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 number release date se t eo ra t employer_identification_number contact person id number telephone number date date legend m n o dear ------------ this is in reference to your letter of date requesting advance approval of your grant procedures under sec_4945 and sec_4945 of the internal_revenue_code you believe that your new scholarships and loan procedures differ materially from those approved in your determination_letter dated date you are recognized as exempt from federal_income_tax under sec_501 of the internal_revenue_code and have been classified as a private_foundation as defined by sec_509 of the code you scholarship procedures were approved under sec_4945 and sec_4945 of the code at the time you were recognized as exempt under sec_501 of the code for those scholarships that were employer-related you agreed to meet the percentage tests and the other guidelines of revproc_76_47 1976_2_cb_670 the name of your scholarship and loan program is m you now propose to make additional college scholarships pursuant to the submitted procedures and use these procedures for those scholarship and loans that were approved in your determination_letter dated date you initially plan to grant added scholarships to graduating seniors at n these scholarships will be called o these scholarships will be awarded annually to one or more seniors graduating from n to provide assistance in paying for their college costs the purpose of your new scholarship and loan program is to allow graduating high school seniors who are from low-income families and who have demonstrated strength of character and initiative in overcoming obstacles and hardships to seek a college degree your scholarship and loan recipients will be determined by a selection committee comprising active or retired members of the faculty of n your president and the president’s designee your applications scholarship and loans will include some or all of the following a transcript of prior academic achievements a report of performance on tests designed to measure ability and aptitude for academic work a description of financial need an essay written by the applicant describing her or his interests and aspirations a description of past involvement in extracurricular activities a list of academic honors and recognitions written recommendations by individuals not related to the applicant your criteria used in selecting your recipients will include but not be limited to prior academic performance performance on tests designed to measure ability and aptitude for higher education recommendations from educators social workers and others not related to the potential recipients financial need and the conclusions that the selection committee might draw from personal interviews as to the applicant’s motivation character ability and potential financial need will be an important criterion your scholarships and loans will be awarded to recipients for study toward a degree at an educational_organization described in sec_170 of the code all high school seniors are eligible to apply for your scholarships your scholarship and loan recipients must use the funds for tuition board room fees books supplies travel costs and incidental_expenses for attendance at the recipient’s respective school you initially plan to award one new scholarship in the amount that is yet to be determined the above number of new scholarships and loans amounts may change in the future and may vary to each recipient although your procedures allow for loans you do not plan to make loans under your o program at this time none of your scholarships may be awarded to the children of your trustees or officers to the children of any disqualified_person or to the children of the selection committee members or children of persons aiding in the selection process you plan to receive reports from those scholarship recipients which you do not directly pay their scholarship funds to the respective college or university you will investigate and seek recovery_of any misuse of funds sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable scientific or educational_purposes no part of the net_earnings of which inures to the benefit of any individual sec_1_501_c_3_-1 of the income_tax regulations provides that the term charitable is used in sec_501 in its generally accepted legal sense charitable as used in its generally accepted legal sense includes advancement of education sec_4945 and b of the code impose certain excise_taxes on expenditure defined as taxable_expenditures by sec_4945 sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant the purpose of which is to achieve a specific objective produce a report or other similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee revrul_77_434 1977_2_cb_420 provides that long-term low-interest educational loans made by a private_foundation under a program that specifically limits the use of the funds to furtherance of the recipient’s education at an educational_institution described in sec_170 of the code are individual grants within the meaning of sec_4945 sec_53_4945-4 of the foundation and similar excise_taxes regulations provides that to secure approval for a grant-making procedure a private_foundation must demonstrate to the satisfaction of the commissioner that a the grant procedures include an objective and nondiscriminatory selection process b the procedure is designed to result in the performance of the activities intended to be financed and c the foundation will obtain reports to determine whether the grant funds are being properly used reports are not required if the foundation pays the scholarship grants to an educational_institution see sec_53_4945-4 and sec_53_4945-4 of the foundation excise_tax regulations sec_53_4945-4 of the foundation and similar excise_taxes regulations provides that a foundation is under a duty to investigate and attempt to recover any misuse of grants since you are aiding students to attend and graduate from college your scholarship program and loan program would be a charitable activity of advancing education under sec_501 of the code based on the information submitted and assuming your scholarship procedures will be conducted as proposed we rule that your procedures for awarding scholarships and loans comply with the requirements contained in sec_4945 and sec_4945 of the code because a your scholarship procedures and loan program include an objective and nondiscriminatory selection process your applicants are rated by objective and nondiscriminatory criteria by persons experienced in rating of students on their accomplishments and potential b your recipients must be enrolled in a degree program to receive your scholarship grants and loans your recipients must be enrolled in an educational_organization described in sec_170 of the code thus your procedures are designed to result in the performance of the activities that you intend to finance c you will satisfy the report requirement by paying some of your scholarship grants directly to the respective college or the respective university you will obtain reports to determine whether the scholarships and loans that you pay directly to the recipients are being properly used and will not continue payments if the recipient’s performance is not satisfactory you have submitted information showing that you will investigate and seek recovery_of any misuse of your grants based upon the information submitted and assuming your program will be conducted as proposed with a view to providing objectivity and nondiscrimination in the awarding of your scholarship grants and loans we rule that your grants comply with requirements of sec_4945 and sec_4945 of the code expenditures made in accordance with these procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code and as such are eligible for the exclusion from income provided for in sec_117 of the code to the extent that such grants are actually used for qualified_tuition_and_related_expenses within the meaning of sec_117 of the code this ruling is conditioned on the understanding that there will be no material changes in the facts upon which it is based it is further conditioned on the understanding that no grants will be awarded to your organization’s creators officers directors trustees or members of the selection committee or for a purpose inconsistent with the purposes described in sec_170 of the code the approval of your grant-making procedures is a one time approval of your system of standards and procedures for selecting recipients of grants that meet the requirements of sec_4945 and sec_4945 of the code thus approval will apply to succeeding grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request we are informing the ohio te_ge office of this action please keep a copy of this ruling with your organization’s permanent records 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 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 sincerely jane baniewicz manager exempt_organizations technical group


