t c summary opinion united_states tax_court rouben djoshabeh and jenia djoshabeh petitioners v commissioner of internal revenue respondent docket no 26533-12s filed date rouben djoshabeh and jenia djoshabeh pro sese christopher j richmond for respondent summary opinion chiechi judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursu- hereinafter 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 ant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in and an accuracy-related_penalty under sec_6662 on petitioners’ federal_income_tax tax for their taxable_year of dollar_figure and dollar_figure respectively the only issue remaining for decision is whether petitioner rouben djoshabeh is liable for the year at issue for the accuracy-related_penalty under sec_6662 we hold that he is findings_of_fact petitioner rouben djoshabeh mr djoshabeh and respondent stipulated some of the facts in this case and those facts are so found petitioners resided in california at the time they filed the petition during certain of petitioners’ debts to three different creditors totaling dollar_figure were canceled by those creditors petitioner jenia djoshabeh ms djoshabeh did not sign the stipulation of facts between respondent and mr djoshabeh stipulation of facts ms djoshabeh did not appear at the trial in this case and respondent filed a motion to dismiss for lack of prosecution as to her we shall grant that motion and shall enter a decision with respect to ms djoshabeh that is the same as the decision that we shall enter with respect to mr djoshabeh petitioners filed form_1040 u s individual_income_tax_return return for their taxable_year return that petitioners and a paid return preparer signed on page of their return petitioners reported wages salaries tips etc of dollar_figure taxable interest of dollar_figure business income or loss of nega- tive dollar_figure taxable social_security_benefits of zero and total income of dollar_figure although petitioners made no entry on that page for other income they attached a statement other income statement to their return with re- spect to other income in that statement petitioners reported negative dollar_figure as 1099-c nontaxable sec_108 and dollar_figure and dollar_figure as two items of cancellation of debt petitioners reduced those two items of cancellation of debt totaling dollar_figure by the negative dollar_figure of 1099-c nontaxable sec_108 and as a result showed a total of zero in the other income statement on page of their return petitioners claimed total_tax of zero respondent issued a notice_of_deficiency to petitioners for their taxable_year in that notice respondent determined inter alia that petitioners have can- in the stipulation of facts mr djoshabeh admitted that petitioners failed to include in the other income statement attached to their return an additional canceled debt of dollar_figure cellation of debt income totaling dollar_figure in the notice respondent also deter- mined that petitioners are liable for the accuracy-related_penalty under sec_6662 opinion the only issue that we must decide is whether mr djoshabeh is liable for the year at issue for the accuracy-related_penalty under sec_6662 that section imposes an accuracy-related_penalty of percent of the underpayment to which sec_6662 applies sec_6662 applies to the portion of any under- payment which is attributable to inter alia negligence or disregard of rules or regulations sec_6662 or a substantial_understatement of tax sec_6662 the term negligence in sec_6662 includes any failure to make a reasonable attempt to comply with the code sec_6662 negligence has also been defined as a failure to do what a reasonable person would do under the cir- cumstances 963_f2d_907 6th cir aff’g tcmemo_1991_179 91_tc_686 aff’d 893_f2d_656 4th cir the term negligence also includes any in the notice respondent made a computational adjustment relating to social_security rrb that resulted from respondent’s determination that petitioners have cancellation of debt income totaling dollar_figure failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard sec_6662 for purposes of sec_6662 an understatement is equal to the excess of the amount of tax required to be shown in the tax_return over the amount of tax shown in the return sec_6662 an understatement is substantial in the case of an individual if the amount of the understatement for the taxable_year ex- ceeds the greater of percent of the tax required to be shown in the tax_return for that 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 taxpayer’s reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs reliance on the advice of a professional may demonstrate reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith id in this connection a taxpayer must demon- strate that the taxpayer’s reliance on the advice of a professional concerning sub- stantive tax law was objectively reasonable 39_f3d_402 2d cir aff’g tcmemo_1993_480 a taxpayer’s reliance on the advice of a professional will be objectively reasonable only if the taxpayer has provided necessary and accurate information to the professional 115_tc_43 aff’d 299_f3d_221 3d cir see also 70_tc_158 the commissioner of internal revenue commissioner bears the burden of production with respect to any penalty or addition_to_tax see sec_7491 116_tc_438 to satisfy the commissioner’s burden of production the commissioner must come forward with sufficient evi- dence indicating that it is appropriate to impose the penalty or addition_to_tax higbee v commissioner t c pincite although the commissioner bears the burden of production with respect to any penalty or addition_to_tax the commis- sioner need not introduce evidence regarding reasonable_cause or similar provisions the taxpayer bears the burden_of_proof with regard to those issues id at the trial in this case mr djoshabeh conceded the deficiency determina- tion that respondent made in the notice implicit in that concession is that peti- tioners have cancellation of debt income in the total amount that respondent deter- mined in the notice on the record before us we find that respondent has carried respondent’s burden of production under sec_7491 mr djoshabeh contests here only the accuracy-related_penalty according to mr djoshabeh he should not be liable for that penalty because he gave the ac- countant who prepared petitioners’ return three forms with respect to certain debt of petitioners that was canceled during and it was his accoun- tant who did not include in petitioners’ income any amount with respect to that canceled debt presumably mr djoshabeh gave the accountant who prepared petitioners’ return forms 1099-c cancellation of debt mr djoshabeh did not claim at trial that the accountant who prepared peti- tioners’ return was responsible for failing to include in the other income statement attached to their return a canceled debt of dollar_figure in addition to the total of dollar_figure of canceled debt shown in that statement see supra note except for mr djoshabeh’s uncorroborated testimony that petitioners relied on the accountant who prepared their return when they did not include in their return certain cancellation of debt income the record is devoid of evidence such as the testimony of that accountant that establishes that mr djoshabeh acted with reasonable_cause and in good_faith in failing to report that income on the record before us we find that mr djoshabeh has failed to carry his burden of establishing that there was reasonable_cause for and that he acted in good_faith with respect to the underpayment for his taxable_year based upon our examination of the entire record before us we find that mr djoshabeh has failed to carry his burden of establishing that he is not liable for his taxable_year for the accuracy-related_penalty under sec_6662 see sec_6664 sec_1_6664-4 income_tax regs we have considered all of mr djoshabeh’s contentions and arguments that are not discussed herein and we find them to be without merit irrelevant and or moot see supra note sec_3 and to reflect the foregoing and mr djoshabeh’s concession an order granting respondent’s motion to dismiss for lack of prosecution as to petitioner jenia djoshabeh and decision for respondent will be entered


