hospital to provide pharmacy management services you state that this operational model benefits subscribers because pharmacy services provided to your subscribers are founded on the evidence based practice of medicine and sound clinical decisions in addition pharmacy data relating to your subscribers is shared with other components of a for research purposes your anticipated revenues and expenditures you state that substantially_all of your revenues will be from premiums charged to subscribers of your healthcare plans you estimate your revenues from healthcare plans for the periods below as follows table healthcare plan revenues investment_income xx x x dollar_figurey y sy total dollar_figure dollar_figure year dollar_figure year the allocation of premiums among different healthcare plans and the expected shift of that allocation subsequent to the implementation of aca are shown in table above you allocated your anticipated expenditures across the following categories table expenditures percent healthcare provided to subscribers under employer-provided group plans healthcare provided to individual subscribers healthcare provided to medicaid subscribers subscribers healthcare provided to medicare supplemental plan programs administered through g broker commissions other business_expenses total law social welfare organizations sec_501 of the code provides that an organization described in sec_501 will be exempt from taxation unless exemption is denied under sec_502 or sec_503 sec_501 describes civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 of the income_tax regulations states in general a civic_league_or_organization may be exempt as an organization described in sec_501 if - i it is not organized or operated for profit and ii it is operated exclusively for the promotion of social welfare promotion of social welfare in general an organization is operated exclusively for the promotion i it is primarily engaged in promoting in some way the of social welfare if common good and general welfare of the people of the community an organization embraced within this section is one which is operated _ primarily for the purpose of bringing about civic betterments and social improvements ii noris an organization operated primarily for the promotion of social welfare if its primary activity is general_public in a manner similar to organizations which are operated for profit carrying on a business with the revrul_54_394 1954_2_cb_131 describes an organization whose sole activity was to provide television reception for its members on a cooperative basis in an area not readily adaptable to ordinary reception members of the organization paid service and installation fees nonmember households could not derive any benefit from the organization’s activities concluding that the organization did not qualify for exemption under sec_501 the revenue_ruling explained as follows in when an organization’s only activity is to provide television reception on a cooperative basis to its members who contract and pay for such services such organization is held to operate for the benefit of its members rather than for the promotion of the welfare of mankind revrul_62_167 1962_2_cb_142 describes an organization created for the purpose of constructing and maintaining a reflector-type television station capable of receiving signals of television stations and reproducing the signals so that satisfactory television reception would be available to the community at large all persons in the community could become members the organization derived its revenues from a combination of membership fees and donations the reflector-type equipment received signals from three television stations and retransmitted the signals into the community any television in the community could receive the signals retransmitted by the organization’s equipment the organization in this revenue_ruling is distinguishable from the organization described in revrul_54_394 in the earlier revenue_ruling only members who entered into a contract with that organization and paid installation and service fees could access its services in contrast the organization described in this revenue_ruling operated its system for the benefit of the community at large members paida fee or made donations to this organization voluntarily the same benefits could be enjoyed by members of the community who opt not to pay the membership fee accordingly the organization described in this revenue_ruling qualified for exemption under sec_501 revrul_73_349 1973_2_cb_179 describes an organization formed to purchase groceries for its members at the lowest possible prices membership was open to the entire community however the benefits of the organization were available only to members each member paid a ratable share of the organization’s administrative expenses the organization was held not to qualify for exemption under sec_501 because it was operated primarily for the private benefit of members and any benefits to the community were not sufficient to meet the requirement of the regulations that the organization be operated primarily for the common good and general welfare of the people of the community revrul_75_199 1975_1_cb_160 describes an organization that provided sick benefits for its members and paid death_benefits to the beneficiaries of deceased members the organization restricted membership to individuals of good moral character and health who belonged to a particular ethnic group and who resided in a specific geographical area the organization held monthly meetings and maintained an established system for the payment of sick and death_benefits revenues were derived primarily from membership dues which were used to pay benefits to members and to pay miscellaneous operating_expenses in concluding that the organization did not qualify for exemption under sec_501 the revenue_ruling found that the organization was principally a mutual self-interest organization that used its income to provide direct economic benefits to members any benefit to the community at large was minor and incidental revrul_78_69 1978_1_cb_136 describes an organization created by residents of a suburban community to provide bus transportation during rush hours between the community and the major employment centers in the metropolitan area during rush hour periods regular bus service was inadequate the organization contracted for buses and drivers planned their routes and schedules and arranged for volunteers to collect the fares on each trip although anyone could ride the organization’s buses for the established fare ridership was drawn almost entirely from the community revenues from fares sometimes fell short of the amount needed to cover the organization’s expenses the organization covered the short-fall through grants from governmental units the organization was found to provide a useful service to all members of the community the organization provided bus service to the area that was not otherwise commercially available and paid for the service through fares and subsidies from governmental units access to the organization’s bus service was available to anyone and community residents and volunteers assist the organization to carry out its activities this method of operation distinguished the organization from commercial bus services that carried on business with the public and operated for profit as a result because the organization promoted the common good and general welfare of the community the organization qualified for exemption under sec_501 revrul_81_58 1981_1_cb_331 describes a membership_organization formed to benefit police officers in a community the organization supplemented civil service retirement and death_benefits provided by the political_subdivision in which the police officers were employed benefits were limited to members or their beneficiaries the organization’s income was used to provide direct economic benefits to members therefore although the class of employees benefited by the organization consisted of police officers engaged in the performance of essential and hazardous public services the organization was principally a mutual self-interest type of organization that provided only an incidental benefit to the larger community accordingly the organization did not qualify for exemption as a social_welfare_organization under sec_501 in 470_f2d_849 10th cir cert_denied 414_us_864 citing 346_us_389 the court held that an organization claiming exemption must bear the burden of establishing its entitlement to exempt status 