t c memo united_states tax_court estate of eva franzen kollsman deceased jeffrey hyland executor petitioner v commissioner of internal revenue respondent docket no filed date kim e baptiste and michael e swartz for petitioner jane j kim and robert a baxer for respondent memorandum findings_of_fact and opinion gale judge respondent determined a dollar_figure deficiency in the federal estate_tax of the estate of eva franzen kollsman estate the deficiency arise sec_1unless otherwise noted all section references are to the internal_revenue_code_of_1986 as amended and in effect for the date of decedent’s death and all continued principally from respondent’s determination that the estate underreported the values of two paintings held by decedent at her death on date valuation_date after concessions the sole issue for decision is the fair market values of the paintings on the valuation_date the parties have each introduced expert reports and testimony to support their respective positions findings_of_fact some of the facts have been stipulated and together with the exhibits attached thereto are incorporated herein by this reference i background eva franzen kollsman decedent a resident of new york died testate on date her estate was administered in new york her will designated jeffrey hyland as the executor of her estate and the distributee of its residual mr hyland resided in california at the time the petition was filed continued rule references are to the tax_court rules_of_practice and procedure all dollar amounts have been rounded to the nearest dollar 2a portion of the deficiency is attributable to respondent’s determination that the estate failed to report taxable_gifts made by decedent eva franzen kollsman for taxable_year sec_2002 and the estate has conceded this adjustment 3decedent’s will provided for the distribution of the residuary_estate to mr hyland after the satisfaction of various bequests and the payment of debts expenses and death taxes defined to include federal and state estate_taxes ii the paintings a description the estate’s assets included two 17th-century old master4 paintings village kermesse dance around the maypole maypole by pieter brueghel the younger pieter brueghel measuring approximately by inches and orpheus charming the animals orpheus by jan brueghel the elder or jan brueghel the younger or a brueghel studio measuring approximately by inches both are oil paintings on wood panels maypole depicts the revelry of a village festival some villagers dance around a maypole as others engage in similarly spirited pursuits orpheus depicts the musician of greek mythology by that name playing a lyre surrounded by an assortment of paired animals in a sylvan setting mr hyland inherited maypole and orpheus from decedent’s estate b the estate’s expert’s experience with the paintings the estate’s expert george wachter vice president of sotheby’s north america and south america and cochairman of sotheby’s old master painting sec_4the term old master refers to a superior artist or craftsman of established reputation especially a distinguished painter of the 16th 17th or early 18th century webster’s third new international dictionary unabridged 5the parties’ experts dispute whether orpheus is properly attributed to jan brueghel the elder or jan brueghel the younger an issue discussed infra pp worldwide first saw the paintings at issue in during a visit to decedent’s residence he visited her residence on several subsequent occasions over the years and saw the paintings each time around the date of decedent’s death in a letter dated date mr wachter wrote to mr hyland outlining proposed terms under which sotheby’s would handle the auctioning of maypole and orpheus he stated that the preliminary estimates of the sale prices the paintings would bring at sotheby’s date auction in new york city were dollar_figure to dollar_figure for maypole and dollar_figure to dollar_figure for orpheus c mr wachter’s fair_market_value letter and proposed consignment rights agreement a few weeks later a sotheby’s employee sent a letter to mr hyland dated date enclosing two documents prepared by mr wachter and signed on his behalf both dated date the first took the form of a letter from mr wachter to mr hyland in which he stated that the fair market values of maypole and orpheus based on firsthand inspection of the property and without further elaboration were dollar_figure and dollar_figure respectively this letter was subsequently attached to the estate’s estate_tax_return the second document was a letter agreement sent by mr wachter to mr hyland providing terms under which mr hyland would agree to give sotheby’s exclusive rights to auction maypole and orpheus for five years consignment rights agreement the consignment rights agreement stated in consideration of the work that we sotheby’s have done with you and mrs kollsman over the past years and also our help with the donation process for the circle of cranach altarpiece this letter certifies that you mr hyland agree that if you should decide during the 5-year period beginning on the date this letter agreement is mutually executed to offer the two pictures listed below maypole and orpheus for sale you shall consign such property exclusively and only to sotheby’s to be offered for sale at an auction to be conducted by us the values of maypole and orpheus were described in the consignment rights agreement as dollar_figure to dollar_figure and dollar_figure to dollar_figure respectively at some time between september and date mr hyland signed the agreement during the period in which the agreement was proposed and executed sotheby’s imposed a buyer’s premium that it collected and retained on any auction 6the estate’s assets also included another old master painting circle of cranach st mauritius which under the terms of decedent’s will was bequeathed to the metropolitan museum of art in new york city provided that the museum agreed to put it on permanent display under terms acceptable to the estate’s executor in the event that the metropolitan museum did not agree to terms acceptable to the executor the painting was to be given to such other museum as the executor chose in his discretion sale equal to of the first dollar_figure of the hammer price and of any excess_amount d cleaning of the painting sec_1 engagement approximately three to four weeks after decedent’s death mr hyland consulted with brad shar vice president and general manager of julius lowy frame and restoring co lowy regarding work to be done to the paintings lowy is and was at all relevant periods a preeminent fine art services firm specializing in fine art restoration and framing with a client list that has included the auction houses sotheby’s and christie’s museums such as the metropolitan museum of art the museum of modern art and the guggenheim museum all in new york city as well as the national gallery of art in washington d c and the art institute of chicago numerous art galleries in new york city architects and interior designers and the private collections of david rockefeller ralph lauren richard manoogian and millicent hearst 7the hammer price is the winning bid at auction 8the buyer’s premium sotheby’s imposes on auctions sales has varied over time when as discussed infra p maypole sold at a sotheby’s auction in date the buyer’s premium wa sec_25 of the first dollar_figure of a bid price of any amount in excess of dollar_figure up to and including dollar_figure million and of any amount in excess of dollar_figure million on date mr hyland emailed mr shar confirming that he wished to have lowy put new frames on maypole and orpheus by that time the paintings had been moved from decedent’s residence to sotheby’s mr hyland asked mr shar to examine them there mr hyland noted that one of the paintings had a signature in the lower left-hand corner and the other had a slight bow along the bottom and possibly the top as well on date lowy obtained a certificate of insurance from its insurer which mr shar forwarded to mr hyland that same day to demonstrate that lowy had insurance coverage for maypole and orpheus while it had custody of them the certificate indicated that lowy had insurance with respect to any damage that might occur to the paintings in transit to or from or while on lowy’s premises the coverage was effective from date to date and insured maypole for dollar_figure million and orpheus for dollar_figure mr hyland determined the amounts for which lowy was to insure maypole and orpheus examination by lowy personnel after examining maypole and orpheus mr shar concluded that they were dirty and should be cleaned he found the paintings to be covered with a heavy 9a property casualty insurance_policy issued to decedent for the period date to date provided insurance coverage for her residence and its contents including the paintings at issue the policy insured maypole for dollar_figure and orpheus for dollar_figure layer of dirt and grime that nonetheless looked like it could be removed with relative ease the chief conservator at lowy bill santel who performed an initial examination of both paintings before they had been cleaned or any testing on them had been done likewise believed on the basis of that examination that cleaning would be appropriate for both and reasonably safe --something he would certainly have done if he owned them in his judgment maypole appeared to have been previously cleaned though not recently he considered maypole not the dirtiest painting he had seen in his work and a pretty good painting to be cleaned mr shar therefore suggested to mr hyland that he have the paintings cleaned before framing mr hyland agreed and engaged lowy for that purpose lowy condition