department of the treasury internal_revenue_service washington d c date number release date cc pa apjp br3 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel strategic litigation - chicago large and mid-size business cc lm rfp sl chi from assistant chief_counsel administrative procedures judicial process cc pa apjp by curt j wilson subject using partnership items to determine a partner’s outside_basis this field_service_advice responds to a request of date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend year year dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref x y lp sc z issues whether respondent should assert that the tax_court has jurisdiction under sec_6214 to consider proposed adjustments to partnership items of a tefra partnership for partnership years not before the court in the course of determining a partner's basis in his or her partnership_interest what consideration should respondent give to the partnership items of multi- tiered tefra partnerships for the purpose of determining a partner's basis in a partnership_interest conclusion respondent should not rely upon sec_6214 as a basis for considering proposed adjustments to partnership items of a tefra partnership for partnership years not before the court in this deficiency proceeding respondent must consider but generally may not adjust any partnership items of a partnership that may affect the determination of a partner’s basis in a partnership_interest facts during year lp a partnership subject_to administrative and judicial procedures in sec_6621 through ie a tefra partnership was liquidated and distributed its assets to a new partnership formed by those persons holding direct and indirect partnership interests in lp during year and the relevant preceding years lp was a partnership between x z and sc sc was the general_partner while x and z held the limited_partnership interests x was the sole shareholder in sc a corporation subject_to tax under subchapter_s of the internal_revenue_code to acquire his partnership_interest in lp in year x had contributed to lp depreciable and nondepreciable real_property with a fair_market_value of dollar_figurea on which there was a secured debt of dollar_figureb to an unrelated third party x had acquired the property for dollar_figurec and had taken depreciation of dollar_figured on the property when the contribution to lp was made when lp was liquidated the property had a fair_market_value of dollar_figuree for the tax years between lp’s receipt of the property and its distribution lp reported additional_depreciation and made payments to reduce the amount of the secured debt the service issued a notice_of_deficiency to x and y in which the service attributed a basis of dollar_figuref to x for his partnership_interest in lp at the time of lp’s liquidation the tax_court petition alleges that the service is required to allow x a higher basis in lp based upon the partnership items reported by lp since x’s acquisition of his partnership_interest x further alleges that he is entitled to use the alternative method of determining his basis if his substantiation of basis under sec_705 is deemed insufficient legal analysis the partnership provisions in title iv of the tax equity and fiscal responsibility act of tefra publaw_97_248 sec 96_stat_324 established a unified_audit and litigation process under code sec_6221 through for determining the tax treatment of partnership items at the partnership level for partnership tax years beginning after date these tefra provisions created a statutory dichotomy between the procedures applicable to the determination of tax deficiencies and overpayments under sec_6211 through of the code and the procedures applicable to the administrative adjustment and judicial readjustment of partnership items under sec_6621 through see 205_f3d_54 2d cir aff’g sann v commissioner tcmemo_1997_259 64_f3d_101 2d cir 519_us_815 and 87_tc_783 the tefra unified_audit rules for partnerships apply to taxable years of partnerships such as lp’s year that began after date in the interest of providing consistent treatment for all partners in a partnership the tefra partnership provisions require adjustments to partnership items to be made at the partnership level in a separate tefra partnership proceeding sec_6221 the service is generally prohibited from assessing a deficiency regarding a partnership_item without first making the appropriate adjustments to the partnership items in a partnership level proceeding sec_6225 the service however may adjust nonpartnership_items including affected items under the existing deficiency procedures see 102_tc_550 87_tc_783 sec_6231 defines a partnership_item as any item that is required to be taken into account for the partnership’s taxable_year under any provision of the code to the extent that service regulations provide that the item is more appropriately determined at the partnership level than at the partner level n c f energy partners v commissio89_tc_741 treasury regulations define partnership items to include the partnership’s aggregate and each partner’s share of i tems of income gain loss deduction or credit of the partnership sec_301_6231_a_3_-1 partnership items also include factors affecting the determination of other partnership items sec_301_6231_a_3_-1 thus the determination of each partner’s share of a partnership’s income gain loss deductions or credits is a partnership_item that can only be adjusted in a partnership proceeding see 99_tc_298 allocating partners’ share of losses woody v commissioner 95_tc_132 allocating guaranteed payments among partners an affected_item is any item on a partner’s return to the extent that it is affected by a partnership_item sec_6231 102_tc_550 affected items can be either computational adjustments which the service can make to reflect the adjustment of partnership items without issuing a notice_of_deficiency sec_6231 or items that require a factual determination at the individual partner level using the deficiency procedures see n c f energy partners v commissio89_tc_741 either type of affected_item may be determined only after the partnership items or items upon which it is based are established by definition affected items are not partnership items thus they are not subject_to determination at the partnership level section a a i authorizes the service to issue a notice_of_deficiency for affected times that require partner level determinations further if the service is not contesting the partnership items as reported by the partnership the service is not required to conduct an examination of the partnership returns before issuing a notice_of_deficiency to contest an affected_item see 102_tc_550 94_tc_853 in jenkins a partner terminating her interest in a partnership reported a distribution she received from the partnership for agreeing not to exercise rights to have premiums waived under a life_insurance_policy as being exempt from income under sec_104 the partnership reported the distribution as a guaranteed_payment under sec_707 after the taxpayer filed a notice of inconsistent treatment the service issued a notice_of_deficiency to the taxpayer disallowing the tax exempt treatment of the payment under sec_104 the taxpayer claimed that the notice was invalid because the service sought to make a partnership_adjustment without first conducting a partnership audit under the tefra procedures the tax_court in considering the service’s handling of the notice of inconsistent treatment agreed with the service that the determination did not involve an adjustment to a partnership_item and that it was properly raised in a notice_of_deficiency entitlement to tax exempt treatment under sec_104 was best determined at the partner’s level as long as the service did not contest the partnership’s reported characterization of the distribution under sec_707 the service was not required to follow the tefra_audit procedures the court concluded that the claimed exemption from tax under sec_104 was an affected_item that the service properly addressed in a notice_of_deficiency in 94_tc_853 the taxpayers claimed losses from three tefra partnerships the service did not conduct tefra audits for any of the partnerships and the statute_of_limitations expired without any partnership level adjustments being made the service issued a notice_of_deficiency to the taxpayer denying the carryback of the taxpayers’ reported share of partnership losses because the taxpayers were not at risk for the losses under sec_465 finding that the at risk determination was an affected_item and that acceptance of the partnership return as filed served as the outcome of any partnership proceeding the tax_court found it had jurisdiction to consider the affected_item in the deficiency case before it in this case the service has not proposed any adjustment to the income and losses reported by lp either on its form_1065 u s partnership return of income or on the schedule_k-1 it issued to x for each of the years at issue or for any related years instead the service is contesting x’s basis in lp for purposes of determining the amount of the gain_or_loss to be recognized by x on the dissolution of lp and its distribution of assets the service’s determination does not affect the amount of the income losses or other partnership items reported by lp for the year at issue as in jenkins v commissioner and in roberts v commissioner that determination would properly be made in a notice_of_deficiency issue tax court’s jurisdiction under sec_6214 in determining x and y’s tax_liability including overpayments for year the court has jurisdiction to consider transactions in other years that affect the taxes in those years sec_6214 gives the tax_court jurisdiction - to consider such