internal_revenue_service number release date index number ---------------------------- ----------------------------- ----------------------- ------------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- telephone number --------------------- refer reply to cc tege eb ec plr-153823-06 date april ------------------ -------- ---------------------------- -------------------------- -------------- -------------- --------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ------------------------ ----------------- ----------------- ------- legend dollar_figurea dollar_figureb corporation date month month partnership plan plan target x percent y percent year dear ------------ this letter is in response to the letter dated date submitted by your authorized representative requesting certain rulings under sec_424 of the internal_revenue_code code regarding the adjustment as the result of a particular transaction of outstanding_stock options intended to satisfy the requirements under sec_422 of the code concerning incentive stock_options the facts as represented are as follows corporation owns approximately x percent of the common limited_partnership units of partnership corporation also owns preferred units of partnership corporation’s overall ownership_interest in partnership both common and preferred units is y percent corporation elected to be taxed as a real_estate_investment_trust reit as defined under sec_856 of the code virtually all of corporation’s interests in properties and plr-153823-06 other assets are held through partnership both corporation and partnership have common equity securities that are required to be registered under sec_12 of the securities exchange act of exchange act options intended to qualify as incentive stock_options under sec_422 of the code have been granted to employees of corporation under plan and plan plan includes an adjustment provision under which the compensation committee of corporation may make such substitution or adjustment if any as it deems to be equitable with respect to the number or kind of shares or other_securities issued or reserved for issuance pursuant to plan and to outstanding awards in the event of any change in the outstanding shares of corporation by reason of any share dividend or split recapitalization merger consolidation spinoff combination or exchange of shares or other corporate change or any distributions to common shareholders other than regular cash dividends plan contains a substantially identical adjustment provision except that either the compensation committee or the board_of trustees of corporation may make such substitutions or adjustments as it deems equitable in such circumstances for financial_accounting reasons corporation’s board_of trustees approved an amendment to the adjustment provision under both plan and plan the amendment to each of the stock plans revised the language may make such substitution or adjustment if any as it deems to be equitable to read shall make such substitution or adjustment if any as it deems to be equitable prior to the amendment only the compensation committee had authority to make substitutions or adjustments under plan as part of the amendment of plan the adjustment provision was amended to provide that either the compensation committee or the board_of trustees of corporation has the authority to make substitutions or adjustments as it deems equitable during year corporation made an investment in target in month of year target sold one of its businesses and in month of year paid most of the net after-tax proceeds of the sale to target shareholders as an extraordinary_dividend as a shareholder of target corporation’s share of the extraordinary_dividend was dollar_figurea corporation shared this extraordinary_dividend with its own shareholders and unit holders by paying them a special dividend the special distribution of dollar_figureb per share on date corporation distributes a portion of its earnings to shareholders by paying four equal quarterly dividends each year the special distribution is unlike the quarterly dividends because it is nonrecurring not a part of a pattern of dividends or distributions and could not reasonably have been predicted until shortly before the special distribution was made the special distribution is more in the nature of a return of corporate capital through the one-time sale of a corporate asset by target than a payout of normal plr-153823-06 corporate earnings as is the case with regular quarterly dividends further the special distribution potentially reduced or diluted the value of the option holders’ interests relative to those of the shareholders who received the special distribution as a result of the special distribution_corporation intends to make a proportional adjustment of outstanding options including options intended to qualify as incentive stock_options under sec_422 of the code under both plan and plan as soon as practicable following receipt of a favorable response to its ruling_request the adjustment would apply to all options that were outstanding when the special distribution was paid the options would cover the same stock before and after the contemplated adjustments sec_424 of the code provides that if the terms of any option to purchase stock are modified extended or renewed such modification extension or renewal shall be considered the granting of a new option sec_1_424-1 of the income_tax regulations regulations provides that any modification extension or renewal of the terms of an option to purchase shares is considered the granting of a new option sec_424 of the code provides that the term modification means any change in the terms of the option that gives the employee additional benefits under the option but such terms shall not include a change in the terms of the option attributable to the issuance or assumption of an option under sec_424 sec_1_424-1 of the regulations provides that for purposes of sec_1_424-1 the term modification means any change in the terms of the option or change in the terms of the plan pursuant to which the option was granted or in the terms of any other agreement governing the arrangement that gives the optionee additional benefits under the option regardless of whether the optionee in fact benefits from the change in terms sec_424 of the code provides that the term issuing or assuming a stock_option in a transaction to which sec_424 applies means a substitution of a new option for the old option or an assumption of the old option by an employer_corporation or a parent or subsidiary of such corporation by reason of a corporate merger consolidation acquisition of property or stock separation reorganization or liquidation if the excess of the aggregate fair_market_value of the shares subject_to the option immediately after the substitution or assumption over the aggregate option_price of such shares is not more than the excess of the aggregate fair_market_value of all shares subject_to the option immediately before such substitution or assumption over the aggregate option_price of such shares and the new option or the assumption of the old option does not give the employee additional benefits which he did not have under the old option plr-153823-06 sec_1_424-1 of the regulations provides that in order for a change in an option or issuance of a new option to qualify as a substitution or assumption the change must occur by reason of a corporate transaction as defined in sec_1 a sec_1_424-1 of the regulations provides that generally a change in an option or issuance of a new option is considered to be by reason of a corporate transaction unless the relevant facts and circumstances demonstrate that such change or issuance is made for reasons unrelated to such corporate transaction a change in an option or issuance of a new option will be considered to be made for reasons unrelated to a corporate transaction if there is an unreasonable delay between the corporate transaction and such change in the option or issuance of a new option or if the corporate transaction serves no substantial corporate business_purpose independent of the change in options sec_1_424-1 of the regulations provides that a change in an option or issuance of a new option is by reason of a distribution or change in the terms or number of the outstanding shares of a corporation only if the option as changed or the new option issued is an option on the same stock as under the old option sec_1_424-1 of the regulations provides that the term corporate transaction includes a distribution excluding an ordinary dividend or a stock split or stock_dividend described in sec_1_424-1 or change in the terms of number of outstanding shares of a corporation sec_1_424-1 of the regulations provides that in order for a change in an option or issuance of a new option to qualify as a substitution or assumption the new option