t c no united_states tax_court mehrdad rafizadeh petitioner v commissioner of internal revenue respondent docket no filed date sec_6038d enacted on date and effective for taxable years beginning after the date of enactment imposes new reporting requirements with respect to certain specified foreign financial_assets sec_6501 also enacted on date provides a six-year period of limitations if the taxpayer omits_from_gross_income amounts attributable to one or more assets with respect to which information is required to be reported under sec_6038d held because sec_6501 applies only to omissions from gross_income of amounts attributable to assets with respect to which the reporting requirement of sec_6038d is applicable or would be applicable without regard to specified exceptions it is effective only for tax years with respect to which the reporting requirement of sec_6038d is effective harvey r poe and jeffrey r pittard for petitioner brian e derdowski jr for respondent opinion pugh judge petitioner while residing in new jersey timely petitioned the court for review of respondent’s notice_of_deficiency determining deficiencies and accuracy-related_penalties for and as follows year deficiency dollar_figure big_number big_number big_number penalty sec_6662 dollar_figure big_number petitioner moved for summary_judgment pursuant to rule arguing that the six-year period of limitations under sec_6501 does not apply for his unpaid federal_income_tax for and the specific rule references are to the tax_court rules_of_practice and procedure section references are to the internal_revenue_code_of_1986 as amended and in effect at all relevant times all dollar amounts are rounded to the nearest dollar respondent concedes that sec_6501 does not apply for continued question before us is whether sec_6501 can apply for tax years for which the reporting requirement of sec_6038d did not apply petitioner has conceded certain facts for purposes of his motion to eliminate potential factual disputes that would preclude summary_judgment on the period of limitations issue background petitioner timely filed his federal_income_tax returns for and but did not report income earned on a foreign_account he held respondent served a john_doe_summons seeking information relating to petitioner’s account among others and on date that john_doe_summons was finally resolved on date respondent issued a notice_of_deficiency determining deficiencies and accuracy-related_penalties on underpayments for and respondent has conceded that the notice_of_deficiency was issued after the expiration of the general three-year period of limitations for each year at issue and more than three years after the final resolution of the john_doe_summons petitioner does not dispute for purposes of summary_judgment that the limitation sec_2 continued petitioner’s taxable_year because the amount omitted from gross_income attributable to a foreign financial_asset is less than the required dollar_figure respondent also concedes that sec_6501 the other issue raised in petitioner’s motion does not apply period was still open as of date either because the outstanding john_doe_summons had suspended the running of the period as it was not resolved finally until date or because the general three-year period had not expired petitioner also concedes for purposes of summary_judgment that his foreign_account is a specified_foreign_financial_asset under sec_6038d i standard for summary_judgment discussion where the material facts are not in dispute a party may move for summary_judgment to expedite the litigation and avoid an unnecessary and potentially expensive trial fla peach corp v commissioner 90_tc_678 summary_judgment may be granted where there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law rule a and b see 98_tc_518 aff’d 17_f3d_965 7th cir ii statutory provisions the internal_revenue_service irs must assess tax within three years of the date a tax_return was due without extensions or the date the return was actually filed whichever is later subject_to certain exceptions sec_6501 relevant to our analysis are two particular exceptions first the period of limitations under sec_6501 is suspended beginning six months after the service of a john_doe_summons and ending with the final resolution of that summons sec_7609 and b sec_301_7609-5 proced admin regs second sec_6501 provides that the irs may assess tax within six years after a return is filed i f the taxpayer omits_from_gross_income an amount properly includible therein and such amount i is attributable to one or more assets with respect to which information is required to be reported under sec_6038d and ii is in excess of dollar_figure sec_6038d in turn requires reporting of additional information relating to specified foreign financial_assets sec_6038d also has a dollar threshold of dollar_figure that is disregarded for purposes of sec_6501 also disregarded are any exceptions to the reporting requirement prescribed by the irs pursuant to authority granted under sec_6038d including for classes of assets that might be subject_to duplicative reporting sec_6501 sec_6038d was added to the internal_revenue_code by the hiring incentives to restore employment act of hire_act pub_l_no sec_511 sec_124 stat pincite and is effective for taxable years beginning after sec_301_7609-5 proced admin regs was not applicable until date date the date of its enactment sec_6501 was added by hire_act sec_513 and d 124_stat_111 but has a different effective date applying to returns filed after date and also to returns filed on or before date if the period specified in sec_6501 of the internal_revenue_code_of_1986 determined without such regard to such amendments for assessment of such taxes has not expired as of such date id sec_513 iii analysis in determining the meaning of a statutory provision we look first to its language giving the ‘words used’ their ‘ordinary meaning’ 498_us_103 first quoting 452_us_576 then quoting 369_us_1 it is a well-accepted canon of construction that ‘a statute ought upon the whole to be so construed so that if it can be prevented no clause sentence or word shall be superfluous void or insignificant’ see 533_us_167 quoting 101_us_112 95_tc_579 furthermore s tatutes of limitation sought to be applied to bar rights of the government must receive a strict construction in favor of the government 464_us_386 quoting e i dupont de n264_us_456 the notice_of_deficiency before us is timely only if the six-year period of limitations in sec_6501 applies petitioner argues that the effective date of sec_6038d precludes application of that six-year period of limitations specifically petitioner argues that the defining phrase in sec_6501 assets with respect to which information is required to be reported under sec_6038d also limits application of the six-year limitations statute to assets for which there was a reporting requirement under sec_6038d or there would be a requirement but for specified exceptions at the time the income was omitted we conclude that the wording of the effective date for sec_6501 limits its application to years for which the reporting requirement of sec_6038d also is effective c ourts must presume that a legislature says in a statute what it means and means in a statute what it says there when the words of a statute are unambiguous then this first canon is also the last ‘judicial inquiry is complete’ 503_us_249 quoting 449_us_424 we must give effect to all of the words in the key phrase before us-- assets with respect to which information is required to be reported under sec_6038d while the effective date of sec_6038d was not imported by the cross-reference to sec_6038d we conclude that the most natural reading of this phrase is that the six-year statute_of_limitations applies only when there is a sec_6038d reporting requirement or would be barring an exception that is to be disregarded sec_6501 does not simply incorporate the definition of assets in sec_6038d it also specifies that the assets are subject_to the reporting requirement or would be but for an exception that is disregarded we agree with petitioner that had congress intended simply to incorporate the definition in sec_6038d of the assets to be covered congress could have used other more straightforward wording such as the defined term itself cf 146_f3d_643 9th cir limiting cross-reference in sec_6621 to any straddle as defined in sec_1092 to the definition of straddle in sec_1092 and declining to import the effective date of sec_1092 as well aff’g tcmemo_1996_86 the addition of the cross-reference to sec_6038d to sec_6501 does not undercut our interpretation sec_6501 provides that in the case of failures to comply with certain information reporting provisions the limitations_period does not expire until three years after the required information is provided hire_act sec_513 sec_124 stat pincite added information reporting under sec_6038d to the other information reporting provisions respondent stretches to argue that the incorporation of that reporting requirement into sec_6501 shows that congress did not intend to make the separate six-year statute_of_limitations in sec_6501 dependent on a taxpayer’s failure to satisfy sec_6038d the trigger in sec_6501 is the failure to report and that failure results in a different limitations_period by contrast the trigger for the six-year limitations_period in sec_6501 is the omission of gross_income from assets that are subject_to the sec_6038d reporting requirement or would be but for an exception thereto and it extends the period to six years thus the contrast between the wording in the two provisions does not tell us any more about how to read the latter than the words of the statute and we find the legislative_history of the effective date cited by respondent no more illuminating than the statute itself because the legislative_history tracks the statute as respondent acknowledges see eg general explanation of tax legislation enacted in the 111th congress jcs-2-11 date we do not assume the effective date was a mistake our analysis applies the statute as written our reading does not render the effective date of hire_act sec_513 meaningless because that effective date also applies to other statutory changes enacted in hire_act sec_513 namely the expansion of sec_6501 to all items on a tax_return and the addition to sec_6501 of reporting relating to passive foreign investment companies hire_act sec_513 added tax_return before event in sec_6501 thus extending the limitations_period for all items reported on a tax_return