facts with relation to other years and other quarters as may be necessary correctly to redetermine the amount of the deficiency for the year before the court but in so doing shall have no jurisdiction to determine whether or not the tax for any other year has been overpaid or underpaid the tax_court has previously held that it may consider whether the taxpayer actually incurred the loss as claimed or would have exhausted the loss by using it in years other than the year before the court when a taxpayer claims the benefits of the carryover of a net_operating_loss to the year before the court leitgen v commissioner u s t c 8th cir aff’g tcmemo_1981_525 substantiation of claimed nol was considered in determining whether loss was available to be carried forward to and 231_f2d_420 2d cir aff’g tcmemo_1955_28 adjustments to income in were considered in determining how much of nol was available for use in 61_tc_436 aff’d without published op 510_f2d_970 3d cir nols available for use in could not be used in and 56_tc_1083 aff’d on other grounds 482_f2d_150 3d cir commissioner could recompute income for closed short taxable_year to determine how much of carried back nol was available in a succeeding year whether the respondent could question adjustments to partnership items reported by lp to x in the years preceding year however presents another issue any adjustments to the partnership items reported by lp and of x’s share of those items would involve the redetermination of losses_incurred and reported by the partnership under the tefra procedural rules the partnership items reported on lp’s partnership returns are partnership items that can only be redetermined in a tefra partnership action see sec_6221 through on this issue sec_6214 appears to be in conflict does the tax court’s authority to consider facts with relation to the taxes for other years or calendar quarters under sec_6214 extend to the consideration of partnership items arising in those years in at least one case durrett v commissioner tcmemo_1994_179 the tax_court concluded that sec_6214 could be applied to make adjustments to partnership items in that case the taxpayers filed a motion asking to amend the petition to raise the carryback of their share of reported partnership losses from another tax_year the service countered by arguing that it should be able to challenge the validity of the claimed partnership losses in the pending deficiency proceeding the court agreed that it had authority to consider adjustments to the partnership losses under sec_6214 as part of its consideration of the taxpayer’s claimed carryback of the losses if it agreed to consider the carryback finding that raising the new issue including the partnership adjustments was unduly burdensome the court denied the taxpayer’s petition to raise the new issue in its opinion in 87_tc_783 however the tax_court distinguished between the consideration of adjustments to partnership items and the consideration of affected items mr maxwell one of the taxpayers in that case formed a limited_partnership in date with limited partners and himself as the general_partner while a partnership audit for the tax_year was pending the service issued a notice_of_deficiency to the maxwells determining deficiencies and additions to the tax for the years and the proposed deficiencies for resulted in part from the disallowance of mr maxwell’s claimed distributive_share of partnership losses and investment tax_credits for the and deficiencies were attributable to the maxwells’ claimed carryback of part of the disallowed investment_tax_credit to those years the service had not completed the partnership audit and had not issued an fpaa to the partners when the notice_of_deficiency was issued as the parties were reaching a basis for settling the case the service reconsidered the notice_of_deficiency and concluded that the partnership’s losses and investment tax_credits were partnership items the service filed a motion to strike the partnership items and affected items from the petition for lack of jurisdiction on the grounds that the tax_court had no jurisdiction to consider them unless they were raised in a tefra petition filed after an fpaa had been issued for the partnership the court granted the motion in explaining its lack of jurisdiction the court analyzed the purpose underlying the tefra partnership audit process and raised several key points - - - - the service has no authority to assess a deficiency attributable to a partnership_item until after the close of the partnership proceeding sec_6225 and may be enjoined from making premature assessments maxwell pincite all nonpartnership matters on a partner’s income_tax return continue to be subject_to existing rules for administrative and judicial resolution of the partner’s tax_liability neither the service nor the taxpayer are permitted to raise nonpartnership_items in the course of a partnership proceeding nor may partnership items be raised in proceedings relating to nonpartnership_items of a partner unless the partnership items are converted to nonpartnership_items h rep 97th cong 2d sess pincite 1982_2_cb_600 pincite maxwell pincite because sec_6226 makes the issuance of an fpaa a condition_precedent to the exercise of its jurisdiction over a partnership action the tax_court has no jurisdiction over partnership items until an fpaa is issued for the partnership maxwell pincite losses and credits claimed by a partnership are partnership items unless some provision of the statute transmits them into none of the partnership items reported on the partnership returns filed by lp have been converted into nonpartnership_items under sec_6231 nonpartnership_items sec_301_6231_a_3_-1 and vi a maxwell pincite - the existence or the amount of carrybacks of the investment tax_credits or nols from the year in which the partnership claimed the credits or losses to other years are affected items as defined in sec_6231 that are dependent upon the determination of a partnership_item -- such as the amount of the partnership loss or the credit - and cannot be considered until the partnership_item is resolved maxwell pincite the tax court’s analysis in maxwell if applied to this case would prohibit the consideration of adjustments to the partnership items the tax_court may consider the partnership items only in a partnership proceeding not in a deficiency proceeding even if an fpaa has been issued 95_tc_560 partner could not reduce his liability for tax on nonpartnership_items by using items attributable to a partnership if there have been no partnership proceedings in which an fpaa might be timely issued and there can no longer be a partnership proceeding under the normal statute_of_limitations the only possible outcome of the partnership proceeding is the acceptance of the partnership return as filed 94_tc_853 in this case where the service has not issued an fpaa to question the partnership items reported by lp the court’s analysis in maxwell would lead to the conclusion the tax_court does not have jurisdiction to adjust those items in a deficiency proceeding issue determining a partner’s basis in the partner’s partnership_interest sec_705 of the code governs the determination of a partner’s basis in the partner’s partnership_interest a partner is required to determine the adjusted_basis of the partner’s partnership_interest only when necessary to determine the partner’s or any other person’s tax_liability ordinarily this determination is made as of the end of a partnership’s taxable_year however where there has been a sale_or_exchange of all or a part of a partner’s partnership_interest or a liquidation of a partner's entire_interest in a partnership the adjusted_basis of the partner's interest should be determined as of the date of sale_or_exchange or liquidation the adjusted_basis of a partner's interest in a partnership is determined without regard to any amount shown in the partnership books as the partner's capital equity or similar account under sec_1_705-1 a partner’s basis in the partner’s partnership_interest is determined by taking the original_basis of the partner’s partnership_interest determined under either sec_722 relating to contributions to a partnership or sec_742 relating to transfers of a partnership_interest as applicable and increasing that original_basis by any subsequent partnership contributions under sec_722 and by the sum of the partner's_distributive_share for the taxable_year and prior taxable years of i taxable_income of the partnership as determined under sec_703 ii tax-exempt receipts of the partnership and iii the excess of the deductions for depletion over the basis of the depletable_property unless the property is an oil or gas property the basis of which has been allocated to partners under sec_613a a partner’s basis in the partner’s partnership_interest is then decreased under sec_733 but not below zero by the amount of any money distributed to the partner and the amount of the basis to such partner of distributed property other than money and by the sum of the partner's_distributive_share for the taxable_year and prior taxable years of i partnership losses including capital losses and ii partnership expenditures which are not deductible in computing partnership taxable_income or loss and which are not capital expenditures finally a partner’s basis in the partner’s partnership_interest is adjusted by any change in the partner’s share of the partnership’s liabilities under sec_752 in certain cases however the adjusted_basis of a partner's interest in a partnership may be determined by reference to the partner's share of the adjusted_basis of partnership property which would be distributable upon termination of the partnership sec_1_705-1 a taxpayer may use the alternative rule to determine the adjusted_basis of the partner's interest where circumstances are such that the partner cannot practicably apply the general_rule set forth in sec_705 or where from a consideration of all the facts it is in the opinion of the commissioner reasonable to conclude that the result produced will not vary substantially from the result obtainable under the general_rule where the alternative rule is used adjustments may be necessary in determining the adjusted_basis of a partner's interest in a partnership adjustments would be required for sec_705 also contains some special basis_adjustment rules that based on the facts provided may not be relevant here see sec_1_705-1 and revrul_99_57 1999_51_irb_678 revrul_96_11 1996_1_cb_140 revrul_96_10 1996_1_cb_138 and revrul_84_15 1984_1_cb_158 example in order to reflect in a partner's share of the adjusted_basis of partnership property any significant discrepancies arising as a result of contributed_property transfers_of_partnership_interests or distributions of property to the partners sec_722 provides that the basis of a partnership_interest acquired by a contribution of property including money to the partnership is the amount of the money and the adjusted_basis of the property to the contributing_partner at the time of contribution this basis amount is increased by the amount of gain if any the contributing_partner recognized under sec_721 on the contribution sec_752 governs the treatment of certain liabilities in general any increase in a partner’s share of the partnership’s liabilities or any increase in a partner’s individual liabilities by reason of the partner’s assumption of the partnership’s liabilities is considered as a contribution of money to the partnership by the partner sec_752 similarly any decrease in a partner’s share of the partnership’s liabilities or any decrease in a partner’s individual liabilities by reason of the partnership’s assumption of the partner’s liabilities is considered as a distribution of money to the partner by the partnership sec_752 thus for purposes of the tefra partnership provisions a partner’s basis in that partner’s partnership_interest is an affected_item under sec_6231 the calculation of basis is an affected_item because it is in part based on factors that are considered partnership items under sec_6231 see sec_301_6231_a_5_-1t b stating that basis in a partnership_interest is an affected_item to the extent that it is not a partnership_item for example although certain items considered in calculating a partner’s initial basis in the partner’s partnership_interest are not partnership items see sec_722 or sec_742 other components of the basis calculation would require partnership level determinations under sec_705 partnership taxable_income partnership tax-exempt receipts partnership depletion partnership’s basis in depletable_property partnership loss partnership nondeductible and noncapital expenditures partnership liabilities and if applicable the partnership items discussed in footnote supra in this case the determination of x’s basis in his partnership_interest at the time the partnership liquidated is an affected_item the tax_court would have jurisdiction to consider and adjust the nonpartnership components of x’s basis in his partnership 3in this case x has not shown that the use of the alternative method for determining basis is appropriate a mere allegation as an alternative theory is not sufficient grounds to apply the alternative method see 540_f2d_427 9th cir stating that taxpayers failed to show that circumstances were such that the taxpayers could not ‘practicably’ apply the general_rule of sec_705 interest ---- those factors x used to compute his initial basis in his partnership_interest under sec_722 the tax_court however would not have jurisdiction to adjust the partnership_item components of x’s basis in his partnership_interest ---- those factors x used to adjust his initial basis in accordance with sec_705 therefore unless challenged in a tefra proceeding those partnership items as reflected on a form_1065 or a schedule_k-1 of the source partnership --- the one in which x’s partnership_interest is to be determined --- must be accepted in determining the basis of that partnership_interest see roberts supra treas reg a -2t a case development hazards and other considerations our office is available to provide further assistance as you develop the facts in this case please call if you have any further questions


internal_revenue_service appeals_office release number release date date date certified mail dear department of the treasury employer_identification_number person to contact employee id number tel fax uil this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code it is determined that you do not qualify as exempt from federal_income_tax under sec_501 of the code effective xxxx our revocation was made for the following reason s you are not operated exclusively for exempt purposes as specified in sec_501 of the code because you are not engaged primarily in activities which accomplish an exempt_purpose a substantial part of your activities serve the private interests of individuals private interests served include the payment of tuition for families and students and which is not based on any objective criteria contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov if you were a private_foundation as of the effective date of the adverse determination you are considered to be taxable private_foundation until you terminate your private_foundation_status under sec_507 of the code in addition to your income_tax return you must also continue to file form_990-pf by the 15th day of the fifth month after the end of your annual_accounting_period processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code we will make this fetter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you ina separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c see also publication you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matters that may not have been resolved through normal channels get prompt and proper handling f you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours appeals team manager enclosure publication and or yi department of the treasury internal_revenue_service te_ge exempt_organizations examinations date date taxpayer_identification_number form_990 ez tax_year s ended april 20xx - april 20xx person to contact id number contact numbers phone number fax number manager's name id number manager's contact number phone number response due_date september 20xx certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the letter rev catalog number 34809f irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't 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 internal_revenue_service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f department of the treasury - internal revenuc service may 20xx fo tm a name of taxpayer year period ended april 20xx-20xx org explanation of items issue whether the tax exempt status of a 501_c_3_organization which has failed to demonstrate that it is operated exclusively for charitable purposes and which acts as a conduit for a foreign organization should be revoked alternative issue whether contributions to the tax exempt status of a 501_c_3_organization which acts as a conduit for a foreign organization should be deductible under sec_170 c facts organization and purpose org org or the eo was organized as a non-profit corporation in the state of state on april 20xx the following individuals were named as initial directors director-1 director-2 president treasurer secretary the address listed for all directors is address city state zip code county county property records show that address as a residence owned by individual-1 and individual-2 the organization uses this address to the present day the articles list the organization's primary purpose as providing financial support to org and other institutions and to indigent individuals and families on november 20xx treasurer treasurer filed amended articles that expanded the purpose to provide financial support to org and needy individuals and families to provide student holiday and fellowship stipends to support jewish education to fund jewish outreach events weekends and trips and to fund room and board for students attending jewish institutions in addition to providing support to jewish education the eo makes contributions to the other schools in country including xxxx xxxxx and xxxxxx form_1023 application and related correspondence org submitted form_1023 application_for recognition of exemption under sec_501 on september 20xx the following individuals were named as officers president president treasurer treasurer secretary secretary form 886-acev department of the treasury - internal_revenue_service page -1- f om department of the treasury - internal revenuc service may 20xx a year period ended name of taxpayer explanation of items april 20xx-20xx org activities listed in part il of form_1023 are to support the operation of religious schools in the u s and abroad these schools will involve themselves in the study of the bible talmud and other religious subject matter in the jewish tradition the support will be to bona-fide institutions of jewish education located in the u s and aboard sic the organization will not and sic issue direct aid or assistance to any individuals the organization will not have any voice in these matters or visa sic versa based on the org's form_1023 application and several rounds of subsequent correspondence over a sixteen month period the internal_revenue_service stated in a letter january 20xx that at this point your activities indicate that you are in