or assumed option must not give the optionee additional benefits that the optionee did not have under the old option in revrul_71_217 1971_1_cb_136 the terms of outstanding qualified_stock_options provided that the options would terminate if the granting corporation was not the survivor in any corporate merger consolidation reorganization or similar transaction unless otherwise provided for in writing in connection with the transaction the corporation later deleted this termination provision and substituted a provision providing assurances that in the event of a designated corporate transaction the options would be replaced by new options of comparable value or would be assumed by a successor_corporation the service ruled that a modification occurred because the deletion of the termination provision and the addition of the favorable provision conferred upon the employee an additional benefit he did not previously have plr-153823-06 unlike the options described in the ruling the options issued under plan and plan do not terminate in the event of a corporate transaction and the amended adjustment provision does not require the continuation of options that would otherwise terminate the compensation committee or board_of trustees of corporation retains the discretion to determine which adjustments or substitutions are equitable and is not required to make any particular adjustment or substitution therefore revrul_71_217 is distinguishable from the facts in the ruling_request and the amended adjustment provision does not confer an additional benefit on employees holding options previously issued pursuant to plan or plan based solely on the facts presented we rule as follows the amendment of the adjustment provisions in both plan and plan as described in this ruling will not constitute a modification extension or renewal under sec_424 of the code or sec_1_424-1 of the regulations of outstanding options intended to qualify as incentive stock_options that were granted pursuant to plan and plan the adjustment of outstanding options intended to qualify as incentive stock_options that were granted pursuant to plan and plan by reason of a corporate transaction within the meaning of those terms as used in sec_1_424-1 and of the regulations will not give optionees additional benefits under sec_1_424-1 and will not otherwise constitute a modification extension or renewal of those options under sec_424 of the code or sec_1_424-1 merely because a the adjustment is made pursuant to the amended adjustment provision in plan or plan as applicable or b the original adjustment provision in each of plan and plan has been amended as described in this ruling the special distribution was a corporate transaction within the meaning of that term as used in sec_1_424-1 of the regulations the contemplated adjustment of outstanding options intended to qualify as incentive stock_options that were granted pursuant to plan and plan to reflect the special distribution will be treated as occurring by reason of a corporate transaction within the meaning of those terms as used in sec_1_424-1 and of the regulations no opinion is expressed or implied regarding whether options granted under plan or plan satisfy the requirements of sec_422 of the code no opinion is expressed or implied concerning the tax consequences of the proposed transactions under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed or implied concerning the application of sec_409a of the code to the proposed transactions plr-153823-06 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely william c schmidt senior counsel executive compensation branch employee_benefits tax exempt government entities


ez department of the treasury internal_revenue_service p o box irs cincinnati oh number release date uil dear date date employer id number contact person id number contact telephone number form you must file tax years 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 because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code 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 we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter rev catalog number 47632s 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 we sent a copy of this letter to your representative as indicated in your power_of_attorney sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 redacted letter final adverse determination under sec_501 - no protest letter rev catalog number 47632s department of the treasury internal_revenue_service cincinnati oh legend b date c state d organization e state statute f organization g name dear date date employer id number contact person id number contact telephone number contact fax number uil 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 incorporated on b in c your articles state you are a charitable or religious corporation as defined in e they also state that in the event you dissolve or terminate at any time your assets become the sole property of d you believe you are exempt under sec_501 of the code but our records show you are exempt under sec_501 of the code as of b you are current with all form_990 filings you submitted form_1023 to change your status to be recognized as exempt under sec_501 of the code your mission is to support and supplement the charitable works of d and to facilitate the fraternal civic and social pursuits of f you are a membership_organization your bylaws state in article iii that your members are all members of f that are in good standing your bylaws additionally indicate that your members elect your board_of directors your primary activity is the operation of a banquet center doing business as g the banquet center is rented to the general_public for such events as weddings events associated with weddings including rehearsal dinners showers luncheons parties and business events the facility can be configured to the needs of the clients including a classroom and a theater you offer numerous packages that can be tailored to the clients and the pricing will vary greatly from client to client per each person’s individual needs for their event catering is also available through your preferred caterers to all clients you offer several wedding packages which can be customized according to the client’s wishes you have basic rates and charge additional fees for drink packages and other amenities such as the use of your patio and the lounge as well as specialty glassware and specialty beverages for your business events you offer customized seating styles and can accommodate a few hundred these packages may include meeting room tables chairs and wireless internet and are generally offered in half day and full_day increments these clients can also pay an additional fee for audio video services and other amenities you publicize g primarily on your web site which contains details of the numerous available event packages and fee schedules the website enables potential clients to download detailed brochures on the various packages you offer for such events as weddings business meetings and parties and the fee schedules your website also has photos of the various available amenities and emphasizes the amenities are offered at an affordable price to emphasize your customer service the website solicits testimonials from satisfied clients emphasizing the pricing and services offered you have a salaried full time banquet facility operations manager who is responsible for g’s day to day operations the duties consist of contracting with clients for rental of the facility reporting to your board_of directors and advising the board_of all maintenance needs and making recommendations for improvements the facility may need in addition to the base pay the operations manager may receive a receive a monthly commission based on the monthly invoicing of hall rental revenue you wrote this percentage considers the modest level of base pay compensation and adds an incentive component to the compensation package in addition upon the review of overall financial results your board at its discretion may provide another annual bonus in the range of of total compensation your income statement also shows you hire independent contractors and members are encouraged to volunteer at g to keep costs down ninety nine percent of your income came from fees earned from g’s operations expenses were for its operating_expenses such as salaries of your expenses interest_expense of your expenses advertising of your expenses and cost of sales of your expenses charitable_contributions were of your expenditures