305_f2d_814 4th cir denied exemption under sec_501 to a nonprofit membership corporation that purchased two multi-family housing projects consisting of over residential units from the federal government the organization made units available to its members under perpetual-use contracts preference for membership was granted to inadequately housed veterans of world war ii first and veterans of world war second however in the absence of purchasers in these categories the organization could sell perpetual-use contracts to other individuals approved by the organization the court_of_appeals held that the organization failed to qualify for exemption under sec_501 because its activities did not meet the dictionary definition of civic even though the benefits provided by the organization were available to all citizens eligible for membership the benefits were not municipal or public in nature the court_of_appeals also concluded that the organization failed to fall within the dictionary definition of social or welfare because the organization did not propose to offer a service or program for the direct betterment or improvement of the community as a whole members and not the public derived a substantial private benefit from their purchase of perpetual-use contracts including the right to the equitable ownership of the value of their units and the ability to pass the perpetual use contracts to family members at death in 39_tc_756 aff'd 331_f2d_923 2nd cir the tax_court affirmed revocation of the exempt status of an organization that was created to acquire real_property where the organization would conduct studies and develop certain liberal and progressive social programs the organization initially engaged in activities that promoted social welfare within the meaning of sec_501 and was recognized as exempt from tax however some years after its formation the organization opened the premises to the public and commenced to operate a financially lucrative vacation resort that competed with for-profit resorts the organization continued to engage in the activities that provided the basis for its exempt status however by the time that the organization’s exemption was revoked the organization expended less than percent of its revenues on the conduct of its exempt_activities furthermore in the context of the resort operations various art and educational programming that originally furthered the organization’s exempt_purpose had over time acquired entertainment value that enhanced the commercial resort function when considered in relation to its activities as a whole operation of the resort precluded the organization from qualifying for exemption under sec_501 operation of the resort did not exclusively or even principally promote social welfare within the meaning of sec_501 operation of the resort had become the organization's primary activity the tax_court found that the organization’s commercial activities overshadowed all of its other activities in 338_f2d_526 2d cir the court_of_appeals concluded that the organization was not tax-exempt under sec_501 because the majority of the benefits were for its members and it did not promote social welfare in 488_f2d_684 2d cir the court_of_appeals concluded that a plumbers cooperative was not tax-exempt under sec_501 because the benefits to the members were proportional to their financial involvement and therefore it operated primarily for the benefit of its members rather than for the purpose of benefiting the community as a whole in 985_f2d_1210 3d cir remanded to tax_court on a separate issue geisinger the court_of_appeals considered whether an organization that provided healthcare benefits only to its subscribers could qualify for exemption under sec_501 the court focused its analysis on whether the activities of geisinger health plan ghp provided a community benefit id pincite the court concluded that providing healthcare benefits to the population limited to ghp’s paying subscribers did not result in a benefit to the community at large even though the court_of_appeals was considering the application of sec_501 rather than sec_501 this case also assists our analysis because in order to qualify for exemption under sec_501 the organization in question also must show that its operations benefit the community as a whole in vision service plan v u s u s dist lexis e d calif affd mem u s app lexis 9th cir reh’g denied date cert_denied date hereinafter vsp v usa’ vision service plan vsp contracted with employers hmos insurance_companies and political subdivisions collectively subscribers to arrange for the provision of certain vision care services to subscribers’ employees or members collectively enrollees vsp arranged for these services to be provided to enrollees by contracting with independent optometrists and ophthalmologists participating providers vsp operated a prepaid vision care program and a self-funded program under the prepaid program subscribers contracted with vsp agreeing to pay a fixed monthly amount to vsp in return for which subscribers’ enrollees are entitled to receive the contracted vision care benefits from vsp’s participating providers under the self-funded program vsp provided administrative services such as processing and paying claims in exchange for an administrative fee most of vsp’s enrollees were employed by its large subscribers vsp’s subscribers include small and rural employers and hmos enrolling beneficiaries under medicare medicaid and california health families child health assistance program members of the general_public could not receive vsp’s services without being an employee or member of a subscriber individuals who were not enrollees were not eligible for vsp’s services and could not receive vision care benefits under vsp’s prepaid program or self-funded program vsp’s gross revenue for was dollar_figure million and its net_income was dollar_figure million vsp arranged for free vision services to non-enrollees paid for the provision of vision services to low-income children and incurred expenditures_for community outreach and community educational programs in relation to vsp’s revenue and accumulated surplus these expenditures were minor the district_court determined that vsp did not qualify for exemption under sec_501 holding that vsp’s primary activity was not the promotion of social welfare vsp did not offer its vision care plans to the general_public rather its services were available only to employees or members of a subscribing employer political subdivisions or other groups with which vsp contracted further the services it provided through its charity programs to non-enrollees were comparatively insubstantial the court concluded that vsp was not primarily engaged in the promotion of social welfare but instead provided public benefits that were incidental to the primary purpose of serv ing its paying members the court also concluded that d espite vsp's charity work the membership-based structure as well as the types of services offered demonstrate that vsp's primary activity is not the promotion of social welfare the court_of_appeals affirmed the district_court holding that vsp is not entitled to tax-exempt status because it is not primarily engaged in promoting the common good and general welfare of the community the court also found that vsp’s primary purpose establishing a fund from payments by its subscribers to defray and assume their costs of vision care benefits vsp’s subscribers rather than the general welfare of the community exempt status based upon the integral-part test sec_502 provides that an organization operated for the primary purpose of carrying_on_a_trade_or_business for profit shall not be exempt from taxation under sec_501 on the ground that all of its profits are payable to one or more organizations_exempt_from_taxation under sec_501 sec_1_502-1 provides the framework for derivative or vicarious exemption for a subsidiary_organization of a tax-exempt_organization that is an integral part of the parent organization the subsidiary organization’s exemption will not be lost because as a matter of accounting between the two organizations the subsidiary derives a profit from its dealings with its parent organization for example an entity created to provide electrical power solely to its parent organization to enable the parent to conduct its exempt activity may qualify for exemption as an integral part of the parent organization such an organization would not qualify for exemption on this basis if it were to provide electrical services primarily to customers