effect operating as a conduit for a foreign organization the foreign organization appears to be furthering charitable and educational_purposes and you may be recognized as exempt under sec_501 but you will not have deductibility the reasons given for regarding the organization as a conduit were supported by an example from revrul_63_252 were e e the foreign organization caused the domestic organization to form the organization's organizing document refers to supporting a specified foreign organization and publicity regarding donations represents that funds raised through the exempt_organization for the supported_organization will be deductible specifically e e e org stated during correspondence that it was formed to further the purpose of org org stated in its articles of incorporation that its primary focus is to provide financial support to org and org stated on its web site that donations can be made deductible in the u s if made through org the organization disagreed with this assessment and provided additional statements and information in responses of february 20xx and april 20xx in a letter dated june 20xx based on the additional written testimony the irs determined that the organization was no longer considered a foreign conduit and allowed deductibility of donations the reasons given for no longer regarding the organization as a conduit were e e e the org's web site no longer directed donors to org org described its grant program as independent of the org and org described how funds it donated were under its full discretion and control org accepted this determination in a letter dated june 20xx the final_determination letter was issued by the internal_revenue_service on july 20xx form 886-a crev department of the treasury - internal_revenue_service page -2- form_886 a department of the treasury - internal_revenue_service may 20kx year period ended name of taxpayer explanation of items april 20xx-20xx org related individuals and organizations org the org located in city country has been exempt under c as a school since december 19xx the organization's form_990 return for the period ended december 20xx return lists the following officers president president city country treasurer vice-president city country its form_990 for the period ending december 20xx states its program service accomplishments as provider of education note the 20xx form_990 is the last return filed by the org org is described by org in correspondence related to the form_1023 application as a post high school institution of higher learning located in country which caters to english speaking male students between the ages of to the overwhelming majority of student come from the united_states the boys study subjects at intermediate and advanced level in jewish law jewish history bible ethics etc in addition there are recreational activities centering on jewish life style and awareness of the jewish life cycle and jewish holidays the goal of the school is to increase awareness of the role of judaism in the life cycle of the students the students study abroad for a period of one to two years after completing high school in the u s upon completion of their period of study in country the students return to colleges and universities in the u s the students of org can receive u s college credits for their studies -abroad org has a web site address www xxxxx however its home page does not contain any hyperlinks several pages are available as stand-alone documents using an internet search the latest update to any of the pages appears to be 20xx xxxxx currently located in city state has been exempt under c since september 19xx its form_990 returns list the following officers president-2 president city state formerly of city state treasurer sec treasurer city state formerly of city state the organization's purpose is described as raising funds for org education note its articles were amended on december 20xx to change its name to org its form_990 return for the period ended april 20xx shows the new name exempt_organizations are required to notify the irs of significant changes however the irs database does not show receipt of updated information form 886-a cev department of the treasury - internal_revenue_service page -3- may 20xx form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer year period ended april 20xx-20xx org org org summary of overlapping org board members of the three related_organizations treasurer treasurer and co- vice-president founder president and co- president founder sec treasurer president grants to organizations the following information was requested on information_document_request issued xx xx with answers received from the organization xx in italics provide a listing of the total number of grants made outside of the u s a to organizations this listing should include the country or countries to which the grants have been made the amount distributed for each grant and the purpose of each grant response organization country country amount - year amount - year purpose ended xx ended xx dollar_figure dollar_figure torah education-1 torah education-2 torah education-3 jewish education country dollar_figure dollar_figure country country dollar_figure dollar_figure dollar_figure higher education higher education higher education higher education during the pre-grant process how does your organization inquire about the foreign grant recipient’s general financial status its history and past activities as well as its operational ability to accomplish the grant’s purpose response received xx during the pre-grant process members of the organization visit the offices of the grant recipient if subsequent grants are made to foreign grant recipients what type of follow-up does the eo conduct to determine whether or not the foreign grant recipient continues to have the operational ability to accomplish the grant’s purpose response received xx periodic follow-up visits to the grant recipients' premises form 886-a rev department of the treasury - internal_revenue_service page -4- department of the t reasury - internal_revenue_service may 20xx form_88 a year period ended name of taxpayer explanation of items april 20xx-20xx org does your organization refer to the ofac sdgt office of foreign asset control specially designated global terrorist list to determine if the foreign grant recipient is included on the list of possible terrorist activity organizations if not what process does your organization use response received xx no during the grant application process are the foreign grant recipients required to complete an application if so please make available all copies of such applications response received xx no official documentation is requested is the foreign grant recipient required to provide a detailed description of their project if so how is this information conveyed to your organization response received xx n a does your organization accept applications from individuals not connected with a particular organization if so please provide a listing of all individuals who have applied for a grant in the periods ending april 20xx-20xx response received xx no how are grant applications or requests reviewed and approved please provide detailed guidelines with respect to the entire review process including the levels of review and approval within your organization response received xx the board_of directors reviews and approves the grants note board meeting minutes which would have documented the review and approval process were requested as part of the examination but not provided does the board_of directors approve or disapprove the grants prior to notification to the foreign grant recipient if so are these actions documented in the minutes response received xxx see above are grants ever approved in variance with the amount requested if so please provide examples response received xx no are grant recipients required to certify that funds will be used solely for charitable purposes if so how is this accomplished response received xx the grants are given for educational_purposes form 886-a rev department of the treasury - internal_revenue_service page -5- department of the treasury - internal_revenue_service may 20xx forn a year period ended name of taxpayer explanation of items april 20xx-20xx org provide any agreements or documentation that set forth standards to enable measurement of the foreign grant recipient's progress toward grant goals response received xx n a in a letter dated august 20xx the organization states as far as monitoring the use of funds the org is a serious institution and there is no doubt all of the funds are used in the course of educating the students note annual operating reports or financial reports for the org were requested as part of the examination but were not provided org states it provided dollar_figurex to org for the year ended april 20xx and dollar_figurex for the year ended april 20xx org states that the org charges tuition of dollar_figurex per student org provided student lists showing the org had approximately x students for the 20xx-20xx school year and x students for the 20xx-20xx school year org's form_990 for the year ended december 20xx reports receiving dollar_figurex in contributions and reports dollar_figurex in expenses the year ended december 20xx is the last year for which the org has filed a return grants to individuals the following information was requested on information_document_request issued xx xx with responses received from the organization xx in italics listing of the total number of grants made to individuals this listing should include provide a the names and tax identification numbers of grant recipients the amount distributed for each grant and the purpose of each grant for educational