you also indicated your facility is debt financed finally your other activity is a weekly bingo_game which is conducted by your volunteer member bingo committee your financial information shows you have only conducted this activity for one year law sec_501 of the code provides for the recognition of exemption of organizations that are organized and operated exclusively for religious charitable or other purposes as specified in the statute no part of the net_earnings may inure to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt letter rev catalog number 47630w sec_1_501_c_3_-1 holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization’s assets will be considered dedicated to an exempt_purpose for example if upon dissolution such assets would by reason of a provision in the organization’s articles or operation of law be distributed for one or more exempt purposes sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 defines the term charitable as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes lessening of the burdens of government sec_1_501_c_3_-1 states an organization may qualify for tax exemption under sec_501 of the code although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization’s exempt_purpose or purpose sec_2 and also if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 of the code revrul_64_182 1964_1_cb_186 - a corporation organized exclusively for charitable purposes derives its income principally from the rental of space in a large commercial office building which it owns maintains and operates the charitable purposes of the corporation are carried out by aiding other charitable organizations selected in the discretion of its governing body through contributions and grants to such organizations for charitable purposes held the corporation is deemed to meet the primary purpose test of sec_1 c - e of the income_tax regulations and to be entitled to exemption from federal_income_tax as a corporation organized and operated exclusively for charitable purposes within the meaning of sec_501 of the internal_revenue_code of where it is shown to be carrying on through such contributions and grants a charitable program commensurate in scope with its financial resources in 326_us_279 66_sct_112 90_led_67 the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes in 70_tc_352 the court found that a corporation formed to provide consulting services did not satisfy the operational_test under sec_501 of the code because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational or scientific but rather commercial in addition the court found that the organization's financing did not resemble that of the typical sec_501 organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected letter rev catalog number 47630w costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations in 76_tc_380 t c the court held that a not-for-profit corporation that owned and operated a mountain lodge as a religious retreat facility and made available to lodgers recreational and social activities comparable to activities offered by vacation resorts does not qualify for tax-exempt status as an organization described under sec_501 of the code in easter house v u s ci ct aff'd 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the agency was a nonexempt commercial purpose the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization's argument that the adoption services merely complemented the health-related services to unwed mothers and their children rather the court found that the health-related services were merely incident to the organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiffs adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house ci ct pincite in 950_f2d_365 the court_of_appeals upheld a tax_court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church did not qualify for exemption under sec_501 of the code because the organization was operated for the court found that the organization's activities were presumptively commercial because the organization was in competition with other restaurants engaged in marketing and generally operated in a manner similar to commercial businesses a substantial nonexempt commercial purpose airlie foundation v commissioner in the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose as the court stated d d c the relied supp court on 2d f among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations application of law you are not operated for exempt purposes consistent with sec_501 of the code your activities consist of operating a commercial banquet center you operate in a manner consistent and in competition with other banquet centers letter rev catalog number 47630w you do not meet the provisions stated in sec_1_501_c_3_-1 because your assets upon dissolution are dedicated to a specifically named entity which does not guarantee that they will be distributed for one or more exempt purposes described in sec_501 of the code you are not operating exclusively for charitable purposes as required under sec_1 c - c your primary activity is the operation of a banquet center available for a fee to the general_public rental fees are paid_by anyone using it as provided in sec_1_501_c_3_-1 you have not established that your operations accomplish exclusively charitable purposes operating as a banquet center for a fee on a regular and continuous basis is an unrelated_trade_or_business for profit within the meaning of sec_513 of the code pursuant to sec_1_501_c_3_-1 you do not meet the requirements for recognition of tax exemption under sec_501 of the code as your primary purpose is the operation of an unrelated_trade_or_business for profit within the meaning of sec_513 of the code unlike the organization in revrul_64_182 you do not restrict the rental of your banquet center to other sec_501 exempt_organizations maintaining and renting a banquet center to members of the general_public does not further a recognized sec_501 purpose while you have made charitable_contributions this has been less than of your total revenue in addition your primary activity would remain the operation of a banquet center for rent by the general_public as the court found in better business bureau of washington d c v u s the presence of a single substantial non-exempt purpose will preclude exemption regardless of the number of other exempt_activities your operations are like those of the organization described in arlie foundation inc as the owner and operator of a banquet center you are in direct competition with other banquet centers who provide services to members of the public for a fee the fees you charge are customary to those of the industry in addition you will advertise your services on the internet and use marketing methods common to for-profit businesses you have received less than of your total revenue from public donations or grants and are almost solely funded by fees you have a paid banquet manager and contract labor as needed thus you meet most of the factors provided in airlie foundation inc indicating that you are operated for a substantial nonexempt commercial purpose you are like the organizations described in b s w group inc easter house schoger foundation and living faith because you are operating for a substantial nonexempt commercial purpose rather than for a tax-exempt purpose you are open to the general_public during regular business hours and the rental of the banquet center is available to anyone in the general_public you use your rental income to pay for the cost of sales the upkeep of your facility the employment of staff and the making of interest payments on debt this is an activity normally carried on by for-profit businesses therefore you conduct the activity in a manner similar to for profit businesses and are in direct competition with such businesses conclusion based on the information submitted you have failed to establish that you are organized and operated exclusively for exempt purposes within the meaning of sec_501 of the code and the related_income tax regulations therefore based on the administrative record you fail to qualify for exemption under sec_501 letter rev catalog number 47630w 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 e e e e e your name address employer_identification_number ein and a daytime phone number 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 47630w 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 47630w


