department of the treasury internal_revenue_service washington d c date number release date uilc cc intl br aaehrlich wta-n-116333-00 wli memorandum for new england district attn john feeley international examiner international group from elizabeth u karzon chief branch cc intl br1 subject this field_service_advice responds to your request for assistance evaluating the protest dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend wta-n-116333-00 a b c d e f source h country i country j country k country l usco fco m ftrust company n p q year year year date date date date date date issue whether a principal purpose for a’s expatriation on date was the avoidance of u s taxes for purposes of sec_877 issue whether sec_351 does not apply to the transfer on date by a of stock of usco to fco in exchange for fco stock because it was not undertaken for a valid business_purpose thereby permitting the transfer of such stock to be taxable as a sale_or_exchange under sec_877 as in effect on date wta-n-116333-00 conclusions based on the evidence presented to date a’s loss of u s citizenship appears to have for one of its principal purposes the avoidance of u s taxes a is therefore subject_to tax for the 10-year period following such loss pursuant to sec_877 in effect at the date of a’s expatriation based on the evidence presented to date a has asserted a sufficient business_purpose to conclude that his transfer of usco stock in exchange for fco stock qualifies as a non-recognition exchange under sec_351 thus such transfer is not treated as a sale_or_exchange of domestic stock for purposes of sec_877 facts a was born in year in the united_states a is a very successful business person who has made his career managing a number of large international businesses according to information provided to the service a maintained his primary residence in country i from year until date a did not indicate whether his country i address remains his primary residence no information has been provided concerning his continuing personal and business contacts with the united_states including how often he has been present in the united_states since date however it is public knowledge that a remained a member of the board_of directors for company n a large u s multinational_enterprise after expatriating a first visited country i in year a asserts that in year he decided to make country i his principal home and acquired an office in country i hiring full time administrative and accounting staff a also has an office available for his use in the united_states a asserts that beginning in year he and his wife became active members of a church in country i and began supporting several charitable institutions in country i a enrolled his sons in a private country i school where a is a founding trustee a also constructed a residence over the course of six years in country i according to a country i’s economy is largely tourism based and stagnant however because of a’s considerable business acumen v arious country i government members as well as opposition members of parliament solicited a’s assistance in helping them develop and implement an economic development and diversification wta-n-116333-00 program a’s background as a successful corporate executive was well known and the government was anxious to have the benefit of his experience and his extensive contacts in the business community for a number of years a became an unpaid advisor to the country i government regularly meeting with government officials and introducing these officials to united_states business people who were considering investing in country i country i law country i imposes no income or inheritance taxes on resident individuals it is a favored location for international investors because of its accommodating investment climate a contends that he felt restricted in his ability to invest in country i because he was not a citizen however country i actively seeks to attract foreign investors for major areas of its economy and offers an array of foreign investment incentives including exemptions from customs duties and property taxes in addition in the year prior to a’s expatriation country i liberalized the rules for foreign ownership of residences and real_estate and for obtaining annual and permanent residency certificates despite this climate a felt that he was a second class citizen in country i and that he carried the stigma of being considered an outsider although he held a significant financial investment in country i he felt that country i’s policies concerning non-citizen investment were annoying obstacles additionally a contends that the fact that country i has the right to revoke non-citizen work permits might some day jeopardize his significant financial investment in country i which would make it impossible for him to continue to live in country i country i immigration law provides for the naturalization of aliens through an application to the official responsible for nationality and citizenship the official will grant a certificate of naturalization provided that the alien meets certain residency and character qualifications one such qualification is that an alien must be a country i resident for six of the nine years prior to naturalization a’s country i residence was in its sixth year of construction when a filed his application_for country i citizenship 1source h wta-n-116333-00 as a has asserted no certificate will be granted unless the alien first renounces any other citizenship that he possesses however the alien may obtain a waiver in some cases i n the case of a person who cannot renounce his citizenship of some other country under the laws of that country he makes instead such declaration concerning that citizenship as may be prescribed despite his considerable business acumen access to professional counsel alleged residence in country i since year and six years of construction on his country i residence a asserts that he was taken by surprise by the requirement that he relinquish any other citizenship a asserts that he had never been told by anyone at any time prior to the receipt of an official country i letter that he would be required to relinquish his united_states citizenship in order to become a country i citizen a contends that he immediately took action in a series of fruitless attempts to retain his united_states citizenship neither his contacts in the country i government nor his country i counsel could assist him apparently defeated a asserts that he reluctantly filed the appropriate papers to renounce his united_states citizenship however it appears that country i does not prohibit its citizens from acquiring citizenship in additional countries since renouncing his united_states citizenship a has also become a citizen of country j the united_states does not require country j citizens to acquire a visa prior to entering the united_states for tourism or business purposes for days or less therefore a may enter the united_states more easily than his country i countrymen who rely solely on their country i citizenship country j also imposes income_tax solely on a territorial basis income that is neither earned nor remitted to country j is not taxed in that jurisdiction the entities prior to expatriating a owned a domestic grantor_trust ustrust which owned c of the stock of usco a domestic_corporation as an estate_planning matter a had initially decided to establish the domestic_trust in order to avoid 2id 3id wta-n-116333-00 united_states and foreign probate proceedings the bulk of a’s property was to remain in trust after a’s death during the lifetime of a’s wife and possibly through the lives of his children b is a’s longtime business partner personal friend c usco shareholder and chief operating officer b was appointed as the ustrust successor trustee however a’s wife became uncomfortable with the amount of control b would have over the lives of herself and her children after a’s death a desired to appoint a successor trustee who not only had the extensive business experience of b but who would live long enough to manage the trust through the lives of a’s young children a felt that although an institutional trustee would be long-lived such a trustee would lack the ability to actively manage usco and would sell ustrust’s interest in usco for less than its maximum potential value in order to ease the administration of the trust after consultation with his lawyers accountants b and his family a decided that a holding_company trust structure would accomplish his goals a is familiar with the benefits of holding_company structures and has considerable experience managing a number of such companies in the role of chairman and ceo a determined that he should implement a strategic oversight management team in the holding_company while he was alive and well so that his death or disability would not trigger a forced sale which could be harmful to his family’s interest according to a the foreign holding_company trust structure was also designed to shelter a from personal liability and to allow him to segregate assets from the claims of creditors a asserts that usco is engaged in a type of business that is highly susceptible to tort claims according to a i n certain instances persons who have suffered damages are allowed to pierce the corporate veil and seek compensation from the corporation’s shareholders as well as its officers and directors one of the inconveniences of country i citizenship from a’s perspective is their exchange control policies however a holding_company trust structure circumvents these requirements a asserts that his ability to invest worldwide would be severely hampered if he were required to secure country i central bank approval for all non-country i investments or if he were required to convert hard currency reserves to country i dollars a was also concerned about sheltering his assets from the potential of political unrest and expropriation in country i country i although politically stable at the moment is still is a small developing country where there can be no guarantee of long term stability a also contends that he chose a holding_company trust structure to insulate himself from liability through conducting business in other less developed countries where corporations are not necessarily recognized as a separate legal entity from its shareholders wta-n-116333-00 in addition a defends his choice of a foreign_trust in part because of a strong reluctance of many u s trustees to assume fiduciary obligations with respect to such high-risk businesses as usco he asserts that foreign trustees are less concerned with potential claimants he also decided that because he intended to live outside of the united_states he had no reason to limit himself to a domestic_trust the transactions on date a renounced his u s citizenship on date days later a caused fco a country k corporation to be formed on date days after expatriating a transferred his entire_interest in usco to fco in exchange for all the outstanding shares of fco stock also on date a settled ftrust a country l trust on date days after expatriating a contributed his fco stock to ftrust a foreign_trust of which a and his family are the beneficiaries approximately seven weeks after the above transactions usco filed a form s-1 registration_statement with the securities_and_exchange_commission to register newly-issued shares of usco in advance of an initial_public_offering ipo despite being a c shareholder of usco a contends that he did not control the filing or the timing of the filing of the registration_statement a vigorously argues that he was not obligated to sell any of his existing shares in usco however the registration_statement was drafted to allow for a secondary offering whereby a’s existing shares could be sold at the time of an ipo if a decided to do so the ipo was halted at this point in addition to denying his control_over this decision a cites various non-tax factors for delaying the ipo such as usco’s pending litigation negative equity and decreasing profits after waiting months after the date a’s expatriation usco’s ipo proceeded a through fco and ftrust decided to sell a portion of his existing shares in usco at a gain of dollar_figuref through fco and ftrust a decided to reinvest the gain from this sale in other foreign investments after this sale a continues to hold through fco and ftrust shares of usco stock representing approximately d of all the shares entitled to vote and e of the value of all classes of stock law and analysis fco changed its name to m on date for the sake of convenience we will continue to refer to this corporation as fco wta-n-116333-00 issue sec_877 in general sec_877 imposes an alternative scheme of income gift and estate taxation on u s citizens and since on lawful permanent residents who expatriate with a principal purpose of avoidance of u s income or transfer_taxes under the version of sec_877 in effect at the time of a’s expatriation for the 10-year period following the year of expatriation an expatriate with a principal purpose of avoidance of u s taxes was subject_to the normal rules applicable to the income_taxation of nonresident_aliens with three major differences first the expatriate was taxed as a u s citizen on u s source income at the income rates applicable to u s citizens if it resulted in a tax greater than the tax that would have been imposed on the expatriate at the rates applicable to nonresident_aliens see former sec_877 and b second capital_gain on the sale_or_exchange of property other than stock located in the united_states was considered u s source income former sec_877 third an expatriate who was subject_to former sec_877 was required to include in gross_income gains from the sale of stocks and securities issued by u s persons former sec_877 gain on the sale_or_exchange of property that had a basis determined in whole or in part by reference to stock issued by a domestic_corporation was also treated as a sale of stock of a domestic_corporation id prior to the amendments to sec_877 it was possible for a tax- motivated expatriate to evade the consequences of sec_367 by expatriating prior to an sec_351 exchange with a controlled_foreign_corporation under the existing sec_367 regulations and the expatriation provisions of prior_law a u_s_person who expatriated even for a principal purpose of avoiding u s tax could subsequently engage in transactions that involve the transfer of property to a foreign_corporation without any adverse consequences under sec_367 since expatriation even for a principal purpose of tax_avoidance is not an event covered by sec_367 or the current regulations under that section for example under sec_877 if a principal purpose of tax_avoidance existed an expatriate would be taxed for years on any sale of u s corporate stock however after expatriation the person would no longer be a u_s_person for purposes of sec_367 and thus generally could have transferred u s corporate stock to a foreign_corporation controlled by the expatriate under sec_351 without any sec_367 effect the foreign_corporation generally could wta-n-116333-00 have then sold the u s corporate stock within the 10-year period but the gain would not have been subject_to u s tax joint_committee general explanation of the health insurance portability and accountability act of 104th cong 2nd sess date sec_877 was substantially revised in date as part of the health insurance portability and accountability act hipaa the amendments eliminated this particular practice see sec_877 burden_of_proof former sec_877 shifted the burden_of_proof to the taxpayer to show that the avoidance of u s taxes was not a principal purpose of expatriation where the service establishes that it is reasonable to believe that an individual’s loss of u s citizenship would result in a substantial reduction in u s taxes in the year of expatriation in this case if a had remained a u s citizen at the time he transferred the stock of usco to fco he would have been subject_to substantially more u s taxes a would have been a u_s_person pursuant to sec_7701 and a’s transfer of property to a foreign_corporation fco in connection with an sec_351 exchange would have invoked sec_367 sec_1_367_a_-3 under sec_367 fco would not have been considered a corporation for purposes of sec_351 non-recognition therefore a would have recognized p gain on this transfer resulting in a u s tax_liability of q however a expatriated days prior to exchanging usco stock for fco stock thereby circumventing the application of sec_367 by doing so a avoided taxation on p of gain and reduced his u s tax_liability on this exchange from q to zero therefore it is reasonable to believe that a’s loss of citizenship resulted in a substantial reduction in u s taxes during the year of his expatriation therefore even under the law prior to former sec_877 shifted the burden_of_proof to the taxpayer to show that the avoidance of u s taxes was not a principal purpose of expatriation the two central cases which discuss whether a taxpayer has expatriated with a principal purpose of the avoidance of u s taxes are kronenburg v commissioner 64_tc_428 and 83_tc_755 kronenburg dealt with a native born swiss citizen who emigrated to the united_states in he became a naturalized united_states citizen in the same year in which he founded an importing business pic he retained dual wta-n-116333-00 citizenship in kronenberg entered into a contract to sell his business kronenberg was to become an employee of the new corporation and would live and work in the united_states until date at that time the contract provided that he would move to europe and continue to work for the new corporation for the remainder of his contracted five year employment term rather than purchase the shares of pic the new owner wished to form a new corporation therefore on date a plan_of_liquidation for pic was adopted under which the liquidation would be complete by date in december kronenberg’s accountant informed him that if kronenberg renounced his u s citizenship prior to receiving liquidating distributions from pic the distributions would not be subject_to u s taxes kronenberg decided to move to switzerland before the planned distribution date in february rather than waiting until april of as he had originally planned during january and february of kronenberg sold his house and made all of the necessary arrangements to wind up his business and personal affairs and to move his family to switzerland before receiving the distributions from pic he instructed his attorneys to make the distributions at the latest possible time id pincite kronenberg and his family left the united_states on date and arrived in switzerland on february on february kronenberg and his wife renounced their u s citizenship at the u s consul in zurich on february kronenberg’s attorneys transferred some of pic’s former assets into kronenberg’s personal account id the tax_court held that one of kronenberg’s principal purposes in expatriating was the avoidance of u s taxes kronenberg testified that when he returned to switzerland he renounced his u s citizenship because he believed that its retention would be inconsistent with his participation in the privileges and duties of a swiss citizen however the evidence failed to show that he gave any consideration to renouncing his u s citizenship before he learned of the possible tax advantage of doing so the tax_court felt that kronenberg’s activities during the first two months of were too perfect to be unplanned id pincite in furstenberg the tax_court held that an oil heiress originally from the united_states did not have a principal purpose of avoiding u s taxes by expatriating shortly after her marriage to an austrian aristocrat by the time she expatriated furstenberg’s ties to the united_states were relatively few her parents were dead and her children were grown she had been living in europe for many years before her marriage and her personal effects were maintained outside of the united_states wta-n-116333-00 prior to expatriating she informed her accountant that she intended to marry prince furstenberg adopt austrian citizenship and to continue to live in paris he told her that adopting austrian citizenship would complicate her taxes and warned her that french taxes could be very high they had no further discussions in her income in and came from trust distributions to her and from the sale of stock the distribution from one of the trusts occurred on the day of her expatriation in addition she sold a large amount of stock in after her expatriation the tax_court defined the term principal purpose as a first-in-importance purpose and held that furstenberg did not have tax_avoidance as a principal purpose in expatriating id pincite in reaching this conclusion the court found that the timing of furstenberg’s expatriation was inextricably linked to her marriage because she expatriated four days following her honeymoon id pincite in addition the court stated that at the time of her expatriation furstenberg was not aware of any_tax advantages in doing so the court distinguished furstenberg from kronenberg by stating that mrs furstenberg's actions were too imperfect from a tax standpoint to have been planned instead of too perfect to be unplanned as in kronenberg id pincite p etitioner engaged in no flurry of activity in connection with her expatriation she decided to expatriate before she knew anything about the tax consequences thereof she had lived in europe for more than years at the time of her expatriation she knew of only possible negative tax effects and her activity or lack of it viz-a-viz the trust distributions indicates that she did no planning whatsoever to delay them until after her expatriation id pincite in the present case a’s actions are clearly more closely aligned to kronenberg within days of expatriating a transferred his usco stock to fco and then gifted the foreign_corporation stock to a foreign_trust the usco ipo was originally scheduled to follow only seven weeks after the above transactions if the ipo had proceeded at that time it would have been even more clear that a’s u s tax_liability was substantially reduced in the year of his expatriation thereby even more clearly shifting the burden to a to prove that he was not tax motivated an ipo following so closely on the heels of his expatriation would have squarely placed a in the shoes of mr kronenberg a argues that he did not control the timing of the ipo however as a c shareholder a must have been a key participant in the decision to take usco public wta-n-116333-00 a also argues that because he has not personally received any of the proceeds of the sale of the usco stock and that the sale of the stock was designed to diversify the ftrust’s holdings this is further evidence that the ipo was not part of a tax-avoidance plan however ftrust holds all of a’s fco stock and a and his family remain the ftrust beneficiaries a claims that he became a country i citizen in order to undo the discrimination that he asserts country i imposes on non-citizens and to more completely integrate into his new home however a has not accepted the inconveniences of country i citizenship a has planned around country i exchange controls by implementing the foreign holding_company trust structure a also opted out of country i’s foreign relations policies by adopting country j citizenship that will allow him to travel and invest more conveniently citizens of country j are permitted to enter the united_states without a visitor’s visa country i citizens must apply for a visa in addition country j taxes on a territorial basis therefore because fco is not a country j corporation and ftrust is not settled in country j he will not be subject_to country j taxes on this income unless it is remitted to country j the combination of all of the above facts clearly show that a principal purpose in a’s expatriation was to avoid u s taxes issue sec_351 if a expatriated with a principal purpose to avoid u s taxation former sec_877 would have required him to include in his gross_income gains from the sale of stocks and securities issued by u s persons for the year period following the date of his expatriation former sec_877 also would have required him to include in his gross_income gain on the sale of stock which had a basis determined in whole or in part by reference to his basis in u s stock however a argues that because he transferred his usco stock to fco in a bona_fide tax-free sec_351 exchange there were no gains associated with his disposition of the usco stock furthermore he never sold or exchanged any fco stock but rather made a completed_gift of the fco stock to ft a’s position depends however on the initial exchange of usco stock for fco stock being in a bona_fide sec_351 exchange in general under sec_351 no gain_or_loss is recognized when property is transferred to a corporation by one or more persons solely in exchange for stock in the second corporation and immediately_after_the_exchange the transferors are in control of the corporation control is defined as having ownership of stock possessing at least percent of the vote and value of the wta-n-116333-00 corporation sec_368 the transferor in an sec_351 exchange takes the same basis in the stock received from the transferee corporation as the aggregate basis that the transferor had in the property transferred to the transferee sec_358 similarly the transferee corporation takes the same basis in the property it received from the transferor as the transferor had in such property sec_362 thus gain_or_loss built into the transferred property is deferred until either the stock is sold by the transferor or the property is sold by the transferee or both courts have recognized that a taxpayer may benefit from non-recognition treatment under sec_351 as long as a valid non-tax business_purpose partially motivated the transaction see eg 688_fsupp_1129 n d tex aff’d 865_f2d_644 5th cir 714_f2d_977 9th cir aff’g t c memo and 154_f3d_630 6th cir aff’g in relevant part and rev’g in part on another issue t c memo in determining whether a valid non-tax business_purpose partially motivated the transaction courts examine all the facts and circumstances with particular emphasis on the following factors whether the transfer fulfilled its stated purpose the extent to which the transferor rather than the transferee benefitted from the transfer the extent to which the transferee needed the property the length of time between the transfer and subsequent events the number of such transfers the taxpayers’ expertise in tax matters and the transactions’ form courts also examine any indicators of a taxpayer’s intent such as documents or negotiations that confirm or belie the existence of a pre-arranged plan estate of kluener pincite cases involving business_purpose in the sec_351 context also focus on whether the corporation to which property was transferred in a purported sec_351 transaction was used solely as a mere conduit to accomplish tax benefits that could not have been accomplished directly under circumstances where a transfer of property to a corporation is undertaken to advance a tax_avoidance plan and serves no other independent business_purpose courts generally disregard the transfer see eg estate of kluener supra 293_us_465 aff’g 69_f2d_809 2d cir see also revrul_70_140 1970_1_cb_73 a transfer to a controlled_corporation in a purported sec_351 exchange is disregarded under circumstances demonstrating that the transfer was motivated by tax_avoidance considerations and 56_tc_600 transfer of appreciated securities by shareholder to corporation followed by the corporation’s sale of the securities treated as a sale by shareholder of the securities wta-n-116333-00 in this case a asserts that he transferred his usco stock to fco a holding_company containing essentially no other assets ie other than his fco stock for valid business reasons ie to effectuate his estate_planning goals and to protect himself from the liability inherent in usco’s business a states that his decision to move his usco stock into a foreign holding_company structure will allow a skilled board_of directors to oversee usco in the event of his death or disability so that his heirs will not be forced to either manage usco or to sell their interest at a potentially discounted price a also asserts that he and the co-owner of usco were threatened with a lawsuit alleging that they were personally liable for damages for which usco was allegedly responsible a states that while it is generally accepted in the united_states that a corporation is a separate legal entity and that shareholders are not liable for the debts or liabilities of the corporation the separate_entity principle is not recognized in every jurisdiction including some in which a might have business interests thus a argues that additional levels of corporate ownership and the existence of a_trust between a and a’s investments including usco would enhance the protection afforded by corporate ownership alone a states that he chose a foreign_trust over a domestic_trust to hold the fco stock because many u s trustees have a strong reluctance to assume fiduciary responsibility over high risk businesses such as usco a also states that indirect ownership of his usco stock is preferable over direct ownership because country i is still a developing country with no guarantee that it will continue to have a stable political environment in addition he admits that both fco and ftrust are non-country i entities in order to plan around country i foreign exchange control regulations although there is a business_purpose requirement under sec_351 based on the information presented by a we believe that there may be sufficient non-tax reasons for a to have contributed usco stock to fco under sec_351 thus despite the fact that there are strong indications of a principal purpose of u s tax_avoidance the exchange of usco stock for fco stock does not appear to be a sale_or_exchange within the meaning of sec_877 as it existed on the date of a’s expatriation however if upon inquiry it is found that the foreign holding_company structure is no longer in place or that the board_of fco is not actively managing its affairs a’s business_purpose may be challenged of course had a transferred usco stock to fco after the legislative amendments to sec_877 the exchange would have constituted a taxable_exchange regardless of whether there was a business_purpose see sec_877 wta-n-116333-00 this field_service_advice has been coordinated with the office of assistant chief_counsel corporate branch if you have any further questions please call _____________________ elizabeth u karzon chief branch international


department of the treasury internal_revenue_service commerce street mc dal dallas texas tax_exempt_and_government_entities_division date date release number release date uil code legend xx - date address - address org address taxpayer_identification_number employee identification_number contact numbers telephone eae last day for filing a pleading with the tax_court the claims_court or the united_states district_court for the district columbia december 20xx certified mail - return receipt requested dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code code our favorable determination_letter to you dated september 19xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx our adverse determination was made for the following reasons organizations described in sec_501 and exempt under sec_501 must be organized and operated exclusively for an exempt_purpose you have not provided sufficient information regarding your expenditures distributions and exempt_activities you have not established that the operated exclusively for an exempt_purpose venetited a charitable_class or that its non- exempt_activities were insubstantial you have failed to establish that you meet the requirements of sec_501 and sec_1_501_c_3_-1 in that you have failed to provide information to establish that you were operated exclusively for an exempt_purpose has been organized and since you have not established that you have operated exclusively for an exempt_purpose we hereby revoke your organization’s exemption from federal_income_tax under sec_501 of the internal_revenue_code effective january 20xx contributions to your organization are no longer deductible under sec_170 after january 20xx you are required to file income_tax returns on form_1120 the returns should be filed with the appropriate service_center for the tax years ending beginning with january 20xx and for all tax years thereafter in accordance with the instructions of the return because the statute_of_limitations on assessment of tax is about to expire we are concurrently making income_tax determinations with respect to your 20xx taxable_year 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 internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia must be filed before the ' day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to the united_states tax_court at the following address 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 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 see the enclosed publication taxpayer_advocate_service - your voice at the irs for taxpayer_advocate telephone numbers and addresses we will notify the appropriate state officials of this action as required by code sec_6104 you should contact your state officials if you have any questions about how this final_determination may affect your state responsibilities and requirements if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely douglas h shulman commissioner by sunita b lough director eo examinations enclosures publication publication internal_revenue_service department of the treasury tax exempt government entities division speer blvd suite denver colorado date org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter rev 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 nota 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 ina united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely renee b wells acting director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f 886a etapa explanation of items department of the ‘i'reasury - internal_revenue_service schedule no org year period ended december 20xx legend org organization name fdn-1 6th 5th founder 7th gt ot xx date emp emp-1 2ot state state co-1 thru co-14 companie sec_137 founder founder revocation of sec_501 tax-exemption issue whether the sec_501 tax exempt status of org should be revoked because it is not operated exclusively for tax exempt purposes facts org org was incorporated under the laws of the state of state as a non-profit organization on may 19xx the organization’s status as a non-profit in the state of state has been suspended exhibit in 19xx the founder of the organization founder was doing a project in state called co-1 the mission of that organization was to participate in selected humanitarian and charitable efforts the organization morphed into the org org was set up to support educational religious and or scientific purposes in the bylaws of org it advises that the founding director shall be a director of the corporation with the additional specific duties and powers as provided in the bylaws the founding director shall continue in office until he submits a written resignation the additional duties of the founding director include the ability to designate and select all of the other directors authorized in the bylaws the organization lists it a summary of activities over the past two decades as exhibit the commission of emp-1 to sculpt a likeness of roles cast in bronze this bronze work_of_art has been used to honor and raise money for such organizations as co-2 co-3 raise funds for the co-4 honored individuals such as president produced a montage of social service organizations or youth groups in need of a fundraising event for his contributions to the country entitled which we make available to for her public service in addition to former in various movie memory the operational plan of the organization is outlined by the organization as exhibit form 886-a rev department of the treasury - internal_revenue_service page -1- department of the ‘treasury - internal_revenue_service oer 886a schedule no org explanation of items year period ended december 20xn sponsor or co-sponsor approved projects in the area_of_interest as designated by the board_of directors assist in the formation of other c organizations both public and private develop long term programs to provide health and well care to the general_public construct a health and medical compound to house all approved programs staff and patient needs assist other organizations world wide on a non-denominational basis in obtaining funds for charitable causes establish a permanent endowment fund to support all approved programs to accomplish these operational plans the organization lists it current programs as exhibit w w co-sponsoring an audiology research and outreach program for the hearing impaired through the co-5 co-sponsoring co-7 to provide funding and research in optical enhancement for the underprivileged and elderly co-sponsoring of a fundraising program for co-2 co-6 program providing free public seminars on the value of estate_planning in conjunction with the co-8 it is noted that through search of public records the co- sec_5 as well as the co-8 were both established and incorporated by fdn-1 who sits on the board_of the org payments to these organizations could not be identified through the organization bank statements the organization sends out a flyer to perspective donors seeking partnerships with existing companies and individuals who are interested in the development of new answers to the old the problems facing man as well as the new problems that will surface in the century organization advises that there are licensing and territorial rights available that can be covered under joint_venture affiliations under the following areas construction and development products a b c d e thin ceramic cements or ceramic coatings tilt up panel construction fire retardant mobile home recreation vehicle housing pre-fab housing ceilings fire proof panels class-a fire rated products environmental remediation microbe technology water waste management a b reclamation of natural_resources form 886-a crev department of the treasury - internal_revenue_service page -2- department of the ‘treasury - internal_revenue_service schedule no ea 886a explanation of items org year period ended december 20nn a b c enzymes-refineries- oil wells - wells waste water cleaned to 9ppm sewers-streams-lakes as a part of the sponsorship and programming org will assist in acquiring grants to kick start the program and org will receive continuing royalties from business developed exhibit at its board meeting on november 20xx the board was advised that the purchase of the co- had been completed the organization entered into a management agreement with co-10 to run the plant exhibit sec_5 as part of this agreement co-10 entered into partnership with co- to run the day to day operations of the organization in addition co-12 entered into contract with co-11 to also operate the co-9 company it is noted that through public records founder is managing director of the co-10 and co-12 on july 20xx by a resolution of the board_of directors founder was given sole discretion to execute all documents necessary to assign ownership_interest in and to the co-9 including all patents trademarks to the to be formed co-13 exhibit on august 20xx a civil suit was filled against org and it founding director founder by the co-14 for breach of contract concerning the co-9 on february 20xx judgment was entered against org and its founding director for dollar_figure in principal dollar_figure in attorney’s fees and dollar_figure in court costs on june 20xx the judgment was upheld and on november 20xx final judgment was entered against org for dollar_figure for principal dollar_figure in attorney’s fees and dollar_figure in court costs exhibit on the organization’s 20xx it reported contributions gifts grants and similar amounts totaling dollar_figure in addition a dollar_figure tax_refund was included as income reportable expenses for the year were broken down in the following manner dollar_figure in legal fees dollar_figure in supplies dollar_figure for telephones dollar_figure for postage dollar_figure for occupancy dollar_figure for printing and publication dollar_figure for travel dollar_figure in bank charges dollar_figure in insurance and dollar_figure for auto rentals law internal_revenue_code sec_501 provides for tax exemption to organizations operated exclusively sec_1_501_c_3_-1 provides that an organization will be regarded as for charitable purposes operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose treas reg c -1 d ii provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for form 886-a rev department of the treasury - internal_revenue_service page -3- schedule no department of the ‘l'reasury - internal_revenue_service explanation of items eee 886a org year period ended december 20xx the benefit of private interests such as the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes 326_us_279 66_sct_112 bbb the operational_test focuses on the actual purposes an organization’s activities advance rather than the organization’s stated purpose or the nature of its activities 92_tc_1053 in 36_tc_1097 butler the court examined the relationship between a partner and a partnership for purposes of determining whether the partner was entitled to a business_bad_debt deduction for a loan he had made to the partnership that it could not repay in holding that the partner was entitled to the bad_debt deduction the court noted that b y reason of being a partner in a business petitioner was individually engaged in business in housing pioneers v commissioner 65_tcm_2191 aff'd 49_f3d_1395 9th cir housing pioneers the tax_court concluded that an organization did not qualify as a sec_501 organization because its activities performed as co-general partner in for-profit limited_partnerships substantially furthered a non- exempt_purpose and serving that purpose caused the organization to serve private interests the organization entered into partnerships as a one percent co-general partner of existing limited_partnerships for the purpose of splitting the tax benefits with the for-profit partners under the management agreement the organization’s authority as co-general partner was narrowly circumscribed it had no management responsibilities and could describe only a vague charitable function of surveying tenant needs in 74_tc_1324 aff'd 675_f2d_244 9th cir plumstead the tax_court held that a charitable organization’s participation as a general_partner in a limited_partnership did not jeopardize its exempt status the organization co-produced a play as one of its charitable activities prior to the opening of the play the organization encountered financial difficulties in raising its share of costs in order to meet its funding obligations the organization formed a limited_partnership in which it served as general_partner and two individuals and a for-profit corporation were the limited partners one of the significant factors supporting the tax court’s holding was its finding that the limited partners had no control_over the organization’s operations in 71_tc_1067 aff’d in unpublished opinion 647_f2d_170 9th cir est of hawaii’ several for-profit organizations exerted significant indirect control_over est of hawaii a non-profit entity through contractual arrangements the tax_court concluded that the for-profits were able to use the non-profit as an instrument to further their for-profit purposes neither the fact that the for-profits lacked structural control_over the organization nor the fact that amounts paid to the for-profit organizations under the contracts were reasonable affected the court’s conclusion consequently est of hawaii did not qualify as an organization described in sec_501 in 293_fsupp_346 w d va broadway theatre league the court held that an organization that promoted an interest in theatrical arts did not jeopardize its exempt status when it hired a booking organization to arrange for a series of theatrical performances promote the series and sell season tickets to the series because the contract was for a reasonable term and provided for reasonable_compensation and the organization retained ultimate authority over the activities being managed revrul_98_115 i r b date provides that for purposes of determining exemption under sec_501 the activities of a partnership including an llc treated as a partnership for federal tax department of the treasury - internal_revenue_service page -4- form 886-a cev schedule no department of the reasury - internal_revenue_service explanation of items orn sec_86a org year period ended december 20xx purposes are considered to be the activities of the partners a sec_501 organization may form and participate in a partnership and meet the operational_test if participation in the partnership furthers a charitable purpose and the partnership arrangement permits the exempt_organization to act exclusively in furtherance of its exempt_purpose and only incidentally for the benefit of the for-profit partners 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 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_2008_9 sec_12 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_2008_9 sec_12 government’s position the internal_revenue_service has held for an organization to be exempt under sec_501 the organization needs to meet both the organization and operational tests under sec_1_501_c_3_-1 in addition sec_501 and sec_1_501_c_3_-1 hold that an organization shall not be exempt if any of its earnings inure to the private benefit of any of its shareholders the organization does not meet the operational_test because it is not operated exclusively for sec_501 purposes as required and defied by sec_1 c -1 d and has been used as a vehicle to serve the private interests of its members rather than public interest as prescribed under sec_1 c - d ii these tests focus on the purposes the organization promotes by means of its activities article ii of the organizations articles provide that the purpose of the organization not for private gain of any person and the public for which is it organized include educational religious and or scientific purposes however the organization was operated in a way that would allow for joint ventures and partnerships with for-profit entities to generate substantial income which has not been distributed for charitable endeavors the operations ended december 20xx the organization was unable to provide sufficient evidence that would substantiate its charitable activities or that it had implemented an actual plan to use its share of received income to meet its current charitable objectives this lack of substantiation caused the organization to fail the operational_test under sec_501 as stated above for the 20xx and subsequent years form 886-arrev department of the treasury - internal_revenue_service page -5- department of the ‘treasury - internal_revenue_service schedule no eee 886a org explanation of items year period ended december 20xx we need not however dwell upon the charitable aspects of org’s charitable activities the crucial issue is whether the purpose of the organization non-exempt activities are substantial in nature sec_501 requires that the exempt_organization be organized and operated exclusively for religious charitable etc purposes the service has recognized that a non-exempt purpose even perhaps somewhat beyond a de_minimis level is permitted without loss of exempt nevertheless that is a limit beyond which the statute may not be stretched that limit was set forth by the supreme court in bbb when it stated the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt_activities as in bbb a review of the operations of org indicates that the organization’s activities actual and proposed include at least a single non-exempt activity substantial in nature to determine a single non-exempt activity that is substantial in nature it first must be determined if the activities of the joint_venture between org and co-10 are includable as activities includable in the determination of operated exclusively for exempt purposes within the meaning of sec_501 a sec_501 organization may form and participate in a partnership including an llc treated as a partnership for federal_income_tax purposes and meet the operational_test if participation in the partnership furthers a charitable purpose and the partnership arrangement permits the exempt_organization to act exclusively in furtherance of its exempt_purpose and only incidentally for the benefit of the for-profit partners see plumstead and housing pioneers similarly a sec_501 organization may enter into a management_contract with a private party giving that party authority to conduct activities on behalf of the organization and direct the use of the organization’s assets provided that the organization retains ultimate authority over the assets and activities being managed and the terms and conditions of the contract are reasonable including reasonable_compensation and a reasonable term see broadway theatre league however if a private party is allowed to control or use the non-profit organization’s activities or assets for the benefit of the private party and the benefit is not incidental to the accomplishment of exempt purposes the organization will fail to be organized and operated exclusively for exempt purposes see est of hawaii harding sec_1_501_c_3_-1 and sec_1_501_c_3_-1 gi for federal_income_tax purposes the activities of a partnership are often considered to be the activities of the partners see butler aggregate treatment is also consistent with the treatment of partnerships for purpose of the unrelated_business_income_tax under sec_512 in light of the aggregate principle discussed in butler and reflected in sec_512 the aggregate approach also applies for purposes of the operational_test set forth in sec_1_501_c_3_-1 thus the activities of an llc treated as a partnership for federal_income_tax purposes are considered to be the activities of a nonprofit organization that is an owner of the llc when evaluating whether the nonprofit organization is operated exclusively for exempt purposes within the meaning of sec_501 form 886-arev department of the treasury - internal_revenue_service page -6- een 886a departement of the ‘treasury - internal_revenue_service org explanation of items schedule no year period ended december 20xx we must next determine if the activities of the organization serve an exempt_purpose and the activities do not inure to the private benefit of individuals over the public good as was the case in housing pioneers the limited_partnership with which org has agreed to associate itself with are for-profit entities arid the partnerships interests other than orgs are in addition as was the case in housing pioneers among the non-exempt holding_companies non-exempt owners of co-10 and organizers and officers of org and even though there may be non-exempt parties not mentioned they nonetheless stand to benefit from the activities of the partnership thus significant federal_income_tax benefits will flow to the non-exempt partners as such a substantial private benefit is being conveyed on individuals of which the benefit is not incidental to the carrying on of orgs exempt_purpose are individuals who are also the a keystone to the organization’s entire plan is its ability for org to use it exempt status to acquire grants to kick-start the ventures as was the case in housing pioneers which in that case the organization used its exempt status to receive property_tax deductions for the venture is apparent that the incentives for the joint ventures between org and for-profit organizations are to provide tax incentives to business entities not to further an exempt_purpose it in addition as in revrul_98_15 when org and co-10 formed there joint_venture and turned substantial control_over to co-10 org maintained that its activities would consist of providing sponsorship to humanitarian and environmental solutions ‘while the diagnosis and cure of disease are indeed purposes that may furnish the foundation for characterizing the activity as ‘charitable ’ something more is required continuing revrul_98_15 in the absence of a binding obligation in joint ventures governing documents for the joint_venture to serve charitable purposes or otherwise provide its services to the community as a whole the joint_venture will be able to deny advantages to segments of the community such as roofs for homes for the homeless because org will share control of the joint_venture with co-10 org will not be able to initiate programs within the joint_venture to serve charitable building needs within the community without the agreement of at least one governing board member appointed by co- as a business_enterprise co- will not necessarily give priority to charitable building needs of the community over the consequences for the joint venture’s profits the primary source of information for board members appointed by org will be the chief executives who have a prior relationship with c o-10 and the management company which is a subsidiary of co- the management company itself will have broad discretion over the joint ventures activities and assets that may not always be under the board’s supervision for example the management company is permitted to enter into all but unusually large contracts without board approval the management company may also unilaterally renew the management agreement based on all these facts and circumstances org cannot establish that the activities it conducts through joint_venture further exempt purposes form 886-a rev department of the treasury - internal_revenue_service page -7- form 886a explanation of items department of the ‘treasury - internal_revenue_service schedule no org year period ended december 20xx in order for an organization to qualify for exemption under sec_501 the organization must ‘establish’ that it is neither organized nor operated for the ‘benefit of private interests ’ consequently the benefit to co- venture will not be incidental to the furtherance of an exempt_purpose thus org will fail the operational_test when it forms the joint_venture contributes its operating_assets to the joint_venture and then serves as an owner of joint_venture resulting from the activities org conducts through the joint based on the forgoing analysis the government holds that org has non-exempt activities which are substantial and that private interests are being served by its activities taxpayer’s position the organization has no stated position conclusion therefore it is the governments position that the organization no longer meets the guidelines under internal_revenue_code sec_501 and sec_1_501_c_3_-1 as the income of the organization inures to the personal benefit of the members and that the activities of the organization are incidental to providing for the personal benefits of the members of the organization nor does the organization meet the operational_test because it is not operated exclusively for sec_501 purposes as required and defied by sec_1 c -1 d and has been used as a vehicle to serve the private interests of its partners rather than public interest as prescribed under sec_1 c -1 d ai it is recommended that that exempt status of this organization be revoked as of january 20xx form 886-a ev department of the treasury - internal_revenue_service page -8-


department of the treasury internal_revenue_service commerce street dallas tx form tax_year s ended december perenn to cantract contact telephone number uil number release date date certified mail dear we have completed our examination of your form_990 for the periods ended december it has been determined that your exempt status should be revoked the previous report of examination issued on june you have concurred with our determination by signing form_6018 consent to proposed adverse action on july from federal_income_tax under sec_501 of the internal_revenue_code has been revoked effective january a copy of which is enclosed accordingly your exemption states the basis for the revocation you are required to file federal_income_tax return form_1120 with the internal_revenue_service center we have secured the delinquent forms for the periods ended december remember the internal_revenue_code sec_277 may limit your deductions and december december when filing future returns 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 you tax information and can help you get answers you can call and ask for the taxpayer_advocate assistance or you can contact the advocate from the site where this issue was determined by writing to o t taxpayer_advocate assistance cannot be used as substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determination nor extend the time fixed by law that you have to file a petition in 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 if we do not hear from you within days of the date of this letter this determination will be considered final and no further action will be required please keep a copy of this report with your permanent records if you have any questions regarding this matter please contact the person whose name and telephone number are shown above enclosure s publication wendt yoursy nanette m downing director eo examination tax_exempt_and_government_entities_division department of the treasury internal_revenue_service capitol st ste stop 4710o0ma omaha ne date taxpayer_identification_number form tax_year s ended december person to contact id number contact numbers telephone fax certified mail return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exernpt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog nurther bsd1v e i you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues ifa determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns 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 lf you have any questions please call the contact person at the telephone number shown in the heading of this letter the mast convenient time to call if we need to contact you if you write please provide a telephone number and letter catalag number 34801v thank you for your cooperation sincerely nanette m downing director eo examinations enclosures publication publication form_6018 report of examination envelope letter catalog number v form 886a department of the treasury - internal revenue schedule no or exhibit explanation of items service name of taxpayer ein whether c of the internal_revenue_code qualifies for exemption under section _ the the articles provide that the facts the the articles on august _ common purpose for pleasure and recreation to operate a golf course establishing an organization which is described in sec_501 the november of and incorporated communities with a population of big_number or less each member will purchase a stock certificate for dollar_figure below obtained their exempt status in the membership is any person of legal_age that resides in the rural_area was created with articles of incorporation was created for the has five classes of membership as shown the family membership- membership is available to parents and all unmarried children and students the membership entitles all such members to participate in all associated activities single- membership is available to unmarried and non-students the benefits are the same as the family membership social- membership is available to one or more non-golfing family members the membership entitles such member and family to participate in all association activities except golf and golf cart stall rental college student- membership is available to bona_fide college students who do not qualify under a family membership the membership entitles such member to the same benefits as a single membership high school- membership is available to bona_fide high school students not past graduation who do not qualify under a family membership the membership entitles such member to unlimited golf participation only rules and fees residents within the original stockholders in order to participate in association activities anyone living outside of this area may become stockholders by purchasing a fully paid stock certificate or may participate in association activities by paying appropriate membership fee or green fee non stockholders living inside the paying green fees boundaries must become ice in ea onl ar n lay the minutes have discussed the expenses they have increased their dues in the past years since surrounding areas have golf courses they are in competition for the rural members in the area has been struggling to keep the cash_flow above their the chart below shows the total income reported on the forms and the amount of non- member income received for years ending december member income is on the right side under ubi income the non- and form 886-arrev department of the treasury - internal_revenue_service page -1- form 886a department of the treasury - internal revenue schedule no or exhibit explanation of items service name of taxpayer ein gross_receipts txpd form_890 gross_receipts line 1d 6a 6a t0a non-member income test percentage ubi income gross_receipts oo es test ee _ ae qo taper green fees tournament tne interest cait rentals total 10a - ewe bar sales rentals hever ncnnnacnacmmennen ee eee txpd form990 gross_receipts _ lne ie sec_2 2--i itst ‘is é‘ér erc _ ubi income gross_receipts _ test a _ green fees ____ tournament interest _ 10a __ sales rentals _ txpd form_990 gross_receipts line 1d -_ ___ test _ on percentage __ublincome gross_receipts _ - nue ees owen green fees tournament - cart rentals bar sales rentals total _ the gross_receipts were taken from all the forms from removed the refunds for and took the unrelated_business_income ubi from the poa’ s work papers offs to ofdollar_figure ofdollar_figure not income form 886-arrev deparunent of the treasury - internal_revenue_service page -2- form 886a department of the treasury - internal_revenue_service schedule no or exhibit name of taxpayer explanation of items ein the forms from were used to compute the ubi the percentages for the ubi gross_receipts_test for unrelated_business_income ubi gross_receipts_test the poa’s work papers were used to compute the and the to are as follows and as shown above to sec_501 clubs organized for pleasure recreation and other nonprofitable purposes substantially ali of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder regs sec_1_501_c_7_-1 social clubs a the exemption provided by sec_501 for organizations described in sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if any part of its net_earnings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities b a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 solicitation by advertisernent or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption reg sec_1_501_c_7_-1 sec_277 deductions incurred by certain membership organizations in transactions with members sec_277 general_rule -in the case of a social_club or other membership_organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation deductions for the taxable_year attributable to furnishing services insurance goods or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members including income derived during such year from institutes and trade shows which are primarily for the education of members if for any taxable_year such deductions exceed such income the excess shall be treated as a deduction attributable to furnishing services insurance goods or other items of value to members paid_or_incurred in the succeeding taxable_year the deductions provided by sec_243 sec_244 and _245 relating to dividends received by corporations shall not be allowed to any organization to which this section applies for the taxable_year revproc_71_17 1971_1_cb_683 describes the record-keeping requirements for social clubs exempt under sec_501 with respect to nonmember use of their facilities it sets forth guidelines for determining the effect of gross_receipts derived from form 886-airev deparment of the treasury - imernal revenue service page -3- form 886a department of the treasury - internal revenue schedule no or exhibit explanation of items service name of taxpayer ein public use of the club's facilities on exemption and liability for unrelated_business_income_tax gross_receipts_test public law sec_501 was amended in by public law to provide that sec_501 organizations could receive some outside income without losing their exempt status senate report no 2d session 1976_2_cb_597 explains that a social_club is permitted to receive up to percent of its gross_receipts including investment_income from sources outside of its membership without losing its tax-exempt status it is also intended that within thi sec_35 percent amount not more than percent of the gross_receipts should be derived from the use of a social club's facilities or services by the general_public nonmembers in effect the latter modification increases from percent rev_proc c b to percent the proportion of gross_receipts a club may receive from making its club facilities available to the generai public without losing its tax exempt status the senate report also states that it is not intended that these organizations should be permitted to receive within the percent or percent allowances income from the active_conduct of businesses not traditionally carried on by these organizations in cases where an organization’s nontraditional income would cause the organization to exceed the or percent allowances consideration should be given as to whether the organization continues to be substantially operated for sec_501 c purposes according to the committee reports where a club receives income from other sources non- traditional or unusual including income from the sale of its clubhouse or similar facility that income is not to be included in the formula that is such income is not to be included in either the numerator or the denominator for purposes of computing the or percent allowances the committee reports provide that gross_receipts include charges admissions membership fees dues assessments investment_income such as dividends rents and similar receipts and normal recurring capital_gains on investments but excluding initiation fees and capital contributions where college fraternities or sororities charge membership initiation fees but not normal dues such fees will be included in their gross_receipts notwithstanding that initiation fees are ordinarily excluded senate report 2d session 1976_2_cb_599 government's position based on the facts of the examination the organization does not qualify for exemption since the operations were more than substantial for non-members the has operated from c because the ubi gross_receipts are over the three years revocation was recommend effective january above the provisions for non-member income described in irc for non-member income for to the public law and senate report no amended sec_501 as of october receiving of its income for use of club facilities from non-members this organization provide that to be exempt under sec_501 a club is limited to form 886-avres department of the treasury - internal_revenue_service page -4- form 886a department of the treasury - internal revenue schedule no or exhibit explanation of items service name of taxpayer ein substantially exceeded the consecutive years limitation from non-member income for three discussed the issue with the poa and the taxpayer and they agreed the non-member income exceeded the gross_receipts limitations poa has been compliant and sent in converted forms for the december tax periods and conclusion the status of c should be revoked effective january the provisions for exempt purposes the member income for three consecutive years therefore no longer qualifies to be exempt exceeded the amount of allowable non- because it did not operate within as an organization described under section the per sec_277 of the internal_revenue_code code a non-exempt organization that is a membership_organization is allowed a deduction for expenses that relate to the operation of the organization for its members sec_277 states that in the case of a social_club or other membership_organization which is operated primarily to furnish services or goods to the taxable_year members and which is attributable to furnishing services insurance goods or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members including income derived during such year from institutes and trade shows which are primarily for the education of members not exempt from taxation deductions for when completing the form_1120 the organization must divide the income and expenses a loss from the membership between the member and non-member activities if there is activity it cannot be used to offset the income from the non-member activities a loss on the member activity can be carried forward to a later year to be taken against member income form_1120 u s_corporation income_tax returns for years ending december later is due no later than the day of the month following the close of the organization's tax_year and form 886-arrev -63 department of the treasury - internal_revenue_service page -5-


number release date index number ---------------------- -------------- ------------------------ - - - person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-150796-03 date april re -------------------------------------------- legend grandparent ------------------------ ---------------------------------------- grandparent ----------------------- ---------------------------------------- son ---------------------------------- daughter-in-law ---------------------- grandson ------------------------------------ trust -------------------------------------------------------------------- --------------------------- sub-trust ---------------------------------------------- ----------------------------------- sub-trust ------------------------------------------ ---------------------------------- date -------------------------- date ---------------------- date ------------------- date ---------------- year ------- year ------- year ------- year ------- year ------- year ------- year ------- amount ---------- law firm ----------------------------------------------- accounting firm -------------------------------------- accountant -------------------------- this is in response to a letter from your authorized representative dated march dear ---------------- and prior correspondence requesting an extension of time under sec_301 of the procedure and administration regulations to make an allocation of generation- skipping transfer gst tax exemption facts the facts and representations submitted are summarized as follow grandparent created trust on date for the benefit of son daughter-in-law and grandson grandparent contributed amount to trust at that time article first section dollar_figure of trust permits the trustee to receive as part of article first section dollar_figure of trust provides that the trustee has the discretion to distribute income and principal to son daughter-in-law and grandson as the trustee in the trustee’s sole and absolute discretion deems necessary for their health education support and maintenance section dollar_figure provides that trust shall terminate upon the death of the last to die of son and daughter-in-law at termination trust principal and any accumulated and undistributed_income is to be distributed to the then-living lineal_descendants of son and daughter-in-law per stirpes trust contributions of additional property from the settlor or any other person in date grandparent also contributed amount to trust grandparent is daughter-in- law’s father established the share to which grandparent is the donor is known as sub-trust and grandparent 2’s share is known as sub-trust united_states gift and generation-skipping_transfer_tax return for year in early year during a personal divorce son became aware of the issues regarding the gst tax and the need to make allocations to trust as a result grandparent filed her form_709 and made a late allocation of her gst_exemption to her respective trust share sub-trust on date grandparent filed his form_709 and made a late allocation of his gst_exemption to his respective trust share sub-trust on date neither grandparent nor grandparent filed a federal gift_tax_return form_709 because trust then had multiple transferors separate trust shares were the trust instrument was prepared by law firm the attorney who prepared the trust instrument signed an affidavit stating that she had no record of providing advice to grandparent or grandparent regarding the proper allocation of the gst_exemption to contributions to trust from year until the present accounting firm has been the accountant for in year both grandparent and grandparent had sufficient gst_exemption trust accountant represents that distributions were made during year through year to son daughter-in-law and grandson in year distributions were made to son and daughter-in-law no distributions were made to grandson in year accountant also represents that no gst tax has ever been paid available to allocate sufficient gst_exemption to trust in order for trust to have an inclusion_ratio of zero the only allocation of gst_exemption by either grandparent or grandparent has been the year late allocations discussed above law and analysis sec_2601 of the internal_revenue_service imposes a tax on every generation-skipping_transfer a generation-skipping_transfer is defined under ' a as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines aapplicable rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2631 as in effect for the tax years at issue provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under ' c which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under ' a once made shall be irrevocable sec_2654 provides that for purposes of chapter the portions of a_trust attributable to transfers from different transferors shall be treated as separate trusts sec_2632 provides that any allocation by an individual of his or her gst_exemption under ' a may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor s lifetime other than in a direct_skip is made on form_709 under ' a the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the aapplicable fraction the applicable_fraction as defined in ' a is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2642 provides that except as provided in ' f if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by ' b for such transfer or is deemed to be made under ' b or c the value of such property for purposes of ' a shall be its value as finally determined for purposes of chapter within the meaning of ' f or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in ' b or and an election under ' b or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under ' g b the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_transfer_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in ' b or b or an election described in ' b or c under the provisions of ' requests for relief under ' will be granted when the taxpayer provides the 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 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with ' g b and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in ' b or b or an election described in ' b or c under the provisions of ' based on the facts submitted and the representations made we conclude that the requirements of ' have been satisfied therefore grandparent is granted an extension of time of days from the date of this letter to make an allocation of her available gst_exemption with respect to her transfer to sub-trust in year the allocation will be effective as of the respective date of the transfer to sub-trust and the inclusion_ratio of sub-trust will be determined based on the value of the transfers to sub-trust as determined for federal gift_tax purposes and the amount of exemption allocated to sub-trust this allocation should be made on a supplemental form_709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form_709 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 tax consequences of the transaction under the cited provisions or under any other provisions of the code except as specifically ruled herein we express or imply no opinion on the federal provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures cc copy for sec_6110 purposes copy of this letter