grants break out the amounts provided for tuition school fees books travel room board etc response received xx listing of total number of grants made to individuals see attached listing all grants were made for educational_purposes note breakdown of costs was not provided as requested describe the criteria used to select grant recipients including the rules of eligibility response received xx the recipients were selected on recommendation of their teachers describe how and by whom the recipients were selected including levels of review and approval and how selection is documented response received xx the recipients were interviewed and then approved by the members of the board_of directors form 886-a prev department of the treasury - internal_revenue_service page -6- foun a department of the treasury - internal_revenue_service may 20xx year period ended name of taxpayer explanation of items april 20xx-20xx org note board meeting minutes which would have documented the review and approval process were requested as part of the examination but not provided describe the process used to ensure the recipients used the grants for the intended purpose if the grants were made directly to students describe the process used to determine whether the students completed the education program for which the grants were provided response received xx n a note student attendance records progress reports and or grade reports were requested as part of the examination but not provided provide a copy of the grant scholarship application form and any brochures or literature describing the grant scholarship program response received xx the students come by recommendation note on august 20xx copies of org's student application form were provided as part of the examination the explanation provided states the following the org charges dollar_figurex annually for attendance at the school org provides scholarships for students based upon merit and upon need they do not provide any monies directly to any of the boys attending the org instead all scholarship money is transferred to the org itself later in the same letter it is stated that org pays fellowship stipends to senior students who demonstrate a willingness and aptitude for teaching jewish studies org also pays tutors on behalf of the parents in order to help them achieve more success in their studies are grants ever approved in variance with the amount requested if so please provide examples response received xx no are any agreements in place that reflect your organization’s discretion to withdraw approval if grant goals or charitable purposes are not met if applicable provide copies of such agreements response received xx no expenditure control the following information was requested on information_document_request issued xx xx with answers received from the organization xx in italics does your organization receive periodic reports from foreign grant recipients to track the use of grant funds if so how often are the reports received and what information is required to be contained in the reports f applicable please have these reports available upon request form 886-arev department of the treasury - internal_revenue_service page -7- form_886 a department of the treasury - internal_revenue_service may 20xx year period ended name of taxpayer explanation of items april 20xx-20xx org response received xx no note annual operating reports or financial reports for the org were requested as part of the examination but were not provided if reports and financial statements received from foreign grant recipients are not in english and or dollars are the reports and financial records converted to english and or dollars if so how is this accomplished if not indicate whether someone in your organization is fluent in the foreign grant recipient's language and what their position is response received xx n a are there specific individuals within the foreign grant recipient organization for whom to contact regarding the use of the grant funds if so please provide the contact information for each foreign grant recipient organization and indicate the position held by the contact person response received xx if contact is needed then the foreign organization's office is called there is no specific contact person does your organization periodically evaluate reports and financial statements for comparison purposes with the original grant proposal application if so how often does this take place and who is responsible for such evaluation and review if applicable please have these reports available upon request response received xx n a are on-site field audits of the foreign grant recipients performed by your organization if so please provide a detailed explanation of these on-site audits including how often they are performed and what reports are prepared if applicable please have these reports available upon request response received xx periodic visits are made to the foreign grant organizations note no written documentation of the visits was provided during the examination if your organization determines that funds granted to a foreign grant recipient are not accounted for what steps are taken to track the funds and if necessary recover unaccounted or misspent funds if applicable please provide documentation of actual instances where this has occurred response received xx n a if your organization determines that the foreign grant recipient organization has failed to satisfy accountability requirements is funding discontinued if so how does your organization notify the foreign grant recipient form 886-a ev department of the treasury - internal_revenue_service page -8- may 20xx form 886a department of the treasury - internal_revenue_service explanation of items year period ended name of taxpayet april 20xx-20xx org response received xx n a in contrast with the responses above that were provided in february 20xx org made the following representations in june 20xx correspondence related to its form sec_1023 application our funding to xxxxxx provides for tuition subsidies for poor students rental of study premises and dining facilities and recreational activities in addition they request funding to provide fellowship grants to graduate students to continue their studies do research and intern as student teachers the xxxxxxx contacts us periodically in writing about ongoing financial needs projects and other budgetary situations these written requests are considered at meetings of the board_of directors and donations are allocated accordingly xx we keep a file for all requests for contributions by organizations and individuals xx our board will not approve any distributions to xxxxxx or any other recipient without receiving a grant request or letter the board carefully reviews the request and acts thereon accordingly xx loans to and from related parties undocumented toans to and from related parties were reported on form_990 listed as assets or liabilities on form_990 but not reported on schedule l as required director-2 individual-3 loans receivable 20xx04 na 20xx04 dollar_figure na dollar_figure a loans payable 20xx04 dollar_figure 20xx04 dollar_figure na dollar_figure na dollar_figure org dollar_figure dollar_figure bg b in a letter dated june 20xx org states that loan receivable - director-2 was actually repayment of a loan director-2 had made to the organization earlier in the same fiscal_year regarding loan b the eo states that it borrowed dollar_figurex from board member director-1 in march 20xx which it repaid in may 20xx the eo states that it borrowed dollar_figure from individual-4 who is a relative of a board member this loan was not repaid in september 20xx the eo borrowed dollar_figurex from org this amount is still reported as outstanding on the form_990 for the year ended april 20xx none of the loans to or from the eo are documented in writing the eo states that there was no interest charged as it is against jewish religious teachings form 886-acrev department of the treasury - internal_revenue_service page -9- may 20kx department of the treasury - internal_revenue_service explanation of items form 886a name of taxpayer org year period ended april 20xx-20xx unreported payments to individuals org's general ledger for the two year period ending april 20xx shows a total of dollar_figurex in payments to individuals which were not reported on form_w-2 or form 1099-misc payments include wages stipends to instructors tutors or students rent payments to an officer employee and loan proceeds or repayments for which no contemporaneous loan documentation exists note the month of april 20xx is not included here because it is only one month of the quarterly employment_tax period ending june 20xx qtr covered by payments to individual s ledger account dollar_figure na f941 total comp f941 fed income_tax wh f941 unreporte total ss med dpmts to wages individuals dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure na transfers to org stipends transfers to org stipends transfers to org wages-fellowship transfers to org stipends stipends dollar_figure dollar_figure loans receivable undocumented rent paid to dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure _ officer employee dollar_figure dollar_figure stipends wages transferred to stipends dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure loans receivable undocumented rent paid to officer employee stipends wages transferred to stipends loans receivable undocumented stipend wages dollar_figure dollar_figure dollar_figure dollar_figure exam 20xx and 20xx total for qtr 20xx06 may and june total for qtr 20xx 20xx total for qtr 20xx 20xx 20xx total for qtr 20xx 20xx 20xx total for qtr 20xx 20xx 20xx 20xx 20xx total for qtr 20xx 20xx 20xx 20xx 20xx total for qtr 20xxxx 20xx03 20xx 20xx form 886-ackev department of the treasury - internal_revenue_service page -10- may 20xx form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer year period ended april 20xx-20xx org total for qtr 20xx april 20xx not incl here dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure it was in the fall of 20xx that the articles of incorporation were amended to include an expanded purpose that includes to provide student holiday and fellowship stipends to support jewish education to fund jewish outreach events weekends and trips and to fund room and board for students attending jewish institutions on the form_990 for the period ended april 20xx the eo reported stipends as contributions to org for the calendar_year ended december 20xx wages expense was reported as stipends the organization first started filing employment_tax forms in the calendar_year ended december 20xx in addition to direct payments to individuals the general ledger memo for contributions to torah-2 made in the period ended xx indicates student fellowships torah-2 made no grant application neither did it report on the use of the grants received torah-2 received dollar_figure from org in the period ended xx tuition payments the following accounting transactions were questioned on information_document_request dated xx 20xxx e e e according to the general ledger for the year ended april 20xx checks or transfers in the amount of dollar_figure were made to org however only dollar_figure was reported on form_990 as contributions to the org explain the difference in the general ledger and the form_990 according to the general ledger for the year ended april 20xx a liability account entitled due to jewish education was used instead of the usual contributions account for dollar_figure in deposits explain the use of a liability account in addition to the revenue account for contributions received according to the general ledger for the year ended april 20xx the due to jewish education account was zeroed out with year end journal entries with credits of dollar_figure to accounts_receivable and dollar_figure to transfers to org explain the reason for the journal entries and the relationship between the accounts in a written response received xx the eo provided the following explanation to the three items noted above as we understand it the correction was made because a portion of the funds recorded as contributions was actually a short term_loan form 886-a cev department of the treasury - internal_revenue_service page -11- year period ended name of taxpayer department of the treasury - internal_revenue_service explanation of items may 20xx april 20xx-20xx form_886 a org in a later written response dated june 20xx the eo provided this explanation for the transactions has had a history of tuition checks being lost in the mail when they are jewish education sent to it from the united_states to country purely as an accommodation to the parents located in the united_states who were remitting tuition to jewish education jewish education asked org if they would be willing to accommodate those payers of tuition by permitting them to deposit the funds to org which would then transfer to jewish education being that these were tuitions to jewish education and not donations to org no tax-deductible receipts were issued the fact that after org received tuition funds under this arrangement org was indebted in a like amount until the funds were transferred is why it was listed under liabilities instead of contributions in correspondence of xx related to the form sec_1023 application org stated when we receive a donation for the school we make it clear to the donor that we are prohibited by law to accept donations that are really tuition or in any other way a payment for services rendered a review of the student list from the form_1023 application correspondence shows the following overlap with the eo's schedule b donor name on schedule b 20xx total of donors listed from admin file donor-1 donor-2 donor-3 donor-4 donor-5 donor-6 donation to org student last name from admin file donor-1 donor-2 donor-3 school year 20xx x x donor-5 donor-6 x x dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure school year 20xx- x x x x x school year 20xx x x x examination of the eo's schedule b schedule of contributors listing names of those persons or entities who contributed dollar_figure or more compared with the list of student names at the org shows the following overlap donor name on schedule b 20xx04 donation to org donor-7 dollar_figure student last name stu-1 donor-7 stu-2 stu-3 stu-4 tuition fee 20xx-20xx scholarship received 20xx-20xx total tuition cost - dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure form 886-a crev department of the treasury - internal_revenue_service page -12- department of the treasury - internal_revenue_service may 20xx form 886a year period ended april 20xx-20xx name of taxpayer org explanation of items donor-8 donor-9 donor-10 donor-11 donor-12 donor-13 donor-14 donor-15 xxxx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure donor-8 donor-8 donor-8 donor-9 stu-5 stu-6 donor-10 donor-11 donor-12 donor-13 stu-7 donor-14 donor-15 stu-8 stu-9 stu-10 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure na na dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure donor name on schedule b- 20xx04 donation to org donor-18 donor-19 donor-20 donor-21 donor-9 student last name stu-11 stu-12 stu-13 stu-14 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure stu-15 stu-16 donor-20 stu-17 stu-18 stu-19 donor-21 stu-20 stu-21 donor-9 stu-5 stu-23 tuition fee 20xx- 20xx scholarship received 20xx- 20xx total tuition cost dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure form 886-acev department of the treasury - internal_revenue_service page -13- fo im 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service may 20xx org year period ended april 20xx-20xx donor-23 donor-24 donor-11 donor-26 donor-27 donor-28 donor-14 donor-15 law dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure donor-23 stu-24 donor-11 donor-26 donor-28 donor-12 stu-26 donor-14 stu-27 donor-15 stu-28 stu-29 stu-30 stu-31 stu-32 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure sec_501 of the internal_revenue_code code exempts from federal_income_tax organizations that are organized and operated exclusively for religious charitable scientific or educational_purposes where no part of the net_earnings inures to the benefit of any private_shareholder_or_individual reg c -1 d states in part that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests reg c -1 c states in part that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_501 c of the code exempts from federal_income_tax organizations organized and operated exclusively for charitable educational and other exempt purposes provided that no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1 c -1 a of the regulations provides that in order to be exempt as an organization described in sec_501 c of the code the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section form 886-a crev department of the treasury - internal_revenue_service page -14- department of the treasury - internal_revenue_service may 20xx foun a year period ended name of taxpayer explanation of items april 20xx-20xx org sec_1 c -1 c of the regulations provides that an organization will not be regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt purposes sec_1 c -1 d ii of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1 c -1 d of the regulations provides that the term charitable is used in sec_501 c of the code in its generally accepted legal sense and includes the promotion of education the presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes 326_us_279 90_led_67 66_sct_112 am campaign acad v commissioner 92_tc_1053 see also old dominion box co inc v united_states f2d 4th cir cert_denied 413_us_910 operating for the benefit of private parties who are not members of a charitable_class constitutes a substantial nonexempt purpose when an organization operates for the benefit of private interests such as designated individuals the creator or his family or persons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes am campaign acad v commissioner supra pincite6 in 70_tc_1037 an organization was formed as a nonprofit corporation to support and assist religious educational and or other nonprofit_organizations in their relationships with their contributors and in stimulating proper application of christian stewardship principles among their contributors to reimburse its cost of operation petitioners charge a fee to each subscribing organization respondent determined that the described activities although helpful to charitable organizations are not exclusively for charitable purposes but rather serve private interest by advising individuals about methods to decrease federal income and estate_taxes in revrul_69_545 cb117 a hospital did not qualify under sec_501 of the code because it must be organized and operated exclusively for one or more of the purposes set forth in that section hospital b was initially established as a proprietary institution same as network marketing for the benefit of its owners although its ownership had been transferred to a nonprofit organization the hospital continued to be operated for the private benefit of the original owners who exercised control_over the eo through the board_of trustees they had used their control to restrict staff determine amount contributions to enter into favorable rental agreements who deducts what expenses and to limit emergency room care and hospital admission to their own patients these facts indicated that the hospital was operated for the private benefit of its original owners rather than for the exclusive benefit of the public form 886-a rev department of the treasury - internal_revenue_service page -15- may 20xx for a a department of the treasury - internal_revenue_service explanation of items year period ended name of taxpayer april 20xx-20xx org in 950_f2d_365 a nonprofit organization operated restaurants and food stores in accordance with doctrines of the seventh-day adventist church their application was denied because it was not operated exclusively for exempt purposes living faith operated two vegetarian restaurants and health food stores in illinois these two facilities-the subject of this litigation-were open to the public they had several purposes listed to teach restaurant management teach vegetarian cooking minister to those changing their way of life learn how to communicate with others in addition to purveying food and health products living faith disseminated various informational materials which promoted both the healing and message of jesus christ and each day before the facilities opened living faith conducted devotional talks bible reading bible studies it occasionally provided meals to the needy the nonexempt purpose cannot be substantial a single activity may be carried on for more than one purpose the fact that an organization's primary activity may constitute a trade_or_business does not of itself disqualify it from classification under c provided the trade_or_business furthers or accomplishes an exempt_purpose if one of the activities purposes however is substantial and nonexempt the organization will be denied exempt status under c even if its activity also furthers an exempt_purpose revrul_72_369 1972_3_cb_245 describes an organization formed to provide management and consulting services at cost to unrelated exempt_organizations this revenue_ruling states providing managerial and consulting services on a regular basis for as fee is a trade_or_business ordinarily carried on for profit the fact that the services in this case are provided at cost and solely for exempt_organizations is not sufficient to characterize this activity as charitable within the meaning of sec_501 c of the code also in 70_tc_352 the court concluded that because its sole activity consisted of offering consulting services for a fee set at or close to cost to nonprofit limited resource organizations it did not qualify for exemption under sec_501 c of the code sec_170 provides that a charitable_contribution to be deductible must be made to an organization created or organized in the united_states or in any possession thereof or under the law of the united_states any state the district of columbia or any possession_of_the_united_states form 886-a crev in s e 2_tc_441 the court held that amounts paid to provide special advantages for a particular child in the illinois children's home and aid society were not deductible when earmarked for the benefit of that child this case and revrul_54_580 1954_2_cb_97 established the principle that an inquiry as to the deductibility of a contribution need not stop once it is determined that an amount has been paid to a qualifying_organization if the amount is earmarked then it is appropriate to look beyond the fact that the immediate recipient is a qualifying_organization to determine whether the payment constitutes a deductible contribution rev_rul revrul_63_252 applied these principles to the question of deductibility of contributions to foreign organizations and concluded department of the treasury - internal_revenue_service page -16- may 20xx foun a department of the treasury - internal_revenue_service explanation of items year period ended _ name of taxpayer april 20xx-20xx org a given result at the end of a straight path is not made a different result because reached by following a devious path 302_us_609 pincite ct_d c b george w 308_us_355 pincite ct_d c b moreover it seems clear that the requirements of sec_170 of the code would be nullified if contributions inevitably committed to go to a foreign organization were held to be deductible solely because in the course of transmittal to the foreign organization they came to rest momentarily in a qualifying domestic organization in such case the domestic organization is only nominally the donee the real donee is the ultimate foreign recipient _ revrul_63_252 illustrated the point with the following five examples in pursuance of a plan to solicit funds in this country a foreign organization caused a domestic organization to be formed at the time of formation it was proposed that the domestic organization would conduct a fund-raising campaign pay the administrative expenses from the collected fund and remit any balance to the foreign organization certain persons in this country desirous of furthering a foreign organization's work formed a charitable_organization within the united_states the charter of the domestic organization provides that it will receive contributions and send them at convenient intervals to the foreign organization a foreign organization entered into an agreement with a domestic organization which provides that the domestic organization will conduct a fund-raising campaign on behalf of the foreign organization the domestic organization has previously received a ruling that contributions to it are deductible under sec_170 of the code in conducting the campaign the domestic organization represents to prospective contributors that the raised funds will go to the foreign organization a domestic organization conducts a variety of charitable activities in a foreign_country where its purposes can be furthered by granting funds to charitable groups organized in the foreign_country the domestic organization makes such grants for purposes which it has reviewed and approved the grants are paid from its general funds and although the organization solicits from the public no special fund is raised by a solicitation on behalf of particular foreign organizations a domestic organization which does charitable work in a foreign_country formed a subsidiary in that country to facilitate its operations there the foreign organization was formed for purposes of administrative convenience and the domestic organization controls every facet of its operations in the past the domestic organization solicited contributions for the specific purpose of carrying out its charitable activities in the foreign_country and it will continue to do so in the future however following the formation of the foreign_subsidiary the domestic organization will transmit funds it receives for its foreign charitable activities directly to that organization revrul_63_252 held that contributions to organizations described in the first second and third examples were not deductible but that contributions to the organizations described in examples four and five were in examples four and five the contributions were not earmarked for use in a foreign_country and the contributions were subject_to control by the domestic organization revrul_66_79 clarified an ambiguity contained in examples three and four of revrul_63_252 revrul_66_79 provided that contributions to a domestic charity solicited for a specific project of a form 886-a cev department of the treasury - internal_revenue_service page -17- year period ended name of taxpayer department of the treasury - internal_revenue_service explanation of items may 20xx april 20xx-20xx for 886a org foreign charity are deductible under sec_170 where the domestic organization has approved the project as being in furtherance of its own exempt purposes and has control and discretion as to the use of the contributions in this case the bylaws of the domestic organization provided among other things that the board_of directors would require that grantees furnish a periodic accounting to show that the funds were expended for purposes for which they were approved and the board might in its absolute discretion refuse to make grants for which any funds were requested the revenue_ruling concluded that the test in each case is whether the organization has full control of the donated funds and discretion as to their use so as to insure that they will be used to carry out the domestic organization's function and purposes revrul_83_104 1983_2_cb_46 states in part that a contribution for purposes of sec_170 of the code is a voluntary transfer of money or property that is made with no expectation of procuring a financial benefit commensurate with the amount of the transfer see sec_1_170a-1 of the income_tax regulations and h_r rep no 83rd cong 2d sess a44 tuition expenditures by a taxpayer to an educational_institution are therefore not deductible as charitable_contributions to the institution because they are required_payments for which the taxpayer receives benefits presumably equal in value to the amount_paid taxpayer's position on february 20xx a closing conference manager meeting was held between the taxpayer's representative the eo group manager and the eo examiner to discuss the outcome of the examination and the draft report proposing revocation a letter was sent to the taxpayer and faxed to the representative the same day requesting a written response to the draft proposal within fourteen days in a letter dated march 20xx the taxpayer's representative requested an extension of time until april 20xx to provide a written response the letter received march 20xx also included the following statements e e the reason the eo's contributions to org were not included in the school's form_990 for 20xxx is that the school reported only funds deposited into u s accounts on form_990 the eo's contributions to the org were not deposited into the u_s_account donor receipts are only issued for contributions