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division release number release date legend org organization name org address date address address xx date uil person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court november 20xx dear this is a final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons a substantial part of your activities consists of providing down payment assistance to home buyers to finance the assistance you rely on home sellers and other real-estate related businesses that stand to benefit from these down payment assistance transactions your receipt of a payment from the home seller corresponds to the amount of the down payment assistance provided in substantially_all of your down payment assistance the manner in which you operate demonstrates you are transactions therefore operated primarily to further your insiders' business interests you are operated for a substantial nonexempt purpose in addition you operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 you failed to meet the requirements of sec_501 and sec_1 c -1 d in that you failed to establish that you were operated exclusively for an exempt_purpose rather you were operated for the benefit of private interests and a part of your net_earnings inured to the benefit of outsiders your founder and board members contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to internal_revenue_service taxpayer advocates office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_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 we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours vicki l hansen acting director eo examinations eyzan 886a department of the ‘treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 legend org organization name employee company president president co -1 company xx date motto motto emp-1 co-2 issue whether org org operates exclusively for an exempt_purpose under sec_501 of the internal_revenue_code background facts org org is a articles of incorporation were amended on march 20xx not-for-profit corporation chartered on december 20xx the org applied for recognition as a tax-exempt_organization under internal_revenue_code sec_501 c on form_1023 application_for recognition of tax-exempt status its stated primary purpose was review and dissemination of research done by other individuals individuals to pursue research into methods of enhancing and prolonging life done by org staff into grants to and research org was granted an advanced ruling as a public charity pursuant to sec_509 on april 20xx by letters dated december 20xx and may 20xx org was notified that it would be classified as a private_foundation due to the non-receipt of form_8734 support schedule for advance_ruling period this change was effective for years after 20xx for years prior to 20xx a primary activity of org was promoting research which has as its objective enhancing and prolonging life through grants for such research and publication of the results org reviewed and disseminated research done by other organizations with respect to methods and treatments that enhance lives org made grants to individuals to pursue research into methods of enhancing and prolonging life in 20xx org disbursed over dollar_figure for motto including grants in the total amount of dollar_figure although the activities of org were limited due to limited resources in 20xx it disbursed dollar_figure to emp-1 of the co-1 for research into methods of prolonging life org made no other disbursements in 20xx in furtherance of its exempt_purpose in 20xx org operated a down payment assistance program as described below in that year with the exception of the disbursement described above the operation of the dpa program was org’s exclusive activity for 20xx and 20xx org had no revenue from any source including the operation of the down payment assistance program the organization incurred expenses however in excess of for professional fees rent bank charges consulting fees insurance and advertising form 886-a rev department of the treasury - internal_revenue_service page -1- rouen 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx12 federal returns org filed forms for the calendar years 20xx through 20xx it filed forms 990-pf as required for the calendar years 20xx and 20xx org reported on form_990 contributions in 20xx in the amount of dollar_figure and dollar_figure in interest the amount reported as contributions is receipts in the amount of dollar_figure from the down payment assistance program through co-2 less disbursements this amount was reduced by dollar_figure for payments made for referral and marketing expense resulting in the net receipt of dollar_figure reported as the contributions on the return part i of form_990 for 20xx showed a decrease in net assets from the prior year this decrease was due to payments for rent and other expenditures including consulting expenses the expenditures exceeded the receipts by dollar_figure part iii of form_990 for 20xx indicated that the primary purpose of the organization was motto president confirmed this purpose in an interview on august 20xx operation of org’s down payment assistance program dpa revenues received from the down payment assistance program were used to fund the motto purpose of the organization according to president org through its websites and flyers advertising and other methods promoted its dpa program to builders lenders loan officers mortgage brokers real_estate agents title insurers buyers and sellers many of the participants in org’s dpa program utilized federal housing administration fha financing for their home purchase the promotional material provided by the other website has also now been shut down explained the program as follows website is no longer in use and has been blocked by its owner however which l the program is called a true gift requiring no income limits for houses selling for less than dollar_figure the seller pays org a service fee which consists of the grant usually of the sales_price plus the greater of dollar_figure or of the final sales_price for houses selling for more than the fee is the amount of the grant plu sec_1 of the final sale price the grant gift letter is sent to the mortgage company org then pays the total grant funds to the title company form 886-a crev department of the treasury - internal_revenue_service p page -2- orin 886a department of the casi - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended 20xx12 org at the closing the title company withholds the service fee from the seller’s proceeds these funds service fee were then transferred to org in essence these transactions resulted in a circular flow of the money the sellers made required_payments to org of the amount equal to the amount the buyers would receive from org plus an additional transaction fee org provided the funds to the buyers the buyers used the funds to make the down payment to the sellers to purchase a home from the seller the seller received the monies back as proceeds from the sale org’s promotional material and advertising made it clear that anyone who could qualify for some type of loan would be eligible for the down payment assistance program toll-fee contact numbers were included on one of org’s promotional hand-outs one of the numbers was no longer in service however the number was still being used in november 20xx by the org president in 20xx the number is now answered corporate office president confirmed that the number is still in use by org but is not used for a dpa program law sec_501 of the code provides for the exemption from federal_income_tax with respect to corporations organized and operated exclusively for charitable or educational_purposes provided that no part of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual sec_501 sec_1_501_c_3_-1 provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in sec_501 an organization must not engage in substantial activities that fail to further an exempt_purpose in 326_us_279 the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests sec_1_501_c_3_-1 defines the term charitable for sec_501 purposes as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions form 886-a ev department of the treasury - internal_revenue_service page -3- orm 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items 20xx12 org schedule no or exhibit year period ended to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the advancement of education id sec_1_501_c_3_-1 provides in part that the term educational for sec_501 purposes relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of sec_501 if the trade_or_business furthers an exempt_purpose and if the organization’s