and treatment reports a maypole lowy prepared a condition and treatment report concerning maypole the section of the report devoted to the painting’s pretreatment condition condition report dated date states that maypole had a surface coating of discolored natural resin varnish the condition report has an entry for degrees of surface dirt with the options of light apparent or heavy heavy is circled the immediately following entry is for degrees of embedded dirt with the same three options none of the options is circled under the signature entry the condition report notes that the signature was b arely visible the condition report was based on a two-step process lowy employs to determine the condition of a painting a visual examination using various forms of light and a chemical detergent window test window test whereby detergent is applied to a small section or sections of the painting’s surface the visual examination is nonintrusive using ultraviolet light x rays and an infrared scope it typically enables a conservator to detect damage within a painting or previous restorations the window test performed only with the client’s permission typically reveals further information about a painting’s condition including how it will clean and whether any dirt is surface or embedded maypole was cleaned on date the section of the report devoted to the painting’s treatment treatment report states that the cleaning took three hours the treatment report further states that the lowy conservator used wolbers and naphtha detergents to remove a heavy layer of surface dirt-grease- grime-nicotine the treatment report notes that the conservator did not remove varnish b orpheus lowy also prepared a condition report and a treatment report concerning orpheus the condition report dated date states that the surface coating of orpheus was varnished with a natural as opposed to synthetic varnish with discoloration that was apparent the surface dirt entry has heavy circled and the options for the degree of embedded dirt are unmarked the entry regarding signature is filled out as n one visible the condition report further states under surface distortions that the painting had a convex warp and elsewhere the report observes that the panel was substantially bowed at the top and bottom orpheus was also cleaned on date the treatment report states that the cleaning took two hours the treatment report further states that the lowy conservator used wolbers and naphtha detergents to remove a discolored heavy dirt grime layer yellowed only and notes that the conservator did not remove varnish 10as with the condition report prepared for maypole the condition report for orpheus was based on a visual inspection using various forms of light and a window test cost and shipping the cleaning and framing of maypole and orpheus cost dollar_figure and dollar_figure respectively both paintings were shipped to mr hyland at his residence in california on date e post-valuation-date sale of maypole and market data mr hyland ultimately consigned maypole to sotheby’s pursuant to the consignment rights agreement and approximately years after the valuation_date maypole sold at sotheby’s date old masters auction in new york for a hammer price of dollar_figure against a presale estimate of dollar_figure to dollar_figure million the total purchase_price including the buyer’s premium was dollar_figure at the time of trial orpheus remained in mr hyland’s possession as of the date old masters auction the highest sale totals for old masters auctions achieved by sotheby’s or christie’s in new york city were as follows sotheby’s date dollar_figure million sotheby’s date dollar_figure million christie’s date dollar_figure million sotheby’s date dollar_figure million sotheby’s date dollar_figure million sotheby’s date dollar_figure million sotheby’s date dollar_figure million sotheby’s date dollar_figure million sotheby’s date dollar_figure million christie’s date dollar_figure million five of the top ten were achieved between the valuation_date in date and the date sotheby’s auction at which maypole was sold iii return position and deficiency determination the estate timely filed a form_706 united_states estate and generation skipping transfer_tax return reporting the fair market values as of the valuation_date of maypole as dollar_figure and orpheus as dollar_figure as noted mr wachter’s date letter assigning those fair market values to the paintings was attached to the return respondent thereafter issued the estate a notice_of_deficiency determining the fair market values as of the valuation_date of maypole as dollar_figure and orpheus as dollar_figure the estate timely petitioned the court for redetermination subsequently in an amended answer respondent asserted that the fair market values of maypole and orpheus were dollar_figure and dollar_figure respectively on the valuation_date opinion i valuation and the estate_tax sec_2001 imposes a federal estate_tax on the transfer of a decedent’s taxable_estate the taxable_estate consists of the value of the gross_estate after applicable deductions sec_2051 the value of a decedent’s gross_estate includes the fair_market_value of the property owned by the decedent on the date of death sec_2031 sec_20_2031-1 estate_tax regs fair_market_value for this purpose is the price at which property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts 411_us_546 sec_20_2031-1 estate_tax regs the estate bears the burden of proving that the values respondent determined in the statutory_notice_of_deficiency are incorrect see rule a 290_us_111 respondent bears the burden_of_proof with respect to the increased values and the increased deficiency asserted in the amended answer rule a ii expert reports as noted the estate offered the expert report of george wachter vice chairman of sotheby’s north america and south america and cochairman of sotheby’s old master paintings worldwide and respondent offered that of paul 11mr wachter has been a member of sotheby’s old master paintings department since he became a director of the fine arts division of sotheby’s in and then managing director in in mr wachter was appointed vice chairman of sotheby’s north america and south america and cochairman of sotheby’s old master paintings worldwide a position he held at the time of trial cardile ph d an art historian with more than years of experience as a fine art appraiser to support their respective positions on valuationdollar_figure 12mr cardile holds a ph d from yale university he has taught college and graduate courses in art history at various institutions and served as museum director of the denison art gallery in granville ohio from to mr cardile is certified by the appraisers association of america and has appraised art for museums private individuals and corporations for the past years 13the estate and respondent also attempt to support their respective valuation positions by citing the insurance coverage on the paintings the estate points to the property casualty policy providing coverage for decedent’s residence and its contents including maypole and orpheus specifically at insured values of dollar_figure and dollar_figure respectively respondent cites the insurance coverage that mr hyland required lowy to demonstrate in connection with lowy’s custody of the paintings namely dollar_figure million for maypole and dollar_figure for orpheus on this record we do not find the insurance values probative of fair_market_value both experts opined that insured values are often higher than fair_market_value as for the policy covering the contents of decedent’s residence there is no evidence that the coverage values for the paintings were supported by appraisals moreover the coverage period for the policy was date to date the record demonstrates that the paintings were moved from decedent’s residence shortly after her death in date to sotheby’s and then were moved to lowy on or about date they were shipped from lowy to mr hyland’s residence in california on date there is no evidence that the paintings were ever returned to decedent’s residence consequently we conclude it is unlikely that mr hyland scrutinized or relied upon the coverage amounts for the paintings in this policy they are therefore not probative regarding the fair market values as for the coverage amounts that mr hyland required for the lowy policy there is no evidence that these values were based on any appraisal while these values might suggest that mr hyland believed the paintings were worth more than the fair_market_value estimates he had received from mr wachter we draw no inference in that regard given both experts’ view that insurance coverage values are often higher than fair_market_value on balance we likewise do not find the continued a in general expert witness reports may assist the court in understanding an area requiring specialized training knowledge or judgment 93_tc_529 however as the trier of fact the court is not bound to accept an expert’s opinions 538_f2d_927 2d cir aff’g tcmemo_1974_285 84_tc_722 we may be selective in deciding what part of an expert’s report we will accept 304_us_282 the opinions of expert witnesses are weighed according to their qualifications and other relevant evidence 250_f2d_242 5th cir aff’g in part remanding in part tcmemo_1956_178 85_tc_469 opinion evidence that does not appear to be based upon disclosed facts is of little or no value 30_f2d_807 7th cir aff’g 6_bta_610 the purpose of expert testimony is to assist the trier of fact to understand evidence that will determine the fact in issue 92_tc_101 an expert has a duty to the court that exceeds his duty to his client the expert is obligated to present data analysis and opinion with detached continued coverage amounts in the lowy policy probative of fair_market_value neutrality and without bias 94_tc_570 in the context of valuation cases experts lose their usefulness and credibility when they merely become advocates for the position argued by a party laureys v commissioner t c pincite 74_tc_441 b the estate’s expert mr wachter mr wachter’s valuations mr wachter’s report opined that the fair market values of maypole and orpheus on the valuation_date were dollar_figure and dollar_figure respectively--the same fair_market_value estimates he gave in the date letter to mr hyland that was attached to the estate_tax_return his report states that in forming his opinions he relied on his personal examination of the paintings and his years of professional experience valuing and selling old master paintings he also cited photographs of the paintings provided to him by lowy and his august and date letters to mr hyland as additional sources he consulted in reaching his fair_market_value estimates mr wachter’s report states that his dollar_figure valuation of maypole was based on multiple factors but he made specific reference to the painting’s attribution to pieter brueghel and its pleasant composition and subject matter however the report asserts that on the valuation_date the condition and quality of maypole were very unclear because the painting was covered with a dense film of dirt and grime and had an extreme yellow discoloration the report observes that maypole was among the dirtier paintings that mr wachter had observed in his 35-year career in sum the report’s chief assertion is that maypole’s condition on the valuation_date was so poor that there was no way to have known for certain its inherent value these factors taken together the report opines indicated a fair_market_value of dollar_figure mr wachter argues that two factors explain the sizable gap between his valuation and maypole’s date sale price of dollar_figure a significant improvement in the quality and condition of the painting as a result of the lowy cleaning and a substantial increase in market demand in the intervening period primarily driven by a large influx of russian buyers seeking old master paintings as support for the second point he points to sotheby’s data showing that of the highest sale totals for old masters auctions in new york city occurred between the valuation_date and date with respect to orpheus mr wachter’s report identifies three points as affecting the painting’s dollar_figure valuation first the report attributes the painting to jan brueghel the younger whose works sell for significantly less than those of jan brueghel the elder according to the report second his report states that orpheus does not have a strong composition such that some of the animal figures are barely visible and others appear disjointed from their surroundings finally the report observes that orpheus like maypole had accumulated a layer of surface dirt and grime and had a severe yellow discoloration making it one of the dirtier paintings mr wachter had examined in his career the report does not make any mention of orpheus’ being bowed or warped as in the case of maypole the report concludes that orpheus’ condition on the valuation_date was so poor that there was no way to have known for certain its inherent value these factors taken together the report opines indicated a fair_market_value of dollar_figure in his report and testimony mr wachter placed significant emphasis on the precleaning condition of the paintings which he characterized as extremely dirty grimy and discolored he knew decedent and as noted visited her residence on several occasions starting in he described decedent as a heavy smoker and attributed the soiled condition of the paintings on the valuation_date in part to years of tobacco smoke exposure in addition mr wachter’s report maintains that cleaning the paintings posed a very substantial risk because the process might reveal hidden flaws beneath the surface or otherwise damage them compromising their values to such an extent that they might have been left unmarketable his report states that because of this risk sotheby’s general practice is to avoid cleaning old master paintings before selling them his report further states that he generally does not advise clients to clean old master paintings before placing them for sale the implicit premise in mr wachter’s fair_market_value estimates was that a willing buyer would demand and a willing seller would have to accept a substantial discount off the value each painting would have after a successful cleaning to take into account the risk of adverse effects from the cleaning process rejection of mr wachter’s valuations we find mr wachter’s valuations unreliable and unpersuasive for several reasons first he had a significant conflict of interest that could cause a reasonable person to question his objectivity mr wachter first gave his fair_market_value estimates for the paintings at the time of decedent’s death in amounts that remained unchanged in his expert report prepared for trial his correspondence with mr hyland during that period demonstrates that the two had previously discussed the disposition of maypole and orpheus upon decedent’s death and that mr hyland was considering selling the paintings mr wachter provided his fair_market_value estimates at the same time he was soliciting mr hyland for the exclusive rights for five years to auction the paintings in the event they were solddollar_figure under sotheby’s terms at that time an auction sale would have entitled sotheby’s to a commission on the first dollar_figure of the hammer price and of the remainderdollar_figure thus mr wachter on behalf of his firm had a direct financial incentive to curry favor with mr hyland by providing fair_market_value estimates that benefited his interests as the estate’s residual beneficiary--that is to say lowball estimates that would lessen the federal estate_tax burden borne by the estate the fair_market_value estimate letter mr wachter provided to mr hyland was in fact used by him as the basis for the values reported on the estate_tax_return the fact that mr wachter simultaneously presented mr hyland with these fair_market_value estimates and his pitch for exclusive auction rights for sotheby’s gives rise to an inference that the latter affected the former second on the basis of other substantial evidence in the record we are convinced that mr wachter exaggerated the dirtiness of the paintings on the valuation_date and the risks involved in cleaning them if cleaning the paintings presented the magnitude of risk postulated by mr wachter we find it 14as noted in our findings mr hyland in fact entered into the proposed exclusivity agreement with sotheby’s and maypole was successfully auctioned by sotheby’s in date 15even under mr wachter’s fair_market_value estimates for the paintings sotheby’s stood to gain dollar_figure and dollar_figure on any auction sale of maypole and orpheus respectively inconceivable that he would not have raised these concerns with mr hyland in the course of their discussions concerning auctioning the paintings yet mr wachter did not recall any such discussiondollar_figure instead mr hyland made the decision to have the paintings cleaned because personnel at lowy--a leading fine arts conservator--recommended cleaning and did not believe it posed any significant risk bill santel chief conservator at lowy who performed the initial examination of the paintings testified that when he first examined maypole it was dirty appeared to have been cleaned previously but not recently and was a pretty good painting to be cleaned he testified that if he had owned it he would have cleaned it as doing so seemed reasonably safe mr santel similarly stated that orpheus was dirty but not the dirtiest painting he had ever seen even mr shar--the estate’s own witness--contradicted mr wachter’s assertions about the risk of cleaning the paintings testifying that although both paintings were quite dirty and discolored it appeared the dirt and grime could be removed easily and he therefore recommended to mr hyland that he have the paintings cleaned the condition report for each painting prepared after a window test recorded that the dirt on 16mr hyland was present at trial but did not testify each was surface rather than embedded an important distinction according to mr santel because the former is generally much easier to clean the cleaning process itself corroborated the lowy witnesses’ precleaning assessments mr santel and mr shar both explained that only the mildest detergents used for cleaning paintings wolbers and naphtha were required to clean maypole and orpheus mr shar testified that this was unusual and that typically stronger detergents are required the success of these mild detergents according to mr santel confirmed that the paintings were covered in surface dirt only he testified that if the dirt had been heavily embedded in the varnish or the paint the mild detergents could not possibly have achieved the results that they did mr santel further testified that the duration of the cleaning processes recorded in the lowy treatment reports as three hours for maypole and two hours for orpheus indicated that these cleanings were comparatively easy and problem free there is no dispute that the paintings’ cleanings were unqualified successesdollar_figure on balance the lowy condition and treatment reports and the testimony of the lowy personnel who also examined the paintings in their precleaning condition convince us that mr wachter exaggerated both the dirtiness of the paintings and the risks inherent in cleaning them 17mr wachter characterized maypole’s postcleaning appearance as fabulous and a winner third mr wachter’s analysis and conclusions regarding the risks of cleaning the paintings are contrary to the well-established principle that the hypothetical willing buyer and seller are presumed to have reasonable knowledge of relevant facts affecting the value of property at issue sec_20_2031-1 estate_tax regs this presumption applies even if the relevant facts at issue were unknown to the actual owner of the property 346_f2d_213 5th cir moreover both parties are presumed to have made a reasonable investigation of the relevant facts id thus in addition to facts that are publicly available reasonable knowledge includes those facts that a reasonable buyer or seller would uncover during the course of negotiations over the purchase_price of the property see 131_tc_8 concluding that on the valuation_date a corporation was no longer a going concern as a reasonably informed and willing buyer or seller would have been aware of imminent changes likely to cause operations to cease we believe that given the dirty condition of the paintings on the valuation_date a reasonable investigation into their values would involve at the very least seeking an opinion from a conservator about the risks and likely outcome of having them cleaned see simmons f 2d pincite finding that a sufficient examination of decedent’s records in existence on the date of death would have revealed certain evidence establishing the value of a tax_refund claim because such evidence was always there to be found moreover a hypothetical willing buyer is presumed to be reasonably informed and prudent and to have asked the hypothetical willing seller for information that is not publicly available see estate of gallagher v commissioner tcmemo_2011_148 determining that the use of financial data not publicly available on the valuation_date to value a company was appropriate because a willing buyer could have inquired and elicited the nonpublic information from the company dise v commissioner tcmemo_1986_87 holding that a discount should apply to the value of commercial real_estate where the parcel suffered from a water shortage problem that was not generally known but was readily discoverable to a reasonably informed buyer estate of tully v united_states a f t r 2d ria ct_cl finding that the value of corporation stock on the valuation_date should reflect that company officials were engaged in illegal activities that were not revealed to the public until four years later but nonetheless were evidenced by red flags that would have been obvious to a prudent purchaser and prompted further inquiry two witnesses from the same leading conservator--one called by the estate the other by respondent--who each examined the paintings in their condition near the valuation_date and before cleaning both judged cleaning to be a well- advised and low-risk undertaking this information was readily discoverabledollar_figure the hypothetical willing buyer and seller are chargeable with knowledge of it we conclude that the effective discount urged by mr wachter on the premise that the risks posed by cleaning were substantial is contrary to the presumption of sec_20_2031-1 estate_tax regs that the willing buyer and seller have reasonable knowledge of relevant facts fourth even if we accepted mr wachter’s contentions regarding the risks of cleaning the paintings which we do not he has provided no comparables to support his valuationsdollar_figure this omission is remarkable we have repeatedly found sale prices for comparable works quite important to determining the value of art 18we emphasize in this regard that both witnesses from lowy judged cleaning to be advisable on the basis of their initial inspections of the paintings before any window tests were performed we do not believe that the results of window tests would constitute reasonable knowledge of relevant facts because the window tests were invasive and the hypothetical willing seller would not necessarily have agreed to them 19at trial the estate also proffered an expert report by clarissa post sotheby’s vice president of old master paintings ms post’s report used comparables she was not available to testify and be cross-examined however and respondent accordingly objected to the admission of the report the estate thereupon withdrew it the report was in any event inadmissible in view of the author’s being unavailable for cross-examination see 125_tc_1 pack v commissioner tcmemo_1980_65 see eg 57_tc_650 aff’d on another issue 510_f2d_479 2d cir 50_tc_994 estate of mitchell v commissioner tcmemo_2011_94 101_tcm_1435 doherty v commissioner tcmemo_1992_98 63_tcm_2112 aff’d 16_f3d_338 9th cir farber v commissioner tcmemo_1974_155 33_tcm_673 aff’d without published opinion 535_f2d_1241 2d cir in the absence of comparables mr wachter’s report lacks any objective support for his valuation figures he effectively urges the court to accept them on the basis of his experience and expertise we have no basis for doing so see frates v commissioner tcmemo_1987_79 53_tcm_96 rejecting expert’s art valuations for lack of evidence of comparable sales reynolds v commissioner tcmemo_1981_714 43_tcm_115 petitioners’ expert has the more impressive credentials but essentially asks the court to accept his conclusions without offering an adequate explanation as to how these conclusions can be reached stone v united_states a f t r 2d ria n d cal rejecting a sotheby’s appraisal lacking a description of how the valuations were reached supplemented by a f t r 2d ria n d cal aff’d stone ex rel stone tr agreement v united_states a f t r 2d ria 9th cir finally there is the issue of maypole’s sale in date in general a valuation of property for federal tax purposes is made as of the valuation_date without regard to any event happening after that date see 279_us_151 post-valuation-date events however are not necessarily irrelevant to a determination of fair_market_value as of the valuation_date the general_rule against consideration of post-valuation date events is a rule_of relevance see 763_f2d_891 7th cir 101_tc_412 thus in some cases the subsequent sale price of a painting can be probative evidence of its fair_market_value on the valuation_date assuming intervening market conditions are taken into account see estate of newberger v commissioner tcmemo_2015_246 at mr wachter attempts to account for the nearly fivefold increase in value between his dollar_figure valuation in date and maypole’s dollar_figure sale price in date by arguing that the lowy cleaning vastly improved the painting’s condition and there was a significant surge in the market demand for old master paintings after we have rejected mr wachter’s claims regarding maypole’s precleaning condition as exaggerated as for his claims regarding market demand the estate introduced aggregate auction sales results demonstrating that of the highest sale totals for old masters auctions at sotheby’s and christie’s occurred after and included the date sotheby’s old masters auction however because these are only gross_sales figures they do not demonstrate the extent of appreciation in individual paintings as the sales figures may reflect a larger volume of paintings sold rather than an increase in sale prices consequently the aggregate sales volume figures fall considerably short of persuading us that either brueghel paintings or old master paintings generally experienced a nearly fivefold increase in value between date and date yet an appreciation rate of this magnitude would be necessary to reconcile mr wachter’s dollar_figure valuation of maypole with its sale at auction less than years later for approximately dollar_figure for this reason we find that the date auction price casts doubt on mr wachter’s valuation the lack of post-2005 market data in the record precludes any more definitive finding from maypole’s date sale price for the foregoing reasons we give very little weight to mr wachter’s report and testimony regarding the fair market values of the brueghel paintings on the valuation_date c respondent’s expert mr cardile respondent’s burden_of_proof we turn to a consideration of whether respondent has met his burden of showing that the paintings’ fair market values were equal to the amounts asserted in his amended answer namely dollar_figure for maypole and dollar_figure for orpheus mr cardile’s valuations as noted respondent offered the expert report and testimony of paul cardile mr cardile assigned valuation_date fair market values of dollar_figure to maypole and dollar_figure to orpheus he attributed orpheus to jan brueghel the elder but acknowledged a dispute over its attribution and therefore provided an alternate_valuation of dollar_figure in the event the painting were attributed to jan brueghel the younger as contended by mr wachter mr cardile employed a comparative market data approach as his valuation method a maypole mr cardile’s report observes that maypole’s image is one of pieter brueghel’s more popular motifs and is discussed in all the major works written about him the report explains that the popularity of kermesse ie festival scenes such as maypole caused pieter brueghel to produce multiple versions through his workshop with differing degrees of involvement by brueghel himself as opposed to workshop craftsmen according to the report the successful works would receive pieter brueghel’s signature and sometimes the date mr cardile’s report contends that the quality and valuation of pieter brueghel’s works largely turn on three factors the degree to which pieter brueghel’s hand --that is his direct intervention correction and supervision--is apparent in the work the condition of the work and the size of the work the report notes that provenance ie record of ownership and citation in the literature are additional factors that may add to the value indicated by the first three the report identifies as comparables and provides the public auction sale prices for four pieter brueghel paintings featuring the same subject and composition as maypole maypole-scene paintings that were sold at auction from through as follows date of sale date date date description inches price peasants dancing around a maypole by dollar_figure village scene with peasants dancing around a maypole by village kermesse with dance around the maypole dollar_figure by big_number big_number big_number date der tanz um den maibaum dance around the maypole by according to the report no other versions of the maypole scene sold from through the valuation_date however the report identifies three other paintings by pieter brueghel featuring a village kermesse but not a maypole scene --which according to the report were well within the parameters of comparables--that did sell at public auction during this period as follows date of sale date date date description inches price a village kermesse by kermesse of st george by kermesse of st george by dollar_figure big_number big_number mr cardile’s report treats these latter three paintings as a secondary group of comparables cited for the purpose of demonstrating that the market for pieter brueghel village scenes remained strong after the international economic downturn that followed the date terrorist attacks in the united_states and continued to strengthen through the first half of with respect to the comparables mr cardile’s report opines that maypole was closest in quality and condition to the maypole-scene painting that sold for dollar_figure in that maypole-scene painting according to mr cardile was considered by some to be the prototype for the others maypole ie the painting at issue exhibited the quality of the 1997-auctioned maypole-scene painting because mr cardile opined the facial characteristics in both were more lifelike reflecting work by pieter brueghel himself rather than workshop craftsmen mr cardile found the maypole-scene painting that sold for dollar_figure in to be a poor comparable because it had been transferred from its original support and was therefore in a compromised condition likewise he thought the two maypole- scene paintings that each sold for approximately dollar_figure million in to be inferior artistically in that the facial features of the villagers were more caricaturelike demonstrating a greater amount of workshop intervention than with maypole the estate through its expert mr wachter offered no specific rebuttal to mr cardile’s thesis that maypole was most comparable to the 1997-auctioned maypole-scene painting because both exhibited superior artistic quality in the rendering of facial features reflecting the hand of pieter brueghel himself mr wachter conceded that mr cardile’s comparables were good ones but insisted that the most comparable of the maypole-scene paintings was one of the 1999-auctioned works--specifically the one auctioned at sotheby’s for dollar_figure --because that painting like maypole on the valuation_date was quite dirty the maypole-scene painting he argues is most comparable to maypole sold for over dollar_figure million on date in a dirty uncleaned condition as contended by mr wachter and as reflected in the photograph thereof in evidence both that work and maypole are of the same scene and are the same approximate size yet mr wachter’s position is that maypole’s value more than six years later on the valuation_date was only dollar_figure--not quite half the sale price of the work he deems most comparabledollar_figure mr wachter sought to reconcile this discrepancy by 20mr wachter also offered no rebuttal to mr cardile’s contention that the market for pieter brueghel paintings remained strong from through notwithstanding the international economic downturn occasioned by the date terrorist attacks in the united states--as supported by his auction sale data from and contending that maypole was so much dirtier than the 1999-auctioned maypole-scene painting that the risk of cleaning it was considerably greater mr wachter is again unpersuasive as before we reject his cleaning risk thesis as exaggerated as to any value diminution mr cardile’s reasons for finding the 1997-auctioned maypole-scene painting most comparable to maypole have not been rebutted by the estate and we accept his opinion on this point having established the comparability of the 1997-auctioned maypole-scene painting mr cardile’s report nonetheless contends that a downward adjustment in maypole’s value was appropriate to account for the fact that the 1997-auctioned work’s provenance was superior to maypole’s--the former according to mr cardile’s findings having come from the collection of a well-known collector whereas maypole was likely from the f b greenstreet collection in london and then was in a lesser-known american private collection ie decedent’s from approximately finally mr cardile’s report considered the village-kermesse-scene comparables that were auctioned in and for prices ranging from approximately dollar_figure to dollar_figure million taking into account the larger size of each and the different subject matter relying principally on the 1997-auctioned work and maypole’s similar superior artistic quality and condition yet lesser provenance mr cardile concluded that maypole’s fair_market_value on date was dollar_figure we accept that valuation with one qualification on the basis of the entire record we are satisfied that on the valuation_date maypole was quite dirty and needed to be cleaned by a conservator we further accept that cleaning such a painting presented some degree of risk of damage for which a hypothetical willing buyer would insist on a discount we are not persuaded of mr wachter’s description of the nature or degree of that risk as it is incompatible with the routine manner in which mr hyland in consultation with a preeminent conservator made the decision to clean the painting mr cardile made no adjustment for the dirty condition of maypole on the valuation_date observing that surface dirt do es not affect the intrinsic value of an old master painting in view of the conservators’ assessment of the low risk of cleaning we place the discount pincite respondent has therefore shown and we hold that the fair_market_value of maypole on the valuation_date was of mr cardile’s dollar_figure valuation or dollar_figure b orpheus as noted mr cardile’s report attributed orpheus to jan brueghel the elder in contrast to mr wachter’s position that it should be attributed to jan brueghel the younger mr cardile’s report offered several reasons for this position first the report notes the catalog from a exhibition of orpheus at west’s gallery in london made this same attribution second the report opines that although orpheus appears to be a unique composition the style in which the animals are painted shows the hand of jan brueghel the elder as reflected in the rendering of animals in his known works third the report cites the writings of klaus ertz--acknowledged by both expert witnesses as a key authority on the brueghels--for the proposition that mythological themes played a rather subordinate role in jan brueghel the younger’s work mr cardile’s report found that no works of the same subject and composition as orpheus either by jan brueghel the elder or jan brueghel the younger were sold at public auction between and date however the report posits that three nonetheless comparable works by jan brueghel the elder were sold at auction from to as follows date date date date description inches st margaret and the dragon by virgin and child with saints surrounded by garlands in a landscape by allegory of the five senses by price dollar_figure big_number big_number the report posits that if orpheus is attributed to jan brueghel the elder it compares favorably to his other works and displays the best of his style it opines that orpheus is more valuable than the 2004-auctioned work because the latter is smaller but is less valuable than the 2001-auctioned work because the latter is larger and more complexdollar_figure the report accordingly estimates the fair_market_value of orpheus if attributed to jan brueghel the elder at dollar_figure in view of the dispute over attribution mr cardile’s report also posited comparables if orpheus were attributed to jan brueghel the younger those comparables were sold at public auction from through as follows 21mr cardile does not address the comparability of the 2003-auctioned work the sale of this work would tend to suggest a higher value for orpheus in any event date date date date date description inches garden of eden by element of air by sense of hearing by allegory of the four elements by price dollar_figure big_number big_number big_number the report concludes that a conservative estimate of orpheus’ value if attributed to jan bruegel the younger would be dollar_figure a figure less than any of the cited comparables’ sale prices finally mr cardile’s report notes with respect to orpheus’ condition that no bowing of the surface is apparent from the submitted photographic images and that surface dirt do es not affect the intrinsic value of an old master painting we generally accept mr cardile’s fair_market_value estimates for orpheus he presented cogent explanations for concluding that the painting is properly attributed to jan brueghel the elder whereas mr wachter offered only the conclusory observation that he was unaware of any leading scholar who would contend for the attribution to jan brueghel the elder as with maypole mr cardile supported his valuations of orpheus with reasoned argument based on objective market data however we find that certain adjustments are necessary first as with maypole mr cardile made no adjustment for the dirty condition of orpheus on the valuation_date the evidence satisfies us that orpheus was quite dirty on the valuation_date and therefore in need of a routine cleaning by a conservator we thus as with maypole apply a discount to account for the risk of cleaning second mr cardile’s report makes clear that he did not believe orpheus was bowed the lowy condition report establishes to our satisfaction that orpheus was bowed on the valuation_date mr cardile conceded at trial that bowing depending on its extent would possibly have a negative impact on orpheus’ value the record provides us scant evidence upon which to calculate the discount a willing buyer would insist upon for bowing though our best judgment is that some discount would be necessary in relation to an identical painting that was not bowed we find guidance nonetheless in the fact that the estate’s expert mr wachter whose valuation was based upon a firsthand inspection of orpheus made no mention of the bowing in his report we therefore will apply a discount off mr cardile’s valuation to account for the bowing finally while we found mr cardile’s report largely persuasive regarding orpheus’ attribution to jan brueghel the elder an attribution dispute nevertheless exists rendering a discount appropriate see 50_tc_994 doherty v commissioner tcmemo_1992_98 63_tcm_2112 aff’d 16_f3d_338 9th cir mr cardile valued orpheus at dollar_figure if attributed to jan brueghel the elder and dollar_figure if attributed to jan brueghel the younger an effective discount for attribution to the lesser-regarded artist because mr cardile has made a stronger case for attribution to jan brueghel the elder we weight the discount towards that attribution and limit it to thus applying a total discount of off mr cardile’s dollar_figure valuation premised on a jan brueghel the elder attribution respondent has met his burden of showing and we hold that orpheus had a fair_market_value of dollar_figure on the valuation_date to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division date number release date uil legend org organization name address address xx date org address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court june 20xx certified mail - return receipt requested dear a final adverse determination_letter as this is to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx you have agreed to this adverse determination our adverse determination was made for the following reasons organizations described in sec_501 and exempt under sec_501 must be organized and operated exclusively for an exempt_purpose your organization is not a charitable_organization within the meaning of sec_1_501_c_3_-1 you failed to meet the requirements of sec_501 and sec_1 c -1 d in that you failed to establish that you were operated exclusively for an exempt_purpose contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this ' determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment however you you also have the right to contact the office_of_the_taxpayer_advocate should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or you can contact the taxpayer_advocate nearest you by calling or writing to internal_revenue_service office of taxpayer_advocate taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ratnirez director eo examinations tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service n los angeles st ms los angeles ca taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition 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 examinations enclosures publication publication report of examination letter catalog number 34809f form a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year petiod ended december 20xx december 20xx legend org organization name xx date director director issue should org’s federal tax exempt status under sec_501 of the internal_revenue_code be revoked for failure to operate exclusively for exempt purposes facts org was founded by director in 20xx in 20xx org applied for federal tax exemption and was subsequently recognized by the irs by the letter dated october 20xx as an organization exempt from federal_income_tax under sec_501 of the internal_revenue_code org was also determined to be a public charity under sec_509 of the internal_revenue_code the purpose of org as stated in its articles of association is to attract individual public contributions of dollar_figure each and to forward all resulting annual income to help support federally sponsored children’s education and health programs around america the board_of directors is composed of director director and a secretary per director well known children charity organizations such as etc receive most of financial supports from the public however there are organizations that are not well known that do not get much support org will solicit and collect public contributions and forward them to children welfare funds that do not receive much support the organization states on its website that it proudly operates on behalf of the three very important and distinct groups of people they are children and families who are in need families and individuals who want the possibility of owning a home but who may not have the ability or means to purchase a place they can call home homeowners who have the desire to use their real_estate as a way to personally help provide direct support a through a responsible reputable and federally recognized charitable_organization b c who are uncomfortable with and or do not wish to use real_estate agents or corporations who have been unsuccessful selling their homes in the real_estate market since its inception in 20xx the organization has not engaged in any activities to achieve its exempt purposes the organization has no assets and receives no support since it came into existence since march 20xx the organization’s planned activity is the homeowner contest per director the homeowner contest is a new way of doing business it has not been done by other non-profit organizations form 886-a rev service_department of the treasury - internal revenue page -1- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx december 20xx legend org organization name xx date director director the homeowner contest works as follows homeowners who want to sell their house but do not want to deal with real_estate agents or do not get the offers they like or cannot sell their house on the real_estate market or who want to use their house as a way to help the children will request org to hold a contest using their house as a prize each contest participant not the homeowner will donate dollar_figure dollar_figure if paid_by credit card for a chance to win the house the contest participants are informed that the dollar_figure they paid to participate in the contest will be tax deductible as charitable_contribution the numbers of participants and the proceeds from the contest will determine whether or not any charity will receive distributions there are three possible ending scenarios for each contest scenario the proceeds from the contest exceeded the homeowner’s desirable selling_price - once the proceeds from the contest exceeded the seller’s desirable selling_price the seller is obligated to transfer the title to the winner the winner is not randomly drawn instead the participant will have to tell the seller in the eyes of the seller why he or she deserves to win the house director provided the following example to illustrate scenario proceeds from contest less seller’s share of proceeds gross_profit from contest less net profit contributions to a children fund salaries contest expenses scholarship fund - contributions to a children fund - scenario proceeds from the contest equaled the homeowner’s desirable selling_price - if the proceeds from the contest equals to the homeowner’s desirable selling_price the seller will get the entire proceeds from the contest and transfer the title to the selected winner no children funds will receive any money the director will not get his share of salaries expenses from the proceeds proceeds from contest less seller’s share of proceeds gross_profit from contest less contributions to a children fund salaries contest expenses department of the treasury - internal revenue page -2- form 886-a rev service form 886-a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx december 20xx legend org organization name xx date director director scholarship fund - contributions to a children fund - net profit scenario proceeds from the contest are less than the homeowner’s desirable selling_price - if the proceeds from the contest are less than the homeowner’s desirable selling_price the seller can accept it or elect to have the proceeds donated to a children fund the seller is not obligated to select a winner per director the homeowner contest will benefit three classes of people the homeowners someone who wants a house but cannot afford to buy a house and the children and families in need fund director will be the one selecting which organization is to receive the money the organization that best uses the money will get the money director will rely on the irs’s report to determine which organization allocated the most funding to its programs if there is any money to be distributed to a children’s director intends to put the homeowner contest in to operation within next year he will utilize newswire websites non-profit forums to promote the homeowner contest once the homeowner contest becomes successful director will expand it nationwide and keep it going for years he will also consider expanding the contest into other areas such as real_estate if there are contests per year director will manage the contest on full-time basic and make it his own employment in april 20xx org was offered for sale on ebay the starting bid was dollar_figure period began on april 20xx and ended on april 20xx org was subsequently removed from ebay prior to closing when asked why org was listed on ebay for auction and who offered the organization for sale director answered j don’t know they the director responded ebay they even credited my credit card for the transaction fee they said sorry when asked who the bidding somebody else this stuff happens all the time it might have been when asked if it was the secretary who put the organization on ebay for sale director said no it was not her when asked in what circumstance director found out that the organization was listed on ebay for sale director responded somebody contacted me to find out more information regarding the organization and the sale form 886-a rev service_department of the treasury - internal revenue page -3- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended december december 20xx 20xx org legend org organization name xx date director director at the conclusion of the interview director said jt is good if we can find out who put the organization on ebay for sale if not it is okay laws sec_501 of the internal_revenue_code exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_1_501_c_3_-1 of the regulations clarifies that an organization is not operated exclusively for exempt purposes if its net earning inures to the benefit of private individual sec_1_501_c_3_-1 of the regulations states an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interest such as designated individuals the creator or his family shareholders or the organization or persons controlled directly or indirectly by such private interests revrul_81_94 1981_1_cb_330 held that an exempt_organization operates to serve the private interest of the designated individual is not operated exclusively for religious or charitable purposes therefore it does not qualify for exemption from federal_income_tax under sec_501 of the code governments position an organization to be qualified as an entity described in sec_501 of the internal_revenue_code or in certain other categories of tax-exempt_organization must be organized and operated so that no part of its net earning inures to the benefit of any private_shareholder_or_individual the essence of the concept is to ensure that a tax-exempt charitable_organization is serving a public interest and not a private interest sec_1_501_c_3_-1 of the regulations made it clear that an organization is not operated exclusively for exempt purposes if its net earning inures to the benefit of private individual org does not operate in accordance with its exempt purposes since its inception the organization has not engaged in any activities to accomplish and further its exempt purposes the form 886-a rev service_department of the treasury - internal revenue page -4- form a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx december 20xx legend org organization name xx date director director organization has no assets and plans enabling it to conduct activities to further the exempt purposes the children the organization claims the homeowner contest will benefit are not readily identifiable the organization claims that he will help lesser known children welfare funds however the organization’s website only listed the very well-known orgs such as etc the homeowner contests although has not been implemented once carried out will substantially serve the private interests of the persons who are not the object of charity therefore by conducting the homeowner contest the organization substantially serves the private interest of individuals who are not in a charity class violating the basic requirement of sec_501 operated exclusively for religious charitable scientific purposes the evidence indicates that the director intends to carry out the homeowner contest promoting the contest in through newswire non-profit forum etc federal tax exempt status under sec_501 or any other code section is granted to organizations with the intent that these organization will serve the public interest and operate in manner consistent with thé purposes for which exemption was granted federal tax exempt status is not an asset such as stock bond rights or a business that can be transferred bought and sold offer for sale of federal tax exempt status is seeking to substantially enrich the private individual selling the exemption and therefore is not an exempt_purpose therefore org’s federal tax exempt status under sec_501 should be revoked for failure to operated exclusively for exempt purposes as described under such section see laws section above taxpayers position the taxpayer has verbally agreed to the proposed revocation of tax exempt status under sec_501 conclusion org’s federal tax exempt status under sec_501 should be revoked for failure to operate exclusively for charitable religious and scientific purposes the effective date of this revocation will be january 20xx form 886-a rev service_department of the treasury - internal revenue page -5-


internal_revenue_service number info release date index number robert p bartek ph d magical wonders daycare center inc sixth avenue ford city pa department of the treasury washington dc third party communication none date of communication not applicable_person to contact susanna rose id no telephone number refer reply to cc psi genin-107710-05 date date dear dr bartek this letter responds to your inquiry dated date relating to a late election under subchapter_s for the taxable_year automatic relief is unavailable under revproc_97_48 because the entity’s first tax_return was filed late similarly you are ineligible for relief pursuant to revproc_2003_43 because the window period has closed generally to request relief for a late s_corporation or entity classification election you must request a private_letter_ruling plr from the national_office the procedures for requesting a plr are set forth in revproc_2005_1 copy enclosed the standard user_fee for a plr request is dollar_figure however if the entity’s gross_income was less than dollar_figure million on the tax_return it may pay the reduced user_fee in the amount of dollar_figure in order for the lower fee to be accepted you must include a statement verifying the entity’s gross_income for the last 12-month taxable_period otherwise you will be billed for the higher fee if you decide to submit a formal request for a plr please follow the sample format shown in appendix b of revproc_2005_1 your request must include required procedural statements a user_fee check and documents to substantiate your intent to be an s_corporation please refer your ruling_request to the following address attn cc pa t p o box ben franklin station washington dc direct to cc psi genin-107710-05 incidentally the irs has developed two compact discs cds to help educate small_business owners on their tax responsibilities publication introduction to federal taxes for small_business self-employed and publication small_business workshop these items are free and can be ordered by calling an onli ne classroom is available at www irs gov businesses small this letter has called your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful if you have any additional questions please contact our office at sincerely s dianna k miosi dianna k miosi chief branch office of associate chief_counsel passthroughs special industries enclosure revproc_2005_1