for which the taxpayer failed to satisfy specified reporting requirements which predated enactment of the hire_act not just items relating to the particular reporting omission hire_act sec_513 and added other reporting requirements to the existing list in sec_6501 information required to be reported pursuant to an election under sec_1295 and under sec_1298 sec_1298 which requires annual reporting by a u_s_person who is a shareholder of a passive_foreign_investment_company was added to the internal respondent cited the blue_book as legislative_history along with other publications by the joint_committee on taxation we have recognized that the blue_book is not legislative_history but like a law review article may be relevant to the extent it is persuasive united_states v woods u s __ __ s ct revenue code by hire_act sec_521 sec_124 stat pincite but sec_1295 and the election under sec_1295 to treat a foreign_corporation as a qualified_electing_fund within the meaning of that section was enacted in and regulations requiring annual reporting by u s persons making that election were promulgated in see sec_1295 tax_reform_act_of_1986 pub_l_no sec_1235 stat pincite sec_1_1295-1 income_tax regs t d 1998_1_cb_562 t d 2000_1_cb_647 thus the effective date of hire_act sec_513 which applies to returns filed on or before date if the period specified in sec_6501 of the internal_revenue_code_of_1986 determined without such regard to such amendments for assessment of such taxes has not expired as of such date could apply to all items on tax returns with reporting omissions and those omissions could include information which is required to be reported to the secretary pursuant to an election under sec_1295 sec_6501 we addressed a similar issue with cross-referencing to a section with a different effective date in 133_tc_431 considering whether the effective date of sec_6707a precluded the application of the extended limitations_period in sec_6501 in blak invs v commissioner t c pincite as here the taxpayer argued that because sec_6501 cross-referenced sec_6707a the effective date of sec_6707a controlled we held that applying the effective date for sec_6707a to sec_6501 would render the different effective date for sec_6501 meaningless id pincite congress chose to cross-reference and thereby incorporate into sec_6501 the definition in sec_6707a but not its effective date id pincite comparison of the provision before us in blak invs to the one before us here is instructive we turn first to the distinction between the wording of the two provisions sec_6501 includes the phrase for any taxable_year the application of sec_6501 by contrast is not broadened to any taxable_year in addition in blak invs the taxpayer had an obligation under pre-existing regulations to report certain information and failed to do so although there was no penalty for the failure to report id pincite because the taxpayer failed to report as required for the limitations_period remained open for and here by contrast petitioner had no preexisting obligation to report the sec_6501 provides as follows if a taxpayer fails to include on any return or statement for any taxable_year any information with respect to a listed_transaction as defined in sec_6707a which is required under sec_6011 to be included with such return or statement information required by sec_6038d these differences between the statutory wording and the reporting regimes require a different result in the case before us conclusion we conclude that the six-year limitations_period under sec_6501 does not apply for and we therefore will grant petitioner’s motion that respondent’s notice_of_deficiency was untimely to reflect the foregoing an appropriate order and decision will be entered


department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc tege eb ec - plr-134451-01 date date ---------------------------------------- ----------------------- ------------------------------------------------------------------------------- ---------------------------------- ----------------------- -------------------------- --------------------- ----------------------------------- -------------------------- --------------------- --------------------------------------------------------------------------------- ------------------------------------------------- ------- internal_revenue_service number release date index number ---------------------- ------------------------ ------------------------------------- ------------------------------- target acquiring parent country a stock exchange date a date b form y year x dear ----------------- this is in reply to your letter dated date requesting rulings concerning the deduction limitation of sec_162 of the internal_revenue_code the facts as represented by acquiring are as follows plr-134451-03 acquiring is a wholly owned subsidiary of parent a country a corporation parent’s shares are traded on stock exchange in the form of american depository shares parent is a aforeign private issuer under c f_r section 3b-4 c because it is incorporated under the laws of country a and does not fit the following description more than percent of the issuer’s outstanding voting_securities are directly or indirectly held of record by residents of the united_states and any of the following apply i the majority of the issuer’s executive officers or directors are united_states citizens or residents ii more than percent of the assets of the issuer are located in the united_states or iii the business of the issuer is administered principally in the united_states parent is required to file form y with the united_states securities_and_exchange_commission sec because there is no summary compensation table requirement for foreign private issuers that sets out the compensation paid to each employee the form y filed by parent does not contain a summary compensation table described in item b of regulation s-k under the securities exchange act of the exchange act on date b target merged with and into acquiring with acquiring as the surviving corporation the merger acquiring will continue as the parent of target’s operating subsidiaries target s final separate consolidated tax_year ended on date b acquiring represents that after the merger neither acquiring nor any of its united_states subsidiaries will be a publicly_held_corporation under sec_162 of the code acquiring represents that because the merger occurred prior to the deadline for filing proxy statements with its shareholders for its taxable_year ending on date a target will not be required to file any proxy statements with the sec that disclose executive compensation under item of regulation s-k for that year or for the short taxable_year that ended with the merger on date b there are executives of target who are expected to continue to serve as executives of acquiring acquiring represents that the compensation paid to these executives will not be reported by acquiring because as a wholly owned subsidiary of a foreign private issuer it will not be required to file a summary compensation table sec_162 of the code allows as a deduction all the ordinary and plr-134451-03 necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 of the code provides that in the case of any publicly_held_corporation no deduction shall be allowed for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of the remuneration for the taxable_year exceeds dollar_figure sec_162 defines publicly_held_corporation as any corporation issuing any class of common equity securities required to register under sec_12 of the exchange act under sec_1_162-27 of the income_tax regulations a publicly_held_corporation includes an affiliated_group_of_corporations as defined in sec_1504 determined without regard to sec_1504 sec_162 defines acovered employee as any employee of the taxpayer if as of the close of the taxable_year such employee is the chief_executive_officer of the taxpayer or is an individual acting in such capacity or the total compensation of such employee for the taxable_year is required to be reported to shareholders under the exchange act by reason of such employee being among the highest compensated officers for the taxable_year other than the chief_executive_officer under sec_1_162-27 of the regulations whether an individual is the chief_executive_officer or one of the four highest compensated officers is determined pursuant to the executive compensation disclosure rules under the exchange act in the notice of proposed rulemaking containing the proposed_regulations under sec_162 the preamble contains the following language concerning the identification of acovered employee the regulations clarify which employees are acovered employees for purposes of sec_162 the legislative_history to sec_162 provides that acovered employees are defined by reference to the sec rules governing executive compensation disclosure under the exchange act under the regulations an individual generally is a acovered employee if the individual s compensation is reported on the asummary compensation table under the sec s executive compensation disclosure rules as set forth in item of regulation s-k cfr under the exchange act however the regulations specifically provide that in order to be a acovered employee for sec_162 purposes an plr-134451-03 individual must be employed as an executive officer on the last day of the taxable_year thus only those employees who appear on the asummary compensation table and who are also employed on the last day of the taxable_year are acovered employees therefore based on the facts submitted we rule as follows for purposes of sec_162 of the code target s officers will not be acovered employees with respect to the taxable_year ending on date a or the short taxable_year ending on date b provided that no summary compensation table listing target’s officers is included in any target proxy statement that is sent to the shareholders and filed by target with the sec for the taxable_year ending on date a or the short taxable_year ending on date b for purposes of sec_162 of the code target’s executives who continue to serve as executives of the post-merger company will not be covered employees with respect to compensation paid in year x because as a wholly-owned subsidiary of a foreign private issuer their compensation is not required to be reported to shareholders under the exchange act except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely yours _______________________________ robert b misner senior technician reviewer executive compensation branch office of the division counsel associate chief_counsel tax exempt and government entities plr-134451-03 enclosure copy for purposes