primary purpose does not consist of carrying on an unrelated_trade_or_business revrul_2006_27 discusses whether organizations described in situations operate exclusively for charitable purposes the first two of these situations merit discussion here the organization described in situation helps low-income families to purchase decent and safe homes in the metropolitan area in which it is located individuals are eligible to participate if they have the employment history and financial history to qualify for a mortgage with the exception that they do not have the funds necessary for down payments the organization in situation offers financial seminars conducts educational activities to prepare the individuals for home ownership and requires a home inspection report before providing funds for down payment assistance to fund the program the organization conducts broad based fundraising that attracts gifts grants and contributions from the general_public further the organization has policies in place to ensure that the grant making staff does not know the identity or contributor status of the home seller or other parties who may benefit from the sale and does not accept contributions contingent on the sale of particular properties because the organization described in situation relieves the poor and distressed requires a home inspection to insure that the house is habitable conducts educational seminars has a broad based funding program and has policies to ensure that the organization is not beholden to particular donors the service held that the organization is operated exclusively for charitable purposes and qualifies for exemption from federal taxation as an organization described in sec_501 the organization described in situation of revrul_2006_27 is similar to the organization described in situation except that its staff knows the identity of the party selling the home and may know the identity of other parties involved in the sale the organization receives a payment from the seller the amount of which bears a direct correlation to the amount of down payment assistance provided in substantially_all the cases in which the organization provides assistance to the home buyers and most of its financial support comes from home sellers and related businesses that may benefit from the sale of homes to buyers who receive assistance from the organization form 886-a ev department of the treasury - internal_revenue_service page -4- oon 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended 20xx12 org because the organization described in situation provides down payment assistance amounts that directly correlate to the amounts provided by home sellers and relies primarily on payments from home sellers and real-estate related businesses that stand to benefit from the transactions to finance its program the service held that the organization described in situation is not operated exclusively for exempt purposes and does not qualify for exemption from federal_income_tax as an organization described in sec_501 in easter house v united_states cl_ct aff'd 846_f2d_78 fed cir the u s court of federal claims considered whether an organization that provided prenatal care and other health-related services to pregnant women including delivery room assistance and placed children with adoptive parents qualified for exemption under sec_501 the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization’s argument that the adoption services merely complemented the health-related services to unwed mothers and their children rather the court found that the health-related services were merely incidental to the organization’s operation of an adoption service which in and of itself did not serve an exempt_purpose the organization’s sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits in addition although the organization provided health care to indigent pregnant women it only did so when a family willing to adopt a woman’s child sponsored the care financially that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house accordingly the court found cl_ct at in 92_tc_1053 the court held that an organization that operated a school to train individuals for careers as political campaign professionals but that could not establish that it operated on a nonpartisan basis did not exclusively serve purposes described in sec_501 because it also served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with entities of a particular political_party and that most of the organization’s graduates worked in campaigns for the party’s candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting the party’s candidates and entities although the candidates and entities benefited were not organization insiders the court stated that the conferral of benefits on disinterested persons who are not members of a charitable_class form 886-a crev department of the treasury - internal_revenue_service page -5- evr 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org 20xx12 may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 i1 the court concluded by stating that even if the political party’s candidates and entities did comprise a charitable_class the organization would bear the burden of proving that its activities benefited members of the class in a non-select manner american campaign academy t c pincite in 71_tc_202 the court held that an organization that marketed handicrafts made by disadvantaged artisans through museums and other non-profit organizations and shops operated for exclusively charitable purposes within the meaning of sec_501 the organization in cooperation with national craft agencies selected the handicrafts it would market from craft cooperatives in communities identified as disadvantaged based on objective evidence collected by the bureau of indian affairs or other government agencies the organization marketed only handicrafts it purchased in bulk from communities of craftsmen the organization did not market the kind of products produced by studio craftsmen nor did it market the handicrafts of artisans who were not disadvantaged the court concluded that the overall purpose of the organization’s activity was to benefit disadvantaged communities the organization’s commercial activity was not an end in itself but the means through which the organization pursued its charitable goals the method the organization used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans who were directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans therefore the court held that the organization operated exclusively for exempt purposes described in sec_501 in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which the organization conducted its activities the court found that it was operated for a nonexempt commercial purpose rather than for a tax-exempt purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for-profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations see also 950_f2d_365 7th cir holding that a religious_organization which ran restaurants and health food stores in furtherance of its health ministry did not qualify for tax-exempt status because it was operated for substantial commercial purposes and not for exclusively exempt purposes revrul_67_138 1967_1_cb_129 held that helping low-income persons obtain adequate and affordable housing is a charitable activity because it relieves the poor and distressed or underprivileged the organization described therein carried on several activities directed toward form 886-a rev department of the treasury - internal_revenue_service page -6- ever 886a department of the treasury - internal_revenue_service name of taxpayer 20xx12 org explanation of items schedule no or exhibit year period ended the purpose of assisting low-income families to obtain improved housing including conducting a training course on various aspects of homebuilding and homeownership coordinating and supervising joint construction projects purchasing building sites for resale at cost and lending aid in obtaining home construction loans revrul_70_585 1970_2_cb_115 discussed four situations of organizations providing housing and whether each qualified as charitable within the meaning of sec_501 situation described an organization formed to construct new homes and renovate existing homes for sale to low-income families who could not obtain financing through conventional channels the organization also provided financial aid to low-income families who were eligible for loans under a federal housing program but did not have the necessary down payment