internal_revenue_service commerce street mc dal dallas tx department of the treasury 501-dollar_figure release number date date legend org - organization name xx - date address - address org address taxpayer_identification_number form tax period s ended person to contact id number contact numbers phone fax certified mail - return receipt requested dear in a determination_letter dated june 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective may 20xx this is a final letter with regard to your exempt status we previously provided you a report of examination explaining why we believe revocation of your exempt status was necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on date you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you are required to file federal_income_tax returns for the tax period s shown above if you have not yet filed these returns please file them with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns 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 contact the person whose name and telephone number are shown at the beginning of this letter thank you for your cooperation sincerely nanette m downing director eo examinations internal_revenue_service department of the treasury te_ge exempt_organizations second avenue m s w540 seattle washington taxpayer_identification_number form tax period s ended person to contact id number contact numbers telephone fax date date org address dear we have enclosed a copy of the preliminary findings of our examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code irc is necessary your organization may instead make an election to be treated as a taxable homeowner's association under sec_528 if you accept our findings please sign and return the enclosed form 6018-a consent to proposed action to the individual listed above we will then send you a final letter revoking your exempt status please also file federal_income_tax return form 1120-h for the tax_year ending april 20xx with the individual listed above if you disagree with our findings please provide in writing any additional information you believe may alter the findings your reply should include a statement of the facts the applicable law and arguments that support your position please also include any corrections to the facts that have been stated if in dispute upon receipt of your response we will evaluate any additional information you have provided prior to issuing any final report of examination please respond within days from the date of this letter thank you for your cooperation wit sincerely anne jewell revenue_agent enclosure form 886-a explanation of items form 6018-a consent to proposed action schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number ein legend org - organization name county co-4 co-5 - poa - poa p xx - date ein - ein state - state county - treasurer - treasurer ra-1 - ra co-1 co-2 c0-3 3rp 4th g companies issues does org org qualify as a tax exempt homeowners_association under sec_501 of the internal_revenue_code irc does org qualify as a for-profit homeowners_association under sec_528 what are the exempt and non-exempt function income and expenses as defined in irc if so what are the tax implications of the revocation and reclassification of the organization under sec_528 an alternative position based on if the organization continued to qualify as an organization exempt under sec_501 is included at the end of the primary position facts org _ org is currently classified as a tax-exempt_organization under sec_501 of the internal_revenue_code irc per the articles of incorporation articles the organization was originally organized in state on october 19xx these articles were later amended on october 20xx to expand the stated purpose the organization was created to acquire maintain and conduct building and property and activities for a community life and center at the org as above described to engage in educational and recreational facilities for members to acquire other_property and construct buildings for such proposes to foster and promote good citizenship among is members to promote and foster educational recreational ' physical and social activities of its members and their friends to engage in such activities as shall raise the standards of civic morality and community welfare the 19xx articles were expanded with the following language during the 20xx revision org’s primary purpose is to own repair maintain and improve the roads within the org and to collect and disperse road maintenance fees related to the private roads within the plats of the assessor's plat of org in volume of plats records of county state or in volumes and of said records or any additions thereto as platted the bylaws were also amended at this time the current bylaws provide the following definition of a member any property owner who chooses to pay an annual membership fee established by the board_of directors to org for the rights to enjoy org member properties and the secondary purposes of org as outlined in the amended articles of incorporation on october 20xx a form_2848 power_of_attorney and declaration of representative was received by the internal_revenue_service allowing poa authority to discuss income_tax for the tax periods ending april 20xx through april 20xx form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit om b86-4 explanations of items ave name of taxpayer org tax identification_number ein year period ended 20xx - 20xx on september 20xx a letter and publication your rights as a taxpayer and a form_4564 information_document_request ‘idr were issued to notify the organization of an examination of the form_990 return of organization exempt from income_tax for the year ended april 20xx the initial appointment was held november 20xx at poa’s office treasurer the treasurer and poa poa were present on behalf of the organization the following is a summary of the relevant points of the initial interview questions asked in bold and response in italics to get a full understanding of your organization please describe the history of your organization and all of its activities the organization was started in 19xx as a group of owners who purchased property from the ra-1 the original plan fiad lots which were completely undeveloped and were mostly for tents the mission is to manage and maintain the roads of org the roads were later deeded to org the organization has changed several times over the years based on who has had power over the board_of directors the organization has been involved in major law suits the first in 20xx was based around additional assessments made to replace a bridge the organization won the right to make assessments against the owners based on a formula but the formula was not specified according to the organization this suit also stated that the organization was not a homeowners_association under state law the formula determined was based on how many of the main and side roads were used when accessing the properties the second law suit was a class action suit against the owners of the organization who were not paying assessments this suit validated the formula used before with minor changes to make it more fair the new formula was the old formula and the assessed value of the property the suit also allowed the organization to place liens or even foreclose on properties the organization currently has owners in collections this case also allowed them to collect for administrative and legal costs the organization had a road budget of dollar_figuredollar_figure and an admin budget of dollar_figure dollar_figure used for bookkeeping and lawyers as the organization has no employees the organization is also in the process of selling some of their properties some gained through foreclosure and some were road accesses the properties owned by the organization include two beach access points and a stretch of river beach what are the rules for non-owners being on the property the road is not open to the public except in limited ways the co-1 road to the first arch is public access and the organization has an easement across the land from the first arch to the second arch miles org owns the roads while the co-1 has an easement per the co-1 the only people who should be on the roads after the first gate are owners or those on official co-1 business the remainder of the road is marked as being for property owners and guests only there are signs on both arches which state that the road is private the organization requires stickers to be present on cars that enter the property if the sticker is not present on the car the organization will place a note on the car when asked the treasurer stated that usually if a person is on the property they are instructed to carry out their business leave the premises and that they are not to return a does the organization have a gate or security guard shack the organization does have a guard shack but it has not been used in years form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number ein how commonly does the organization receive income from logging this happens once every years or so and was not for the sale of lumber but instead was compensation_for use of the roads the organization was paid dollar_figuredollar_figure the lumber company was required to pay repair costs for any damage done to the roads per the treasurer the money was used fo pay for flood damage and the class action lawsuit for what reason was the organization property logged the logging was occurring on the land on the other side of the property and the logging company had an easement across the organization in order to reach their property what access is given to the general_public to view the waterfalls and the river the public are not given access to view the waterfalls and river the waterfalls are located beyond the area with the co-1 easement what benefit do you provide to the general_public no benefit is provided to the public what are the requirements for being a property owner they must own property within the organization’s serviced area what classes of members or property owners are there and are there any differences in voting rights there are no classes of property owners and in order to vote you must be in good standing have paid all assessments what are the dues initiation fees for the various classes of members assessments are between dollar_figuredollar_figure and dollar_figuredollar_figure a year based on the formula does the organization own lease or sublease any real_property by debt if so is the property encumbered the organization owns roads and other properties none are encumbered by debt per the transcript of the class action law suit posted on the organization’s website the organization is not primarily a membership based organization the determination was made that the organization may solicit voluntary membership and dues for all purposes besides the maintenance of the roads the law suit establishes the validity of the agreement between org and the co-1 this agreement establishes a basis for dues assessments to the org members to maintain the of a mile that is owned by the co-1 form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit explanations of items form 886-a rev date name of taxpayer org tax identification_number ein year period ended 20xx - 20xx the law suit finds that the administrative costs of the organization including legal fees from this lawsuit may be assessed against the owners the class action finds that the correct assessment formula would be of the implied easement formula ie and the assessed value of the property the determination of commercial use of the property is also important as commercial activity increases traffic on the roads the determination was made that a surcharge of dollar_figure per lot may be assessed for commercial use the minutes for the board meeting held march 20xx state that there was an issue with guests being on the property and being told that they were not allowed to have access to the property the organization requires that owners display a sticker on their car to show that they are allowed to park on the property guests would receive a hanging tag these plans were finalized january 20xx with each owner receiving two guest tags with the option to purchase more for dollar_figure a pair the minutes for june 20xx state that a sign should be posted at co-2 to notify non-residents that only residents and their guests may park on co-3 money was allocated for this activity during the tour of the facility several posted signs were observed the signs stated that the roads are private roads for owners only signs were observed on both the first and second arches the following are the income and expenses as reported by the organization income income statement 20xx04 20xx04 administrative income income for admin use asphalt crushed asphalt road income income for road maintenance security police patrols special assessment repair flood damage 20xx archway slide area guard shack mailbox roadbed raise roadbed co-2 roadway repair flood damage washout repair road along tracks total special assessment total income cost_of_goods_sold road expenses asphalt grindings compacting compacting road material culverts dozer grading gravel hauling labor form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit name of taxpayer form 886-a rev date org explanations of items tax identification_number ein year period ended 20xx - 20xx rental equipment road expense supplies snow removal street lighting street signs track-hoe rental water truck road expense - other total road expense total cost_of_goods_sold gross_profit expense administrative cost annual meeting bank service charges bank service charges donations insurance insurance licenses and permits licenses miscellaneous miscellaneous office supplies office supplies postage and delivery postage and delivery professional fees professional fees accounting accounting fees legal legal fees administrative costs - other total administrative cost grader shed expense total expense other income expense other income_interest income_interest income other income other income total other income net_income per further discussion it was noted that the logging company owned property within the organization's boundaries the logging company paid a total of dollar_figuredollar_figure as a special assessment for_the_use_of the roads by the logging trucks the logged area was located behind the land owned by the organization the logging activity was in process from october 20xx through april 20xx a total of weeks per the org response to an idr dated january 20xx the organization noted two expenses which could be directly related to the existence of logging trucks on the roads these expenses as shown below are for sss department of the treasury-internal revenue service form 886-a i-i994 catalog number 20810w publish no irs gov page schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number ein lumber and repairs on a bridge within the organization’s boundaries the expenses were incurred in the next fiscal_year ten months after the end of the logging activity date 20xx 20xx aa payee co-4 co-5 amount dollar_figuredollar_figure dollar_figuredollar_figure per an org idr response there are a total of property owners in the organization of these are - permanent residents who are likely to drive on the roads an average of twice a day once as they leave and once when they return the remaining property owners are non-residents and more likely to use the roads on a more intermittent basis on average they may drive the roads twice per time in residence per the org idr response it is likely that the non-residents used the facility an average of times during the six months that the logging company was using the roads per the org idr response a large logging truck does much more damage to a road than a passenger car or pickup ‘ruck for purposes of this analysis it is assumed that a logging truck does twice as much damage as a passenger car or pickup truck org spent a total of dollar_figuredollar_figure on road maintenance during the year ended april 20xx law sec_501 sec_501 holds that civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes it also requires that no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual revenue ruiing 1974_1_cb_131 modifies revrul_72_102 to make clear that a homeowners’ association oft the kind described in revrul_72_102 must in addition to otherwise qualifying for exemption under sec_501 of the code satisfy the following requirements activities that confer benefit on a community comprising a geographical unit which bears a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof it owns and maintains only common areas or facilities such as roadways and parklands sidewalks and street lights access to or the use and enjoyment of which is extended to members of the general_public and is not restricted to members of the homeowners’ association it must not conduct activities directed to the exterior maintenance of private residences and it must engage in flat top lake ass'n inc v us holds that an organization will not qualify for tax exempt status under sec_501 if it restricts its facility and activities only to members it sites rev_rul which states that a homeowner's association must serve a community which bears a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or unit second it must not conduct activities form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page_6 form 886-a rev date org schedule number or exhibit name of taxpayer explanations of items tax identification_number ein year period ended 20xx - 20xx directed to the exterior maintenance of any private residence third common areas or facilities that the homeowners’ association owns and maintains must be for the use and enjoyment of the general_public sec_528 sec_528 holds that a homeowners_association as defined in subsection c shall be subject_to taxation under this subtitle only to the extent provided in this section a homeowners_association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes a tax is imposed for each taxable_year on the homeowners’ association taxable_income of every homeowners_association such tax shall be equal to percent of the homeowners’ association taxable_income - sec_528 defines a homeowners_association as an organization which is a condominium_management_association a residential_real_estate_management_association or a timeshare_association if such organization is organized and operated to provide for the acquisition construction management maintenance aid care of association_property percent or more of the gross_income of such organization for the taxable_year consists solely of amounts received as membership dues fees or assessments from owners of residences or residential lots in the case of a residential_real_estate_management_association or percent or more of the expenditures of the organization for the taxable_year are expenditures_for the acquisition construction management maintenance and care of association_property and in the case of a timeshare_association for activities provided to or on behalf of members of the association no part of the net_earnings of such organization inures other than by acquiring constructing or providing management maintenance and care of association_property and other than by a rebate of excess membership dues fees or assessments to the benefit of any private_shareholder_or_individual and such organization elects at such time and in such manner as the secretary by regulations prescribes to have this section apply for the taxable_year sec_528 defines the term residential_real_estate_management_association as any organization meeting the requirements of subparagraph a of paragraph with respect to a subdivision development or similar area substantially_all the lots or buildings of which may only be used by individuals for residences sec_528 defines association_property as property held by the organization property commonly held by the members of the organization property within the organization privately held by the members of the organization and property owned by a governmental_unit and used for the benefit of residents of such unit sec_528 for purposes of this section defines homeowners_association taxable_income as an amount equal to the excess if any of the gross_income for the taxable_year excluding any exempt_function_income over the deductions allowed by this chapter which are directly connected with the production of the gross_income excluding exempt_function_income the section also allows for the following modifications there shall be allowed a specific deduction of dollar_figure no net_operating_loss_deduction shall be allowed under link sec_172 and no deduction shall be allowed under part viii of subchapter_b relating to special_deductions for corporations sec_528 defines exempt_function_income as any amount received as membership dues fees or assessments from owners of real_property in the case of a residential_real_estate_management_association federal tax regulations regulations sec_1_528-1 homeowners associations form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number ein c residential_real_estate_management_association -residential real_estate management associations are normally composed of owners of single-family residential units located in a subdivision development or similar area however they may also include as members owners of multiple-family dwelling units located in such area they are commonly formed to administer and enforce covenants relating to the architecture and appearance of the real_estate development as well as to perform certain maintenance duties relating to common areas taxpayer’s position the taxpayer's position is being solicited at this time government’s position issue does org org qualify as a tax exempt homeowners_association under sec_501 of the irc org does not qualify as a tax exempt homeowners_association per the findings of revrul_74_99 and flat top lake ass'n inc v u s there are three requirements for a homeowners_association to be considered tax exempt under sec_501 one the organization must engage in activities that confer benefit on a community comprising a geographical unit which bears a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof two it must not conduct activities directed to the exterior maintenance of private residences finally it must own and maintain only common areas or facilities such as roadways and parklands sidewalks and street lights access to or the use and enjoyment of which is extended to members of the general_public and is not restricted to members of the homeowners’ association the organization satisfies the first and second requirements for exemption but does not satisfy the third requirement the organization as stated during the initial interview and seen during the tour of the road does not allow members of the general_public access to their road or the common areas maintained by the organization as noted in the facts above org will ask persons who do not have a parking decal or hanging tag not enter their property again the organization also posted signs in several locations along the road which state that only members and their guests are allowed access to the road as such the communal property of org is not made available to the general_public and the organization can not qualify under sec_501 issue does org qualify as a for-profit homeowners_association under sec_528 per their bylaws org is organized as a for-profit homeowners_association under sec_528 as a residential real-estate management association sec_528 defines a homeowners_association as an organization which is organized and operated to provide for the acquisition construction management maintenance and care of association_property a residential real-estate management association is any organization meeting the requirements of a subdivision development or similar area substantially_all the lots or buildings of which may only be used by individuals for residences form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number ein given the conclusion reached in issue org is operated to manage and maintain the roads of co-3 per the current articles of incorporation the organizations primary purpose is to own repair maintain and improve the roads within the org and to collect and disperse road maintenance fees related to the private roads within the plats of the assessor’s plat of org in volume of plats records of county state or in volumes and of said records or any additions thereto as platted this furthers the argument that the organization is organized in such a way as to qualify for exemption under sec_528 issue what are the exempt and non-exempt function income and expenses as defined in sec_528 per sec_528 the taxable_income of a homeowners_association is the gross_income for the taxable_year less any exempt_function_income and any deductions that are directly connected with the production of the gross_income sec_528 further defines exempt_function_income as any amount received as membership dues fees or assessments from owners of real_property in the case of a residential_real_estate_management_association as noted in the initial interview and the books_and_records of the organization the organization receives the majority of their money from assessments made for road and administrative fees these amounts would be considered exempt_function_income to an sec_528 organization the organization’s purpose is to conduct activities which support the community as a whole rather than provide a specific benefit to support this purpose the organization may impose annual or special_assessments for road maintenance as noted in the initial interview the organization also received dollar_figuredollar_figure from a logging company for use of the road this invoine was classified as a special assessment the fundamental difference between a special assessment for road maintenance and the special assessment made against the logging company is in the purpose for which it is assessed a valid special assessment would be assessed against the entire property owner community or a distinct portion of such community in order to pay for an unusual repair such as the replacement of a culvert or to fix the damage from a flood in comparison the special assessment made against the logging company was not made in response to the need for an unusual repair nor was it an assessment that was paid_by any distinct portion of the community the assessment was instead a payment for use of the road by an outside party to alleviate some of the cost of maintaining the road as well as paying for any additional costs associated with increased traffic as such this income would not be considered exempt_function_income the total exempt_function_income is dollar_figure in the year ended april 20xx and dollar_figure in the year ended april 20xx the non-exempt function income includes all investment and other income that is not related to the exempt_purpose of an sec_528 organization this is income is as follows non-exempt function income 20xx04 20xx04 interest_income other income other income - logging form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit rov b86 explanations of items tax identification_number ein name of taxpayer org the non-exempt function expenses are those expenses which are directly connected to the production of the non-exempt income in this instance while the organization may not deduct any portion of expenses from the interest_income as it has not directly related expenses it may deduct any expenses which are directly related to the income from the logging company these expenditures have been allocated using the method below year period ended 20xx - 20xx per sec_528 the organization may deduct only those expenses which are directly related to the production of the non-exempt function income the organization identified the following transactions as directly related to damage caused by the logging trucks date 20xx 20xx payee co-4 co-5 amount dollar_figuredollar_figure dollar_figuredollar_figure while these transactions are directly related to the unrelated business activity they may not be deducted in the year ended april 20xx as they were not incurred until the following year however these costs are fully deductable in the following year as valid road maintenance_expenses the organization may deduct an allocated portion of the years total road maintenance_expenses to the unrelated business activity using a slightly modified version of the allocation method provided by org the road maintenance_costs may be allocated using the estimated road use by logging trucks shown below estimated road use by logging trucks trips made by logging trucks damage severity factor weighted number of trips trips made by property owners total trips made percentage of trips made by logging trucks the estimated number of trips made by logging trucks was calculated using the following calculation method provided by org estimated number of trips by logging trucks number of trips per day number of days per week number of weeks october 20xx through april 20xx estimated trips made form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items form 886-a rev date name of taxpayer org the explanation for the damage severity factor per org is as foliows a large logging truck does much more damage to a road than a passenger car or pickup truck for purposes of this analysis it is assumed that a logging truck does twice as much damage as a passenger car or pickup truck the organization used a damage severity factor of to represent this increased damage year period ended 20xx - 20xx tax identification_number ein the estimated number of trips by property owners was calculated using the following calculation method provided by org estimated number of trips by property owners number of permanent residents permanent resident trips per week two per day number of weeks estimated trips made non residents seasonal weekend non resident trips one in one out average number of days used by nonresidents during the time the logging company was also using the road estimated number of trips by property owners in addition to the allocation factor shown above the agent also allocated the portion of road maintenance_expenses that would have been incurred during the logging assuming that the maintenance expense was incurred evenly over the course of the year this calculation has been shown below allocated total maintenance_expenses total road maintenance_expenses dollar_figuredollar_figure weeks per year weeks used by logging company total maintenance_costs during logging dollar_figure dollar_figure this maintenance cost figure is then multiplied by the estimated use by logging trucks to calculation the _total maintenance expense allocable to the logging activity as shown below total maintenance_costs during logging percentage of use by logging trucks total allocable expenses dollar_figure dollar_figure form 886-a department of the treasury-internal revenue service catalog number 20810w _publish no irs gov page_11 schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org given the above calculation the organization may deduct a total of dollar_figure from the income received from the logging trucks using the roads year period ended 20xx - 20xx tax identification_number ein as such the total net non-exempt function income is shown in the following table net non-exempt function income 20xx04 20xx04 interest_income other income other income - logging other expenses - logging net non-exempt function income issue if so what are the tax implications of the revocation and reclassification of the organization under sec_528 given the conclusions reached in issues through the organization can possibly qualify as an organization exempt under sec_528 however this code section requires that in any given year the organization have either of the total income of the organization consist of membership dues fees or assessments from owners of residences or residential lots or or more of the expenditures of the organization are for the acquisition construction management and care of association_property org given the income statement shown above has the following percentages of income from membership dues fees and assessments percentage of exempt_function_income 20xx04 20xx04 exempt_function_income total income as noted in the figures above the organization meets the exempt_function_income test in only the year ended april 20xx the year ended april 20xx did not qualify due to the non-exempt function income received from the logging company org given the income statement above has the following percentages of expenditures made for the acquisition construction management maintenance and care of association_property this figure includes all expenditures made including those made as a result of the logging trucks using the road percentage of exempt_function expenditures 20xx04 20xx04 exempt_function expenses form 886-a i-1984 catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer org total expenses year period ended 20xx - 20xx explanations of items tax identification_number ein the organization also does not qualify for this code section under the expenditure test as in nether year do they meet the requirement as such the organization may not make the election to be treated as a homeowners_association under sec_528 for the year ended april 20xx but may for the year ended april 20xx sec_528 defines a homeowners_association taxable_income as the amount equal to the excess if any of the gross_income less the exempt_function_income for the taxable_year less any deductions which are directly connected with the production of those non-exempt activities exempt_function_income is defined as any membership dues fees or assessments from owners of real_property the calculation of taxable_income for the year ended april 20xx has been shown in the first table below and includes investment_income and any additional income that is received by the organization in a given year form 1120-h u s income_tax return for homeowners associations for year ended april 20xx 20xx04 w w w o q o o m type of homeowners_association residential real_estate association total exempt_function_income must meet gross_income_test total expenditures made for purposes described in expenditure test association's total expenditures_for the tax_year tax-exempt_interest received or accrued during the tax_year gross_income n o w r o o n o c dividends taxable interest gross rents gross royalties capital_gain_net_income net gain_or_loss from form_4797 other income gross_income add line sec_1 through deductions salaries and wages repairs and maintenance rents taxes and licenses interest depreciation form 886-a catalog number 20810w page_13 _publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer org explanations of items tax identification_number ein other deductions total deductions add lines through taxable_income before specific deduction of dollar_figure subtract line from line specific deduction of dollar_figure year period ended 20xx - 20xx dollar_figure - tax and payments taxable_income subtract line from line enter of line tax_credit sec_22 total_tax subtract line from line the second table calculates the taxable_income for the year ended april 20xx as that year does not qualify for the sec_528 election this has been calculated using the corporate tax_rate ----------------_ form_1120 u s_corporation income_tax return for year ended april 20xx a gross_receipts b less returns and allowances c balance cost_of_goods_sold gross_profit subtract line from line 1c dividends interest gross rents gross royalties capital_gain_net_income schedule d form_1120 net gain or losso from form_4797 part il line other income total income compensation of officers directors etc salaries and wages repairs and maintenance bad_debts rents taxes and licenses interest charitable_contributions depreciation d l w a o d n a o a d o o - - - - - - - - - - - - form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number ein year period ended 20xx - 20xx name of taxpayer org - - - - - depletion advertising pension profit-sharing etc plans employee benefit programs domestic_production_activities_deduction other deductions total deductions taxable_income before net_operating_loss_deduction and special_deductions less a net_operating_loss_deduction - - b special_deductions taxable_income tax due conclusion as noted in the above analysis the organization does not qualify for exemption under sec_501 of the irc but does qualify under sec_528 as a taxable homeowners_association for the year ended april 20xx as such the organization may make an election in the year ended april 20xx and all subsequent years when filing the form_1120 to instead file the form 1120-h if they continue to qualify in the year ended april 20xx the organization would be assessed dollar_figure in income_tax in the year ended april 20xx the organization does not qualify for exemption under either sec_501 or sec_528 as such they must file form_1120 for the year in question the tax to be assessed in the prior year would be dollar_figure treatment under sec_528 is an election made every year upon the filing of the tax_return an organization may qualify for exemption in one year but not the next due to unusual income as such the total_tax to be assessed against the organization is dollar_figure alternative positon in the alternative if the organization continues to qualify for exemption under sec_501 should the income from logging truck using the road received by the organization in the year ended april 20xx be considered unrelated businesses income under sec_511 issues is the revenue received from the logging company related to the exempt_purpose of the organization if not what expenses may be allocated to the unrelated_business_income what is the total unrelated_business_income_tax due form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx - 20xx tax identification_number ein facts on september 20xx a letter and publication your rights as a taxpayer and a form_4564 information_document_request idr were issued to notify the organization of an examination of the form_990 return of organization exempt from income_tax for the year ended april 20xx the initial appointment was held november 20xx at the power of attorney's office treasurer the treasurer and poa poa were present on behalf of the organization the following is a summary of the relevant points of the initial interview in relation to the income from the logging activity how commonly does the organization receive income from logging this happens once every years or so and was not for the sale of lumber but instead was compensation_for use of the roads the organization was paid dollar_figure as well as the lumber company fixing any damage done to the roads per the treasurer the money was used to pay for flood damage and the class action lawsuit for what reason was the organization property logged the logging was happening on the land on the other side of the property and the logging company had an easement across the organization in order to reach their property per further discussion it was noted that the logging company owned property within the organization and paid a total of dollar_figuredollar_figure as a special assessment for_the_use_of the roads by the logging trucks the area being logged is behind the area owned by the organization the logging activity was in process from october 20xx through april 20xx a total of weeks per the inforiiation document request idr response dated january 20xx the organization noted two expenses which could be directly related to the existence of logging trucks on the roads these expenses as shown below are for lumber and repairs on a bridge within the organization the expenses were incurred in the next fiscal_year ten months after the end of the logging activity date 20xx 20xx payee co-4 co-5 amount dollar_figuredollar_figure dollar_figuredollar_figure per idr response there are a total of property owners in the organization of these are permanent residents who are likely to drive the roads an average of twice a day once as they leave and once when they return the remaining property owners are non residents and more likely to use the roads on a more intermittent basis on average they may drive the roads twice per time in residence per the org it is likely that the rion-residents used the facility an average of times during the six months that the logging company was using the roads per org a large logging truck does much more damage to a road than a passenger car or pickup truck for purposes of this analysis it is assumed that a logging truck does twice as much damage as a passenger car or pickup truck form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer org org spent a total of dollar_figuredollar_figure on road maintenance during the year ended april 20xx year period ended 20xx - 20xx tax identification_number ein explanations of items org did not file a form 990-t for the period in question law sec_512 provides that the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the deductions which are directly connected with the carrying on of such trade_or_business treasury regulations regulations sec_1_512_a_-1 defines unrelated_business_taxable_income as the gross_income derived from any unrelated_trade_or_business regularly carried on less those deductions allowed by chapter of the code which are directly connected with the carrying on of such trade_or_business subject_to certain modifications referred to in sec_1_512_b_-1 to be deductible in computing unrelated_business_taxable_income therefore expenses depreciation and similar items not only must qualify as deductions allowed by chapter of the code but also must be directly connected with the carrying on of unrelated_trade_or_business except as provided in paragraph d of this section to be directly connected with the conduct of unrelated business for purposes of sec_512 an item of deduction must have proximate and primary relationship to the carrying on of that business in the case of an organization which derives gross_income from the regular conduct of two or more unrelated business activities unrelated_business_taxable_income is the aggregate of gross_income from all such unrelated business activities less the aggregate of the deductions allowed with respect to all such unrelated business activities for the treatment of amounts of income or loss of common trust funds see sec_1_584-2 regulations sec_1_512_a_-1 defines expenses depreciation and other similar items that are attributable solely to the conduct of unrelated business activities as those which are proximately and primarily related to that business activity such expenses qualify for deduction to the extent that they meet the requirements of sec_162 sec_167 or other relevant section of the internal_revenue_code thus the wages of personnel employed full-time in carrying on unrelated business activates are directly connected with the conduct of said activity and are deductable in computing unrelated_business_taxable_income if they otherwise qualify under the requirements of sec_162 regulations sec_1_512_a_-1 provides that when facilities or personnel are used for both exempt_activities and the conduct of an unrelated_trade_or_business expenses depreciation and similar items shall be allocated between the two activities on a reasonable basis the portion of any such item so allocated to the unrelated_trade_or_business is proximately and primarily related to that business activity and shall be allowable as a deduction in computing unrelated_business_taxable_income to the extent provided by sec_162 sec_167 or other relevant code section taxpayer’s position the taxpayer’s position is unknown at this time government’s position issue form 886-a ---- department of the treasury-internal revenue service catalog number 20810w publish no irs gov page schedule number or exhibit form 886-a rev date name of taxpayer org year period ended 20xx - 20xx tax identification_number ein explanations of items is the revenue received from the logging company related to the exempt_purpose of the organization the income received from the logging company is not related to the exempt_purpose of the organization per the bylaws of the organization the organization is organized acquire maintain and conduct building and property and activities for a community life and center at the org as above described to engage in educational and recreational facilities for members to acquire other_property and construct buildings fur such proposes to foster and promote good citizenship among is members to promote and foster educational recreational physical and social activities of its members and their friends to engage in such activities as shall fraise the standards of civic morality and community welfare as such the organizations purpose is to conduct activities which support the community as a whole rather than provide a specific benefit to support this purpose the organization may impose annual or special_assessments for road maintenance the fundamental difference between a special assessment for road maintenance and the special assessment made against the logging company is in the purpose for which it is assessed a valid special assessment would be assessed against the entire property owner community or a distinct portion of such community in order to pay for an unusual repair such as the replacement of a culvert or to fix the damage from a flood in comparison the special assessment made against the logging company was not made in response to the need for an unusual repair nor was it an assessment that was paid_by any distinct portion of the community the assessment was instead a payment for use of the road by an outside party to alleviate some of the cost of maintaining the road as well as paying for any additional costs associated with increased traffic as such the dollar_figuredollar_figure paid_by the logging company was a payment for use rather than a valid assessment and is therefore unrelated to the exempt_purpose of a sec_501 homeowner's organization issue if not what expenses may be allocated to the unrelated_business_income per sec_512 the organization may deduct only those expenses which are directly related to the production of the unrelated_business_income the organization identified the following transactions as directly related to damage caused by the logging trucks a date 20xx 20xx payee co-4 co-5 amount dollar_figuredollar_figure dollar_figuredollar_figure while these transactions are directly related to the unrelated business activity they may not bee deducted in the year ended april 20xx as they were not incurred until the following year however these costs are fully deductable in the following year as valid road maintenance_expenses the organization may take deduction of a portion of the years total road maintenance_expenses as allocated to the unrelated business activity using a slightly modified version of the allocation method form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org provided by org the road maintenance_costs may be allocated using the estimated road use by logging trucks shown below year period ended 20xx - 20xx tax identification_number ein estimated road use by logging trucks trips made by logging trucks damage severity factor weighted number of trips trips made by property owners total trips made percentage of trips made by logging trucks the estimated number of trips made by logging trucks was calculated using the following calculation method provided by org ' estimated number of trips by logging trucks number of trips per day number of days per week number of weeks october 20xx through april 20xx estimated trips made the explanation for the damage severity factor per org is as follows a large logging truck does much more damage to a road than a passenger car or pickup truck for purposes of this analysis it is assumed that a logging truck does twice as much damage as a passenger car or pickup truck the organization used a damage severity factor of to represent this increased damage the agent disagrees with the damage factor used by the organization as it would represent three times as much damage rather than twice as much damage as such the agent has used as the damage factor the estimated number of trips by property owners was calculated using the following calculation method provided by org estimated number of trips by property owners number of permanent residents permanent resident trips per week two per day number of weeks estimated trips made form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items form 886-a rev date name of taxpayer org non residents seasonal weekend non resident trips one in one out year period ended 20xx - 20xx tax identification_number ein average number of days used by nonresidents during the time the logging company was-also using the road estimated number of trips by property owners in addition to the allocation factor shown above the agent also allocated the portion of road maintenance_expenses that would have been incurred during the logging assuming that the maintenance expense was incurred evenly over the course of the year this calculation has been shown below allocated total maintenance_expenses total road maintenance_expenses weeks per year weeks used by logging company total maintenance_costs during logging this maintenance cost figure is then multiplied by the estimated use by logging trucks to calculation the total maintenance expense allocable to the logging activity as shown below total maintenance_costs during logging percentage of use by logging trucks total allocable expenses given the above calculation the organization may deduct a total of dollar_figure from the income received from the logging trucks using the roads issue what is the total unrelated_business_income_tax due per the calculations shown in issue and the organization owes dollar_figure in unrelated_business_income_tax this figure has been calculated as follows unrelated_business_income_tax is a tax on the unrelated income less any directly related expenses allocation of income and expenses from the logging company unrelated_business_income_tax total income from logging operations allocated maintenance_expenses form 886-a catalog number 20810w page _publish no irs gov department of the treasury-internal revenue service 886-a schedule number or exhibit form rev date name of taxpayer org net_income from logging operations explanations of items year period ended 20xx - 20xx tax identification_number ein ubi tax_rate total unrelated_business_income_tax conclusion org allowed a logging company to use their roads for a fee as this transaction is not typical of organizations defined under sec_501 it is considered to be unrelated to the exempt_purpose of the organization and is therefore subject_to unrelated_business_income_tax in this case the total_tax due was calculated at dollar_figure for the transaction in question form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service


internal_revenue_service appeals_office capitol street suite fresno ca release number release date date date a b certified mail dear department of the treasury taxpayer_identification_number person to contact tel fax tax period s ended vil we considered your appeal of the adverse action proposed by the director exempt_organizations rulings and agreements this is a final adverse determination regarding your request for recognition of 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 date the revocation of your exempt status was made for the following reason s you have not demonstrated that you are operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 and sec_1_501_c_3_-1 including that you have failed to establish that your net_earnings do not inure to the benefit of private shareholders and individuals which is prohibited by irs sec_501 contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms for the tax periods stated in the heading of this letter and for all tax years thereafter 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 revocation 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 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 if 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 tax_exempt_and_government_entities_division date date department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number legend b president j predecessor organization w state where incorporated x date of incorporation uil numbers we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below do the facts show you have failed to pass the operational_test therefore disqualifying you from exemption under sec_501 of the code yes for the reasons described below do your funds inure to the benefit of your founder causing you to be disqualified from exemption under sec_501 of the code yes for the reasons described below does your sale of horses at market rates further a substantial non-exempt purpose under sec_501 of the code disqualifying you from exemption yes for the reasons described below letter cg catalog number 47630w dear issue sec_3 facts you were formed by articles of incorporation on date x in the state of w by individual b to provide rehabilitation and care for neglected abused and abandoned horses your bylaws state you are dedicated to providing rehabilitation and care for neglected abused and abandoned horses you filed a form_1023 application_for exemption seeking classification under sec_501 of the code your application stated your purposes are as follows to rescue and rehabilitate abused neglected and abandoned horses or horses destined for the slaughterhouse to offer educational programs to students and the general_public relating to horse management to offer educational programs to students and the general_public relating to the abuse of mares for estrogen replacement therapy to assist other not-for-profit_organizations within your county through consultation and loan of rehabilitated horses and associated equipment horses that have suffered injury neglect or have been designated for slaughter are brought to your facility immediately upon arrival each animal's individual needs are evaluated the horses are housed kept clean and receive proper nourishment and medications if required on a regular schedule all of the animals are exercised groomed and trained the animals are evaluated as to their ability to adapt to environmental changes level of training and capacity for higher achievement with the help of enthusiastic volunteers from the surrounding community the animals are restored to health and then placed in carefully screened loving homes as a part of the application you indicated you are a successor to a previously tax-exempt_organization j j’s exemption under sec_501 of the code was revoked and the organization dissolved you further indicated you have established a new corporation and board_of directors are to be responsible for effective governance of the newly formed organization you also stated in your application that j was inactive for a period of time and as a result lost its exempt status however j had its exemption revoked following examination when asked for a copy of j’s revocation letter you replied have to find but you did not send acopy you did not respond to a second request for a copy of the revocation letter and your response was silent to our request a copy of j’s revocation letter was sent to you the examination of j revealed that the income of j was inuring to the benefit of b j’s credit card had been used by b for personal purposes stolen checks were used by b through j and b was convicted for forgery you were asked to demonstrate or explain how you have resolved all of the issues that were present at the time of j’s revocation your complete response was pay pal account when asked for a description of the policies and procedures you have in place to prevent private letter cg catalog number 47630w inurement you responded paper trail - cks when asked for evidence you are keeping the records required by sec_6001 of the code you responded file and on line banking responses to inquiries regarding your facilities and the specific descriptions and details of your operations were often incomplete and inconsistent b owns the property where you operate the assets left from the previously-exempt organization j were transferred to you portions of a horse arena that belonged to j were transferred to you as a gift which according to you is worth about dollar_figure agreement regarding the transfer there was no written you described your facility as our ranch yet it’s owned by b a description was requested of the land and facilities you use in relation to the portion used by b you stated in response y acres our place - officer b owner your proposed budgets include occupancy expenses for future years when asked how you will determine the fair_market_value when you begin paying to use the facility you stated we never have you currently have a verbal agreement with b to use two acres of b’s ranch free of charge until you become fully financially secure at which time a monthly rental payment may be negotiated the use of the facility is currently considered a donation-in-kind your budgets include this in-kind donation amount which exceeds dollar_figure per year regarding a request for actual expenses that occurred in your first year of operation you responded my funds threw sic my trust account donations from the public in support of maintenance expense were solicited through your website the high winds are a bit of a nuisance that cause damage to structures as well as fencing we need to mend the ranch and don't want to turn away any animals for lack of funds in response to a request for a list of expenditures made for repairs and maintenance of the ranch you provided an insurance claim receipt indicating that b and b’s spouse received an insurance settlement of less than dollar_figure for damaged portions of their property’s fence you rescue and rehabilitate horses and then sell them at market_value to new loving owners when you were asked how many horses you have sold in the last year you said none however your website states your website includes photographs of many of these horses when asked how in responding by fax you advertise the horses for sale you said have not sold or have any to a related inquiry you said you had rescued two horses in a second response to the same set of inquires also received by fax later the same day you said you had rescued only one horse you were asked how you transport the horses and for a list of your assets you responded i own trucks photographs of your facilities were requested and you simply said to see your website your facility will hold horses you keep the horses at a ranch owned by b when you were asked how many of the horses at the ranch belong to b personally and how many belong to you you responded by stating as described on your website you are dedicated to the rescue of those unfortunate horses bound for slaughter you buy horses that are headed to the slaughter house from buyers who purchase animals by weight you work directly with these in your geographical letter cg catalog number 47630w area where on your website you ask ‘ was old information you were asked for details about whether you had found a facility including the address and details about the facility and you simply responded yes your response to an inquiry about this although you were only recently incorporated in x your website states you have been operating for over years your website instructs individuals on ways to make charitable donations to you and indicates that such donations would be tax-deductible these instructions also include many references to making donations to your predecessor j whose tax-exempt status has been revoked rather than to you your website also includes a section which states and that _ when details regarding this notice and an explanation of the reward were requested your complete response was police report and you provided the name of a city you did not provide a copy of the police report law sec_501 of the code provides for the exemption from federal_income_tax for organizations described in sec_501 such organizations are recognized as exempt if they are organized and operated exclusively for religious charitable and educational_purposes sec_501 of the code describes corporations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_6001 of the code states that notice or regulations requiring records statements and special returns provides that every person liable for any_tax imposed by this title title_26 of the united_states_code which is the internal_revenue_code or for the collection thereof shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe whenever in the judgment of the secretary it is necessary he may require any person by notice served upon such person or by regulations to make such returns render such statements or keep such records as the secretary deems sufficient to show whether or not such person is liable for tax under this title sec_1_501_c_3_-1 of the regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt letter cg catalog number 47630w sec_1_501_c_3_-1 of the regulations provides that an exempt_organization must serve a public rather than a private interest the organization must demonstrate that it is not organized or operated to benefit 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 thus if an organization is operated to benefit private interests rather than for public purposes or is operated so that there is prohibited inurement of earnings to the benefit of private shareholders or individuals it may not retain its exempt status revproc_2012_9 superseding revproc_90_27 1990_1_cb_514 sec_4 provides that the internal_revenue_service will recognize the tax-exempt status of an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal_income_tax is claimed section dollar_figure states that a determination_letter or ruling on exempt status is issued based solely upon the facts and representations contained in the administrative record it further states the applicant is responsible for the accuracy of any factual representations contained in the application any oral representation of additional facts or modification of facts as represented or alleged in the application must be reduced to writing over the signature of an officer or director of the taxpayer under a penalties of perjury statement the failure to disclose a material fact or misrepresentation of a material fact on the application may adversely affect the reliance that would otherwise be obtained through issuance by the service of a favorable determination_letter or ruling section dollar_figure states that the organization must fully describe all of the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures in 485_us_351 108_sct_1179 99_led_368 the supreme court held that an organization must prove unambiguously that it qualifies for a tax exemption in better business bureau of washington d c inc v united_states 326_us_179 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 74_tc_531 in an action for declaratory_judgment pursuant to sec_7428 the tax_court considered an adverse_ruling by the irs on an application_for exempt status as a church the applicant had declined to furnish some information and made answers to other inquiries that were vague and uninformative on the basis of the record the court held that the applicant had not shown that letter cg catalog number 47630w no part of its net_earnings inures to the benefit of the family or that petitioner was not operated for private benefit in 73_tc_196 the petitioner's only activities were some individual counseling and distribution of a few grants to needy individuals the petitioner's failure to keep adequate_records and its manner of operation made it impossible to trace the money completely but the court found it clear that money passed back and forth between petitioner and its director and his for-profit businesses the court held that petitioner had not shown it was operated exclusively for exempt purposes or the no part of its earnings inured to the benefit of its officer in 70_fedclaims_782 the petitioner brought to challenge the denial of its application_for exempt status the court found that the administrative record supported the service's denial on the basis that the organization operated for the private benefit of its founder who had a history of promoting dubious schemes the organization's petition claimed that the founder had resigned and it had changed however there was little evidence of change other than replacement of the founder with an acquaintance who had no apparent qualifications the court resolved these questions against the petitioner who had the burden of establishing it was qualified for exemption if the petitioner had evidence that contradicted these findings it should have submitted it as part of the administrative process it is well-accepted that in initial qualification cases such as this gaps in the administrative record are resolved against the applicant application of law sec_501 of the internal_revenue_code provides for exemption for organizations operated exclusively for religious charitable and educational_purposes sec_1_501_c_3_-1 of the regulations states that if an organization fails to meet either the organizational_test or the operational_test it is not exempt you have not substantiated the activities you conduct further exclusive c purposes although multiple requests have been presented to you you have not supplied supporting records as required by sec_6001 of the code sec_1_501_c_3_-1 of the regulations states that an organization is not organized or operated for any purpose under sec_501 unless it serves a public rather than a private interest the facts show b has significant control of your operations b completed your application responded to requests owns the facility and is considered your owner despite the revocation of your predecessor's tax-exempt status as a result of private benefit inurement and inadequate records you are unable to substantiate that operations will not inure to b’s benefit as required by revproc_2012_9 you have not established that you are organized and operated exclusively for exempt purposes and not for the private benefit of your creators designated individuals or organizations controlled by such private interests you are a successor to j which was revoked due to the inurement of j’s assets to b for b’s own personal purposes b has not provided any substantiation that the operations have changed in any letter cg catalog number 47630w significant manner to allow you to now qualify for exemption the minimal amount of information you provided affirms that you were formed for the private benefit of b your purpose includes receiving horses as donations and rescuing horses from the slaughterhouse by purchasing them however obtained you then sell the horses at market rates as indicated in better business bureau supra the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes your purchase and subsequent sale of horses is your primary activity this substantial non-exempt purpose preciudes you from qualifying for exemption you have not proven unambiguously that you qualify for a tax exemption as in united_states v wells fargo bank supra likewise as in the above-cited case of bubbling well church you have given answers to our inquiries that were vague and uninformative the same questions were asked multiple times with minimal responses and the responses often provided information contradictory to previously provided information or information available on your website the tax_court in bubbling well church has stated that the application_for tax-exempt status calls for open and candid disclosure of all facts bearing upon an applicant’s organization operations and finances to assure that there is not abuse of the revenue laws if such disclosure is not made the logical inference is that the facts if disclosed would show that the applicant fails to meet the requirements of sec_501 as in the case of western catholic church supra your lack of sufficient records makes it impossible to trace the use of your money completely b receives a private benefit by seeking donations from the public on your website to pay for repairs to b’s ranch you also appear to confuse the expenses of running the ranch with b’s expenses as you submitted a copy of your insurance claim payable to b and b’s spouse these fact patterns are also consistent with the above-cited case of western catholic church where lack of control_over an organization’s funds contributed to the organization’s failure to establish an exempt_purpose consistent with sec_1 c of the regulations an organization that is unable to demonstrate they have now or will have in the future sufficient records to show operations that exclusively further exempt purposes will not be found to meet the operational_test under sec_501 of the code you were unable to provide any evidence that you have any established policies and procedures to prevent inurement or that you keep adequate_records you are the successor to j and j’s tax-exempt status was revoked due to inurement of funds to b as in the above-cited case of new dynamics foundation v united_states you have not demonstrated that your operations exclusively further exempt purposes and that you have met your burden to resolve gaps in the administrative record therefore you do not qualify for exemption under sec_501 of the code applicant’s position and service’s response you assert you are formed to provide rehabilitation and care for neglected and abandoned horses regarding the specific details of your operations you provided minimal responses to requests for information the information you have provided indicates you were formed for the letter cg catalog number 47630w personal benefit of your founder b and that you have some difficultly distinguishing between your expenses and b’s expenses associated with maintaining b’s ranch also based upon the information on your website you see yourself as a continuation of j’s operations as you state you have been operating for many years and have rescued horses in addition you incorrectly state on your website that donations to you are tax deductible conclusion based on the above facts and law you do not qualify for exemption under sec_501 of the code more specifically the available facts show you have failed to pass the operational_test therefore disqualifying you from exemption under sec_501 of the code your funds inure to the benefit of your founder causing you to be disqualified from exemption under sec_501 of the code your purchase and sale of horses is an activity reflecting a substantial non-exempt purpose and causes you to be disqualified for exemption under sec_501 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal must be accompanied by the following declaration the statement of facts item under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documenis are true and correct letter cg catalog number 47630w an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance internal_revenue_service eo determinations quality assurance you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter enclosure publication sincerely holly o paz director exempt_organizations rulings and agreements letter cg catalog number 47630w


internal_revenue_service number release date index number --------------------------------------------------------- ------------------------------------- --------------------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ----------- telephone number -------------------- refer reply to cc fip b02 plr-142764-13 date date legend taxpayer state a date property ies crops plant s a b c d e f g -------------------------------------------------------------- ------------ -------------------------- --------- --------------------------- ----------------------- -- -- -- -- -------- --- --- dear ------------------ this is in reply to a letter dated date requesting a ruling on behalf of taxpayer that the commercial plants as defined below are real_property for purposes of sec_856 of the internal_revenue_code facts taxpayer is a state a corporation that intends to elect to be taxed as a real_estate_investment_trust reit for its tax_year that ended date taxpayer owns properties that it leases on a triple-net lease basis to unrelated tenants the unrelated tenants use the properties for the production of crops that the tenants harvest plr-142764-13 taxpayer through a wholly-owned indirect subsidiary purchased a plant property property a property a has approximately e plants substantially_all of which are mature and expected to produce a commercially harvestable crop the commercial plants the commercial plants have complex root systems that are typically b to c feet wide and a feet deep law analysis sec_856 provides that at least percent of a reit’s total assets must be among other sources real_estate_assets sec_856 provides that the term real_estate_assets means real_property including interests_in_real_property sec_856 provides that the term interests_in_real_property includes fee ownership and co-ownership of land or improvements thereon leaseholds of land or improvements thereon options to acquire land or improvements thereon and options to acquire leaseholds of land or improvements thereon but does not include mineral oil or gas royalty interests sec_1_856-3 provides that the term real_property means land or improvements thereon such as buildings or other inherently permanent structures thereon including items that are structural_components of those buildings or structures in addition real_property includes interests_in_real_property local law definitions do not control for purposes of determining the meaning of the term real_property as used in sec_856 and the regulations thereunder the term includes for example the wiring of a building plumbing systems central heating or central air-conditioning machinery pipes or ducts elevators or escalators installed in the building or other items that are structural_components of a building or other permanent structure the term does not include assets accessory to the operation of a business such as machinery printing press transportation equipment that is not a structural_component of the building office equipment refrigerators individual air-conditioning units grocery counters furnishings of a motel hotel or office building etc even though those items may be termed fixtures under local law other sections of the code and regulations are also instructive in defining real_property for example sec_897 and sec_1_897-1 define real_property to include land and unsevered natural products of land including growing crops and plants see also sec_1_263a-8 it is well established by the courts that standing timber is treated as real_property hutchins v king 68_us_53 17_led_544 in addition courts have held that the trees and shrubbery growing on the land are part and parcel of the land see adjes v commissioner 74_tc_1005 plr-142764-13 revrul_67_51 1967_1_cb_68 holds that trees of a fruit orchard or grove are not tangible_personal_property within the meaning of former sec_179 the revenue_ruling states that it is well settled that trees are part and parcel of the land and such trees of a fruit orchard are in the nature of land the commercial plants are plants with large and complex root systems and each commercial plant has an expected life of f to g years as natural products of the land that are attached to the land the commercial plants constitute real_property therefore the commercial plants until severed from property a are real_property within the meaning of sec_856 no opinion is expressed or implied as to the federal tax consequences of this transaction under any provision not specifically addressed herein specifically no opinion is expressed or implied concerning whether taxpayer otherwise qualifies as a reit under subchapter_m part ii of chapter of the code furthermore no opinion is expressed or implied concerning whether the rent from property a constitutes rents_from_real_property for purposes of sec_856 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely jonathan d silver____________________ jonathan d silver assistant to the branch chief branch office of associate chief_counsel financial institutions products


number release date id office uilc cca_2011052612334237 --------- from -------------------- sent thursday date pm to ------------------ cc ------------ subject re tefra question loans to the partnership are partnership items the discharge of the loans and the resulting cod income to the partnership and partners is also a partnership_item the partner's loss for the unrecovered outside_basis upon dissolution of the partnership is an affected_item as is any bad_debt deduction incurred by the partner for closing_agreement purposes the characterization is irrelevant


internal_revenue_service number release date index number ----------------------- ---------------------------- ------------------------------------ in re --------------------------------------------------- ----------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ ---------------- telephone number -------------------- refer reply to cc psi b04 plr-102972-16 date date legend decedent spouse date date dear ----------------- ------------------------ ----------------------- ------------------ -------------------- this letter responds to the letter from your authorized representative dated date and subsequent correspondence requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code to allow decedent's surviving_spouse spouse to take into account decedent's deceased spousal unused exclusion dsue amount decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent's dsue amount to spouse decedent's_estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a timely form_706 to make the portability election executrix of decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including taxable_gifts made during his lifetime executrix requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 plr-102972-16 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on the date in question provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of plr-102972-16 the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see 2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination plr-102972-16 under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date as executrix spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly- prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-102972-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely melissa c liquerman melissa c liquerman chief branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes