department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date se t eo ra t contact person identification_number contact number employer_identification_number form required to be filed tax years dear applicant this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penaity file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the 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 notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements informaiton letter if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely lois g lerner director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter ifion letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date uniform issue list contact person identification_number contact number fax number employer_identification_number i u o n u n z z i a i y l w l o q dear applicant we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below this letter supersedes our letter of date facts you mare a state non-profit corporation formed on date your articles of incorporation state that your specific purpose is to act and operate as a charitable_organization in lessening the burdens of government to provide down payment assistance to individuals couples families and groups in obtaining financing to purchase real_property subsequently you amended and restated your articles to state your purposes as to act and operate exclusively for charitable purposes within the meaning of sec_501 of the internal_revenue_code including but not limited to the relief of poverty lessening the burdens of government community beautification and maintenance providing donations and assistance in marketing program management and fund raising for other c organizations your application form_1023 and subsequent correspondence indicates that your primary activity will be operating a downpayment assistance program in conjunction with n for persons regardless of income level to purchase real_property anywhere in the united_states you state that your primary source of financial support for your downpayment assistance program is n established n exemption under sec_501 provider of downpayment funds date and date a related_organization that has applied for tax you state that you specifically of the code to be the primary this is reiterated in your letters of you further state that you will utilize a marketing company r to you describe r administer your downpayment assistance program august various services to m and n clearinghouse for overhead expenses of both m and n as well as providing management administration and marketing services for both in your letter of date you state that r was established as a method of paying the management costs of operating m and n as a for-profit entity that provides you state that r acts as in your letter of a central in your letter of date you describe the basic r solicits and markets the operations of your program as follows down payment assistance program on behalf of yourself and n provide downpayment funds to a particular homebuyer at the conclusion of the transaction the home seller whose property was purchased by the particular homebuyer makes a donation to n turn makes a contribution to your pool of funds downpayment assistance to additional buyers using these funds from n you state that r may refer a buyer to another organization for downpayment assistance however the information you provided indicates that this actually does not occur you then provide nin you the information packet describing your program indicates that to qualify applicants do not need to be first-time home buyers and there are no income limitations state that you specifically target s to provide assistance to low to moderate income families as defined by hud basis funds from you in addition you state that in order for a buyer to receive a buyer must obtain pre-approval from a participating you state that the program will be available on a nationwide in your letter of august in your letter of date you lender that is you rely on the lender to determine which buyers need assistance you state that such pre-approval will assist the buyer in determining the purchase amount for which the buyer qualifies addition the sales_price of the home must be appraised to meet the lender’s terms and the seller must agree to the terms of the seller participation letter in the information packet also indicates that a buyer must purchase a participating property from a participating home seller letter of march a home being sold by a seller who has entered into agreement with you located in any community in the united_states describe the home as usually they the homes are in the lower- income areas you describe a participating property as in addition you in your you state that your program provides home sellers with a greater pool of qualified buyers and helps the seller get the highest value for the home and may be instrumental in a quicker sale of the home sellers enter into an agreement with you and n to provide a donation to a pre-determined charity designated by r upon sale of the seller’s property purchase_price which is withheld from the seller’s proceeds and delivered to the designated charity the business_day following the closing of the transaction homebuyer by you is five percent or less of the selling_price then the seller makes a contribution to n in an amount equal to the gift provided by you plus an additional_amount as a service fee the seller agrees to donate a percentage of the for example if the gift provided to the you further state that the seller is not obligated to give a donation if the closing escrow is terminated percentage of the purchase_price of the property is not negotiable copies of your seller participation letter indicates that the pre- determined charity is n that the seller’s fee and corresponding contribution is only refundable if the buyer does not close on the property the fee and contribution is only made if the seller has signed the agreement and the buyer receives funds from m the seller participation letter indicates the donation is in addition a fixed in your letters of date and date you describe a typical transaction in your downpayment assistance program as follows a real_estate agent writes a contract for the buyer with an addendum stating t he contract is contingent upon the buyer receiving gift funds from a non-profit charitable_organization the seller agrees to the terms and conditions of the seller participation letter and the terms and conditions are incorporated into the real_estate purchase contract d a m and n send a gift the buyer then applies for a loan with a mortgage company the loan officer sends m and n a gift funds request form upon receiving the gift funds request form letter to the loan officer stating that they will provide gift funds to the buyer for the downpayment at the close of escrow or the day before the title company will send m and n a copy of the settlement statement stating the amount of gift funds needed for the buyer from m and the amount of funds that are to be sent to n after the close of escrow m and n will verify that the gift funds are noted on the settlement statement and agree to the amount reflected on the gift letter upon verification the gift funds are wired from m to the title company’s trust account after the title company receives the gift funds and the funds from the lender the transaction is closed and recorded that time proceeds to n the title company wires funds from the seller’s at in your letter of october r has actual contact with either the buyer or the seller you state that neither you m n or the staff members are a in your letter of date you state that you do not have any paid staff members and that r provides the staff needed to operate your program director meeting minutes of date indicates that you drafted an agreement between yourself n and r regarding services to be provided that the service agreement between n and r was approved by board members and signed this agreement as requested in our letter of date however you never provided us with a copy of in your meeting minutes of date you indicate your board_of b and c in your letter of date you state that a b and c are a and b are husband and wife and is their child a loan officer all officers or trustees of m and n c ais employed as real_estate agent c is also a licensed real_estate agent and has worked as a loan officer and c are all you state that you determined that you owners and employees of r should use two nonprofit_corporations gifts to homebuyers and the other to receive donations letter of august directors to seven so that a members employees of however the day-to-day operations are run by a b and c would be the minority board you also state that a you stated that you expanded your board_of one to provide the downpayment a licensed and c as in your b is b r b in your letter of date you state that you have initiated a homebuyer education program you further described your education program in your letter of date offer a homebuyer education program in conjunction with n that the course covers a variety of topics ranging from the home buying process grant programs to money management the programs are open to the general_public and you are creating study in your letter of date you state that the materials course materials used in your homebuyer education program as those published by fha you operate your homeownership program you did not provide any other information as you state that you you state that you state to how in addition you state that the only services you provide to a buyer are the down payment funds other programs or activities to ensure that the buyer is purchasing safe decent sanitary and affordable housing you state that you do not have any in your letter of date you restated your purposes and activities to include the acquisition and rehabilitation of homes for rental lease or sale as affordable housing you state that you will make the renovated homes available to affordable housing families as defined by hud you further state that preference will be given to low-income military public safety and education related families however in your letter of june to contribute funds to other exempt_organizations that conduct such activities activity you did not provide any other information regarding thi sec_2002 you state that you may elect ‘ in your restated purposes and activities you also indicate that you will be offering special needs housing for the elderly in your letter of date you defined handicapped and others such persons as those with a physical or mental_disability which has a substantial and long-term adverse effect on an individual’s ability to carry out normal day-to-day activities you further state that m and n will use the social_security administration’s definition of disability for these purposes information regarding this activity however you did not provide any the financial data that you submitted including your form_990 indicates that you received approximately from services during your first three years of operation ‘gifts of approximately in your letter of october contributions to n have been your only source of financial support you indicate that seller during that same period of time you made in gross_receipts you have represented that your program operates in a manner to lessen the burdens of government by providing housing opportunities in your letter of january part of the american dream downpayment initiative operated through hud’s home program you represent that your program i sec_2002 in your letter dated date you represent that you operate in a manner similar to several specified organizations the manner in which you and these organizations operate is referred to as seller-funded downpayment assistance in the final report an examination of downpayment gift programs administered by non-profit organizations commissioned by office of housing united_states department of housing and urban development hud contract no c-opc- m0001 date the report concludes that seller-funded downpayment assistance for mortgage downpayments has led to underwriting problems that require immediate attention the report concludes that the effective costs of homeownership are increased even more by the processing fees charged by the seller- funded downpayment assistance providers which get passed through to borrowers in higher property prices with this determination_letter furthermore a copy of the report is enclosed sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided no part of the net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in sec_501 of the code an organization must not engage in substantial activities that fail to further an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not sec_1_501_c_3_-1 of the regulations provides that an organization is not operated sec_1_501_c_3_-1 of the regulations defines the term charitable as used in exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals 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 underprivileged the term charitable also includes the advancement of education sec_501 of the code as including the relief of the poor and distressed or of the sec_1_501_c_3_-1 of the regulations provides in part that the term educational as used in sec_501 of the code relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 of the regulations provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of sec_501 of the code if the trade_or_business furthers an exempt_purpose and provided the organization's primary purpose does not consist of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court held that the presence of a single nature will destroy the exemption regardless of the number or importance of truly exempt purposes nonexempt purpose if substantial in in easter house v u s cl_ct aff'd 846_f2d_78 fed cir cert_denied 488_us_907 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 cl_ct pincite 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 of the code because it also served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with republican party entities and that most of the organization's graduates worked in campaigns for republican candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting republican 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 may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 of the regulations the court concluded by stating that even if the republican 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 in 71_tc_202 the court held an organization that marketed handicrafts made by disadvantaged artisans through museums and other non- profit organizations and shops be operated for exclusively charitable purposes within the meaning of sec_501 of the code 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 the bureau of indian affairs or other government agencies the organization marketed only handicrafts it purchased in bulk from these communities of craftsmen it did not select individual craftsmen based on the needs of the purchasers the court concluded that the overall purpose of the activity was to benefit disadvantaged communities the method it used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans for exempt purposes therefore the court held that the organization operated exclusively 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 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 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 revrul_67_138 1967_1_cb_129 holds that helping low income persons obtain adequate and affordable housing is charitable because it relieves the poor and distressed or underprivileged the organization carried on several activities directed to assisting low-income families obtain improved housing including 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 discusses four examples of organizations providing housing and whether each qualified as charitable within the meaning of sec_501 of the code situation describes 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 provides financial aid to eligible families who do not have the necessary down payment 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 holds that by providing homes for low-income families who otherwise could not afford them the organization relieved the poor and distressed situation describes 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 is made available to members of minority groups who are unable to obtain adequate housing because of local discrimination the housing units are 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 holds that the organization was engaged in charitable activities within the meaning of sec_501 of the code situation describes an organization formed 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 was generally old and badly deteriorated the organization developed an overall plan for the rehabilitation of the area it sponsored a renewal project and involved residents in the area renewal plan the organization also purchased apartment buildings 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 holds that the organization is described in sec_501 of the code because its purposes and activities combated community deterioration situation describes 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 service held that the organization failed to qualify for exemption under sec_501 of the code because the organization's program did not provide relief to the poor or further any other charitable purpose within the meaning of sec_501 and the regulations revrul_72_147 1972_1_cb_147 holds that an organization that provided housing to low income families did not qualify for exemption under sec_501 of the code because it gave preference to employees of a business operated by the individual who also controlled the organization although providing housing for low income families furthers charitable 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 revrul_85_1 1985_1_cb_177 sets out a two-part test for determining whether an organization’s activities lessen the burdens of government the ruling holds that an activity is a burden of government only if there is objective manifestation by a governmental_unit that it considers such activities to be its burden the ruling also holds that little weight should be given to statements of government officials that merely praise or express approval of an organization and its activities rather the government must formally recognize the organization and its functions to be considered a governmental burden the ruling sets out relevant factors in determining whether the government unit has made the necessary objective manifestation include a b c a e f a statute specifically creates the organization and clearly defines the organization's structure and purposes the activity is an integral part of a larger governmental program or is acted jointly with a governmental_unit the governmental_unit controls the activities of the organization such as appointing all the board members the organization pays governmental expenses regular government funding of the organization’s activities through grants or general obligation bonds backed with the full faith and credit of the governmental_unit as opposed to general revenue bond financing the governmental_unit is not prohibited from performing the particular activity revrul_85_2 1985_2_cb_178 holds that an organization is lessening the burdens of government if it engages in activities that a governmental_unit considers to be its burden and such activities actually lessen such governmental burden an organization must demonstrate through all the relevant facts and circumstances that a government unit considers the organization to be acting on its behalf thereby freeing up the government assets that would otherwise have been devoted to the particular activity rationale and conclusion based on the information you provided in your application and supporting documentation we conclude that you are not operated for exempt purposes under sec_501 of the code an organization cannot be recognized as exempt under sec_501 unless it shows that it is both organized and operated exclusively for charitable education or other exempt purposes among other things the application and supporting documentation must demonstrate conclusively that the organization meets the operational_test of sec_1 c - c of the regulations your information indicates that your primary purpose is to operate a down payment assistance program that does not exclusively serve a purpose described in sec_501 charitable purposes include relief of the poor and distressed see sec_1 c - d of the regulations program in a manner that establishes that your primary purpose is to address the needs of low- income grantees by enabling low-income individuals and families to obtain decent safe housing see revrul_70_585 situation however you do not conduct your down payment assistance your down payment assistance program does not serve exclusively low-income persons instead your program is open to anyone without any income limitations you have not demonstrated that your down payment assistance program exclusively serves any other exempt_purpose such as combating community deterioration and lessening racial tensions you indicated that you do not specifically target the benefits of your program towards any one disadvantaged group for example you have not shown that your program is designed to attract a mixed-income group of homeowners to a specifically defined geographical area that has a history of racial problems see revrul_70_585 situation sec_2 and your information indicates that you do not limit your assistance to certain geographic areas or target those areas experiencing deterioration or racial tensions see revrul_70_585 situation your program is available to anyone who is able to qualify for a mortgage from any lender in any state in the united_states arranging the purchase of homes in a broadly defined metropolitan area does not combat community deterioration within the meaning of sec_501 of the code furthermore you do not engage in any activity to ensure that the house will be habitable or that the buyer will be able to afford to maintain the house over time instead you rely solely on the mortgage_lender insurance agency home inspector or other third party to conduct such review while you indicate that you require completion of an education program you do not provide oversight or conduct any educational program or other activity to ensure that buyers are purchasing properties that are safe decent sanitary and affordable only an insubstantial portion of the activity of an exempt_organization may further a inc v united_states supra the presence of a single non-exempt purpose if substantial in nonexempt purpose as the supreme court held in better business bureau of washington d c nature will destroy the exemption regardless of the number or importance of truly exempt purposes you conduct your operations in a manner that is consistent with a commercial firm seeking to maximize sales of services rather than in a manner that would be consistent with a charitable or educational_organization seeking to serve a charitable_class or the public at large the manner in which you operate your down payment assistance program indicates that you facilitate the sales of homes in a manner that is indistinguishable from an ordinary trade_or_business you operate as a business that provides services to home sellers for which you charge a market rate fee for example your sample transaction explains how the seller and agent will benefit from your program as sellers are able to sell their homes at the full list price this type of approach as well as your representation that the gift amount was determined to maximize the number of potential homeowners helps to demonstrate that your primary purpose consists of maximizing the fees you derive from facilitating sales of real_property respect you are similar to an organization which was denied exemption because it operated a conference center for a commercial purpose see 283_fsupp2d_58 d d c likewise operating a trade_or_business of facilitating home sales is not an inherently charitable activity thus a substantial part of your activities further a nonexempt purpose in this another indication of your substantial nonexempt purpose is your lack of public support you are not supported by contributions from the general_public government or private_foundation grants almost all of your revenue comes from the sellers you serve through n and r two related_organizations that your primary activity is to promote and to further your private business interests is reflected in the financing structure of your down payment assistance program in this respect you are similar to the organization described in easter house supra which derived most of its support from fees it charged for its adoption services in this case the court stated that the substantial fees were not incidental to the organization’s exempt_purpose because they were designed to make a profit facilitating home sales like running an adoption service is not an inherently charitable activity and receiving support primarily from fees charged to home sellers is indicative of your commercial purpose in fact while you call the funds you will even if your program is directed to exclusively low-income individuals your reliance your grant making procedures indicate that gift funds are only provided if a seller has paid entirely on home sellers or other real-estate related businesses that stand to benefit from the transactions to finance your down payment assistance activities demonstrates that you are operated for the purpose of benefiting private parties a processing fee or has made a contribution to n receive from the sellers contributions these transactions are not contributions because they will not proceed from detached and disinterested generosity 363_us_278 your characterization of these transactions as contributions ignores the business realities surrounding the payments the sellers will make the payments to n and indirectly to the homebuyer through a contribution to you to facilitate the sale of their homes upon the closing of the sale the sellers’ contribution is returned to seller as part of the proceeds the seller receives from the sale of the home this demonstrates the circular character of the payments these contributions are more appropriately characterized as fees received in exchange for the sale of a service your information indicates that your staff is able to take into account whether there is a home seller willing to make a payment to cover the down payment assistance an applicant has requested that you receive a payment from the home seller corresponding to the amount of the down payment assistance in virtually every transaction indicates that the benefit to the home seller is not a mere accident but rather an intended outcome of your operations in this respect you are like easter house supra which provided health care to indigent pregnant women but only when a family willing to adopt a woman’s child sponsored the care financially similar to american campaign academy supra you are structured and operated to directly benefit the home sellers who pay for your services therefore a substantial part of your activities serve a private rather than a public interest you state that your program makes home ownership available to persons in accordance with hud initiatives revrul_85_1 supra holds that an activity is a burden of government only if there is objective manifestation by a governmental_unit that it considers such activities to be its burden and the government must formally recognize the organization and its functions to be considered a governmental burden however you have not provided any facts documentation or otherwise that indicates that providing down payment assistance is a burden of the government or that the government formally recognizes such activity as an integral part of a larger governmental program even if an organization's activities lessen the burdens of government it must otherwise satisfy the requirements under sec_501 of the code thus an organization must demonstrate that its activities serve a public rather than a private interest within the meaning of sec_1_501_c_3_-1 of the regulations finally you assert that other organizations