department of the treasury internal revenuf service wasnineron z0224 government entities feb uniform issue list getep rat ‘ legend taxpayer a taxpayer b iraa irab company m company n company p- amount a amount b dear this letter is in response to a request for a letter_ruling dated date as supplemented by correspondence dated date from your authorized representative in-which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been support of the ruling requested taxpayer a age and taxpayer b age are married and file a joint income_tax return they represent that they respectively received a distribution from ira a totaling amount a and ira b totaling amount b on date taxpayers a and b assert submitted under penalty of perjury in that their failure to accomplish a rollover within the 60-day period prescribed by code sec_408 was due to incorrect advice provided by companies m and n company n advised taxpayers a and b that they could use their iras to invest in company p a real_estate development limited_partnership by performing a self directed ira real_estate investment_company n also advised taxpayers a and b company m for instructions to accomplish a self-directed_ira rollover taxpayers a and b asked company m for instructions and in doing so specifically informed company m that the distribution is intended to be a nontaxable self-directed_ira rollover based on company m's advice taxpayers a and b completed paperwork provided by company m on date intending to respectively transfer amount a from ira a and amount b from ira b to company p via a nontaxable ira rollover to ask taxpayers a and b each received a check made out to them amount a and amount b- respectively from company m dated date company m instructed taxpayers a and b that they could wire or deliver the funds to company p themselves taxpayers a and b then endorsed their checks to company p and delivered them to company p's agent company n who deposited the checks into company p's bank account on date company n reassured taxpayers a and b that this process was appropriate for the rollovers when taxpayers a and b asked if they needed to do anything else to ensure the rollovers were properly accomplished company m failed to advise taxpayers a and b that the receiving account for these rollovers must be qualified ira accounts taxpayers a and b discovered that amounts a and b which were distributed from ira a and ira b respectively were taxable_distributions when they received their respective forms 1099r in date taxpayers a and b did not use amounts a and b for any other purpose and amounts a and b are still in the possession of company p based on the above facts and representations taxpayers a and b request that the internal_revenue_service service waive the 60-day rollover requirement contained in code sec_408 with respect to the distribution of amounts a and b because they did not discover that company m and n's advice caused amounts a and b to be taxable_distributions until they received forms 1099r during date after the 60-day rollover period had expired sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ra shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ra rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - vf the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or i the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 b of the code provides that sec_408 does not apply to any amount described in sec_408 a i received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 axi from an ira which was not includible in grass income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 i of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 d d of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributiéns that occurred after date are eligible for the waiver under sec_408 of the code i revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 3x the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and the documentation submitted by taxpayers a and b is consistent with their assertion that their failure to accomplish a timely rollover was caused by incorrect advice provided by companies m and n therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira a and amount b from ira b taxpayers a and b are granted a period of days from the issuance of this ruling letter to contribute amounts a and b into respective rollover iras provided alt other requirements of sec_408 of the code except the day requirement are met with respect to such contribution amounts a and b will be respectively considered rollover_contributions within the meaning of sec_408 of the code 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 that may be applicable thereto this letter is directed only to the taxpayers who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter_ruling has been sent to your authorized representative pursuant to a power_of_attorney on file in this office contact if you wish to inquire about this ruling please at please address all correspondence to se t ep ra t1 sincerely yours carlton a watkins manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice cc


id office uilc cca-311123-11 ------------ number release date from -------------------- sent friday date pm to -------------------------- cc --------------- --- subject brief summary of facts for question of deductibility of backup withholding taxes --------- hi ----------- - we have a number of banks that have neglected to backup withhold under sec_3406 of the internal_revenue_code under sec_3406 when a taxpayer makes a reportable_payment eg certain dividend or interest payments but fails to meet the requirements of sec_3406 eg does not provide its tin to the bank receiving the payment then the bank receiving the payment is required to withhold a statutory amount backup withhold from the taxpayer’s payment currently the service has several cases involving financial institutions that are coming clean by voluntarily disclosing to the service that they failed to backup withhold payments of interest dividends and proceeds from the sale of stocks and securities made to individuals corporations partnerships trusts and other entities the financial institutions were required to backup withhold because these payments fell into one of the red flag categories listed in sec_3406 as part of this voluntary disclosure the financial institutions are entering into closing agreements with the service under which they will agree to pay the correct amount of backup withholding liability pursuant to sec_3406 plus interest the banks are precluded by sec_275 from deducting the backup withholding payments however the banks argue that they should be permitted to deduct the interest after coordinating with ------------we --------------conclude that the interest_paid by these financial institutions on their backup withholding liabilities is deductible under sec_163 furthermore the interest is deductible when accrued under sec_446 and sec_461 see irs cca lexi sec_71 issue attached if you have any further questions on this issue please do not hesitate to contact me at - -------------------


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person identification_number telephone number employer_identification_number number release date date date uil legend a b c d publisher dollar_figurex dollar_figurey dear ------------------- this letter is in reference to the letter from the authorized representative of a in which a requested rulings that its sale of a half interest in its scholarly journal to a for for-profit publisher will not affect its sec_501 exemption ruling and that royalties and advertising income received by a will not constitute taxable unrelated_business_income a is a non-profit organization that has held a sec_501 tax exemption ruling since a has about members it is an educational and literary organization whose principal aim is to honor preserve study and disseminate scholarship about the life and works of the author b its activities consist of educational conferences a newsletter a scholarly archive and educational outreach its primary activity consists of publication of the scholarly journal c publisher wishes to purchase a half-interest in the a’s scholarly journal c and the publication d in return for such interest publisher would agree to pay to a on signing of the agreement the sum of dollar_figurex publisher and a would retain equal interests in the copyright and subsequent publication revenues publisher would provide c’s editor with an annual stipend of dollar_figurey per year and would publish and distribute the journal to all subscribers in return a will provide all journal content make all editorial decisions and provide publisher with its list of subscribers subscribers fall into two categories institutions primarily university libraries and individuals institutions are not members of a but individuals are publisher will manage all institutional subscriptions set institutional subscription rates and retain the revenues a will manage all individual subscriptions collect all individual dues and pay publisher dollar_figure per individual annually to compensate for publication and distribution costs publisher will pay a a royalty of approximately percent on revenues from institutional subscriptions publisher will also pay a a royalty of percent on non-subscription revenue earned including single and back issues sales and rights and permissions to copy or republish publisher will also pay a a royalty of percent on all advertising in the journal a contemplates that it will conduct significant activities involved in generating such advertising revenues although such revenues are contemplated to be de_minimis none of the officers and directors of a has any financial interest in publisher and none is related to any officers or directors of publisher a has represented that the directors have performed due diligence in negotiating the proposed agreement with publisher and represent that they believe that the agreement represents a fair_market_value transaction law sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less certain allowable deductions and modifications sec_512 of the code provides that there shall be excluded all royalties whether measured by production or by gross or taxable_income_from_the_property and all deductions directly connected with such income sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the function constituting the basis of its exemption sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the income_tax regulations provides that gross_income of an exempt_organization subject_to tax imposed by sec_511 of the code is includable in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that in general any activity of an exempt_organization which is carried on for the production_of_income and which otherwise possesses the characteristics required to constitute trade_or_business within the meaning of sec_162 of the code is a trade_or_business for purposes of sections further the term trade_or_business generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that in general gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question -- the activities that is of producing or distributing the goods or performing the services involved -- and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes and it is substantially related only if the causal relationship is a substantial one the regulation continues that for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes rev_rul 1981_2_cb_135 describes the treatment of income received by an organization in two situations in the first situation the organization is exempt from federal_income_tax under sec_501 of the code the organization engages primarily in activities in furtherance of these purposes the organization also solicits and negotiates licensing agreements with various businesses the licensing agreements authorize the businesses to use the organization's trademarks trade names service marks copyrights and members' names in connection with distribution sale advertising and promotion of merchandise or services offered by such businesses the organization has the right to approve the quality or style of the licensed products and services the agreements also require the businesses to refrain from engaging in any activity that would adversely affect the reputation of the organization or its members or the value of the licensed product the income received by the organization from the agreements is based in some instances on a percentage of the gross_sales of the licensed products or services while in other cases the organization receives a flat sum each year in the second situation set forth revrul_81_178 supra the facts are the same as in the first situation except that the agreements with the businesses are concerned solely with endorsing the products and services offered by such enterprises the agreements require personal appearances by and interviews with members of the organization in connection with the endorsed products and services all income from the agreements is paid directly to the organization under revrul_98_15 1998_1_cb_718 a sec_501 organization may form and participate in a partnership and meet the operational_test of the statute if participation in the partnership furthers a charitable or educational purpose and the partnership arrangement permits the exempt_organization to act exclusively in furtherance of its exempt_purpose and only incidentally for the benefit of the for-profit partners revrul_2004_51 i r b describes whether an organization continues to qualify for exemption from federal_income_tax as an organization described in sec_501 of the code when it contributes a portion of its assets to and conducts a portion of its activities through a limited_liability_company llc formed with a for-profit corporation and whether the organization is subject_to unrelated_business_income_tax under sec_511 on its distributive_share of the llc's income the revenue_ruling holds that when the facts establish that the activities conducted through the llc are substantially related to the exercise and performance of the exempt_organization the exempt_organization continues to qualify for exemption under sec_501 and is not subject_to unrelated_business_income_tax under sec_511 on its distributive_share of the llc's income analysis in the past a has conducted all of the operations in writing publishing and distributing its educational journal advertising revenues have been de_minimis in order to more efficiently accomplish the publication and distribution of the journal a proposes to enter into an agreement to sell a one-half interest in the journal to publisher a for profit corporation under the proposed agreement a would receive a one-time payment of dollar_figurex for the one half interest a would be responsible for virtually all editorial functions of the journal and publisher would be responsible for all printing and dissemination costs none of the officers and directors of a has any financial interest in publisher and none is related to any officers or directors of publisher a has represented that the directors have performed due diligence in negotiating the proposed agreement with publisher and represent that they believe that the agreement represents a fair_market_value transaction the sale and joint publication agreement is similar to a joint_venture between a and publisher under revrul_98_15 1998_1_cb_718 a sec_501 organization may form and participate in a partnership and meet the operational_test of the statute if participation in the partnership furthers a charitable or educational purpose and the partnership arrangement permits the exempt_organization to act exclusively in furtherance of its exempt_purpose and only incidentally for the benefit of the for-profit partners in rev_rul i r b date the service applied this test and approved a joint_venture where a large university provided educational material to a for-profit partner that disseminated the material through interactive video technology however in that case there was the additional fact that the partnership activity constituted only an insubstantial part of the exempt_activities of the university here by contrast the publishing of the literary journal and the other activities under the agreement constitute a substantial apart of the activities of a we must then determine whether the agreement satisfies the two-part test of revrul_98_15 the activities under the agreement satisfy the first test in that the agreement furthers the charitable educational purpose of a a retains full control_over the editorial content of the publications it also receives compensation_for the use of this content that is represented to constitute fair_market_value the agreement allows a to concentrate on the core educational component of the journal and other publication while leaving to the publisher the conduct of the more mechanical aspects of publication and dissemination the activities under the agreement also satisfy the second part of the rev_rul test the agreement permits a to act exclusively in furtherance of its exempt_purpose by creating the editorial content of the journal and the other publication the publisher’s benefit is only incidental to this exempt_purpose giving it a negotiated share of the revenues as fair market compensation_for the printing publishing and dissemination services that it provides given the somewhat esoteric nature of the journal content the limited demand for such material and the due diligence negotiation for a fair_market_value agreement there is realistically no way that the publisher will obtain substantial monetary benefits the second issue is whether the royalties and advertising income that a will receive will constitute unrelated_business_taxable_income there is no question that the royalties and advertising activities constitute business that is regularly carried on the only question is whether the advertising is substantially related to a’s exempt purposes and whether the royalties are excludable under sec_512 it is acknowledged that a conducts all or most of the activities involved in soliciting and designing the advertising there is no contention that the advertising is substantially related to a’s exempt educational activities accordingly under united_states v american college of physicians supra the advertising income is taxable unrelated gross_income by contrast a receives the royalties-here approximately percent of revenues from institutional subscriptions and percent of revenues from non-subscription revenues solely for use of its copyrighted materials a performs no other services in return for such royalties under sec_512 and revrul_81_178 supra such royalties are thus excluded from gross unrelated_business_income accordingly we rule that the sale of a half interest in the scholarly journal to publisher will not affect a ‘s exemption as an organization described in sec_501 of the code and that royalties and advertising income received by a will not constitute taxable unrelated_business_income this ruling takes no position on any other revenue that a may receive either from publisher or any other source this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice mary jo salins acting manager exempt_organizations technical group sincerely


department of the treasury internal_revenue_service mc chi floor south dearborn street chicago il date xx date address address employer identification person to contact id contact telephone number fax tax_exempt_and_government_entities_division release number release date legend oraanization name vil code org address certified mail last date to file a petition in tax_court september 20xx dear this is a final adverse determination that you do not qualify for exemption from income_tax under sec_501 of the internal_revenue_code i r c as an organization described in sec_501 in addition you do not qualify as an organization described in r c sec_509 b a vi internal_revenue_service recognition of your status as an organization described in sec_501 is revoked effective january 20xx our adverse determination is made for the following reason s a substantial part of your activities consists of providing down payment assistance to home buyers to finance the assistance you rely on home seller and other real-estate related businesses that stand to benefit from these down payment assistance transactions your receipt of a payment from the home seller corresponds to the amount of the down payment assistance provided in substantially_all of your down payment assistance transactions the manner in which you operate demonstrates you are operated primarily to further your insiders’ business interests therefore you are operated for a substantial nonexempt purpose in addition your operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 contributions made to you are no longer deductible as charitable_contributions by donors for purposes of computing taxable_income for federal_income_tax