redaction legend ein final revocation letter _ name of organization a b num date date date tpa-a taxpayer_advocate - location tpa-b taxpayer_advocate - address address of organization employer id number last day for filing a petition w tax_court effective date tax_year ended ltr - day letter address of organization name of organization employer id number a b num date tpa-a taxpayer_advocate - location tpa-b taxpayer_advocate - address tax_year ended revenue agent’s report - explanation of items a b c num date date reg a dr _ dr2 dr3 x dria _ _ dr2a dr3a sec seca _ ed ed date date date irs web a web b _ name of organization address of organization address of related_entity employer id number tax_year ended date of incorporation registered agent director director director name of state director address director address director address secretary secretary’s address executive director executive director's address exemption ltr mailed beginning of advance_ruling period end of advance_ruling period name of revenue_agent organization’s website related entity’s website redaction legend ein revenue agent’s report - explanation of items rel grants date date date related_entity grants and allocations date of incorporation of related_entity effective date of revocation date of exemption_letter department of the treasury internal_revenue_service commerce street ms 4920-dal dallas texas date person to contact employee identification_number xx-xxxxxxx contact telephone number xxx xxx-xxxx in reply refer to te_ge review staff ein n number release date uil a attn a b b last date for filing a petition with the tax_court date dear this is a final adverse determination_letter as to the a inc exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons a inc has not been operating exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 meaning of sec_1 c -1 d you are not an organization which operates exclusively for one or more of the exempt purposes which would qualify it as an exempt_organization you operate substantially for a non-exempt purpose for private benefit and your earnings inure to the benefit of a related for profit entity a inc also is not a charitable_organization within the based upon these reasons we are retroactively revoking your sec_501 tax exempt status to date contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending date and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling xxx xxx- xxxx or writing to internal_revenue_service taxpayer advocates office tpa -a tpa-b taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha ramirez tax_exempt_and_government_entities_division w d department of the treasury internal_revenue_service n los angeles street ms los angeles ca date taxpayer_identification_number num form tax_year s ended date person to contact id number employee contact numbers telephone xxx xxx-xxxx fax xxx xxx-xxxx certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at tpa- a tpa -b telephone xxx xxxx-xxxxxx fax xxx xxx-xxxx if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha a ramirez director eo e xaminations letter catalog number 34809f schedule number or exhibit 886-a form rev date explanation of items name of organization taxpayer a ine tax identification_number year period ended date num issue whether a inc operated exclusively for exempt purposes within meaning of internal_revenue_code sec_501 and the regulations thereunder facts organizational information a inc was incorporated as an x not-for-profit corporation on date reg agent was the registered agent and signed the articles of incorporation as the sole incorporator the three directors listed in the articles were dr dr and dr on date applied for recognition as a tax-exempt_organization under internal_revenue_code irc or the code sec_501 on form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code reg agent signed the form_1023 under the penalties of perjury and described a inc purposes as follows a inc has not been actively operated since its date of incorporation one of the two activities that a inc intends to conduct is to assist youth organizations that reach out to young people through outdoor activities including those organizations that reach out to handicapped and troubled youth first equity will assist such organizations by providing time fundraising and coordination of events and financial support the activity will be conducted by the directors and officers of a inc approximately of its time and other resources to this activity a inc will devote in addition first equity will try to influence local media outlets to avoid placing programming on the public airwaves that is not appropriate for family viewing and to seek programming that is positive and educational a inc will devote approximately of its time to this activity a inc will also provide free legal advice and services to youth and non-profit organizations on an ad hoc basis this service will be provided by reg agent who is member of good standing of the x state bar a inc will devote approximately of its time to this activity regarding its sources of financial support reg agent stated as follows funding will come from general and targeted solicitations for gifts through fundraising solicitations mailings etc corporations and of funds will come from the general_public it is estimated that approximately of funds will come from form 886-a page of department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended num date a inc regarding its fundraising program reg agent stated as follows fundraising efforts will occur primarily through local community events and through electronic solicitations via website and email the following individuals were listed as the governing body of a inc name dr1 dr2 sec ed address dria dr2a seca eda emphasis added title director director secretary executive director the list above indicated sec shared the address with ed and according to the service’s records they filed joint tax returns for years and on date in response to the determination agent’s inquiry ed expanded the description of a inc purposes and activities as follows activity in regards to assisting youth organization one of the primary goals of the company is to provide a medium through which like-minded individuals and groups can participate to take advantage of synergies that exist among them another goal is to raise the level of interest and awareness of groups in our community that serve important needs the company will devote approximately of its time and other resources to this activity activity ii in regards to influencing local media the purpose and function of this activity is to promote programming that is educational and appropriate and does not expose children and youth to destructive and inappropriate violence sex profanity etc the company will devote approximately of its time to this activity activity ii in regards to providing free legal advices this service will be provided by ed who is a member of good standing of the x state bar ed is consistently approached about legal questions that organizations are facing any legal advice that he dispenses will be under the auspices of the company in order to provide limited_liability for such activities such legal advice will be limited to the areas of expertise and knowledge that ed possesses and there will be no fees or requirements imposes to limit to whom such assistance will be given this service will be limited based on the time and resources of ed the company will devote approximately of its time to this activity form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date explanation of items tax identification_number year period ended name of organization taxpayer a inc num date a determination_letter was issued on date granting exemption status under code sec_501 as an organization that is not a private_foundation because it is described under code sec_509 and b a vi with an advanced ruling period from date to date proposed change in activities on date days after the issuance of the determination_letter a inc faxed a reg agent signed the letter to the customer service of irs regarding its change in activities letter and stated following we called your customer service_department and were informed that we should notify you via facsimile to of new activities we engage in we will have a new website focusing on the family the website provides content and links designed to provide educational material suggestions and resources for families to help them with common problems such as troubled children and finances as well as helping families avoid these troubles the emphasis is on helping families to be more successful part of this is helping families find a place that in conduc t ive to their success-such as moving families from apartments to homes as part of this we will also seek to assist families with financing by helping with down payments the customer service specialist responded by asking a inc to request a private_letter_ruling from the national_office of the irs instead of submitting the approval for changes in the operation to the national_office a inc re-submitted a similar letter to the customer service on date the customer service_department again directed a inc to the national_office a inc never submitted the request to the national_office operational information in response to the service’s current inquiry about its activities reg agent stated the following a buyer who qualifies for a loan that will allow down payment assistance typically a federal housing authority fha loan may apply to a inc for down payment assistance a inc wires the down payment for the borrower to the title company prior to closing the seller is asked to contribute to our program the amount of the down payment that we provide to the buyer plus our fee the source of gross_receipts reported on our form_990 is the contributions made by sellers to our program the activities described during the application_for exemption process were not mentioned during the current examination of the organization form 886-a department of the treasury-internal revenue service page of - schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended a inc date num irs agent analyzed the forms for fiscal years ended date and date a side-by- side comparison of the financial information is displayed in the table below date date revenue homebuyer participation total revenue expenses grants and allocations down payment assistance for home buyers accounting fees postage and shipping marketing fees wire fees total expenses net_income dollar_figure x xxx xxx dollar_figure_x xxx xxx dollar_figure xx xxx dollar_figure x xxx xx dollar_figure xxx xxx dollar_figure xx xxx dollar_figure x xx xxx dollar_figure xx xxx dollar_figure x xxx xxx dollar_figure_x xxx xxx dollar_figure x xxx dollar_figure x xxx xxx dollar_figure xxx x xxx dollar_figure xxx xxx dollar_figure xx xxx x xxx xxx dollar_figure xxx xxx date percentage date percentage revenue - homebuyer participation x xxx xxx x xxx xxx grants and allocations down payment assistance for home buyers accounting fees postage and shipping marketing fees wire fees total expenses xxx xxx x xxx xk xxx xxx xxx xxx xx xxx x xxx xxx x xxx x xxx xxx xxx x xxx xxx xxx xx xxx x xxx xxx net_income xx xxx in addition in regards to its statement of program service accomplishments a inc stated the following in its form_990 for the year ending date to provide financial aid to qualified home buyers a a inc provided financial assistance to low income home buyers approximately families and individuals were assisted the program service expenses were dollar_figure b a inc began developing a website for parental guidance regarding media consumption by juveniles the program service expenses were dollar_figure irs agent also observed that a inc did not have any other activities other than down form 886-a department of the treasury-internal revenue service page of schedule number or exhibit explanation of items tax identification_number year period ended form 886-a rev date name of organization taxpayer a inc num date payment assistance dpa no paid employees no office or rental expenses etc this indicates that a inc did not handle the operation this setup will be addressed under the related_party section below irs agent visited a inc website web address which promotes its dpa program to builders lenders realtors buyers and sellers the website explains the procedures of down payment assistance program as follows a real_estate purchase contract is executed by buyer and seller language similar to the following should be inserted into the purchase contract seller agrees to contribute dollar_figure------------ to a inc rel upon closing the amount indicated should be equal to the grant plus the processing fee the loan officer submits a grant application to a inc we will contact the escrow company indicated on the grant application days prior to closing and provide them with simple one-page closing instructions these instructions must be signed and returned to us before funds can be wired prior to closing we will wire the requested funds to the closing agent ensuring the money is there before funding when the transaction closes the closing agent wire us the gift amount plus o our processing fee from the seller’s proceeds as instructed through a inc dpa program buyers receive a gift of the funds that they use for the down payment a house buyer was eligible to participate in a inc dpa program when they qualify for financing from a lender according to a inc financial records a inc provided down payment assistance to buyers in a inc charged for processing fees from the sellers up to dollar_figurexxx per transaction according to the procedures listed above we understood that a inc would advance the funds to the buyer for the down payment upon closing of the escrow the seller would pay a inc the advanced funds plus the processing fees the gift funds to the buyer might not have been directly paid_by the seller but indirectly the funds came from the sellers in essence these transactions result in a circular flow of the money with a inc as the intermediary a inc does not have any income limitations for its dpa program and did not screen applicants for down payment assistance based on income a inc explains how a buyer qualifies for its down payment assistance program in its promotional materials as our program does not impose any credit or other restrictions on a buyer in order for them to receive down payment assistance a buyer is automatically qualified for a gift from a inc if they are eligible for a qualifying loan on its website for lenders a inc stated the buyer qualifications as homebuyers form 886-a department of the treasury-internal revenue service page of schedule number or exhibit explanation of items tax identification_number year period ended form 886-a rev date name of organization taxpayer a inc num date must qualify for a loan which allows gift money for the down payment and purchase a home in which the seller agrees to participate a inc has no income or asset restrictions for the homebuyer homebuyers do not need to be first-time homebuyers the parties to the down payment assisted real_estate transactions including the sellers lenders realtors and builders benefited from a inc dpa the references below from a inc website demonstrate these benefits sellers a inc promotes its down payment assistance program to sellers as follows down payment assistance has become a key tool for sellers who wish to qualify the highest number of buyers possible to purchase their home by increasing the pool of buyers who are able to purchase their home by as much a sec_30 sellers benefit from down payment assistance programs by selling their home up to faster and possibly at a higher return to them then they otherwise could less time on the market can mean substantial savings in interest and other expenses in addition sellers will often net an amount comparable to a typical transaction - or even higher - because they will likely not have to reduce their price several times in order to sell their home lenders a inc promotes itself as a qualified grantor to conduct down payment assistance program as follows the grantor qualifies as a public charity and satisfies the requirements of the current guidelines found in hud handbook rev section for fha insured loans this means we can provide grants for homebuyers who qualify for fha loans realtors a inc promotes its down payment assistance program to realtors as follows down payment assistance is a powerful tool for the real_estate industry we work with the best lenders in the business and can help you to close more sales by increasing the number of potential buyers for any seller willing to participate in our program by offering grant funds on the homes you are listing you get yourself apart from your competition and provide a valuable service to you clients builders a inc promotes its down payment assistance program to builders as following let us help you close more deals with our down payment assistance programs new home buyers are often looking for a way to get into a home with little money for down payment or closing costs they may ask you for work they can do on their home to obtain sweat equity to meet their needs a inc provides gifted money for buyers to use toward down payment and or closing costs as you make potential customers aware of this service you will be increasing your pool of buyers and get great referrals other activities a inc website provides the following information to help with some common family problems family helping families understand the importance of homeownership in relation to child form 886-a page of department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended num date a inc development education and finances media a inc promotes sensible media for the improvement of children and family youth important information related to youth and tens internet safety youth group under each section there is a link for more information the additional information under the section of family explained that the advantages to have a homeownership through child development and financial aspects the additional information under the section of media explained how our children are affected by the media and why our parents can help our children avoid the effect from the inappropriate media the additional information under the section of youth provides resources to help parents or guardians to deal with internet safety issues faced to their children a review of its financial records and the correspondence received from a inc does not indicate the organization conducted the family related activities besides merely posting the information on its website all its financial activities are the dpa besides the following cash grants the cash grants and allocations reported on the form_990 were the payments to the following e e e grant grant grant gtant minutes dollar_figure dollar_figure dollar_figure dollar_figure a inc provided a summary of minutes from date till to date the summary of minutes stated as follows february there was a discussion regarding the company’s application_for non-profit status with the irs there is significant mutual interest in youth groups among the board_of directors march discussed what would be done with a inc june there was discussion regarding down payment assistance an explanation was made as to the nature of down payment assistance mention was made of the fact that many other charities are participating in down payment assistance july discuss credit agreement and independent_contractor agreement with rel housing there was discussion as to the use of rel llc to market the down payment assistance and manage and perform the processing and the fee paid to rel housing and the duties of rel housing there was discussion regarding the line of credit from rel housing to a inc to be used to provide down payment assistance february discussed officer positions and duties updates on business and progress of the company form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form rev january explanation of items 886-a name of organization taxpayer tax identification_number year period ended a inc date num april updated on business and progress of the company related_party housing llc rel housing llc was an independent_contractor of a inc to provide marketing services to a inc in and after a inc stated the related_party transaction at statement number of the form_990 return schedule a part ill line - transactions with trustees directors etc were fees paid to a related for-profit corporation rel housing inc in which an a inc officer director is an owner the marketing firm’s responsibility is to spread the name of a inc with real_estate agents escrow officers and potential buyers throughout the country in addition it provides web site services and database management the summary of research of the corporate records indicates the following a inc b company name mailing address incorporated date date business type corporation registered agent reg agent rel housing llc cc date llc reg agent a inc and rel signed an independent contractor's agreement agreement dated as of date a inc provided a copy of the contract but did not attach the schedule a which stated the services rel housing llc agreed to perform and the terms and conditions even though the schedule a is not provided the facts indicated most if not all matters related to dpa were handled by rel the agreement states a inc shall pay to contractor rel dollar_figurexxx for each grant opportunity brought to company a inc by contractor except that in no case shall company be obligated to pay contractor any amount in excess of the amount actually collected by company in total in excess of the amount sent granted by company in total rel’s website web promotes down payment assistance program which is similar with the material at a inc website at this website rel states that it works with a inc a qualified 501_c_3_organization the grant application on its website states that the seller service fee is dollar_figurexxx for new or resold homes regardless of the grant amount for sub prime or conventional the fee is dollar_figurexxx for the first dollar_figurexx xxx of grant amount an additional dollar_figurexxx for the next dollar_figurexx xxx of grant amount and dollar_figurexxx for each dollar_figurexx xxx of grant amount after that for the fiscal_year end date a inc received a dollar_figurexxx xxx service fees from sellers and paid rel housing dollar_figurexxx xxx for marketing fees which wa sec_68 of the service fees a inc received form 886-a department of the treasury-internal revenue service page of schedule number or exhibit explanation of items tax identification_number year period ended 886-a form rev date name of organization taxpayer a inc num date the above facts indicate that reg agent incorporated rel about nine months before he incorporated a inc date two months after a inc was granted its exemption status rel signed the dpa service_contract with a incl it was also the time reg agent notified the service for the changes of a inc activities based on rel website rel primary activity is to conduct dpa through a inc there were no other apparent activities it is apparent that reg agent appeared to have knowledge of the dpa operation during a inc application process according to mr and mrs reg agent individual tax returns filed for housing llc they received k-1 income from rel and applicable legal principles sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided that no part of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that an organization operates exclusively for exempt purposes only if exempt purposes specified in the code sec_501 an organization must not engage in substantial activities that fail to further an exempt_purpose it engages primarily in activities that accomplish sec_1_501_c_3_-1 the regulations provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests sec_1_501_c_3_-1 the regulations defines the term charitable as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the advancement of education sec_1_501_c_3_-1 the regulations provides in part that the term educational relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 the regulations provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of the code sec_501 if the trade_or_business furthers an exempt_purpose and if the organization’s primary purpose does not consist of carrying on an unrelated_trade_or_business form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date name of organization taxpayer explanation of items tax identification_number year period ended a inc date num in 326_us_279 the supreme court held that the presence of a single onexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes in easter house v u s cl_ct aff'd 846_f2d_78 fed cir the u s court of federal claims considered whether an organization that provided prenatal care and other health-related services to pregnant women including delivery room assistance and placed children with adoptive parents qualified for exemption under sec_501 the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization’s argument that the adoption services merely complemented the health-related services to unwed mothers and their children rather the court found that the health- related_services were merely incident to the organization’s operation of an adoption service which in and of itself did not serve an exempt_purpose the organization’s sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits indigent pregnant women it only did so when a family willing to adopt a woman’s child sponsored the care financially accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house in addition although the organization provided health care to cl_ct pincite in 92_tc_1053 the court held that an organization that operated a school to train individuals for careers as political campaign professionals but that could not establish that it operated on a nonpartisan basis did not exclusively serve purposes described in sec_501 because it also served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with entities of a particular political_party and that most of the organization’s graduates worked in campaigns for the party’s candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting the party's candidates and entities although the candidates and entities benefited were not organization insiders the court stated that the conferral of benefits on disinterested persons who are not members of a charitable_class may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 the court concluded by stating that even if the political party’s candidates and entities did comprise a charitable_class the organization would bear the burden of proving that its activities benefited members of the class in a non-select manner american campaign academy t c pincite in 71_tc_202 the court held that an organization that marketed handicrafts made by disadvantaged artisans through museums and other non-profit organizations and shops operated for exclusively charitable purposes within the meaning of sec_501 the organization in cooperation with national craft agencies selected the handicrafts it would market from craft cooperatives in communities identified as disadvantaged based on objective evidence collected by the bureau of indian affairs or other government agencies the organization form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended a inc date num marketed only handicrafts it purchased in bulk from communities of craftsmen the organization did not market the kind of products produced by studio craftsmen nor did it market the handicrafts of artisans who were not disadvantaged the court concluded that the overall purpose of the organization's activity was to benefit disadvantaged communities the organization’s commercial activity was not an end in itself but the means through which the organization pursued its charitable goals the method the organization used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans therefore the court held that the organization operated exclusively for exempt purposes described in sec_501 in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which the organization conducted its activities the court found that it was operated for a nonexempt commercial purpose rather than for a tax-exempt purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for-profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations see also 950_f2d_365 7th cir holding that a religious_organization which ran restaurants and health food stores in furtherance of its health ministry did not qualify for tax-exempt status because it was operated for substantial commercial purposes and not for exclusively exempt purposes revrul_67_138 1967_1_cb_129 held that helping low-income persons obtain adequate and affordable housing is a charitable activity because it relieves the poor and distressed or underprivileged in revrul_67_138 the organization carried on several activities directed to assisting low-income families obtain improved housing including conducting a training course on various aspects of homebuilding and homeownership coordinating and supervising joint construction projects purchasing building sites for resale at cost and lending aid in obtaining home construction loans revrul_2006_27 discusses three examples of organizations providing down payment assistance and whether each qualified as an organization described in sec_501 of the code situation describes x a non-profit corporation that helps low-income individuals and families purchase decent safe and sanitary homes throughout the metropolitan area in which it is located as a substantial part of its activities x makes assistance available exclusively to low-income individuals and families to provide part or all of the funds they need to make a down payment on the purchase of a home individuals are eligible to receive assistance from the downpayment assistance program if they are low-income individuals have the employment history and financial history necessary to form 886-a page of department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended num date a inc qualify for a mortgage and would so qualify but for the lack of a down payment to fund its down payment assistance program and other activities the organization conducts a broad based fundraising program that attracts gifts grants and contributions from several foundations businesses and the general_public in situation x’s grantmaking process is structured to ensure that its staff awarding grants does not know the identity of the party selling the home to the grant applicant or the identities of any other parties such as real_estate agents or developers who may receive a financial benefit from the sale the staff also does not know whether any of the interested parties to the transaction have been solicited for contributions to the organization or have made pledges or actual contributions to the organization further the organization does not accept any contributions contingent on the sale of a particular property or properties in situation the revenue_ruling held the organization qualifies for exemption because its purposes and activities relieve the poor distressed and underprivileged by enabling low-income individuals and families to obtain decent safe and sanitary homes the way the organization conducts its down payment assistance program establishes that its primary purpose is to address the needs of its low-income grantees the organization conducts a broad based fundraising program and receives support from a wide array of sources their policies of ensuring that its grantmaking staff does not know the identity or contributor status of the party selling the home to the grant applicant or any other party who may receive a financial benefit from the sale and of not accepting contributions contingent on the sale of any particular properties ensure that it is not beholden to any particular donors or other supporters whose interest may conflict with that of the low-income buyers the organization is working to help in situation y is a nonprofit corporation that is like x in all respects as set forth in situation except as follows under y’s grantmaking procedures y’s staff considering a particular applicant’s application knows the identity of the party selling the home to the grant applicant and may also know the identities of other parties such as real_estate agents and developers who may receive a financial benefit from the sale moreover in substantially_all of the cases in which y provides down payment assistance to a home buyer y receives a payment from the home seller further there is a direct correlation between the amount of the down payment assistance provided by y in connection with each of these transactions and the amount of the home seller's payment to y finally y does not conduct a broad based fundraising campaign to attract financial support rather most of y’s support comes from home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive y’s down payment assistance in situation the revenue_ruling held y does not qualify as an organization described in sec_501 to finance its down payment assistance activities y relies on sellers and other real- estate related businesses that stand to benefit from the transactions y facilitates furthermore in deciding whether to provide assistance to a low-income applicant y’s grantmaking staff knows the identity of the home seller and may also know the identities of other interested parties and is able to take into account whether the home seller or another interested_party is willing to make a payment to y y’s receipt of a payment from the home seller corresponding to the amount of the down payment form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended a inc num date assistance in substantially_all of the transactions and y’s reliance on these contributions for most of its funding indicate that the benefit to the home seller is a critical aspect of y’s operations in this respect y is like the organization considered in easter house which received all of its support from fees charged to adoptive parents so that the business_purpose of the adoption service became its primary goal and overshadowed any educational or charitable purpose like the organization considered in american campaign academy y is structured and operated to assist private parties who are affiliated with its funders like the organizations considered in american campaign academy easter house and columbia park recreation association y also serves an exempt_purpose but because y is not operated exclusively for exempt purposes y does not qualify for exemption from federal_income_tax as an organization described in sec_501 in situation z is a nonprofit corporation formed to combat community deterioration in an economically depressed area that has suffered a major loss of population and jobs studies have shown that the average income in the area is below the median level for the state z cooperates with government agencies and community groups to develop an overall plan to attract new businesses to the area and to provide stable sources of decent safe and sanitary housing for the area residents without relocating them outside the area as part of the renewal project z receives funding from government agencies to build affordable housing units for sale to low and moderate-income families as a substantial part of its activities z makes down payment assistance available to eligible home buyers who wish to purchase the newly-constructed units from z seminars and conducts other educational activities to help prepare potential low and moderate- income home buyers for the responsibility of home ownership to fund its down payment assistance program and other activities z conducts a broad based fundraising program that attracts gifts grants and contributions from several foundations businesses and the general_public z also offers financial counseling in situation the revenue_ruling held that although z does not limit its down payment assistance program to low-income recipients z’s down payment assistance program still serves a charitable purpose described in sec_501 because it combats community deterioration in a specific economically depressed area that has suffered a major loss of population and jobs through a combination of counseling and financial assistance z helps low and moderate-income families in that area to acquire decent safe and sanitary housing and to prepare for the responsibilities of home ownership in this respect z is like the organization described in situation of revrul_70_585 because z is operated exclusively for charitable purposes z qualifies for exemption from federal taxation as an organization described in sec_501 the revenue_ruling concluded that down payment assistance payments for home buyers in situation sec_1 and are made by those organizations out of a detached and disinterested generosity and from charitable or like impulse rather than to fulfill any moral or legal duty and thus qualify for exclusion from such home buyers’ gross incomes as gifts under sec_102 the benefits provided to the home buyers in these circumstances are sufficiently removed from the interests of any home sellers or sales agents that they proceed from a detached and disinterested generosity on the part of the donor organization and such grants lack the indicia of a rebate price adjustment or quid pro quo incident to a sale in situation the organization is not operated exclusively for charitable purposes form 886-a page of department of the treasury-internal revenue service schedule number or exhibit explanation of items tax identification_number year period ended fom 886-a rev date name of organization taxpayer a inc num date and consequently does not qualify for exemption from federal_income_tax as an organization described in sec_501 benefiting private interests even if an organization's activities serve a charitable_class or are otherwise charitable within the meaning of sec_501 it must demonstrate that its activities serve a public rather than a private interest within the meaning of reg sec_1_501_c_3_-1 revrul_72_147 1972_1_cb_147 held that an organization that provided housing to low income families did not qualify for exemption under sec_501 because it gave preference to employees of business operated by the individual who also controlled the organization the ruling reasoned that although providing housing for low-income families furthers charitable purposes doing so in a manner that gives preference to employees of the founder’s business primarily serves the private interest of the founder rather than a public interest in kj's fund raisers v commissioner t c memo aff'd u s app lexis 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization’s board the tax_court found and the second circuit agreed that the founders exercised substantial influence over the affairs of the organization the organization’s business consisted of selling lucky or similar instant win lottery tickets to patrons of kj's place the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations the lottery tickets were sold during regular business hours by the owners of the lounge and their employees from the proceeds of the sales of the lottery tickets the organization made grants to a variety of charitable organizations a charitable activity the tax_court nevertheless upheld the commissioner's denial of exemption to the organization on the ground that the organization’s operation resulted in more than incidental private benefit the tax_court held and the second circuit affirmed that a substantial purpose of kj's activities was to benefit kj’s place and its owners by attracting new patrons by way of lottery ticket sales to kj's place and by discouraging existing customers from abandoning ku's place in favor of other lounges where such tickets were available thus the organization was not operated exclusively for exempt purposes within the meaning of sec_501 although supporting charitable organizations may be an organization does not serve a public rather than a private interest within the meaning of reg c -1 d if any of its assets or earnings inure to the benefit of any insiders or disqualified persons sec_1_501_c_3_-1 inurement is any transfer of charitable assets to the organization’s insiders for which the organization does not receive adequate_consideration inurement can take many forms form 886-a page of department of the treasury-internal revenue service schedule number or exhibit explanation of items tax identification_number year period ended form 886-a rev date name of organization taxpayer a inc num date excessive_compensation for services is a form of inurement for example in 203_f2d_872 cir the fifth circuit held that the organization's payment of a full-time salary for part-time work was inurement the use by insiders of the organization’s property for which the organization does not receive adequate_consideration is a form of inurement see eg the 412_f2d_1197 ct_cl holding that the insiders’ use of organization-owned automobiles and housing constituted inurement 222_fsupp_151 e d wash holding that the organization’s provision of goods services and refreshments to its members constituted inurement loans that are financially advantageous to insiders from the organization’s funds particularly unexplained undocumented loans are a form of inurement for example in the founding church of scientology f 2d pincite the claims_court listed unexplained loans to and from insiders among the examples of inurement in 823_f2d_1310 cir the ninth circuit held that debt repayments in the form of percent of the organization’s income made to the organization’s founder allegedly to compensate the founder for the organization’s past use of his personal income and capital constituted inurement in 283_fsupp2d_58 d d c the court held that forgiveness of interest was a form of inurement leasing arrangements that favor disqualified persons to the detriment of the organization are a form of inurement in the founding church of scientology f 2d pincite the claims_court treated the organization’s payment of rent to the founder’s wife as inurement in the absence of any showing that the rental was reasonable or that the arrangement was beneficial to the organization see also 272_f2d_168 cir holding that inflated rental prices constitute inurement payment to one person for services performed by another or for services presumed to be performed without any proof of performance is a form of inurement in church of scientology f 2d pincite the court listed royalties received by the organization’s founder on the sale of publications written by others among the improper benefits received by the founder from the organization in the founding church of scientology f 2d pincite the court held that the payment of salary to the founder’s daughter without any proof that she actually performed any services for the organization constituted inurement a number of courts have held that unaccounted for diversions of a charitable organization's resources by one who has complete and unfettered control can constitute inurement 365_f2d_792 8th cir 318_f2d_632 7th cir church of scientology f 2d pincite the provision of inurement can be direct or indirect in church of scientology f 2d pincite the organization transferred in excess of dollar_figure million to a for-profit corporation incorporated by the organization’s founder and his wife the directors of the corporation were high-ranking members form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended a inc num date of the church of scientology the directors approved the founder's decision to transfer dollar_figure million from the corporation’s account to the ship apolfo_aboard which the founder and his family lived the ninth circuit held that the funds funneled through the for-profit corporation constituted inurement to the founder and his family church of scientology f 2d pincite in 765_f2d_1387 cir the ninth circuit held that a church that conducted its activities by mail did not qualify for exemption under sec_501 because a substantial purpose of its activities was to benefit a for-profit corporation controlled by the church's insiders the church employed an advertising agency controlled by its insiders to provide all of the printing and mailing services for the church’s mass mailings the advertising agency devoted approximately two-thirds of its time to the work for the church the majority of the church’s income was paid to the advertising agency although the advertising agency claimed to have clients unrelated to the church it did not advertise its services and refused to identify its other clients the ninth circuit held that the church was operated for the substantial non-exempt purpose of providing a market for the advertising agency's services and thus primarily served the private interests of the advertising agency and its owners rather than a public purpose in so holding the ninth circuit rejected the church's argument that the income paid_by the advertising agency should not be included in the determination of reasonableness and treated this income as indirect inurement of the church’s earnings to the church’s insiders the prohibition on inurement in sec_501 is absolute the service has the authority to revoke an organization’s exempt status for inurement regardless of the amount of inurement effective date of revocation an organization may ordinarily rely on a favorable determination_letter received from the internal_revenue_service sec_1_501_a_-1 revproc_2003_4 dollar_figure cross- referencing dollar_figure et seq 2003_1_cb_123 an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely on a favorable determination if there is a material_change inconsistent with exemption in the organization’s character purposes or methods of operation after the determination_letter is issued sec_601_201 revproc_90_27 1990_1_cb_514 the commissioner may revoke a favorable determination_letter for good cause sec_1_501_a_-1 revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented sec_601_201 revproc_2003_4 dollar_figure cross-referencing dollar_figure et seq hud directive rev-5 issued in date describes about gift funds as follows form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer tax identification_number year period ended a inc num date c gift funds an outright gift of the cash investment is acceptable if the donor is the borrower's relative the borrower's employer or labor_union a charitable_organization a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers or a close friend with a clearly defined and documented interest in the borrower the gift donor may not be a person or entity with an interest in the sale of the property such as the seller real_estate agent or broker builder or any entity associated with them gifts from these sources are considered inducements to purchase and must be subtracted from the sales_price no repayment of the gift may be expected or implied fha deems the payment of consumer debt by third parties to be an inducement to purchase when someone other than a family_member has paid off debts the funds used to pay off the debt must be treated as an inducement to purchase and the sales_price must be reduced by a dollar-for-dollar amount in calculating the maximum insurable mortgage documentation requirements the lender must document the gift funds by obtaining a gift letter signed by the donor and borrower that specifies the dollar amount_of_the_gift states that no repayment is required shows the donor’s name address and telephone number and states the nature of the donor’s relationship to the borrower regardless of when the gift funds are made available to the homebuyer the lender must be able to determine that the gift funds ultimately were not provided from an unacceptable source and were indeed the donor's own funds when the transfer occurs at closing the lender remains responsible for obtaining verification that the closing agent received funds from the donor for the amount of the purported gift and that those funds came from an acceptable source note fha does not approve down payment assistance programs in the form of gifts administered by charitable organizations ie nonprofits mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable_organization meets the appropriate fha requirements and the transfer of funds is properly documented in addition fha does not allow nonprofit entities to provide gifts to homebuyers for the purpose of paying off installment loans credit cards collections judgments and similar debts the directive rev issued in date has similar wordings for the gift funds description and nonprofit organization requirements on date hud issued mortgagee letter for nonprofit agency participation in single family fha activities stating form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date explanation of items name of organization taxpayer a inc tax identification_number year period ended date num approval of downpayment assistance programs in the form of gifts there has been widespread confusion regarding the department’s role in approving downpayment assistance programs in the form of gifts fha does not approve down payment assistance programs in the form of gifts administered by charitable organizations mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable_organization meets the instructions described in hud handbook rev-4 change eg no repayment implied etc thus while fha will issue approval letters to nonprofit agencies for their participation as mortgagors providers of secondary financing and as purchasers of hud homes at a discount such letters are not to be construed as approval of the nonprofit agency’s down payment assistance gift programs fha will not issue approval letters for down payment assistance gift programs on august hud issued mortgagee letter for gift documentation mortgage forms and other credit policy and appraisal issues revising hud procedures for verifying the transfer of gift funds from private individual donors to homebuyers as well as the required contents of the gift letter itself the letter states these reforms are intended to ensure to the greatest extent possible that the gift funds were in fact the donor’s own and are not derived from an unacceptable source the donor must be able to furnish conclusive evidence that the funds given to the homebuyer came from the donor’s own funds and thus were not provided directly or indirectly by the seller real_estate agent builder or any other entity with an interest in the sales transaction the gift letter now must also contain language asserting that the funds given to the homebuyer were not made available to the donor form any person or entity with an interest in the sale of the property including seller real_estate agent or broker builder loan officer or any entity associated with them regardless of when the gift funds are made available to the homebuyer the lender must be able to determine that the gift funds were not ultimately provided from an unacceptable source and were indeed the donor’s own funds when the transfer occurs at closing the lender remains responsible for obtaining verification the closing agent received funds from the donor for the amount of the purported gift government’s position in order for an organization to retain its exempt status it must demonstrate to the internal_revenue_service that it meets both the organizational and the operational tests the facts stated above indicate that a inc failed the operational_test when the organization filed an application form to apply for its exempt status in date it stated that it will devote approximately of its time and other resources to assist youth organizations on date the service issued a determination_letter to recognize the organization form 886-a page of department of the treasury-internal revenue service form 886-a rev date name of organization taxpayer schedule number or exhibit explanation of items tax identification_number year period ended a inc date num exempt from federal_income_tax under sec_501 of the code no education activities were conducted by a inc two months after the issuance of the determination_letter the organization faxed a letter to irs customer service to propose changes in its activities mainly engaging in down payment assistance activities instead of following the instructions from irs customer service to submit its proposed changes in activities to the national_office the organization sent another letter to the irs customer service the organization did not provide any documents to prove that it conducted any activities as stated on the application form_1023 for the year under examination they merely posted educational material on the website charitable purposes include relief of the poor and distressed see sec_1_501_c_3_-1 of the regulations a inc’s down payment assistance program does not operate in a manner that establishes that its primary purpose is to address the needs of low-income people by enabling low- income individuals and families to obtain decent safe housing see revrul_2006_27 situation the down payment assistance program did not serve exclusively low-income persons a inc does not have any income limitations for participation in its dpa program the program is open to every homebuyer without any income limitations who otherwise qualified for financing from a lender a inc’s dpa program does not limit assistance to certain geographic areas or target those areas experiencing deterioration or neighborhood tensions see revrul_2006_27 situation down payment assistance is available for any property that is otherwise able to qualify for a mortgage arranging or facilitating the purchase of homes in a broadly defined geographic area does not combat community deterioration or serve other social welfare objectives within the meaning of sec_501 of the code a inc promotes itself as a qualified grantor to conduct down payment assistance program according to the current guidelines in hud handbook rev section for fha insured loans irs agent quoted the hud handbook rev under the applicable legal principles below the rev was effective date the handbook stated that the gift donor may not be a person or entity with an interest in the sale of the property such as the seller real_estate agent or broker builder or any entity associated with them it means a inc’s dpa did not meet the requirement of the guidelines in hud because the gift donor are the sellers also a inc’s dpa program provided a private benefit to various parties like the organization considered in 92_tc_1053 a inc is structured and operated to assist the private parties who fund it and give it business sellers who participate in a inc’s dpa program benefit from achieving access to a wider pool of buyers thereby decreasing their risk and the length of time the home is on the market they also benefit by being able to sell their home at the home’s full listed price or by being able to reduce the amount of the negotiated discount on their homes buyers who participate in a inc’s dpa program benefit by being able to purchase a home without having to commit more of their own funds it is evident from the foregoing that a inc’s dpa program provides ample private benefit to the various parties in each home sale form 886-a page of department of the treasury-internal revenue service form 886-a rev date name of organization taxpayer schedule number or exhibit explanation of items tax identification_number year period ended a inc date num the manner in which a inc operated its dpa program shows that the private benefit to the various participants in a inc’s activities was the intended outcome of a inc’s operations a incl’s down payment assistance procedures are designed to channel funds in a circular manner from the sellers to the buyers and back to the sellers in the form of increased home prices to finance its down payment assistance activities a inc relies exclusively on sellers a inc neither solicits nor receives funds from other sources a inc requires the home seller to reimburse it dollar-for-dollar for the amount of funds expended to provide down payment assistance on the sellers home plus an administrative fee of several hundred dollars per home sale home seller corresponding to the amount of the down payment assistance in virtually every transaction indicates that the benefit to the home seller and others involved in the transaction is not a mere accident but rather an intended outcome of a inc operations in this respect a inc is like the organization considered in easter house which provided health care to indigent pregnant women but only when a family willing to adopt a woman’s child sponsored the care financially a inc receipt of a payment from the a inc’s receipt of a payment from the home seller corresponding to the amount of the down payment assistance in virtually every transaction and a inc’s reliance on these payments for most of its funding indicate that the benefit to the home seller is a critical aspect of a inc’s operations the sellers got the benefit of having their property sold quicker due to greater number of potential home buyers without actually incurring any costs because the amount that home buyers received from a inc was incorporated into the sale price of a home the purported beneficiaries in fact did not receive anything from a inc further because the transaction fees charged by a inc could be based ona percentage of the home's sale price a inc benefited from the transactions by maximizing its fees the circular cash_flow indicates that the corporation’s primary goal was to facilitate transactions for the benefit of private parties involved or connected to these transactions ie buyers who were not necessarily members of a charitable_class sellers real_estate professionals etc inc is like the organization considered in easter house which provided health care to indigent pregnant women only when a family willing to adopt a woman’s child sponsored the care financially in this respect a a inc ’s promotional material and its marketing activities show that a inc operated in a manner consistent with a commercial firm seeking to maximize sales of services rather than in a manner that would be consistent with a charitable or educational_organization seeking to serve one or more of the charitable purposes enumerated in sec_501 the manner in which a inc operated its dpa program shows that a inc was in the business of facilitating the sales of homes in a manner indistinguishable from an ordinary trade_or_business in this respect a inc ’s operations were similar to an organization which was denied exemption because it operated a conference center for commercial purposes see 283_fsupp2d_58 d d c operating a trade_or_business of facilitating home sales is not an inherently charitable activity unlike the trade_or_business in 71_tc_202 a inc ’s trade_or_business was not utilized as a mere instrument of furthering charitable purposes but was an end in itself did not market its services primarily to persons within a charitable_class a inc receive any funds from parties that did not have interest in the down payment transactions like the organizations considered in american campaign academy supra and easter house v u s cl a inc provided services to home sellers for which it charged a market rate fee did not solicit or a inc form 886-a page of department of the treasury-internal revenue service schedule number or exhibit explanation of items tax identification_number year period ended form 886-a rev date name of organization taxpayer a inc num date ct aff'd 846_f2d_78 fed cir a substantial part of a inc ’s activities furthered commercial rather than exempt purposes furthermore a inc ’s activities were structured to provide substantial private benefit to a inc ’s related for-profit organization rel housing llc a inc entered into a marketing agreement with rel a for-profit entity owned by the director of a inc agreed to pay dollar_figurexxx of the fees generated for each transaction closed a inc normally charges dollar_figurexxx service fee for each home transaction for the year end date a inc made payments total dollar_figurexxx xxx to rel for marketing fees which was for the agreed upon services a inc of the service fees a inc received a inc does not qualify as an organization described in r c sec_501 because it operates a program that does not exclusively serve an exempt_purpose described in sec_501 and provides substantial private benefit to its related for-profit corporations taxpayer’s position a inc hasn't provided its position conclusion in order to qualify for exemption under sec_50i c an organization must be both organized and operated to achieve a purpose that is described under that code section a inc ’s dpa program is not operated in accordance with internal_revenue_code sec_501 and the regulations governing qualification for tax exemption under code a inc offers its down payment assistance to interested buyers regardless of the buyers’ income levels or need a inc ’s dpa activities do not target neighborhoods in need of rehabilitations or other relief such as lessening neighborhood tensions or eliminating prejudice and discrimination a inc operates in a manner indistinguishable from a commercial enterprise a inc ’s primary activity is brokering transactions to facilitate the selling of homes a inc’s primary goal is to maximize the fees from these transactions and benefit its related parties a inc ’s brokering services are marketed to homebuyers sellers realtors lenders and builders regardless of the buyers’ income level or need and regardless of the condition of the community in which the home is located because a inc ’s primary activity is not conducted in a manner designed to further sec_501 purposes a inc is not operated exclusively for exempt purposes within the meaning of sec_501 in addition a inc ’s activities were operated for the purpose of serving a private benefit rather than public interest and a part of the net_earnings were benefit of a related for-profit corporation accordingly it is determined that a inc is not an organization described in sec_501 and is not exempt from income_tax under sec_501 effective date form 886-a department of the treasury-internal revenue service page of


department of the treasury internal_revenue_service washington d c c h ief c o u n sel date number info release date cc pa apjp index uil no conex-128436-02 dear this is in response to your letter dated date copy enclosed for your convenience we are providing the following general information with regard to the issues you raise you state with respect to short_sales of stock that information returns on form 1099-b should reflect the closing of the overall transaction not simply the gross_proceeds from the sales current law would likely permit this type of change in the applicable regulations at least under certain circumstances the regulations relating to form 1099-b however are largely geared to reporting of gross_proceeds widening the scope of reporting in the manner you describe would appear to expand significantly the regulatory burden placed upon preparers of that form nevertheless to the extent regulations on the reporting of short_sale transactions are modified in the future we will certainly keep in mind comments such as yours regarding form 1099-b your letter provides similar comments regarding gross_proceeds reporting in the context of puts_and_calls again although your proposed changes would expand significantly the scope of information reporting on form 1099-b by requiring further detail on transactions we will keep them in mind during any projects involving the relevant regulations generally the gross_proceeds focus in the regulations reflects the fact that brokers could have difficulty obtaining information on cost_basis and similar matters if they had to report more than gross_proceeds you should note with regard to your letter’s comments on premiums that commissions and option premiums may be taken into account by 1099-b preparers when calculating gross_proceeds under certain conditions see form 1099-b instructions for box enclosed thank you for your comments regarding information reporting and form 1099-b sincerely james c gibbons chief branch administrative provisions and judicial practice division procedure and administration


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 intl b01 plr-140678-11 date date legend taxpayer country a llc state b c year business x dear -------------- ----------------------------------------------- --------------------- ---------------------------------- ------------- -- -- ------- ------------------------------------ this replies to a letter dated date as supplemented by correspondence dated date and date from your authorized representative requesting a ruling that your net operating losses from business x may be used in future years regardless of your residency status facts taxpayer a country a national is a resident_alien solely by reason of sec_7701 of the code llc is a state limited_liability_company wholly owned by taxpayer llc is engaged in business x within and without the united_states directly and through wholly-owned u s limited_liability companies with an office in state llc and its u s subsidiaries are disregarded as separate from taxpayer for u s federal plr-140678-11 income_tax purposes by reason of the activities of llc and its u s subsidiaries taxpayer represents that he has a net_operating_loss taxpayer plans to relocate to country a in year and become involved in business x in and around country a taxpayer represents that his relocation to country a will be for a period of b to c years after which he will return to live in the united_states during the period that he is living in country a taxpayer represents that he will be a nonresident_alien for u s federal_income_tax purposes and a resident of country a for purposes of its domestic law and the u s -country a income_tax treaty during this period llc and its subsidiaries will continue to carry on business x in the united_states through a fixed place of business in the united_states taxpayer further represents that the profit or loss from business x in the united_states will be attributable to that fixed place of business and thus taxable as business profits under article of the u s - country a treaty when taxpayer returns to the united_states he will again be a resident_alien for u s federal_income_tax purposes taxpayer represents that llc and its u s subsidiaries will continue to be managed and controlled in the united_states while taxpayer is a country a resident taxpayer further represents that some of his unexpired net operating losses from business x would have been allocated and apportioned to income effectively connected with the conduct_of_a_trade_or_business in the united_states had he been taxed as a nonresident_alien in such years taxpayer requests a ruling that will permit him to use that portion of his unexpired net operating losses from business x against any effectively connected gross_income of business x during the period he is taxed as a nonresident_alien similarly taxpayer requests a ruling that he may carry over any properly apportioned net_operating_loss from business x while he is a nonresident_alien to taxable years after he reacquires u s resident status taxpayer also requests a ruling that his unused net operating losses from business x generated while he was a resident_alien if still available may be carried over to his taxable years after he reacquires u s resident status law analysis sec_1_1-1 of the income_tax regulations generally provides that a resident_alien individual is liable to the income taxes imposed by the code whether the income is received from sources within or without the united_states sec_7701 of the internal_revenue_code code provides that an alien individual shall be treated as a resident_alien with respect to any calendar_year if such individual meets a substantial_presence_test in sec_7701 sec_871 provides that a nonresident_alien_individual engaged_in_a_trade_or_business_within_the_united_states during the taxable_year shall be taxable as provided in plr-140678-11 sec_1 or ie graduated rates on his taxable_income which is effectively connected with the conduct_of_a_trade_or_business within the united_states sec_873 provides that deductions are allowed to a nonresident_alien_individual for purposes of sec_871 only if and to the extent that they are connected with income that is effectively connected with the conduct of the nonresident alien’s trade_or_business in the united_states with certain exceptions not relevant to this ruling the rules governing the proper apportionment and allocation of deductions to a nonresident alien’s income from a u s trade_or_business are found generally in sec_861 et seq of the code see sec_1_873-1 sec_1_861-8 provides that a net_operating_loss_deduction allowed under sec_172 shall be allocated and apportioned in the same manner as the deductions giving rise to the net_operating_loss_deduction sec_172 generally allows for net_operating_loss carrybacks and carryovers without regard to the resident status of a taxpayer according to the legislative_history of sec_172 a nonresident alien’s net_operating_loss may be carried in accordance with sec_172 to other taxable years for which the tax is imposed pursuant to sec_871 see h_rep_no 89th cong 2d sess pincite based solely on the information submitted and the representations made it is held that the portion of taxpayer’s unused net operating losses from business x that were generated while he was taxed as a u s resident and that would have been allocated and apportioned in accordance with the rules in sec_1 e to the gross_income of business x had he been taxed on such income as a nonresident_alien for such years may be used to the extent provided in sec_1_861-8 to offset gross_income effectively connected with the conduct of business x in the united_states while he is a nonresident_alien taxpayer may carry over any unused net operating losses from business x allocated and apportioned to income effectively connected with the conduct of business x in the united_states while he is taxed as a nonresident_alien and may apply such losses against gross_income from business x after he reacquires u s resident status taxpayer may carry over any unused net operating losses from business x generated while he was taxed as a u s resident if still available against his gross_income after he reacquires u s resident status the years in which taxpayer is a nonresident_alien will be taken into account in determining whether any such unused net operating losses from business x are still available under sec_172 plr-140678-11 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed regarding whether taxpayer has properly computed the portion of his unused net operating losses that may be carried over in accordance with this ruling this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 sincerely elizabeth karzon branch chief branch international