similarly situated have been recognized as exempt under sec_501 while you may have provided some facts relating to those other organizations you have not provided all the facts relating to the applications for recognition of exempt status submitted by those organizations in any event you must establish based on the facts you submitted that you are organized and operated exclusively for exempt purposes described in sec_501 see interneighborhood housing corporation v commissioner t c memo based on the facts and information submitted you are not operated exclusively for exempt purposes you have not established that you activities exclusively serve a charitable_class or any other purpose defined in sec_501 your proposed operations further a substantial nonexempt business_purpose and will further the private interests of home sellers and other private parties in addition you have not established that your net_earnings will not inure to the benefit of private shareholders or individuals therefore you are not described in sec_501 of the code accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 of the code 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 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 lf you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this 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 te_ge se t eo ra t 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 if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations rulings agreements enclosure an examination of downpayment gift programs administered by non-profit organizations hud contract no c-opc-22550 m0001 date


t c memo united_states tax_court ramona l mitchell petitioner v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioner miles b fuller for respondent this opinion supplements our prior opinion 138_tc_324 supplemental memorandum opinion haines judge this case is before the court on petitioner’s motions to vacate decision pursuant to rule and to reconsider our opinion in 138_tc_324 mitchell i pursuant to rule we will grant petitioner’s motion to vacate the decision in order to consider and rule on petitioner’s motion to reconsider our opinion for the reasons that follow we will deny petitioner’s motion to reconsider petitioner’s motion in petitioner’s motion petitioner alleges that this court erred in relying on 136_tc_294 kaufman ii which was affirmed in part vacated in part and remanded in part by the court_of_appeals for the first circuit in 687_f3d_21 1st cir kaufman iii petitioner makes various other claims which we will address below unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar the irs originally filed a motion for summary_judgment with this court on date in ruling on the motion for summary_judgment in 134_tc_182 kaufman i we disallowed any deductions for the easement contribution but found genuine issues of material fact remaining with regard to the cash contribution deduction and the irs’ imposition of penalties in a second opinion after a trial on the reserved issues this court on continued background in mitchell i we made findings_of_fact which we incorporate herein by reference for convenience and clarity we repeat below the facts relevant to our disposition of petitioner’s motion and we supplement those facts as appropriate to provide a complete background statement in charles and ramona mitchell bought a 105-acre parcel of land from clyde sheek in mancos colorado for dollar_figure the parcel was unimproved ie it had no buildings only partial fencing no utilities and no domestic water access was from a two-lane gravel road maintained by the county the mitchells installed a two-inch water line from the northern boundary of the 105-acre parcel in with electrical lines added in the mitchells’ son blake and his wife melody built a home on the 105-acre parcel continued date in 136_tc_294 kaufman ii aff’d in part vacated in part and remanded in part 687_f3d_21 1st cir reaffirmed its ruling on the easement but held that the taxpayers were entitled to deduct their dollar_figure cash contribution on their return as opposed to their return and were liable for only a small penalty for negligence in claiming the deduction for the earlier year montezuma county assessor’s records describe the parcel as acres the land records describe it a sec_105 acres we will use acres for purposes of this opinion in subsequently a by 100-foot shop and a 900-square-foot guesthouse were built on the parcel in charles purchased an additional acres bordering the south boundary of the 105-acre parcel from sheek for dollar_figure sheek did not want all cash he wanted retirement income consequently after a downpayment of dollar_figure the balance of dollar_figure was to be paid in installments of dollar_figure per year plus interest a promissory note was signed and secured_by a deed_of_trust recorded in the records of montezuma county colorado in date as a result of the two purchases the mitchells owned acres of ranchland in the southern portion of the mancos valley lone canyon ranch charles and petitioner built their own home at lone canyon ranch in and charles began having health problems in date the mitchells formed c l mitchell properties l l l p a family limited_partnership partnership lone canyon ranch was transferred to the partnership subject_to the deed_of_trust as were other investments including a rental property and cash and securities although charles was named the general_partner it soon became the name of the limited_partnership was later changed to lone canyon ranch limited_liability limited_partnership evident that he could not carry out his management duties consequently blake took over the management duties charles eventually died of his illness in on date the partnership granted a conservation_easement on the south acres of unimproved land to montezuma land conservancy conservancy the parties executed a deed of conservation_easement in gross at the time the easement was granted the deed_of_trust securing the debt to sheek was not subordinated to the conservation_easement held by conservancy from to the partnership had the money to pay off the promissory note which the deed_of_trust secured at any time there were no lawsuits potential or otherwise all bills were paid payments on the promissory note to sheek were current and casualty insurance was in place two years after the conservation_easement was granted sheek agreed to subordinate his deed_of_trust to the conservation_easement but received no consideration for the subordination on date sheek signed the subordination to deed of conservation_easement in gross subordination agreement in the mitchells hired william b love appraisals inc love to appraise the conservation_easement granted to conservancy as of date love determined that the conservation_easement had a market_value of dollar_figure love issued an appraisal report for the partnership on date love appraisal the partnership claimed a dollar_figure charitable_contribution_deduction which flowed through to its two partners charles and petitioner equally charles and petitioner claimed a dollar_figure charitable_contribution_deduction on their joint federal_income_tax return dated date return charles and petitioner attached form_8283 noncash charitable_contributions to their return along with a copy of the love appraisal on date respondent mailed a notice_of_deficiency to petitioner disallowing her charitable_contribution_deduction respondent determined that petitioner had not met the requirements of sec_170 alternatively respondent determined that if petitioner had met the requirements of sec_170 the amount of the charitable_contribution_deduction was dollar_figure petitioner timely filed a petition with this court on date because of limitations on itemized_deductions claimed on schedule a itemized_deductions only dollar_figure of the charitable_contribution_deduction could be claimed on the return respondent in his pretrial memorandum conceded that if a charitable_contribution_deduction was allowed the amount of the deduction would be dollar_figure in mitchell i respondent argued that petitioner’s conservation_easement was not protected in perpetuity and thus was not a qualified_conservation_contribution specifically respondent argued that petitioner failed to satisfy the requirements of sec_1_170a-14 income_tax regs subordination regulation and sec_1_170a-14 income_tax regs proceeds regulation we held that the requirements of the subordination regulation are strict requirements that may not be avoided and that petitioner had failed to satisfy the requirements of the subordination regulation as a result we held petitioner had failed to meet the requirements of sec_170 and denied her charitable_contribution_deduction i motions to reconsider and to vacate discussion motions to reconsider and to vacate are governed by rule sec_161 and sec_162 respectively those rules establish filing deadlines but provide no guidance on when the court should grant or deny such motions in the absence of more specific guidance we look to caselaw and the federal rules of civil procedure see rule b the decision to grant a motion to reconsider or to vacate lies within the discretion of the court 110_tc_440 motion to reconsider kun v commissioner tcmemo_2004_273 motion to vacate aff’d 157_fedappx_971 9th cir motions to reconsider are generally intended to correct substantial errors of fact or law and allow the introduction of newly discovered