purposes see revproc_82_39 1982_2_cb_759 for the rules concerning the deduction of contributions made to you between january 20xx and the date a public announcement such as publication in the internal_revenue_bulletin is made stating that contributions to you are no longer deductible you are required to file income_tax returns on form_1120 for all years beginning after returns for the years ending december 20xx december 20xx january 20xx december 20xx and december 20xx must be filed with this office within ee days from the date of this letter unless a request for an extension of time is granted send such returns to the following address tax returns for subsequent years are to be filed with the appropriate campus identified in the instructions for those returns if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment you may write to the tax_court at the following address the processing of income_tax returns and assessment of any taxes due will not be delayed because a petition for declaratory_judgment has been filed under sec_7428 the last day for filing a petition for declaratory_judgment is september 20xx if you have questions about this letter please write to the person whose name and address are shown on this letter if you write please attach a copy of this letter to help identify your account keep a copy for your records also please include your telephone number and the most convenient time for us to call so we can contact you if we need additional information you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers or you can contact the taxpayer_advocate office located nearest you at the address and telephone number shown in the heading of this letter taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by r c sec_6104 sincerely lois g lerner director exempt_organizations enclosures pub schedule number or exhibit 886-a rom 886a form - explanation of items name of organization taxpayer tax identification_number 20xx year period ended org legend org organization name directors co-1 company xx date xyz state city city motto motto dir-1 dir-2 dir-3 ceo gp application gp application issue whether org org is operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 and the regulations thereunder facts organizational information org was incorporated as a xyz corporation on october 20xx the three directors listed in its articles of incorporation are dir-1 dir-2 and dir-3 on november 20xx org applied for recognition as a tax-exempt_organization under internal_revenue_code irc or the code sec_501 on form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code dir-2 signed the form_1023 as the president of org and described org’s activities as follows a org will provide gifts ranging from two percent to five percent of the contract sales_price to low and moderate income homebuyers for homes included in our program b we will begin on september 20xx c this will be a national motto for people that are low to moderate income homebuyers dir-2 will implement the program from the office located in city xyz we expect this to be of our activity and of our expenditures a we will be collecting service fees for the home seller and builders in the amount ranging from to of the contract sales_price for their homes to be included in this program this will provide an on-going source_of_income with which to provide future gifts to low and moderate income homebuyers b we will begin on september 20xx c this will be a national program implemented by dir-2 from the office in city xyz we expect this to be of our activity and of our revenue a we will be seeking charitable_contributions from people working in the real_estate industry like builders real_estate agents settlement agents and mortgage brokers b we will begin on september 20xx c this will be a small but important part of our program so that we may promote ourselves to home buyers in need of assistance we expect this to be of our activity and of our revenue page of department of the treasury-internal revenue service form 886-a schedule number or exhibit 886-a form rev date explanation of items tax identification_number year period ended name of organization taxpayer 20xx org the sources of financial support stated as follows service fees contribution sec_3 the following individuals were listed as the governing body of org name dir-2 dir-1 dir-3 address address address address title president executive director treasurer director secretary director the list above indicated the organization was governed by the family on february 20xx the internal_revenue_service irs after reviewing the form_1023 concluded that the organization’s activities may not qualify for exemption under c of the code the reason listed was as follows first you indicate an important part of your operation and your only source_of_income will be the performance of services to persons attempting to market their homes in exchange for a fee comprised of a percentage of the final sales_price there is no information from which it can be concluded that the services you describe will further or advance any charitable purpose it appears the described services provide a convenience and a benefit to homeowners who are not members of a charitable_class of persons because services you describe further no exempt_purpose and because they result in benefits to private person you do not meet the operational_test of sec_501 of the code which requires that you operate exclusively for charitable purposes secondly you indicate another important part of your operations will be providing financial benefits to persons of low and moderate income to assist them in acquiring a home while the providing of assistance to low income or needy individuals to enable them to acquire housing would otherwise be considered a charitable activity providing these benefits to moderate income persons would not be deemed charitable you have not explained how benefits you propose to provide to moderate income persons furthers a charitable purpose and you have therefore not described activities that are exclusively charitable in compliance with the requirements of sec_501 of the code on march 20xx the status as follows family responded to the irs’ concerns regarding qualifying for exempt declaration of compliance with revenue_procedure org hereby agrees that for each housing project that a at least percent of the units will be occupied by residents that qualify as low-income and b either at least percent of the units will be occupied by residents that also meet the very low-income limit for the area or percent of the units will be occupied by residents that also do not exceed percent of the area’s very low-income limit up to percent of the page of department of the treasury-internal revenue service form 886-a schedule number or exhibit form 886-a rev date explanation of items year period ended tax identification_number name of organization taxpayer org units may be provided at market rates to persons who have in excess of the low-income limit 20xx org hereby agrees that we will not require that sellers pay a fee to participate in our motto dir-2 dir-1 and dir-3 signed the above declaration and statement on april 20xx the irs recognized org as a tax exempt_organization under code sec_501 and issued a letter to that effect operational information on september 20xx a phone conversation was held with dir-1 about org’s activities dir-1 stated that the sellers of homes provided motto to the buyers of the homes through org fees of dollar_figure on each transaction are charged by org to the sellers org reduced the fee to dollar_figure during may of 20xx org reported the following financial information on its form_990 for fiscal years ended december 20xx and december 20xx as follows with percentages 20xx 20xx revenue program service revenue interest on savings total revenue expenses motto legal fees supplies telephone postage shipping printing publication travel other total expenses net_income on its form_990 for 20xx org stated in the statement of program service accomplishments promote home ownership provided down payment gifts totaling dollar_figure to low-to-moderate income homebuyers it is apparent that org’s primary source_of_income is from home sellers and its major expenses are mottos to home buyers mottos to buyers of homes ranged from dollar_figure to dollar_figure for each transaction which ranged from to of the purchase_price of the home the fees collected by org were dollar_figure for the year 20xx org receives funds for providing motto plus service fees from the escrow company or the title company form 886-a page of department of the treasury-intemnal revenue service schedule number or exhibit 886-a form icon date name of organization taxpayer explanation of items year period ended tax identification_number 20xx qr org then wires the motto back to the same escrow or title company advertising materials org’s pamphlet promotes its motto motto program to buyers builders and sellers as follows buyers how we can help org will make buying a home possible by providing the financial assistance you need as a gift to you the gift - up to of the purchase_price - can be put towards the down payment and or closing costs for the purchase of your home how you get the money for you to receive the financial gift you must purchase a home from a seller builder who is willing to participate in our program simply complete the org gp application from your lender we will take care of the rest how you qualify our program is not just for first-time homebuyers we often assist homeowners who need our program to purchase their next home you must first qualify for a mortgage that will allow our charitable_contribution to be used as your down payment and or closing costs fha mortgages do allow our financial gift to be used in the home buying process your lender will have the gift application_for you to sign once the necessary paperwork is completed we will make arrangements with the settlement closing agent to have your gift funds waiting for you at the time of closing you the homebuyer must also agree to return the entire gift if the home does not close seller builder sell your home faster and easier in today’s market there is a growing need to assist buyers with what they need by expanding _ the number of qualified potential homebuyers for your home will mean e e e less money spent on payments less marketing time less advertising costs how much does it cost being a part of org down payment gift program will cost you less than you may think the cost of the program equals the amount of the financial assistance the buyer needs plus dollar_figure- it’s that simple often times sellers builders will discount the price of the home or provide free options to make the sale there is a good chance that you will not need to negotiate the purchase_price and or provide free options and also participate in program the benefit can be easily seen negotiated real_estate_transaction list price dollar_figure department of the treasury-internal revenue service page of form 886-a schedule number or exhibit form fm a a explanation of items tax identification_number year period ended name of organization taxpayer 20xx org dollar_figure reduction in price dollar_figure dollar_figure dollar_figure dollar_figure sales_price minus commission subtotal less closing costs net amount org transaction gift list price sales_price minus commission minus service fee subtotal less closing costs net amount dollar_figure dollar_figure full price dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure how does it work the gift funds org provided to the buyer do not come from you the seller builder the gift funds we provide the buyer come from a pre-existing pool of money that we have raised when the home closes the service fee you provide org inc will help replenish the funds and help cover the administration costs of the program we also receive contributions from individuals to help the pool grow by replenishing the pool we can provide more people with the opportunity of becoming homeowners throughout the united_states what is the seller’s obligation you only pay the service fee if your buyer uses the down payment gift program how to get started simply have your real_estate agent contact us to order the seller enrollment form there is no cost to enroll your home into the program you can then begin advertising your home as a no down payment property therefore you can offer your home to a larger audience of potential buyers with the org program most sellers builders are able to receive the full list price because of the larger number of qualified buyers if you are in the process of signing a purchase agreement with a buyer that wants the financial assistance have your real_estate agent contact us for the suggested language to be included in the purchase agreement based on the pamphlet org’s motto program operates as follows buyers receive a gift of funds that are used for the down payment house buyers are eligible to participate in the motto program when they qualify for financing from a lender upon closing of escrow the seller pays org service fees which equals the gift funds plus the dollar_figure - dollar_figure processing fees transactions result in a circular flow of the money with org as the intermediary org does not have any income limitations for its motto program and does not screen applicants for motto based on income in effect the gifts of funds to the buyers directly or indirectly come from the sellers these seller enrollment form and or purchase agreement addendum page of department of the treasury-intemnal revenue service form 886-a schedule number or exhibit f 886-a - a date name of organization taxpayer explanation of items tax identification_number year period ended org the seller enrollment form was required to be signed by the seller to enroll in org’s motto program the form contains the following language 20xx into the org down payment gift program the enrolled property is known as address seller agrees to pay a service fee gift amount dollar_figure to org equaling dollar_figure in consideration of the service fee org agrees to include the above-mentioned property into the down payment gift program the seller is only obligated to pay the service fee at the time of settlement closing the seller understands that they are not under any obligation to pay the service fee if the buyer does not purchase the enrolled home from the seller or the buyer does not elect to utilize the down payment gift program the settlement and or closing agent is instructed by the seller to retain and forward the service fee amount as indicated above to org upon successful completion of the settlement closing the seller instructs the settlement and or closing agent to return any funds not used by the buyer to org this agreement is contingent upon buyer receiving a gift service fee - dollar_figure in the amount of dollar_figure the time of closing from org at both the buyer and the seller sign and date the form the enrollment form also indicates that the gift received by the buyer comes either directly or indirectly from the seller gp application the gp application was required to be signed by the buyers the application includes the following items buyers’ names annual income social_security_number property address being purchased sellers’ names sales_price closing date loan file number hud id number seller’s contribution to org minus servicing fee of dollar_figure equals buyer’s gift amount county mortgage company name and address loan officer’s name phone number and fax number settlement company name and address closing agent’s name and phone number minutes org did not provide minutes of board meetings according to a phone conversation with dir-1 on october 20xx her husband and she run the organization and make all of the decisions dissolution page of department of the treasury-internal revenue service form 886-a 886-a schedule number or exhibit a teealemiaunices form name of organization taxpayer explanation of items tax identification_number year period ended 20xx org according to the phone conversation with dir-1 she and her husband decided to dissolve the business of org since org did not have any transactions for the last six months dir-1 filed a statement of foreign_entity withdrawal with the state of xyz at the end of september 20xx a foreign_entity withdraws from doing business in xyz by filing a statement of foreign_entity withdrawal with the xyz secretary of state applicable legal principles 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 that no part of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 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 the code sec_501 an organization must not engage in substantial activities that fail to further an exempt_purpose sec_1_501_c_3_-1 the regulations provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests sec_1_501_c_3_-1 the regulations defines the term charitable as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the advancement of education sec_1_501_c_3_-1 the regulations provides in part that the term educational relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 the regulations provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of the code sec_501 if the trade_or_business furthers an exempt_purpose and if the organization’s primary purpose does not consist of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court held that the presence of a single regardless of the number or importance of truly jonexempt purpose if substantial in nature will destroy the exemption exempt purposes in easter house v u s cl_ct aff'd 846_f2d_78 fed cir the u s court of federal claims considered whether an organization that provided prenatal care and other health-related services to pregnant women including delivery room assistance and placed children with adoptive parents qualified for exemption under sec_501 the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization’s argument that the adoption services page of department of the treasury-internal revenue service form 886-a schedule number or exhibit 886-a explanation of items tax identification_number year period ended 20xx - rev date name of organization taxpayer org 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 in addition although the organization provided health care to indigent pregnant women it accordingly the only did so when a family willing to adopt a woman’s child sponsored the care financially court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 co-1 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 because it also served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with entities of a particular political_party and that most of the organization’s graduates worked in campaigns for the party’s candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting the party’s candidates and entities although the candidates and entities benefited were not organization insiders the court stated that the conferral of benefits on disinterested persons who are not members of a charitable_class may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 the court concluded by stating that even if the political party’s candidates and entities did comprise a charitable_class the organization would bear the burden of proving that its activities benefited members of the class in a non-select manner american campaign academy t c pincite in 71_tc_202 the court held that an organization that marketed handicrafts made by disadvantaged artisans through museums and other non-profit organizations and shops operated for exclusively charitable purposes within the meaning of sec_501 the organization in cooperation with national craft agencies selected the handicrafts it would market from craft cooperatives in communities identified as disadvantaged based on objective evidence collected by the bureau of indian affairs or other government agencies the organization marketed only handicrafts it purchased in bulk from communities of craftsmen the organization did not market the kind of products produced by studio craftsmen nor did it market the handicrafts of artisans who were not disadvantaged the court concluded that the overall purpose of the organization’s activity was to benefit disadvantaged communities the organization’s commercial activity was not an end in itself but the means through which the organization pursued its charitable goals the method the organization used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans therefore the court held that the organization operated exclusively for exempt purposes described in sec_501 in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which the organization conducted its activities the court found that it was operated for a nonexempt commercial purpose rather than for a tax-exempt purpose as the court stated page of department of the treasury-internal revenue service form 886-a 886-a s form form bbo name of organization taxpayer explanation of items tax identification_number year period ended schedule number or exhibit 20xx org among the major