of dollar_figure or greater uniess requested and not issued when the donor has the same surname as a student in a document received may the taxpayer states e e the necessary records are not available due to the 20xx departure of both cfo treasurer and officer administrator cfo payments to tutors and to schools are made on behalf of students the eo does not provide any direct assistance to individuals the eo is not controlled by another other organization the eo incurs travel_expenses for fundraising purposes the eo does not engage in political activity none of the information provided by the taxpayer adequately addresses the main issues of private benefit or conduit activity as of may 20xx no additional information provided by the taxpayer alters the government's position form 886-a cev department of the treasury - internal_revenue_service page -18- may 20xx foun 886a department of the treasury - internal_revenue_service explanation of items year period ended name of taxpayer april 20xx-20xx org government's position org has at least two substantial nonexempt activities the organization collects tuition payments for the foreign schools it supports deposits monies into its accounts and transfers these payments to the schools along with regular contributions for the year ended april 20xx tuition payments transferred total dollar_figure contributions to the school total dollar_figure the organization's schedule b donors include the names of families who pay tuition to the foreign schools this activity provides an improper private benefit to the parents of individual students it is also an activity of a foreign conduit the organization makes payments to individuals which it categorizes as stipends for activities such as instructing and tutoring that which are not reported as wages these payments are reportable as compensation_for which a separate employment_tax adjustment will be proposed the payments are significant in relation to contributions to org for the tax_year ended april 20xx org's general ledger shows transfers to org of dollar_figure 'stipends' of dollar_figure paid to individuals were included in this amount for the tax_year ended april 20xx org's reports contributions of dollar_figure made to org in the same period where wages totaled dollar_figure ‘stipends’ totaled dollar_figure overshadowing the grants to the org org is acting as a conduit because it fails to exercise any discretion and control of funds it gives to schools or to individuals neither does it account for the donated funds to show they were spent for an exempt_purpose the organization's responses to information document requests shows that they do not have a written grant application of their own they do not request a detailed description of the grantee's educational activities or goals they do not approve grants in amounts that vary from the amount requested they do not require that recipients certify that funds will be used only for educational_purposes they do not have an agreement in place to measure progress toward goals they do not have an agreement in place to withdraw approval if educational_purposes are not being met they do not require periodic reports to track the use of grant funds they do not require grant recipients to provide written reports accounting for use of funds they do not have a system in place to investigate when funds are not accounted for seek to recover misspent funds or discontinue funding when recipient fails to satisfy accountability requirements e e the eo cannot show how the schools or the individuals used the money they cannot provide any financial records or an annual report for the schools they gave money to neither can they show attendance or grade reports for the students to which they awarded scholarships scholarships awarded to the students cannot be tracked by individual because payments were not made directly to the students instead payments were made to tutors on behalf of the form 886-a crev department of the treasury - internal_revenue_service page -19- may 20xx f onan a department of the treasury - internal_revenue_service explanation of items year period ended april 20xx-20xx name of taxpayer org students so not only can the eo not document the application process it cannot show how the funds awarded to each student were ultimately used org has not filed a form_990 since 20xx the year ended december 20xx the org reported revenue of dollar_figure and expenses of dollar_figure yet org reports giving them dollar_figure for the year ended april 20xx and dollar_figure for the year ended april 20xx and the org reportedly has approximately students with reported tuition costs of dollar_figure per student so examination of org's form_990 yields more questions than answers conclusion org has failed to demonstrate that it is operated exclusively for charitable purposes it provides a private benefit and cannot document that funds it contributes to educational organizations or to individuals were used for exempt purposes therefore it is not an organization described under sec_501 and its tax exempt status is revoked effective may 20xx this organization is required to file forms for all tax periods beginning after april 20xx if this conclusion is not supported contributions to the organization which is acting as a conduit for a foreign organization should not be deductible under sec_170 c form 886-acev department of the treasury - internal_revenue_service page -20-


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c uniform issue list apr legend financial_institution a savings account a cda cdb amount a amount b amount c amount d amount e ira x amount f 20u727023 page dear this is in response to your request dated the 60-day rollover requirement contained in sec_408 of the internal ‘supplemented the revenue code the code correspondence dated request in which you request a waiver of the following facts and representations have been submitted under penalty of perjury in support of the ruling requested _--years old and represent that you received a distribution from an you are individual_retirement_account ira x totaling amount a you assert that your failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to miscommunication and misunderstanding with financial_institution a which led to amount b being placed into a non-ira account in march the certificate of deposit cd in which ira x was invested was due to mature at approximately the same time you were due to receive funds from your mother’s estate you were advised by an employee of financial_institution a that you could combine funds from ira x with the inherited funds to jumbo cd and receive a more favorable rate of return than ira purchase a x was yielding you maintain that you were not aware of the tax consequences of moving funds from ira x to a non-ira cd you withdrew the entire amount amount a from of this amount amount b was deposited into savings account a a non- acting upon this advice on ira x ira account the balance of ira x amount c was disbursed to you upon receipt of the funds from your mother’s estate you withdrew amount d from savings account a amount d was combined with amount e which consisted of inherited and personal funds to purchase cd a cd a was subsequently moved to cd b where it remains to date the balance of the amount disbursed from the ira x amount f remains in savings account a based on the facts and representations you request a ruling that the internal_revenue_service waive the day rollover requirement with respect to the distribution of amount b contained in sec_408 of the code in this instance sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira 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 2unu7270283 page sec_408 of the code defines and provides the rules applicable to ira ‘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 i 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 ii the entire amount received including money and any other_property is other than an ira for the benefit of paid into an eligible_retirement_plan day after the date on which the such individual not later than 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 of the code provides that sec_408 does not apply to any amount described in sec_408 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 from an ira which was not includible in gross_income because of ss _ the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 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 distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution page 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 d the time elapsed since the distribution occurred you have not presented any evidence to the service as to how any of the factors outlined in revproc_2003_26 affected your inability to timely roll over amount a or any portion thereof to an ira you have stated that the funds were combined with other non-ira funds to purchase cd a for the purpose of earning a higher return there is no evidence to suggest that you were unaware that the transaction was not a rollover or that you intended to rollover amount a into another ira on the contrary the fact that you co-mingled amount b with non- ira funds in order to purchase a high-yielding cd is indicative of an intent not to rollover therefore pursuant to sec_408 of the code the service declines to waive the 60-day rollover requirement with respect to the distribution of amount b from ira x no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative page if you wish to inquire about this ruling please contact address all correspondence to se t ep ra t3 at please sincerely yours vi rances v sloay manager employee pla technical group enclosures deleted copy of ruling letter notice of intention to disclose