evidence that the moving party could not have introduced by the exercise of due diligence in the prior proceeding 131_tc_185 reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party estate of quick v commissioner t c pincite motions to vacate are generally not granted absent a showing of unusual circumstances or substantial error eg mistake inadvertence surprise excusable neglect newly discovered evidence fraud or other reason justifying relief see eg fed r civ p b 69_tc_999 importantly an intervening change in the law can warrant the granting of both a motion to reconsider and a motion to vacate see alioto v commissioner tcmemo_2008_185 in alioto v commissioner tcmemo_2006_199 the court had held that it lacked jurisdiction over stand-alone sec_6015 cases after congress expanded the court’s jurisdiction to include such cases see tax relief and health care act of pub_l_no div c sec_408 sec_120 stat pincite the taxpayer filed timely motions to reconsider and to vacate which the court granted see alioto v commissioner tcmemo_2008_185 we agree that the court correctly applied the caselaw as it existed at the time the court issued alioto i alioto v commissioner t c memo however we disagree that the motion for reconsideration should be denied after the court’s decision in alioto i the law and the court's jurisdiction changed fn ref omitted petitioner asks us to grant petitioner’s motion in the light of the partial vacating of kaufman ii by the court_of_appeals for the first circuit see 687_f3d_21 in petitioner’s motion petitioner argues that this court should follow the approach taken by the court_of_appeals for the first circuit and reconsider its opinion specifically petitioner argues that the conservation_easement deed protected the proceeds to be paid to conservancy in perpetuity upon termination of the conservation_easement and thus under the approach taken in kaufman iii the conservation_easement deed satisfied the requirements of sec_1 170a- g income_tax regs ii legal background a qualified_conservation_contribution a taxpayer is generally allowed a deduction for any charitable_contribution made during the taxable_year sec_170 a charitable_contribution is a gift of property to a charitable_organization made with charitable intent and without the receipt or expectation of receipt of adequate_consideration see 490_us_680 477_us_105 see also sec_1_170a-1 and income_tax regs while a taxpayer is generally not allowed a charitable_contribution_deduction for a gift of property consisting of less than an entire_interest in that property an exception is made for a qualified_conservation_contribution see sec_170 b iii a qualified_conservation_contribution is a contribution of a qualified_real_property_interest to a qualified_organization which is made exclusively for conservation purposes sec_170 see also sec_1 170a- a income_tax regs respondent concedes that there was a contribution of a qualified_real_property_interest and that at the time of the contribution conservancy was a qualified_organization under sec_170 therefore we focus on the third requirement ie whether petitioner’s contribution of the conservation_easement to conservancy was exclusively for conservation purposes a contribution is made exclusively for conservation purposes only if it meets the requirements of sec_170 124_tc_258 aff’d 471_f3d_698 6th cir sec_170 provides that a contribution shall not be treated as exclusively for conservation purposes unless the conservation_purpose is protected in perpetuity sec_1_170a-14 income_tax regs elaborates on the enforceability-in-perpetuity requirement paragraph g provides generally that in order for a conservation_easement to be enforceable in perpetuity the interest in the property retained by the donor must be subject_to legally enforceable restrictions that will prevent uses of the retained_interest inconsistent with the conservation purposes of the donation the various subparagraphs of paragraph g set forth many of these legally enforceable restrictions mitchell i t c pincite paragraph g addresses mortgages and in pertinent part provides that no deduction will be permitted for an interest in property which is subject_to a mortgage unless the mortgagee subordinates its rights in the property to the right of the donee organization to enforce the conservation purposes of the gift in perpetuity paragraph g is entitled remote future event and addresses events that may defeat the property interest that has passed to the donee organization it provides that a deduction will not be disallowed merely because on the date of the gift there is the possibility that the interest will be defeated so long as on that date the possibility of defeat is so remote as to be negligible paragraph g is entitled extinguishment and recognizes that after the donee organization’s receipt of an interest in property an unexpected change in the conditions surrounding the property can make impossible or impractical the continued use of the property for conservation purposes subdivision i of paragraph g provides that those purposes will nonetheless be treated as protected in perpetuity if the restrictions limiting use of the property for conservation purposes are extinguished by judicial proceeding and all of the donee’s proceeds from a subsequent sale_or_exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution subdivision ii of paragraph g is entitled proceeds and in pertinent part provides f or a deduction to be allowed under this section at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right immediately vested in the donee organization with a fair_market_value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time for purposes of this paragraph g ii that proportionate value of the donee’s property rights shall remain constant accordingly when a change in conditions gives rise to the extinguishment of a perpetual conservation restriction under paragraph g i of this section the donee organization on a subsequent sale exchange or involuntary_conversion of the subject property must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction b mitchell i in mitchell i petitioner first argued that she met the requirements of the subordination regulation because sheek subordinated his deed_of_trust to the deed of conservation_easement in two years after the grant of the conservation_easement petitioner argued that the subordination regulation had no requirement as to when the mortgagee must subordinate its claim to that of the donee organization we held that though the subordination regulation is silent as to when a taxpayer must subordinate a preexisting mortgage on donated property in order for a conservation_easement to be protected in perpetuity at the time of the gift ie the time the deduction is taken the taxpayer must have satisfied the requirements of sec_170 and specifically the subordination regulations thus we held that the regulation requires that a subordination agreement be in place at the time of the gift next petitioner argued that we must read the subordination regulation in tandem with the so-remote-as-to-be-negligible standard in sec_1 170a- g income_tax regs she argued that the probability of her defaulting on the sheek promissory note on date was so remote as to be negligible thus petitioner argued that possibility should be disregarded under the so-remote-as-to-be-negligible standard in determining whether the conservation_easement is enforceable in perpetuity relying on our prior discussions of the so-remote-as-to-be-negligible standard in kaufman ii and carpenter v commissioner tcmemo_2012_1 carpenter i we found that the so-remote-as-to-be-negligible standard could not be used to avoid a specific requirement of the regulations ie the subordination regulation the judicial proceeding requirement of sec_1_170a-14 income_tax regs and the proceeds regulation finally petitioner argued that she entered into an oral agreement with sheek with respect to the use of lone canyon ranch and that the oral agreement provided the necessary protection required by sec_170 we disagreed and held that the oral agreement had no effect on sheek’s ability to foreclose on the property and extinguish the conservation_easement agreement had petitioner defaulted on her promissory note thus the oral agreement failed to comply with the requirements of the subordination regulation petitioner also argued that she had satisfied the requirements of the proceeds regulation however having found that petitioner failed to meet the requirements of the subordination regulation we did not need to make a determination on this issue to make our decision c kaufman iii in lorna and gordon kaufman the taxpayers bought a single-family rowhouse in the south end of boston subject_to local restrictions in the taxpayers contributed to a donee organization a facade easement on their single- family rowhouse at the time of contribution the property was subject_to a mortgage the mortgagee agreed to subordinate the mortgage to the conservation_easement deed in favor of the donee organization however the mortgagee retained a prior claim to all proceeds of condemnation and to all insurance proceeds resulting from any casualty of the property the taxpayers claimed a charitable_contribution_deduction equal to the value they assigned to the facade easement the commissioner disallowed the deduction because the taxpayers had failed to meet the requirement of the proceeds regulation that the charity receive a proportionate share of proceeds following judicial extinguishment of the facade easement and a subsequent sale of the property in kaufman ii the taxpayers argued that though the mortgagee may have had a prior claim to condemnation proceeds over the donee that did not absolve lorna kaufman of her obligation to make good on the donee’s entitlement to a pro_rata share of the proceeds realized from the sale or involuntary_conversion of the property as a result the taxpayers claimed the various agreements satisfied the requirements of the proceeds regulation this court found the donee’s contractual right against the taxpayer to a share of the proceeds to be insufficient to satisfy the requirements of sec_1_170a-14 income_tax regs stating w e think it the intent of the drafters of sec_1_170a-14 income_tax regs that the donee have a right to a share of the proceeds and not merely a contractual claim against the owner of the previously servient estate kaufman ii t c pincite the taxpayers also argued that sec_1_170a-14 income_tax regs should be read in tandem with sec_1_170a-14 income_tax regs the taxpayers hypothesized a very low probability of occurrence of a set of events that would deprive the charity of its proportional share of proceeds following judicial extinguishment of the facade easement and subsequent sale of the property they concluded that the possibility of such deprivation was so remote as to be negligible and thus had to be disregarded under the so-remote-as-to-be- negligible standard in determining whether the facade easement was enforceable in perpetuity this court in kaufman ii found that the so-remote-as-to-be-negligible standard does not modify the proceeds regulation specifically we held that i t is not a question as to the degree of improbability of the changed conditions that would justify judicial extinguishment of the restrictions nor is it a question of the probability that in the case of judicial extinguishment following an unexpected change in conditions the proceeds of a condemnation or other sale would be adequate to pay both the bank and the charity as we said in kaufman v commissioner t c pincite the requirement in sec_1_170a-14 income_tax regs that the charity be entitled to its proportionate share of the proceeds is not conditional petitioners cannot avoid the strict requirement in sec_1_170a-14 income_tax regs simply by showing that they would most likely be able to satisfy both their mortgage and their obligation to the charity kaufman ii t c pincite the court_of_appeals for the first circuit agreed kaufman iii f 3d pincite on appeal the court_of_appeals for the first circuit in kaufman iii held for the taxpayers finding the commissioner’s reading of sec_1_170a-14 income_tax regs unreasonable the court_of_appeals noted the superpriority of tax_liens to most prior claims and determined that the commissioner’s reading of sec_1_170a-14 income_tax regs would defeat the purpose of the statute specifically the court_of_appeals stated the irs reads the word entitled in the extinguishment regulation to mean gets the first bite as against the rest of the world a view the tax_court accepted in reading entitled to mean ha s an absolute right kaufman ii t c pincite but a grant that is absolute against the owner-donor is also an entitlement black’s law dictionary 7th ed entitle defined as t o grant a legal right to collins english dictionary 10th ed to give a person the right to do or have something and almost the same as an absolute one where third-party claims here the bank’s or the city’s are contingent and unlikely kaufman iii f 3d pincite the commissioner also argued that the taxpayers failed to meet the requirements of sec_1_170a-14 income_tax regs a provision in the agreement between the taxpayers and the donee stated that nothing in the conservation_easement deed_of_trust shall be construed to limit the donee’s right to give its consent to changes in the conservation_easement deed or to abandon some or all of its rights thereunder the commissioner argued that this provision was a blank check to the donee to consent to any type of change irrespective of its compatibility with the donation’s conservation_purpose thus the easement failed to include the necessary restrictions that would prevent uses inconsistent with the conservation_purpose as required by sec_1_170a-14 income_tax regs the court_of_appeals rejected the commissioner’s argument citing a similar argument made in 646_f3d_6 d c cir aff’g tcmemo_2009_208 the court_of_appeals held that t he language of paragraph g nowhere suggests the stringent outcome that the irs seeks to ascribe to it and the consequences of the reading would be to deprive the donee organization of flexibility to deal with remote contingencies kaufman iii f 3d pincite iii whether kaufman iii requires this court to reconsider its opinion in mitchell i petitioner argues that the court_of_appeals for the first circuit’s opinion in kaufman iii is an intervening change in law and requires this court to reconsider its opinion in mitchell i specifically petitioner argues that in the light of the court_of_appeals for the first circuit’s emphasis on the destination of proceeds upon extinguishment of a conservation_easement in kaufman iii this court should take an overall approach in analyzing the in-perpetuity requirement of sec_170 and sec_1_170a-14 income_tax regs and focus on any proceeds resulting from an extinguishment of the conservation easements petitioner argues that if there were an extinguishment in this case conservancy would receive its proportionate share of any proceeds from the extinguishment because the partnership had an obligation and sufficient funds to pay conservancy its proportionate share of proceeds from an extinguishment of the conservation_easement that conservancy is bound by law to discharge its exempt_purpose upon receipt of such proceeds and thus any such proceeds are protected in perpetuity which is the goal of the law petitioner also argues that since the partnership had sufficient funds to discharge the debt related to the sheek mortgage at any time before the subordination this was a functional equivalent of a subordination respondent argues that kaufman iii does not apply to this case specifically respondent argues that kaufman iii does not represent an intervening change in law for purposes of this case that petitioner has misread kaufman iii that kaufman iii did not address the subordination regulation upon which this court based its opinion in mitchell i and that kaufman iii is not binding in the present case we agree with respondent under 54_tc_742 aff’d 445_f2d_985 10th cir the court will follow the clearly established position of a court_of_appeals to which a case is appealable however we will give effect to our own views in cases appealable to courts that have not yet decided the issue id this case is appealable to the court_of_appeals for the tenth circuit absent stipulation otherwise see sec_7482 the court_of_appeals for the tenth circuit has not yet ruled on the issue of whether a taxpayer who failed to subordinate a conservation_easement deed at the time of the gift of the conservation_easement has met the requirements of the subordination regulation kaufman iii addressed legal issues different from the one present in this case kaufman iii addressed the proper interpretation of the proceeds regulation and in particular the breadth of the donee organization’s entitlement to proceeds from the sale exchange or involuntary_conversion of property following the judicial extinguishment of a perpetual conservation restriction burdening the property the court_of_appeals held that it was sufficient that the donee organization have a right to postextinguishment proceeds that was absolute against the owner-donee of the burdened property kaufman iii f 3d pincite conservancy’s right to postextinguishment proceeds was not determinative in mitchell i as we ruled that petitioner had failed to meet the subordination regulation and therefore we need not discuss the postextinghishement proceeds petitioner would draw a general_rule with respect to the in-perpetuity requirement from the analysis of the court_of_appeals for the first circuit in kaufman iii petitioner states the regulation emphasizes perpetuating an easement’s purpose as opposed to the conservation_easement itself the proceeds are protected which is the goal of the law we disagree with petitioner’s interpretation of kaufman iii nowhere in kaufman iii did the court_of_appeals for the first circuit state a general_rule that protecting the proceeds from an extinguishment of a conservation_easement would satisfy the in-perpetuity requirements of sec_1_170a-14 income_tax regs generally petitioner further argues that there was a functional subordination of the conservation_easement to the sheek mortgage at the time of the gift to conservancy because the partnership had sufficient funds to discharge the debt related to the sheek mortgage at all times before the actual subordination two years later we reject this argument there is no functional subordination contemplated in sec_1_170a-14 income_tax regs nor do we intend to create such a rule petitioner also argues that we held in carpenter i that the regulation in paragraph g merely creates a safe_harbor and that given the opinions in kaufman iii and simmons the entire regulation could and should be read as a safe_harbor we rejected a similar argument in carpenter v commissioner tcmemo_2013_172 at in which we found that the specific provisions of sec_1_170a-14 income_tax regs such as paragraph g are mandatory and may not be ignored we find the same to be true for the subordination regulation which like paragraph g is a specific provision of sec_1 170a- g income_tax regs as a result of the foregoing we find that the holding in kaufman iii does not apply to this case and thus does not constitute an intervening change in law which would justify granting petitioner’s motion iv colorado law petitioner also argues that colorado law creates restrictions that protect the conservation_easement and thus this court should reconsider its opinion in mitchell i petitioner is simply trying to argue a new legal theory with respect to colorado law as we have previously stated reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party estate of quick v commissioner t c pincite v conclusion petitioner has not presented any newly discovered evidence or cited an intervening change in the law that would warrant granting petitioner’s motion in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing an appropriate order and decision 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 psi b02 plr-123597-08 date date legend x --------------------------------------------------------------------------------------------------- ----------------------- trust --------------------------------------------------------------------------------------------------- ------------------------- state ------------- d1 d2 ------------------- ---------------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting inadvertent ineffective election relief pursuant to sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state on d1 x represents that it timely filed an s_corporation_election which was intended to be effective on d2 on d2 trust’s assets included shares of x stock x represents that trust was eligible to be an electing_small_business_trust effective d2 and thereafter however no election to be to an electing_small_business_trust was filed on behalf of trust therefore the trust was not a permissible shareholder and x’s s_corporation_election was ineffective plr-123597-08 in addition the beneficiary of trust signed the form_2553 in an individual capacity rather than as trustee of trust x was not aware of the requirement that the trustee of an esbt rather than the beneficiary must sign the form_2553 x represents that the circumstances resulting in the ineffectiveness of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning additionally x represents that x and its shareholders have filed their federal_income_tax returns consistent with having a valid s_corporation_election in effect for x x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness the corporation shall be treated as an s_corporation during the period specified by the secretary based on the information submitted and the representations made we conclude that x’s s_corporation_election was ineffective on d2 because x had an ineligible shareholder we also conclude that the election was inadvertently ineffective under sec_1362 therefore pursuant to the provisions of sec_1362 x will be treated as an s_corporation from d2 and thereafter provided that x files a new form_2553 effective d2 and the trustee of trust files an esbt election effective d2 pursuant to the procedures set forth in sec_1_1361-1 with the appropriate service_center within days of the date of this letter and provided that x’s election to be an s_corporation was not otherwise ineffective and was not terminated under sec_1362 a copy of this letter should be attached to the form_2553 and the esbt election plr-123597-08 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely melissa c liquerman chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service p o box cincinnati oh department of the treasury employer_identification_number contact person - id number release contact telephone number uil release number release date date date legend x y z name name country b dollars amount dear you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 and sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under the sec_4945 procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request your letter indicates you will operate a scholarship program the purpose of your scholarship program is to provide highly capable students of x located in y the opportunity to receive post-secondary school education and training in the united_states and in some instances in y you expect to provide scholarships for one to two students each year from x which is sustained by z a united_states organization exempt from federal_income_tax under sec_501 the scholarship will fund expenses that are described in both internal_revenue_code sec_4945 and sec_4945 expenses under code sec_4945 will include tuition books and school fees to attend a qualified educational_institution under sec_170 expenses under code sec_4945 will generally consist of living and travel_expenses as well as a small weekly allowance for miscellaneous items furthermore the amount of the grants will vary depending on the tuition expense of the qualifying institution and the living situation of the particular student in some instances donors may make living arrangements available to the recipients within their homes for a period of time you will promote the program directly to x and z to be eligible to receive a scholarship the applicant must e e e bea student of x located in y demonstrate the ability to read and write the english language meet criteria to obtain a united_states student visa for those students planning to study in the united_states be preapproved and accepted by a community college university or other accredited educational or training institution a seven-member selection committee consisting of your officers donors and the director of x or the director of x’s transitional program will evaluate the candidates this will consist of e interviewing the candidates to evaluate their understanding of the english language as well as evaluate their ability to adapt into american culture consulting with the director of x for an evaluation of their character and attitude reviewing the results of each candidate’s toefl examination reviewing the results of national examinations reviewing other scholarships available to students which may defray a portion of their educational expenses you will require a written grant agreement and will primarily provide the funds directly to the educational_institution for those students who will study in the united_states for students who remain in y you will provide the funds to z to manage the funds you will require a periodic accounting and receipts checks bills sales slips or other documentation for items of expense in excess of b dollars you will require transcripts and use other methods to ensure that grantees are maintaining the conditions of attendance grades grade point averages enrollment and other documents any student who fails to meet or maintain your criteria and requirements is required to return to y at your expense to renew the grant the recipient must conform to all governmental requirements to maintain a student visa meet at least the minimum academic standards of the institution and obtain a passing grade in all classes observe and comply with the law including the laws relating to use of illicit drugs you will review reports monthly but in no event less than quarterly you will investigate any perceived diversion of funds if funds are diverted you will take steps to ensure it doesn’t happen again or return the grantee to y you will check the ofac list of specially designated nationals and blocked persons for names of individuals and entities with whom you are dealing to determine if they are included on the list you will comply with all statutes executive orders and regulations that restrict or prohibit persons from engaging in transactions and dealings with designated countries entities or individuals or otherwise engaging in activities in violation of economic sanctions administered by ofac you will acquire from ofac the appropriate license and registration where necessary basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is o o o ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements


internal_revenue_service number release date index number ------------------ ---------------------------------- ---------------------------------------------------- ------------------------------- ---------------- ---------------------------------- ------------------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number -------------------- refer reply to cc psi b02 - plr-112742-07 date date ----------- -------------------------- ----------------------------- legend x ----------------------------------------- ------------------ country date dear ------------ this responds to a letter dated date and additional correspondence submitted on behalf of x requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations for x to make an election to be treated as a disregarded_entity date x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity however x inadvertently failed to timely file a form_8832 entity classification election electing to treat x as a disregarded_entity effective date eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has only the information submitted states that x was formed under the laws of country on sec_301_7701-3 provides guidance on the classification of a foreign sec_301_9100-1 through provide the standards the sec_301_9100-3 provides the standards the commissioner will use to sec_301_9100-1 provides that the commissioner may grant a reasonable sec_301_7701-3 provides that an entity classification election must be filed plr-112742-07 one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register commissioner will use to determine whether to grant an extension of time to make the election determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and -3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose as a condition for this late election relief x and all other entities affected by x’s disregarded_entity classification election must amend their federal_income_tax returns and or informational returns consistent with x having made a timely entity classification election to be treated as a disregarded_entity effective date federal_income_tax consequences of the transactions described above under any other provision of the code except as specifically set forth above we express no opinion concerning the plr-112742-07 provides that it may not be used or cited as precedent being sent to x’s authorized representative sincerely this ruling is directed only to the taxpayer s requesting it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is william p o'shea passthroughs and special industries copy of this letter copy for sec_6110 purposes enclosures cc


department of the treasury internal_revenue_service é washington d c e tax_exempt_and_government_entities_division uic401 mar -t ey pa t legend taxpayer a law firm b plan x state w month percentage percentage dear i this is in response to your letter as supplemented by a fax in which you request several letter rulings under section dated a of the internal_revenue_code code the following facts and representations support your ruling_request taxpayer a a resident of state w is an attorney actively practicing as a member of law firm b taxpayer a attained age in month law firm b isa partnership law firm b sponsors plan x which is represented to be qualified within the meaning of code sec_401 and to have an attached trust tax-exempt within the meaning of code sec_501 plan x’s plan_year is the calendar_year section c of plan x contains language intended to comply with the requirements of code sec_401 in relevant part section c provides that 1a participant’s benefits shall be distributed or must begin to be distributed not later than april following the later of i the calendar_year in which the participant attains age or ii the calendar_year in which the participant retires provided however that this clause ii shall not apply in the case of a participant who is a five percent page of owner at any time during the plan_year ending with or within the calendar_year in which such owner attains age taxpayer a has provided the internal_revenue_service with information that indicates with respect to calendar_year his capital interest in law firm b was percentage and his profits interest was percentage neither percentage nor percentage equaled or exceeded pursuant to the provisions of plan x taxpayer a has provided the administrator of plan x with a form pursuant to which he elected to defer receiving distribution of his plan x benefits until the calendar_year following the calendar_year in which he retires from law firm b this ruling_request deals with the propriety of said election based on the above facts and representations you request the following letter rulings that taxpayer a is not a 5-percent_owner within the meaning of code sec_401 with respect to calendar_year the calendar_year in which he attained age since taxpayer a is not a 5-percent_owner for purposes of code sec_401 and since he remains an attorney actively practicing law with law firm b he is not required under code sec_401 to begin receiving minimum required distributions from plan x by date and if taxpayer a does not begin receiving distributions from plan x by date he will incur no excise_tax consequences under sec_4974 of the code with respect to your ruling requests code sec_401 a a provides in general that a_trust will not be considered qualified unless the plan provides that the entire_interest of each employee- i will be distributed to such employee not later than the required_beginning_date or will be distributed beginning not later than the required_beginning_date over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary code sec_401 provides that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the later of i the page of calendar_year in which the employee attains age ' or ii the calendar_year in which the employee retires code sec_401 provides that subclause id of clause shall not apply except as provided in sec_409 in the case of an employee who is a 5-percent_owner as defined in sec_416 with respect to the plan_year ending in the calendar_year in which the employee attains age ’4 with further respect to your ruling requests final income_tax regulations under code sec_401 and sec_408 were published in the federal_register pincite federal_register date and in the internal_revenue_bulletin pincite_19_irb_852 date the preamble to the final regulations in relevant part provide that the regulations apply for determining required minimum distributions for calendar years beginning after date sec_1_401_a_9_-2 of the final regulations question answer-2 c provides in general that for purposes of sec_401 a 5-percent_owner is an employee who is a 5-percent_owner as defined in sec_416 with respect to the plan_year ending in the calendar_year in which the employee attains age section ii background to notice_97_75 1997_51_irb_18 date provides in relevant part that an employee is treated as a 5-percent_owner for purposes of code sec_401 as amended by the small_business job protection act if such employee is a 5-percent_owner as defined in sec_416 with respect to the plan_year ending in the calendar_year in which the employee attains age once an employee is a 5-percent_owner described in the preceding sentence distributions must continue to such employee even if such employee ceases to own more than 5-percent of the employer in a subsequent year code sec_416 provides that a 5-percent_owner of an employer that is not a corporation means any person who owns more than percent of the capital or profits interest in the employer code sec_4974 imposes a excise_tax on the amount by which a minimum_required_distribution from a qualified_retirement_plan during a taxable_year of a payee exceeds the amount actually distributed from said plan during said year code sec_4974 in relevant part provides that the term minimum_required_distribution includes an amount required to be distributed in accordance with code sec_401 page of code sec_4974 provides in relevant part that the term qualified_retirement_plan includes a plan described in code sec_401 that includes a_trust described in code sec_501 a with respect to your ruling requests taxpayer a attained age during calendar_year fil while employed with law firm b law firm b sponsors plan x which uses the calendar_year as its plan_year during the calendar_year plan_year ending taxpayer a owned less than five percent of either the capital or profits interest of law firm b taxpayer a does not intend to retire or separate from the service of law firm since taxpayer a intends to remain employed by law firm b in accordance with the provisions of plan x taxpayer a has asked the administrator of plan x to defer distribution of benefits from plan x until after he retires from law firm b the facts indicate that taxpayer a was not a five percent owner during calendar yearn thus he is not subject_to the rule_of code sec_401gi d furthermore since there is no plan x required_distribution with respect to taxpayer a for calendar_year failure to make any such distribution does not give rise to an excise_tax under code sec_4974 therefore based on the above facts and representations the service concludes as follows with respect to your ruling requests that taxpayer a is not a 5-percent_owner within the meaning of code sec_401 with respect to calendar yea ll the calendar_year in which he attained age since taxpayer a is not a 5-percent_owner for purposes of code sec_401 and since he remains an attorney actively practicing law with law firm b he is not required under code sec_401 to begin receiving minimum required distributions from plan x no later than date and if taxpayer a does not begin receiving distributions from plan x by date he will incur no excise_tax consequences under sec_4974 of the code this ruling letter is based on the facts and representations contained therein the accuracy of percentage sec_1 and plan x is including but not limited to qualified within the meaning of code sec_401 and its trust tax exempt under code sec_501 at all times relevant to and taxpayer a is employed with law firm b no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto page of this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representatives in accordance with a power_of_attorney on file in this office if you wish to inquire about this ruling either anni phone or please contac please address all correspondence to enclosures deleted copy of ruling letter notice of intention to disclose sincerely yours clilé- wb rey rances v sloan manager employee_plans technical group