other than its parent the subsidiary_organization will not qualify for exemption if its primary purpose is to carry ona trade_or_business that would be an unrelated_trade_or_business if engaged in by the parent revrul_58_194 1958_1_cb_240 holds that an organization operating a book and supply store and a cafeteria and restaurant on the campus of a state university for the convenience of the student body and faculty qualifies for exemption under sec_501 the facilities of the organization are available to everyone connected with the university and the profits are used solely for the benefit of the students and faculty of the university because the organization serves almost exclusively the members of the faculty and student body and since it is performing functions for their benefit and convenience and in furtherance of the university's educational program it is an integral part of the university revrul_78_41 1978_1_cb_148 describes a_trust created to satisfy a specific exempt hospital's malpractice claims the trust was created by the hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital the hospital controlled the trust whose trustee acted upon direction from the hospital as to the payment of claims the trust satisfied the hospital’s obligation under state law to provide for malpractice claims and is an activity that the hospital could do directly repository for funds paid in by the hospital and by making payments at the direction of the hospital to persons with malpractice claims against the hospital the trust operated as an integral part of the hospital and was exempt under sec_501 by serving as a 191_f2d_1018 9th cir held that an organization that operated a bookstore on the premises of a college for the accommodation of students and faculty and which was controlled by the college qualified for exemption because it bore a close and intimate relationship to the functioning of the college itself 72_tc_681 held that the harvard medical school faculty clinical practice organization created by the anesthesiology department of harvard medical school qualified for exemption under sec_501 a clinician could qualify for membership in the organization only so long as he or she was a clinical faculty_member at harvard medical school control of the organization rested directly or indirectly with the chairman of the harvard medical school department of anesthesiology the patients served by the organization were limited to patients of the teaching hospital although the organization’s revenues were used to supplement compensation paid to the members of the faculty practice compensation was capped at an amount that the tax_court held was reasonable and was less than the clinical faculty_member would likely obtain in private practice accordingly the organization comprised an integral part of harvard medical school and its teaching hospital the boston hospital for women no private benefit accrued to the clinical faculty members of the organization which would otherwise disqualify it from exempt status 74_tc_1299 acq 1980_2_cb_1 held that the organization serving as the clinical faculty practice group comprised exclusively of clinical faculty of the university of massachusetts medical school was an integral part of the medical school and its teaching hospital members of the organization participated in the clinical teaching program at the teaching hospital and divided their time between academic pursuits teaching and research and clinical duties at the teaching hospital and other smaller affiliated state hospitals the opportunity for students to observe and assist in the actual treatment of patients was considered to be a vital and necessary part of their medical education accordingly the faculty members’ patient care activities at the hospital were inseparable from the faculty members’ teaching function members of the organization were required to hold academic appointments at the medical school and to be engaged to some degree in clinical practice state conflict of interest laws precluded clinical faculty from personally billing patients or third party payors for their clinical services the organization collected the fees generated by the faculty clinical services deposited those funds into a_trust fund pursuant to statute and expended in the funds for legislatively mandated purposes although amounts generated through the clinical practice enhanced a clinician’s overall compensation total compensation paid to the clinicians was subject_to the same institutional regulations as the clinician's academic salary the provisions regulating the allocation of clinical fees among the practicing clinicians prevented the organization from serving the private interests of the clinicians the tax_court found that the organization provided vital clinical training for medical students interns and residents comprised an integral component of the medical school and the university hospital and therefore qualified for exemption university of maryland physicians p a v commissioner tcmemo_1981_23 found that the medical practice comprised exclusively of clinical faculty of the cardiology nephrology pulmonary diseases and nuclear medicine departments of the university of maryland medical school qualified for exemption as an integral part of the medical school and its teaching hospital the organization’s members provided clinical services exclusively to patients at the medical school teaching hospital and were precluded from holding concurrent positions at any other medical facility or with any other practice groups the tax_court found that clinical instruction is an indispensable primary component of training undergraduate and graduate students at the medical school the clinical practice group’s organizing documents limited its activities to serving the interests of the medical school and teaching hospital the organization's clinical practice revenues were subject_to the control of the medical school although each clinician owned shares in the stock in the organization a shareholder could obtain no more than the nominal par_value for his or her shares upon leaving the practice group these factors precluded the faculty members from deriving an impermissible private benefit from the organization’s operations accordingly the organization qualified for exempt status as an integral part of the university of maryland medical school 30_f3d_494 3rd cir geisinger ii held that geisinger health plan ghp could not qualify for exemption as an integral part of a health system comprised of eight separate healthcare organizations each of which was exempt from tax under one or more sections of the internal_revenue_code geisinger analyzed the basis on which a subordinate organization could qualify for tax-exempt status because of its relationship with one or more exempt parent organizations the court_of_appeals rejected an analysis based upon a hypothetical merger of ghp into the parent organization id pincite instead geisinger il developed the following guidelines to evaluate whether a subsidiary may be entitled to exempt status as an integral part of the exempt parent the subsidiary does not carry on a trade_or_business which would be an unrelated_trade_or_business if regularly carried on by the parent and the relationship between the subsidiary and the parent enhances in some way the subsidiary’s own exempt character to the point that when the boost provided by the parent is added to the contribution made by the subsidiary itself the subsidiary would be entitled to exemption id pincite the court_of_appeals noted that the electric company described in sec_1_502-1 served a charitable purpose solely because it provided an essential service electric power exclusively to a tax-exempt university providing electric power to paying customers is not in itself an exempt - purpose however the power company described in the treasury regulation possessed an exclusive relationship with the university the power company was a wholly owned subsidiary of the university to which it supplied power the university’s educational mission effectively became the mission of the power company id pincite geisinger il noted that ghp served a broader clientele than its parent healthcare system in addition citing to geisinger f 2d pincite the appeals court noted that the population served by ghp was largely limited to its paying subscribers accordingly ghp was distinguishable from the types of organizations that could qualify for exemption as integral parts of their respective parent organizations see eg sec_1_502-1 191_f2d_1018 9th cir revrul_58_194 supra 113_tc_47 analyzed the relationship between an exempt hospital and an ambulatory surgery center operated as a partnership between an affiliate of the exempt hospital and a for-profit entity among the arguments considered by the tax_court was that the organization was an integral part of the exempt hospital in finding that the surgical center was not an integral part of the hospital the tax_court found that there was no substantial overlap between the patients of the hospital and the patients of the organization in addition the hospital continued to maintain its own ambulatory surgical center even after its affiliate joined with the for-profit entity to create the organization 325_f3d_1188 10th cir further develops the in general an entity seeking principle of vicarious exemption under the integral-part doctrine exemption from tax under sec_501 must show that it is entitled to exemption on its own merits however an entity that cannot qualify for tax exemption on its own merits may be entitled to derivative or vicarious exemption under the integral_part_doctrine if its sole activity is an citing the example of the power company integral part of the exempt affiliate’s activities described in sec_1 b the court stated that an essential nexus must exist between the parent and the subsidiary seeking exemption under the integral_part_doctrine important factors are whether the goods or services provided by the subsidiary to the parent are essential to the accomplishment of the parent’s exempt purposes whether the subsidiary provides services solely to the parent and the subsidiary does not engage in a trade_or_business that would be an unrelated_trade_or_business if engaged in by the parent and whether the parent exercises control_over the subsidiary these factors must be considered in conjunction with the exempt_purpose for which the parent operates and must support a finding that the subsidiary operates for the same purpose as the parent rationale an organization described in sec_501 of the code is operated exclusively for the promotion of it is primarily engaged in promoting in some way the common good and general social welfare if welfare of the people of the community an organization embraced within this section is one that is operated primarily to bring about civic betterments and social improvements an organization is not operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general_public in a manner similar to organizations that are operated for profit you do not arrange or administer healthcare services for the benefit of the community as a whole therefore you do not qualify as an organization described in sec_501 social_welfare_organization for example percent of your revenue you are not primarily engaged in promoting the common good and general welfare of the people of the community your primary activity is arranging for health care services for subscribers for compensation your operations are characteristic of an organization that substantially limits the universe of potential clients in year and year will represent premiums_paid by subscribers for healthcare benefits furthermore percent of your subscribers obtain care under employer-provided group plans while only two percent of the subscribers purchase individual healthcare plans although you anticipate that starting in year the allocation of subscribers will change as the aca is implemented you failed to provide a plan as to how you will accomplish a reallocation among your plan offerings you do not demonstrate how a include additional individual subscribers promotes social welfare where those individual subscribers must pay a subscriber fee to obtain healthcare services from you furthermore assuming we accept your speculative representations regarding subscribers through the exchange the number of your subscribers who are low-income and qualify for a subsidy are minor in relation to your subscriber populations as a whole in fact you cannot provide a direct subsidy to qualifying families and individuals or offer policies to them at a reduced premium because such subsidies would be contrary to state law and are also prohibited under the aca instead you will direct potential low-income individuals and families to seek premium-payment potential reallocation of your subscribers to assistance from the s your contribution to s to provide funds for healthcare premium subsidies is included among your specifically identified social welfare activities accordingly for purposes of your business of providing healthcare plans through the exchange no difference exists between individuals and families who qualify for subsidies and those who do not you will receive the same premium amounts from low-income individuals and families who purchase policies through the exchange as your subscribers who do not qualify for a subsidy except for activities coordinated through g you do not serve the general_public in a manner that is more than merely incidental to the administration of your healthcare plans furthermore even after we asked you you did not provide any marketing materials that you will use to solicit subscribers therefore you fail to show that you will expand access to your plans or how you will accomplish that you are not operated for the promotion of social welfare under sec_501 because you do not promote the common good and general welfare of the people of the community within the meaning of sec_1_501_c_4_-1 of the regulations see vsp v usa u s dist lexis plans primarily for employees of large employer groups lake forest 305_f2d_814 restricted membership insubstantial public benefits 488_f2d_684 substantial and different benefits to private members 338_f2d_526 most benefits were for members only compare revrul_54_394 supra providing television services to members with revrul_62_167 supra providing television services to all television owners in the community and with rev rui supra providing bus services to all residents in the community see also revrul_73_349 supra providing groceries solely for its paying members rather than the community and revrul_81_58 supra providing direct economic benefit to its members and only incidental benefit to the community in addition to qualify for tax exemption as an organization described in sec_501 your activities primarily must benefit the community rather than your paying members see vsp v usa u s dist lexis vsp provided public benefits that were incidental to the primary purpose of serv ing its paying members lake forest 305_f2d_814 serving a large segment of the population does not equate to social welfare under sec_501 39_tc_756 operation of a resort was the organization’s primary activity rather than its social welfare activities 338_f2d_526 the majority of the benefits the organization provided were for its members and 488_f2d_684 organization operated primarily for the benefits of its members rather than for the community as a whole you did not engage in any other substantial activities that promote social welfare g administers your social welfare programs however such programs account for only one percent of your total expenditures thus the benefits the community as a whole may derive from any social welfare activities are merely incidental to the health care services you arrange for your universe of enrollees with which you contract for a fee thus you are not operated for the promotion of social welfare under sec_501 see vsp v usa u s dist lexis vsp’s provision of vision services to low-income children and expenditures_for community outreach and community educational programs were minor in relation to its revenue and accumulated surplus generally each organization seeking exemption under sec_501 must qualify on its own merits integral part of a geisinger ii f 3d pincite ihc health_plans inc f 3d pincite however where a subsidiary_organization provides a necessary and essential service to its exempt parent such that the subsidiary contributes to the accomplishment of the parent's exempt_purpose and provided that the subsidiary is not primarily engaged in a trade_or_business that would be an unrelated_trade_or_business if engaged in by the parent the subsidiary may qualify for exemption as an integral part of the parent sec_1_502-1 revrul_78_41 supra university of massachusetts medical school group practice t c pincite university of maryland pysicians p a t c memo geisinger il f 3d pincite ihc health_plans an integral part of a in any way that would qualify you for exempt status even though a controls your operations you will not provide any service to a that is essential to the accomplishment of its exempt purposes inc f 3d pincite based upon the information that you have provided you are not those of your subscribers who choose to obtain primary and specialty care at a incidentally benefit the clinical research and teaching activities of medical school however your subscribers are not unique in this regard you fail to show that you will be the only healthcare plan whose subscribers obtain care through a you also do not show that your subscribers purchase healthcare services from you as opposed to another healthcare plan because they wish to contribute to the advancement of medical education or science none of the information you have provided shows or even suggests that a would be bereft of patients if f would cease to operate or if your merger with f were to fail to occur a provides healthcare services to the general_public you provide healthcare services exclusively to your subscribers thus there is only partial overlap of the population you serve with the population served by a even your subscribers who reside in county will be free to _ elect not to obtain care through a they can do this by selecting among the primary care providers and hospitals that are part of your network but are not part of a your subscribers who reside outside a’s county service area must generally obtain primary care from providers other than a and may obtain specialty care at a only by electing to travel to county for care the subscribers who live outside the a service area as well as subscribers within county who opt not to obtain care at a teaching hospital or through a faculty clinical practice make no direct contribution to clinical education at a we acknowledge that the patient information for all subscribers throughout f’s service area is provided to a for its academic purposes however as discussed above that contribution is merely incidental to services f provides to its paying subscribers your merger with f will not change that factor because your 20-county service area will continue to be substantially larger than the a service area which is limited to county your operations are not essential or indispensable to medical education at a sec_1 b a power-generating facility will not qualify for exemption where it provides services to customers other than the exempt_organization that operates and controls it 325_f3d_1188 a substantial portion of ihc health_plans enrollees received physician services outside the ihc system 113_tc_47 the population served by the surgical center did not overlap substantially with the population served by the exempt hospital you will obtain services that are essential to your operations from a however your purchasing services from a is not essential to the accomplishment of a’s exempt mission each organization that arranges for healthcare services from a to be provided to its subscribers will enter into similar service contracts purchasing services from faculty practice and hospital for the benefit of your subscribers will not make you an integral part of a similarly contracting with faculty practice to obtain medical management disease management technology assessment services and wellness programs will not make you an integral part of a nor will purchasing pharmacy management it management and executive management services from hospital a can accomplish its exempt functions without providing those services to you while a may appreciate the integration of f’s health records with its own you fail to show that e’s contribution to the health records data warehouse is necessary or indispensible to the accomplishment of a’s exempt mission a obtains patient data from multiple sources any benefit to a from its relationship with f is purely incidental to f’s healthcare business any such benefit does not differ significantly from the benefit a concurrently obtains through the other healthcare plans whose subscribers receive care at a you have presented no information showing that this will change after you merge with and assume the activities of f conclusion the overwhelming majority of your activities relate to providing healthcare plans to your paying subscribers your specific social welfare activities represent a minor component of your overall activities therefore on your own you do not qualify as an organization that is operated exclusively for social welfare purposes within the meaning of sec_501 even though you are controlled by a and have intermingled your administrative functions with affiliates of a under various service contracts you have not shown that you will provide any necessary or indispensible service exclusively to a furthermore you will continue to arrange for healthcare services to be delivered by providers and facilities outside of the a system thus you fail to qualify for exemption under sec_501 as an integral part of a you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration 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 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 if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter 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 sincerely karen schiller acting director exempt_organizations rulings and agreements if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter


t c memo united_states tax_court steven lavell gassoway petitioner v commissioner of internal revenue respondent docket no filed date steven lavell gassoway pro_se catherine s tyson for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined a deficiency in and an accuracy- related penalty under sec_6662 on petitioner’s federal_income_tax tax for his taxable_year of dollar_figure and dollar_figure respectively all section references are to the internal_revenue_code code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure the issues remaining for decision for petitioner’s taxable_year are is petitioner entitled to a dependency_exemption deduction under sec_151 for each of ssg dg and scg we hold that he is not is petitioner entitled to the child_tax_credit under sec_24 with respect to each of ssg dg and scg we hold that he is not is petitioner entitled to the additional_child_tax_credit under sec_24 with respect to each of ssg dg and scg we hold that he is not is petitioner entitled to the earned_income_tax_credit under sec_32 with respect to each of ssg dg and scg we hold that he is not is petitioner entitled to head_of_household filing_status under sec_2 we hold that he is not is petitioner liable for the accuracy-related_penalty under sec_6662 we hold that he is not findings_of_fact some of the facts have been stipulated and are so found petitioner resided in missouri at the time he filed the petition petitioner and sheneita d cotton ms cotton are the biological parents of ssg dg and scg who were born in and respectively petitioner also has a daughter tg who lived with petitioner’s mother during on date petitioner and ms cotton each signed a lease peti- tioner’s lease to rent an apartment petitioner’s apartment pincite whisper lake drive petitioner’s lease was to begin on date and to terminate on date petitioner’s lease showed petitioner as a tenant of peti- tioner’s apartment and showed ms cotton ssg dg and scg as occupants of petitioner’s apartment petitioner’s lease did not show petitioner as one of the occupants of petitioner’s apartment petitioner timely filed form 1040a u s individual_income_tax_return for his taxable_year return in that return petitioner claimed head_of_household filing_status under sec_2 a dependency_exemption deduction for each of tg ssg dg and scg and with respect to each of ssg dg and scg a child_tax_credit under sec_24 an additional_child_tax_credit under sec_24 and the earned_income_tax_credit under sec_32 petitioner did not attach to hi sec_2011 return a written declaration that ms cotton signed in which she waived her right to claim a dependency_exemption deduction with respect to each of ssg dg and scg respondent issued a notice_of_deficiency notice to petitioner for his taxable_year the notice disallowed petitioner’s claimed dependency_exemption deduction for each of tg ssg dg and scg the notice disallowed with respect to each of ssg dg and scg petitioner’s claimed child_tax_credit additional_child_tax_credit and earned_income_tax_credit the notice also deter- mined that petitioner’s filing_status is single not head_of_household the notice further determined that petitioner is liable for the accuracy-related_penalty under sec_6662 opinion petitioner bears the burden of establishing that the determinations in the notice that remain at issue are erroneous see rule a 290_us_111 dependency_exemption deduction it is petitioner’s position that he is entitled for his taxable_year to a dependency_exemption deduction under sec_151 for each of ssg dg and scg respondent disagrees petitioner concedes that he is not entitled to a dependency_exemption deduction for tg sec_151 provides an exemption for each dependent of the taxpayer as defined in sec_152 sec_152 defines the term dependent to include a qualifying_child see sec_152 sec_152 defines the term qualifying_child as follows sec_152 dependent defined c qualifying_child --for purposes of this section-- in general --the term qualifying_child means with respect to any taxpayer for any taxable_year an individual-- a who bears a relationship to the taxpayer de- scribed in paragraph b who has the same principal_place_of_abode as the taxpayer for more than one-half of such taxable_year c who meets the age requirements of paragraph d who has not provided over one-half of such individual’s own support for the calendar_year in which the taxable_year of the taxpayer begins and e who has not filed a joint_return other than only for a claim of refund with the individual’s spouse under sec_6013 for the taxable_year beginning in the calendar_year in which the taxable_year of the taxpayer begins as pertinent here an individual satisfies the relationship requirement of sec_152 if that individual is a child of the taxpayer sec c a as pertinent here an individual satisfies the age requirement of sec_152 if that individual is under age as of the close of the calendar_year in which the taxpayer’s taxable_year begins sec_152 the parties’ only disagreement as to whether each of ssg dg and scg is a qualifying_child as defined in sec_152 is whether each of those children satisfies the principal_place_of_abode requirement of sec_152 in support of his argument that each of ssg dg and scg satisfies the principal_place_of_abode requirement of sec_152 petitioner relies on his testimony and on petitioner’s lease with respect to petitioner’s testimony petitioner testified that ssg dg and scg lived with him in petitioner’s apartment from date through the end of we found petitioner’s testimony to be in certain material respects self-serving and uncorroborated we shall not rely on petitioner’s testimony to establish that each of ssg dg and scg lived with petitioner in petitioner’s apartment from date through the end of see eg 87_tc_74 with respect to petitioner’s lease petitioner argues that petitioner’s lease establishes that he lived in petitioner’s apartment with ssg dg and scg from date through the end of we shall not rely on petitioner’s lease to establish that each of ssg dg and scg lived with petitioner from date through the end of on the record before us we find that petitioner has failed to carry his burden of establishing that for his taxable_year each of ssg dg and scg satisfies the principal_place_of_abode requirement of sec_152 on that record we further find that petitioner has failed to carry his burden of establishing that for his taxable_year each of ssg dg and scg was a qualifying_child as defined in sec_152 and that therefore each of them is his dependent as defined in sec_152 on the record before us we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to a dependency_exemption deduction under sec_151 for each of ssg dg and scg child_tax_credit it is petitioner’s position that he is entitled for his taxable_year to the child_tax_credit under sec_24 with respect to each of ssg dg and scg respondent disagrees sec_24 provides a credit with respect to each qualifying_child of the taxpayer for which the taxpayer is allowed a deduction under sec_151 as pertinent here sec_24 defines the term qualifying_child as a qualifying_child of the taxpayer as defined in sec_152 who has not attained age we have found that petitioner has failed to carry his burden of establishing that for his taxable_year each of ssg dg and scg is petitioner’s qualifying_child as defined in sec_152 on the record before us we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to the child_tax_credit under sec_24 with respect to each of ssg dg and scg additional_child_tax_credit it is petitioner’s position that he is entitled for his taxable_year to the additional_child_tax_credit under sec_24 with respect to each of ssg dg and scg respondent disagrees the child_tax_credit provided by sec_24 may not exceed the tax- payer’s regular_tax_liability sec_24 where a taxpayer is eligible for the child_tax_credit but the taxpayer’s regular_tax_liability is less than the amount of the child_tax_credit potentially available under sec_24 sec_24 makes a portion of the credit known as the additional_child_tax_credit refundable we have found that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to the child_tax_credit under sec_24 with respect to each of ssg dg and scg on the record before us we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to the additional_child_tax_credit under sec_24 with respect to each of ssg dg and scg earned_income_tax_credit it is petitioner’s position that he is entitled for his taxable_year to the earned_income_tax_credit under sec_32 with respect to each of ssg dg and scg respondent disagrees sec_32 permits an eligible_individual an earned_income_credit against that individual’s tax_liability as pertinent here the term eligible individ- ual is defined to mean any individual who has a qualifying_child for the taxable_year sec_32 as pertinent here sec_32 defines the term qualifying_child to mean a qualifying_child of the taxpayer as defined in sec_152 the amount of the credit is determined on the basis of percentages that vary depending on whether the taxpayer has one qualifying_child two or more qualifying children or no qualifying children see sec_32 the credit is also subject_to a limitation based on adjusted_gross_income see sec_32 we have found that petitioner has failed to carry his burden of establishing that for his taxable_year each of ssg dg and scg is his qualifying_child as defined in sec_152 on the record before us we find that petitioner has failed to carry his burden of establishing that for his taxable_year each of ssg dg and scg is his qualifying_child as defined in sec_32 on the record before us we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to the earned_income_tax_credit under sec_32 with respect to each of ssg dg and scg head_of_household status it is petitioner’s position that he is entitled for his taxable_year to head_of_household filing_status under sec_1 respondent disagrees sec_1 provides a special tax_rate for an individual who qualifies as a head_of_household as pertinent here sec_2 provides that an unmarried individual shall be considered a head of a household if that individual main- tains as his home a household which constitutes for more than one-half of such taxable_year the principal_place_of_abode of a qualifying_child of the individual as defined in sec_152 sec_2 or any other person who is a dependent of the taxpayer if the taxpayer is entitled to a deduction for the taxable_year for such person under sec_151 sec_2 we have found that petitioner has failed to carry his burden of establishing that for his taxable_year each of ssg dg and scg is his qualifying_child as defined in sec_152 we have also found that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to a depend- ency exemption deduction under sec_151 for each of ssg dg and scg on the record before us we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to head_of_household filing_status under sec_2 accuracy-related_penalty it is petitioner’s position that he is not liable for the accuracy-related_penalty under sec_6662 respondent disagrees sec_6662 imposes an accuracy-related_penalty of percent on the underpayment to which sec_6662 applies sec_6662 applies to the portion of any underpayment which is attributable to inter alia a substantial understate- ment of tax sec_6662 as pertinent here an understatement for purposes of sec_6662 is equal to the excess of the amount of tax required to be shown in the tax_return over respondent claims that in the notice respondent miscalculated the accuracy-related_penalty under sec_6662 and that the amount of the penalty as properly calculated is dollar_figure the amount of tax imposed that is shown in the return sec_6662 an understatement is substantial if the amount of the understatement for the taxable_year exceeds the greater of percent of the amount of tax required to be shown in the tax_return for the taxable_year or dollar_figure sec_6662 the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to such portion sec_6664 the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on all the pertinent facts and circumstances including the taxpayer’s efforts to assess the taxpayer’s proper tax_liability the knowledge and experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs respondent bears the burden of production with respect to the accuracy- related penalty under sec_6662 that the respondent determined in the notice see sec_7491 116_tc_438 to satisfy respondent's burden of production respondent must come forward with sufficient evidence indicating that it is appropriate to impose the accuracy- related penalty at issue see higbee v commissioner t c pincite although respondent bears the burden of production with respect to the accuracy-related penalty under sec_6662 that respondent determined in the notice respondent need not introduce evidence regarding reasonable_cause or similar provisions t he taxpayer bears the burden_of_proof with regard to those issues see id it is respondent’s position that petitioner has a substantial_understatement of tax for his taxable_year within the meaning of sec_6662 and that therefore he is liable for that year for the accuracy-related_penalty under sec_6662 in support of respondent’s position that petitioner has a substantial_understatement of tax for his taxable_year respondent asserts t he proposed deficiency of dollar_figure exceeds dollar_figure and is more than percent of the amount required to be shown on the petitioner’s tax_return for we reject that assertion as contrary to the applicable law and the facts in this case the understatement for petitioner’s taxable_year is substantial if the understatement not the deficiency as respondent claims exceeds the greater of percent of the tax required to be shown in petitioner’ sec_2011 return or dollar_figure see sec_6662 as discussed above and as pertinent here the understatement for petitioner’s taxable_year for purposes of sec_6662 is equal to the excess of the amount of the tax required to be shown on the return for that see supra note year over the amount of the tax imposed which is shown on the return see sec_6662 the phrase amount of the tax required to be shown on the return of petitioner for his taxable_year that is used in sec_6662 has the same meaning as the phrase amount of income_tax imposed as defined in sec_1_6664-2 income_tax regs see sec_1_6662-4 income_tax regs the amount of income_tax imposed on petitioner for his taxable_year as defined in sec_1_6664-2 income_tax regs is the amount of tax imposed on the taxpayer petitioner under subtitle a of the code the phrase amount of the tax imposed which is shown on the return of petitioner for his taxable_year that is used in sec_6662 has the same meaning as the amount shown as the tax by the taxpayer on his return as defined in sec_1_6664-2 income_tax regs see sec_1_6662-4 income_tax regs the amount shown as the tax by the taxpayer petitioner on his return as defined in sec_1_6664-2 income_tax regs is the tax_liability shown by the taxpayer petitioner on his return although the amount of an understatement may sometimes be the same as the amount of a deficiency the amount of the understatement for petitioner’s taxable_year is not as respondent claims the same as the amount of the deficiency dollar_figure that respondent determined in the notice for that year that is because of the following rule that is applicable here for purposes of the definition of a deficiency in sec_6211 sec_6211 definition of a deficiency b rules for application of subsection a --for purposes of this section-- for purposes of subsection a -- a any excess of the sum of the credits allow- able under sec_24 sec_25a by reason of subsection i thereof 36a 36b 36c e k and over the tax imposed by subtitle a determined without regard to such credits and b any excess of the sum of such credits as shown by the taxpayer on his return over the amount shown as the tax by the taxpayer on such return deter- mined without regard to such credits shall be taken into account as negative amounts of tax in hi sec_2011 return petitioner claimed an additional_child_tax_credit under sec_24 of dollar_figure and an earned_income_tax_credit under sec_32 of dollar_figure pursuant to sec_6211 and b respondent determined in the notice that petitioner has a deficiency of dollar_figure for his taxable_year however the understatement for petitioner’s taxable_year is dollar_figure that is because the amount of the tax required to be shown in petitioner’ sec_2011 return is dollar_figure and the amount of the tax imposed which is shown in that return is zero on the record before us we find that petitioner is not liable for his taxable_year for the accuracy-related_penalty under sec_6662 we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant and or moot to reflect the foregoing decision will be entered under rule respondent does not argue that petitioner is liable for the accuracy-related_penalty because of negligence or disregard of rules or regulations under sec_6662 as a result we do not consider any such argument


department of the treasury internal_revenue_service p o box irs cincinnati oh number release date date date employer id number contact person id number contact telephone number form you must file tax years uil dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code 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 follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number 47635z sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 other than c redacted letter final adverse determination under sec_501 other than c - no protest letter rev catalog number department of the treasury internal_revenue_service cincinnati oh legend b limited_liability_company c county d agreement e date f g number h names j name dates date date employer id number contact person iid number contact telephone number contact fax number uil x dollars amount y dollars amount dear we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were formed for the purpose of negotiating and entering into a power purchase arrangement agreement that would be acceptable to your members and b the developer of a project for a new natural_gas fired plant in c you entered into such an agreement called d with b on e which you consider your organizing document the d states you were formed for your members to collaborate to facilitate the development of the project to develop proposed terms and conditions for the members to buy energy and to find opportunities forthe cooperative procurement ofnatural gas natural_gas transportation natural_gas storage and natural_gas scheduling services and to evaluate alternatives for the scheduling and taking delivery of your members prorated share of output further the terms in d will provide additional revenue assurance to help b obtain needed financing of the project from other sources b must have this financing before it can begin the detailed engineering and construction of the project you have g members who consist of h all members are municipal and cooperative electric utility entities from different geographical locations your only activities consist of hiring of a law firm to represent your members as a group for the purpose of negotiating the power purchase arrangement agreement with b each member has one vote you listed f as your only board member on the form_1024 in addition d was signed only by f furthermore you wrote that you were formed to enter into d to achieve the mutual advantage of having common funding of certain activities for the development of mutually acceptable terms and conditions associated with the potential purchase of energy and capacity from b your only expenses are for third party legal services these will be allocated among your members based on the terms in d which states that your expenses are allocated among members based on their individual usage divided by the total usage for all members your legal expenses to date are x dollars you expect an additional y dollars in legal expenses once the contracts with b and h are finalized your operations will terminate this will be after j law sec_501 of the code provides exemption from federal_income_tax for business_leagues not organized for profit and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_6_-1 defines a business league as an association having a common business_interest whose purpose is to promote the common business_interest and not to engage in a regular business of a kind ordinarily carried on for profit its activities are directed to the improvement of business conditions of one or more lines of business rather than the performance of particular services for individual persons revrul_56_65 1956_1_cb_199 describes an organization whose principal activity consists of furnishing particular information and specialized individual service to its individual members engaged in a particular industry through publications and other means to effect economies in the operation of their individual businesses is performing particular services for individual persons such organization therefore is not entitled to exemption from federal_income_tax under sec_501 of the internal_revenue_code of as a business league even though it performs functions which are of benefit to the particular industry and the public generally revrul_66_338 1966_2_cb_226 describes an organization that provided business consulting services electronic management services and low cost office supplies and store fixtures to members of a particular retail trade it allowed its members to secure supplies equipment and services more cheaply than if they had to secure them on an individual basis its primary purpose was providing services to its members and not improving business conditions in their trade as a whole in addition its activities constituted a business of a kind ordinarily carried on for profit revrul_71_175 1971_1_cb_153 states that a nonprofit organization whose principal activity was the operation of a telephone-answering service for member doctors is not exempt under sec_501 of the code by providing a telephone-answering service the organization relieves the individual members of the necessity of securing this service commercially resulting in a convenience or economy in the conduct of the letter rev cataiog number 47628k medical practice of its individual members therefore the organization is rendering particular services for individual persons as distinguished from the improvement of business conditions in the medical profession and public health area generally the american automobile association v commissioner of internal revenue 19_tc_1146 held that an organization whose principal activities consist of performing particular services and securing benefits for its members does not qualify for exemption under sec_501 of the code in indiana retail hardware assn inc v united_states ct_cl the court held that when conducting particular services for members is a substantial activity of an organization the organization will be precluded from exemption under sec_501 of the code in 611_f3d_617 9th cir the court examined an organization that was formed to advance the common business interests of its members in the development and regulation of technical standards for the compatibility and interoperability of wireless products and devices within a wireless personal area network the organization develops specifications and use applications and promotes consumer awareness and marketing through its bluetooth technology and trademark the court held that the organization was not a tax-exempt business league under sec_501 of the code because the organization's activities exclusively benefit its members rather than an entire line_of_business the court noted that it strains credulity for the organization to argue that its services indirectly benefit the industry as a whole simply by generating consumer awareness of the availability and reliability of its technology application of law you are not described in sec_501 of the code because you are primarily organized and operated to perform particular services for your members you are not organized in accordance with sec_501 of the code you did not submit a document showing you were legally formed you only submitted d signed by f which is an agreement with b you are not described in sec_1 c because you are primarily organized and operated so members can pool their resources to pay legal expenses to negotiate on their behalf as private individual companies as evidenced by the terms in your agreement in addition the method in which expenses are allocated among your members also indicates you are providing services to members moreover your members formed you to achieve the common advantage of having pooled funding to obtain acceptable terms and conditions concerning the power purchase arrangement you are similar to the organizations in revenue rulings and you are operated primarily to negotiate the most favorable terms in a power purchase agreement for the individual interests of your members rather than negotiate for the improvement of business conditions within the industry once the agreement is negotiated and contracts are executed with your members your operations will cease like these organizations in the revenue rulings you are performing a particular service to your members rather than directing your activities to the improvement of business conditions of your industry as a whole you are similar to the organization in american automobile association in that although the negotiated terms of the power purchase agreement may benefit the community your primary activity cannot be characterized as letter rev catalog number 47628k fostering the improvement of business conditions throughout the industry rather your services are intended to improve your members negotiating power with b you are similar to the organization in indiana retail hardware assn because your primary activity is the performance of services to members because this is your sole activity you are not exempt under sec_501 of the code you are similar to the organization described in bluetooth sig common business interests of your members to negotiate an agreement to purchase energy your activities exclusively benefit your members rather than an entire line_of_business similar to the organization in bluetooth sig inc it would be difficult to argue that your services benefit the industry as a whole because you are paying legal expenses to negotiate the best terms for a power purchase arrangement for your members inc because you were formed to advance the your position you believe you meet all the requirements for exemption under sec_501 of the code for the following reasons e e e e you have a common business_interest and are not-for profit your activities are devoted to improving business conditions of the geographic electric utility line_of_business to fulfill the needs of your non-for-profit members interests of the communities that the plant will serve will be advanced to ensure low-cost electric provided you have no net_earnings and are not organized for profit you have meaningful membership support achieved through member assessment dues you are a membership_organization our response to your position you failed to provide any additional information from which it can be concluded that your activities primarily accomplish purposes within the meaning of sec_501 of the code you are paying legal expenses for negotiating the most favorable terms for a power purchase arrangement for the individual interest of each member this illustrates you provide services for your members rather than work to improve the conditions of a line_of_business as discussed previously this precludes exemption under sec_501 of the code conclusion negotiating a contract for provision of electricity from a natural_gas power plant and associated legal costs for your members is providing particular services for individual persons and thus does not meet one of the requirements to be exempt under sec_501 of the code in addition your activities are not directed to the improvement of the business conditions of the line_of_business of its members as a whole because your activities are aimed only at improving the interest of your individual members therefore you do not meet the requirements for exemption and do not qualify for exemption under sec_501 of the code if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e your name address employer_identification_number ein and a daytime phone number letter rev catalog number 47628k e e e e e acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney - we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address letter rev catalog number 47628k u s mail street address for delivery service 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 can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k