the organization made rehabilitated homes available to families who could not qualify for any type of mortgage when possible the organization recovered the cost of the homes through very small periodic_payments but its operating funds were obtained from federal loans and contributions from the general_public the revenue_ruling held that by providing homes for low-income families who otherwise could not afford them the organization relieved the poor and distressed situation described an organization formed to ameliorate the housing needs of minority groups by building housing units for sale to persons of low and moderate income on an open-occupancy basis the housing was made available to members of minority groups who were unable to obtain adequate housing because of local discrimination the housing units were located to help reduce racial and ethnic imbalances in the community as the activities were designed to eliminate prejudice and discrimination and to lessen neighborhood tensions the revenue_ruling held that the organization was engaged in charitable activities within the meaning of sec_501 situation described an organization set up to formulate plans for the renewal and rehabilitation of a particular area in a city as a residential community the median income level in the area was lower than in other sections of the city and the housing in the area generally was old and badly deteriorated the organization developed an overall plan for the rehabilitation of the area sponsored a renewal project and involved residents in the area renewal plan the organization also purchased an apartment building that it rehabilitated and rented at cost to low and moderate income families with a preference given to residents of the area the revenue_ruling held that the organization was described in sec_501 because its purposes and activities combated community deterioration situation described an organization formed to alleviate a shortage of housing for moderate- income families in a particular community the organization planned to build housing to be rented at cost to moderate-income families the revenue_ruling held that the organization failed to qualify for exemption under sec_501 because the organization’s program was not designed to provide relief to the poor or further any other charitable purpose within the meaning of sec_501 form 886-a rev department of the treasury - internal_revenue_service page -7- ore 886a department of the treasury - internal_revenue_service name of taxpayer 20xx12 org explanation of items schedule no or exhibit year period ended benefiting private interests an organization is not organized or operated exclusively for charitable purposes unless it serves a public rather than a private interest c -1 d revrul_72_147 1972_1_cb_147 held that an organization that provided housing to low income families did not qualify for exemption under sec_501 because it gave preference to employees of business operated by the individual who also controlled the organization the ruling reasoned that although purposes doing so in a manner that gives preference to employees of the founder’s business primarily serves the private interest of the founder rather than a public interest in kj's fund raisers inc v commissioner t c memo aff'd 166_f3d_1200 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization’s board the tax_court found and the second circuit agreed that the founders exercised substantial influence over the affairs of the organization the organization’s business consisted of selling lucky or similar instant win lottery tickets to patrons of kj's place the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations the lottery tickets were sold during regular business hours by the owners of the lounge and their employees from the proceeds of the sales of the lottery tickets the organization made grants to a variety of charitable organizations although supporting charitable organizations may be a charitable activity the tax_court nevertheless upheld the commissioner’s denial of exemption to the organization on the ground that the organization’s operation resulted in more than incidental private benefit the tax_court held and the second circuit affirmed that a substantial purpose of kj's activities was to benefit kj’s place and its owners by attracting new patrons by way of lottery ticket sales to kj's place and by discouraging existing customers from abandoning kj's place in favor of other lounges where such tickets were available thus the organization was not operated exclusively for exempt purposes within the meaning of sec_501 an organization does not serve a public rather than a private interest within the meaning of sec_1_501_c_3_-1 if any of its assets or earnings inure to the benefit of any insiders or disqualified persons sec_1_501_c_3_-1 inurement is any transfer of charitable assets to the organization’s insiders for which the organization does not receive adequate_consideration inurement can take many forms excessive_compensation form 886-a rev department of the treasury - internal_revenue_service page -8- oem 886a department of the treasury - internal_revenue_service name of taxpayer 20xx12 org explanation of items schedule no or exhibit year period ended for services is a form of inurement for example in 203_f2d_872 cir the fifth circuit held that the organization’s payment of a full-time salary for part-time work constituted private_inurement the use by insiders of the organization’s property for which the organization does not receive adequate_consideration is a form of inurement see eg the 412_f2d_1197 ct_cl holding that the insiders’ use of organization- owned automobiles and housing constituted inurement 222_fsupp_151 e d wash holding that the organization’s provision of goods services and refreshments to its members constituted inurement loans that are financially advantageous to insiders from the organization’s funds particularly unexplained undocumented loans are a form of inurement for example in the founding church of scientology f 2d pincite1 the claims_court listed unexplained loans to and from insiders among the examples of inurement in 823_f2d_1310 cir the ninth circuit held that debt repayments in the form of percent of the organization’s income made to the organization’s founder allegedly to compensate the founder for the organization’s past use of his personal income and capital constituted inurement in 283_fsupp2d_58 d d c the court held that forgiveness of interest was a form of inurement leasing arrangements that favor disqualified persons to the detriment of the organization are a form of inurement in the founding church of scientology f 2d pincite the claims_court treated the organization’s payment of rent to the founder’s wife as inurement in the absence of any showing that the rental was reasonable or that the arrangement was beneficial to the organization see also 272_f2d_168 cir holding that inflated rental prices constitute inurement payment to one person for services performed by another or for services presumed to be performed without any proof of performance is also a form of inurement in church of scientology f 2d pincite the court listed royalties received by the organization’s founder on the sale of publications written by others among the improper benefits received by the founder from the organization in the founding church of scientology f 2d pincite the court held that the payment of salary to the founder’s daughter without any proof that she actually performed any services for the organization constituted inurement a number of courts have held that unaccounted for diversions of a charitable organization's resources by one who has complete and unfettered control can constitute inurement see 365_f2d_792 8th cir 318_f2d_632 7th cir and church of scientology f 2d pincite form 886-a rev department of the treasury - internal_revenue_service page -9- department of the treasury - internal_revenue_service ee 886a name of taxpayer schedule no or exhibit year period ended explanation of items 20xx12 org the provision of inurement can be direct or indirect in church of scientology f 2d pincite the organization transferred in excess of dollar_figure million to a for-profit corporation incorporated by the organization’s founder and his wife the directors of the corporation were high-ranking members of the church of scientology the directors approved the founder’s decision to transfer dollar_figure million from the corporation’s account to the ship apollo aboard which the founder and his family lived the