factors courts have considered in assessing commerciality are competition with for-profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations see also 950_f2d_365 7th cir holding that a religious_organization which ran restaurants and health food stores in furtherance of its health ministry did not qualify for tax-exempt status because it was operated for substantial commercial purposes and not for exclusively exempt purposes revrul_67_138 1967_1_cb_129 held that helping low-income persons obtain adequate and affordable housing is a charitable activity because it relieves the poor and distressed or underprivileged in revrul_67_138 the organization carried on several activities directed to assisting low-income families obtain improved housing including conducting a training course on various aspects of homebuilding and homeownership coordinating and supervising joint construction projects purchasing building sites for resale at cost and lending aid in obtaining home construction loans revrul_2006_27 discusses three examples of organizations providing motto and whether each qualified as an organization described in sec_501 of the code situation describes x a non-profit corporation that helps low-income individuals and families purchase decent safe and sanitary homes throughout the metropolitan area in which it is located as a substantial part of its activities x makes assistance available exclusively to low-income individuals and families to provide part or all of the funds they need to make a down payment on the purchase of a home individuals are eligible to receive assistance from the downpayment assistance program if they are low-income individuals have the employment history and financial history necessary to qualify for a mortgage and would so qualify but for the lack of adown payment to fund its down payment assistance program and other activities the organization conducts a broad based fundraising program that attracts gifts grants and contributions from several foundations businesses and the general_public in situation x’s grantmaking process is structured to ensure that its staff awarding grants does not know the identity of the party selling the home to the grant applicant or the identities of any other parties such as real_estate agents or developers who may receive a financial benefit from the sale the staff also does not know whether any of the interested parties to the transaction have been solicited for contributions to the organization or have made pledges or actual contributions to the organization further the organization does not accept any contributions contingent on the sale of a particular property or properties in situation the revenue_ruling held the organization qualifies for exemption because its purposes and activities relieve the poor distressed and underprivileged by enabling low-income individuals and families to obtain decent safe and sanitary homes the way the organization conducts its down payment assistance program establishes that its primary purpose is to address the needs of its low-income grantees the organization conducts a broad based fundraising program and receives support from a wide array of sources their policies of ensuring that its grantmaking staff does not know the identity or contributor status of the party selling the home to the grant applicant or any other party who may receive a financial benefit from the sale page of department of the treasury-internal revenue service form 886-a schedule number or exhibit form rav date 886-a explanation of items tax identification_number year period ended 20xx name of organization taxpayer further there is a direct correlation between the amount of the down payment ahs and of not accepting contributions contingent on the sale of any particular properties ensure that it is not beholden to any particular donors or other supporters whose interest may conflict with that of the low-income buyers the organization is working to help in situation y is a nonprofit corporation that is like x in all respects as set forth in situation except as follows under y’s grantmaking procedures y’s staff considering a particular applicant's application knows the identity of the party selling the home to the grant applicant and may also know the identities of other parties such as real_estate agents and developers who may receive a financial benefit from the sale moreover in substantially_all of the cases in which y provides down payment assistance to a home buyer y receives a payment from the home seller assistance provided by y in connection with each of these transactions and the amount of the home seller’s finally y does not conduct a broad based fundraising campaign to attract financial support payment to y rather most of y’s support comes from home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive y’s down payment assistance in situation the revenue_ruling held y does not qualify as an organization described in sec_501 to finance its down payment assistance activities y relies on sellers and other real-estate related businesses that stand to benefit from the transactions y facilitates furthermore in deciding whether to provide assistance to a low-income applicant y’s grantmaking staff knows the identity of the home seller and may also know the identities of other interested parties and is able to take into account whether the home seller or another interested_party is willing to make a payment to y y’s receipt of a payment from the home seller corresponding to the amount of the down payment assistance in substantially_all of the transactions and y’s reliance on these contributions for most of its funding indicate that the benefit to the home seller is a critical aspect of y’s operations in this respect y is like the organization considered in easter house which received all of its support from fees charged to adoptive parents so that the business_purpose of the adoption service became its primary goal and overshadowed any educational or charitable purpose like the organization is structured and operated to assist private parties who are considered in american campaign academy y affiliated with its funders like the organizations considered in american campaign academy easter house and columbia park recreation association y also serves an exempt_purpose but because y is not operated exclusively for exempt purposes y does not qualify for exemption from federal_income_tax as an organization described in sec_501 in situation z is a nonprofit corporation formed to combat community deterioration in an economically depressed area that has suffered a major loss of population and jobs studies have shown that the average income in the area is below the median level for the state community groups to develop an overall plan to attract new businesses to the area and to provide stable sources of decent safe and sanitary housing for the area residents without relocating them outside the area as part of the renewal project z receives funding from government agencies to build affordable housing units for sale to low and moderate-income families asa substantial part of its activities z makes down payment assistance available to eligible home buyers who wish to purchase the newly-constructed units from z z also offers financial counseling seminars and conducts other educational activities to help prepare potential low and moderate-income home buyers for the responsibility of home ownership to fund its down payment assistance program and other activities z conducts a broad based fundraising program that attracts gifts grants and contributions from several foundations businesses and the general_public z cooperates with government agencies and department of the treasury-internal revenue service page of form 886-a schedule number or exhibit poe ev date name of organization taxpayer org tax identification_number year period ended 20kx explanation of items in situation the revenue_ruling held that although z does not limit its down payment assistance prorgam to low-income recipients z’s down payment assistance program still serves a charitable purpose described in sec_501 because it combats community deterioration in a specific economically depressed area that has suffered a major loss of population and jobs through a combination of counseling and financial assistance z helps low and moderate-income families in that area to acquire decent safe and sanitary housing and to prepare for the responsibilities of home ownership in this respect z is like the organization described in situation of revrul_70_585 because z is operated exclusively for charitable purposes z qualifies for exemption from federal taxation as an organization described in sec_501 the revenue_ruling concluded that down payment assistance payments for home buyers in situation sec_1 and are made by those organizations out of a detached and disinterested generosity and from charitable or like impulse rather than to fulfill any moral or legal duty and thus qualify for exclusion from such home buyers’ gross incomes as gifts under sec_102 the benefits provided to the home buyers in these circumstances are sufficiently removed from the interests of any home sellers or sales agents that they proceed from a detached and disinterested generosity on the part of the donor organization and such grants lack the indicia of a rebate in situation the organization is not operated exclusively price adjustment or guid pro quo incident to a sale for charitable purposes and consequently does not qualify for exemption from federal_income_tax as an organization described in sec_501 benefiting private interests even if an organization's activities serve a charitable_class or are otherwise charitable within the meaning of sec_501 it must demonstrate that its activities serve a public rather than a private interest within the meaning of reg sec_1_501_c_3_-1 revrul_72_147 1972_1_cb_147 held that an organization that provided housing to low income families did not qualify for exemption under sec_501 because it gave preference to employees of business operated by the individual who also controlled the organization the ruling reasoned that although 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 in kj's fund raisers v commissioner t c memo aff'd u s app lexis 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization’s board the tax_court found and the second circuit agreed that the founders exercised substantial influence over the affairs of the organization the organization’s business consisted of selling lucky or similar instant win lottery tickets to patrons of kj's place the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations the lottery tickets were sold during regular business hours by the owners of the lounge and their employees from the proceeds of the sales of the lottery tickets the organization made grants to a variety of charitable organizations although supporting charitable organizations may be a charitable activity the tax_court nevertheless upheld the commissioner’s denial of exemption to the organization on the ground that the page of department of the treasury-internal revenue service form 886-a schedule number or exhibit form 886-a rev date explanation of items year period ended tax identification_number name of organization taxpayer org organization’s operation resulted in more than incidental private benefit the tax_court held and the second circuit affirmed that a substantial purpose of kj's activities was to benefit kj’s place and its owners by attracting new patrons by way of lottery ticket sales to kj's place and by discouraging existing customers from abandoning kj's place in favor of other lounges where such tickets were available thus the organization was not operated exclusively for exempt purposes within the meaning of sec_501 20xx effective date of revocation an organization may ordinarily rely on a favorable determination_letter received from the internal_revenue_service sec_1_501_a_-1 revproc_2003_4 dollar_figure cross-referencing dollar_figure et seq 2003_1_cb_123 an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely on a favorable determination if there is a material_change inconsistent with exemption in the organization’s character purposes or methods of operation after the determination_letter is issued sec_601_201 revproc_90_27 1990_1_cb_514 the commissioner may revoke a favorable determination_letter for good cause sec_1 a -1 a revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented sec_601 n i revproc_2003_4 dollar_figure cross-referencing dollar_figure et seq government’s position in order for an organization to be tax exempt it needs to demonstrate that it meets the both the organizational and the operational tests the facts stated above indicate that org failed the operational_test when org applied for exempt status in october 20xx the irs initially concluded that org did not meet the operational_test of sec_501 of the code because the motto activities do not further an exempt_purpose but rather provide benefits to private persons org responded to the irs’ initial position with a declaration that org will comply with revproc_96_32 to provide services to charitable classes and agree not to require sellers to pay a fee to participate in the motto however based on the examination org did not operate as it stated it would org’s motto does not operate in a manner that establishes that its primary purpose is to address the needs of low-income people by enabling low-income individuals and families to obtain decent safe housing see revrul_2006_27 situation the motto did not serve exclusively low-income persons org does not have any income limitations for participation in its motto program the program is open to every homebuyer without any income limitations who otherwise qualified for financing from a lender org’s motto program does not limit assistance to certain geo graphic areas or target those areas experiencing deterioration or neighborhood tensions see revrul_2006_27 situation motto is available for any property that is otherwise able to qualify for a mortgage arranging or facilitating the purchase of homes in a broadly defined geographic area does not combat community deterioration or serve other social welfare objectives within the meaning of sec_501 of the code department of the treasury-internal revenue service page of form 886-a schedule number or exhibit explanation of items orm name of organization taxpayer ry vaanparied ended tax identification_number org org’s motto program provided a private benefit to various parties like the organization considered in 92_tc_1053 org is structured and operated to assist the private parties who fund it and give it business sellers who participate in org’s motto program benefit from achieving access to a wider pool of buyers thereby decreasing their risk and the length of time the home is on the market they also benefit by being able to sell their home at the home’s full listed price or by being able to reduce the amount of the negotiated discount on their homes buyers who participate in org’s motto program benefit by being able to purchase a home without having to commit more of their own funds it is evident from the foregoing that org’s motto program provides ample private benefit to the various parties in each home sale 20xx the manner in which org operated its motto program shows that the private benefit to the various participants in org’s activities was the intended outcome of org’s operations org’s motto procedures are designed to channel funds in a circular manner from the sellers to the buyers and back to the sellers in the form of increased home prices to finance its motto activities org relies exclusively on sellers org neither solicits nor receives funds from other sources org requires the home seller to pay it dollar-for-dollar for the amount of funds expended to provide motto on the seller’s home plus an administrative fee of several hundred dollars per home sale org’s receipt of a payment from the home seller corresponding to the amount of the motto in virtually every transaction indicates that the benefit to the home seller and others involved in the transaction is not a mere accident but rather an intended outcome of org’s operations in this respect org is like the organization considered in co-1 which provided health care to indigent pregnant women but only when a family willing to adopt a woman’s child sponsored the care financially org’s promotional material and its marketing activities show that org operated in a manner 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 one or more of the charitable purposes enumerated in sec_501 the manner in which org operated its motto program shows that org was in the business of facilitating the sales of homes in a manner indistinguishable from an ordinary trade_or_business in this respect org’s operations were similar to an organization which was denied exemption because it operated a conference center for commercial purposes see 283_fsupp2d_58 d d c operating a trade_or_business of facilitating home sales is not an inherently charitable activity unlike the trade_or_business in 71_tc_202 org’s trade_or_business was not utilized as a mere instrument of furthering charitable purposes but was an end in itself org provided services to home sellers for which it charged a market rate fee org did not market its services primarily to persons within a charitable_class org did not solicit or receive any funds from parties that did not have interest in the down payment transactions like the organizations considered in american campaign academy supra and easter house v u s cl_ct aff'd 846_f2d_78 fed cir a substantial part of org’s activities furthered commercial rather than exempt purposes org operates a program does not exclusively serve an exempt_purpose described in sec_501 therefore the service determines that org does not qualify for exemption from federal_income_tax under sec_501 effective january 20xx org is liable to file corporate_income_tax return form_1120 for year 20xx and years after -_ department of the treasury-internal revenue service page of form 886-a schedule number or exhibit 886-a f rev date name of organization taxpayer oe tax identification_number year period ended 20xx explanation of items taxpayer’s position the taxpayer states that it provided the american dream of homeownership to low to moderate income families gifts granted to families above the median family income by providing motto there were only which equal sec_11 of the total amount granted the majority which equals was given to families in the low and very low median family income range the taxpayer provided properties’ transaction documents to support the above figures outofthe conclusion the taxpayer declared that org would comply with revproc_96_32 to provide services to charitable classes and agree not to require sellers to pay a fee to participate in the motto when they applied for its exempt status in 20xx org did not comply with revproc_96_32 for the year under examination org gave grants which equal sec_11 of its total grants to families above the median family income therefore org’s motto did not serve exclusively low-income persons also to finance its motto activities org relies exclusively on sellers org requires the home seller to pay it dollar-for-dollar for the amount of motto on the seller’s home plus an administrative fee org’s motto procedures are designed to channel funds in a circular manner from the sellers to the buyers and back to the sellers in the form of increased home prices org’s motto program provided a private benefit to various parties org is structured and operated to assist the private parties who fund it and give it business sellers who participate in org’s motto program benefit from achieving access to a wider pool of buyers and also benefit by being able to sell their home at the home’s full listed price or by being able to reduce the amount of the negotiated discount on their homes buyers who participate in org’s motto program benefit by being able to purchase a home without having to commit more of their own funds motto org operates a program that does not exclusively serve an exempt_purpose described in sec_501 of the code therefore the service determines that org does not qualify for exemption from federal_income_tax under sec_501 effective january 20xx org is liable to file corporate_income_tax return form_1120 for year 20xx and years after department of the treasury-internal revenue service page of form 886-a tax_exempt_and_government_entities_division department of the treasury internal_revenue_service n los angeles street ms los angeles ca taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax org address certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in if we issue a determination_letter to you based on technical_advice no publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f lf we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo e xaminations enclosures publication publication report of examination letter catalog number 34809f