ninth circuit held that the funds funneled through the for- profit corporation constituted inurement to the founder and his family church of scientology f 2d pincite in 765_f2d_1387 cg cir the ninth circuit held that a church that conducted its activities by mail did not qualify for exemption under sec_501 because a substantial purpose of its activities was to benefit a for-profit corporation controlled by the church’s insiders the church employed an advertising agency controlled by its insiders to provide all of the printing and mailing services for the church’s mass mailings the advertising agency devoted approximately two-thirds of its time to the work for the church the majority of the church’s income was paid to the advertising agency although the advertising agency claimed to have clients unrelated to the church it did not advertise its services and refused to identify its other clients the ninth circuit held that the church was operated for the substantial non-exempt purpose of providing market for the advertising agency’s services and thus primarily served the private interests of the advertising agency and its owners rather than a public purpose id pincite in so holding the ninth circuit rejected the church's argument that the income paid_by the advertising agency should not be included in the determination of reasonableness and treated this income as indirect inurement of the church’s earnings to the church’s insiders effective date of revocation generally an organization may rely on a favorable determination_letter received from the internal_revenue_service sec_1_501_a_-1 revproc_2003_4 2003_1_cb_123 dollar_figure cross-referencing dollar_figure et seq an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely on a favorable determination if there is a material_change inconsistent with exemption in the organization’s character purposes or methods of operation after the determination_letter is issued sec_601_201 revproc_90_27 1990_1_cb_514 the commissioner may revoke a favorable determination_letter for good cause sec_1_501_a_-1 revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented sec_601_201 revproc_2003_4 dollar_figure cross-referencing dollar_figure et seq fotm 886-acrev department of the treasury - internal_revenue_service page -10- eye 886a department of the ‘t'reasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended 20xx12 org analysis sec_501 of the internal_revenue_code irc provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided that no part of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in sec_501 an organization must not engage in substantial activities that fail to further an exempt_purpose in 326_us_279 the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests org operated a down payment assistance program that did not further an exempt_purpose like the activities of the organization in 92_tc_1053 org’s down payment assistance program was structured to assist the private parties who funded it sellers of homes benefited by being able to sell their homes at the full listed prices buyers benefited by being able to buy homes without commitment of their own funds as down payments and real_estate professionals benefited from the higher commissions paid associated with the full listed prices no charitable_class benefited since the prospective buyers were not limited to low-income no particular community in need of rehabilitation was targeted although org engaged in some exempt_activities before 20xx by giving grants in furtherance of its exempt_purpose in 20xx org engaged almost exclusively in a nonexempt activity by operating the down payment assistance program org did not disclose or describe the dpa activity on its application_for exemption moreover org did not adequately disclose the change in its operations on its forms the dpa program was a new activity for org which is materially different from the activities in which org represented it would engage and that formed the basis of the internal revenue service’s recognition of the organization as an exempt entity only an insubstantial portion of the activity of an exempt_organization may further a nonexempt purpose org’s down payment assistance program was designed to channel funds in a circular form 886-arev department of the treasury - internal_revenue_service page -11- eee 886a department of the ‘treasury - internal_revenue_service name of taxpayer 20xx12 org explanation of items schedule no or exhibit year period ended manner from the sellers to the buyers and back to the sellers in the form of increased home prices org’s dpa program had not been operated exclusively for an exempt_purpose org operated its dpa program in a manner similar to the operation by the organization described in revrul_2006_27 situation the organization’s activities during the years that org provided down payment assistance purportedly in the form of gifts to individuals and families for the purchases of homes org offered its down payment assistance to interested buyers regardless of the buyers’ income levels or needs org’s dpa activities did not target neighborhoods in need of rehabilitation or other relief such as lessening neighborhood tensions or eliminating prejudice and discrimination in 20xx the dpa program was more than an insubstantial part of org’s down payment funding activity involved brokering transactions to facilitate the selling of homes in the manner indistinguishable from a for profit entity in the business of brokering real_estate transactions an exempt organization’s primary purpose may not be the operation of an unrelated_trade_or_business see sec_1_501_c_3_-1 org’s brokering services were marketed to homebuyers sellers realtors lenders home builders and title companies regardless of the buyers’ income level or need and regardless of the condition of the community in which the home is located alliances were built with the realtors lenders home builders and title companies to assure future business for the mutual benefit of the participants organization’s position org reports that it ended the down payment assistance program in 20xx and plans to rely on public and private research grants and donations as the means of funding its primary purpose of motto in the future it does not agree that revocation of its exempt status is appropriate conclusion since the dpa activities of org were more than insubstantial it was not operated exclusively for an exempt_purpose therefore its status as an exempt_organization described in sec_501 should be revoked effective january 20xx form 886-a crev department of the treasury - internal_revenue_service page -12- cee ena government entities oivision org address department of the treasury internal_revenue_service te_ge eo examination commerce st mail code dal dallas tx date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in if we issue a determination_letter to you based on technical_advice no publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you 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 ina 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 you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f


internal_revenue_service number release date index number ---------------------------------- ------------------------------------------------- ----------------------------------- -------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-101791-07 date date ---------------------------------- legend x -------------------------------------------------- state date dear -------------------- ----------------------- ----------- this letter responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date under the sec_1362 provides that a small_business_corporation may elect to be an s laws of state the shareholder of x intended that x be treated as an s_corporation effective date but the election to be treated as an s_corporation was not timely filed law and analysis corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 plr-101791-07 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any x did not timely file an election to be treated as an s_corporation under sec_1362 taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply as of date x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes the code provides that it may not be used or cited as precedent letter will be sent to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer s requesting it sec_6110 of except as specifically set forth above no opinion is expressed or implied as to sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes