department of the treasury internal_revenue_service gommerce street dallas tx number release date date date legend org organization name org address certified mail dear ull xk date - address address person to contact identification_number contact telephone number ein in reply refer to internal_revenue_service last date for filing a petition with the united_states tax_court march 20xx this is a final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked cffective january 20x ‘our adverse determination was made for the following reasons a substantial part of your activities consisted of providing down payment assistance to home buyers to finance the assistance you relied on home sellers and other real-estate related businesses that stand to benefit from these down payment assistance transactions your receipt of a payment from the home seller corresponds to the amount of down payment assistance provided in substantially_all your transactions therefore you are operated for a substantial nonexempt purpose tn addition your operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 contributions to yout organization ate no longer deductible under sec_170 of the internal_revenue_code ‘you are required to file federal_income_tax returns on korm these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax retums and assessment of any taxes duc will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code ifyou decide to contest this determination under the declaratory_judgment provisions of cade sec_7428 a petition to the united_states tax_court the united_states court of 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 contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment to secure a petition from the united_states tax_court write to the united_states tax_court second siteet n w washington d c we will notify the appropriate state officials of this action as tequited by sec_6104 of the taternal revenue code if you have any questions about how this determination may affect your state responsibilities and requirements you should contact your state officials ‘you also have the eight to contact the office of the ‘taxpayer advocate however you should first contact the person whose name and telephone number ate shown above since this person can access your tax information and can help you get answers ‘you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to revetse 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 if you have any questions please contact the person whose name and telephone aumber are shown in the heading of this letter sincerely yours vicki l hansen acting director eo examinations ss department of the treasury internal_revenue_service org address date 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 your protest should include a statement of the facts the ifyou 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 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 intemal 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 intemal 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 advacate assistance if you prefer you may contact your local taxpayer_advocate at tfyou have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34800f schedule number of exhibit form b86-a ‘av date tame of taepayer ons yeatparod anded 91-20x explanations of items arco naber legeno org organization name co-4 co-5 co-3 xx date 3m xyz state g g companies website website co-1 co- whether org operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 issue i m f i i a overview org org is a xyz not-for-profit corporation incorporated on june 20xx it also has a certificate of authority to transact business in the state of xyz the purpose of org as stated in the articles of incorporation is to expand the availability of decent safe affordable housing by capitalizing on current opportunities to acquire rehabilitate preserve buy lease rent manage broker or construct housing units for rent and or for sale on september 20xx org applied for recognition as a tax exempt_organization under intemal revenue code sec_501 on form_1023 on january 20xx based on the information that org provided in its application_for exemption and on the assumption that org would operate in the manner represented in its application org was recognized as of june 20xx as a tax exempt_organization as described in sec_501 ‘org operates a down payment program that provides financial assistance to homebuyers the amount the provided can be used for the down payment closing costs outstanding debt or numerous other needs funds are generated from payments from builders and sellers although org stated in its application_for recognition of exempt status that it also planned to offer interim ot specialized housing for the elderly or handicapped it did not engage in that activity ion for recognition of tax-exempt status app org filed form_1023 application_for recognition of tax-exempt status with the irs on september 20xx on its form_1023 org stated its purpose as the following gift of down payment program-with funds charged to sellers of homes revenues will be accumulated to allow the organization to make gifts of down payments to homebuyers provide real_estate agents lenders homebuyers and others with the contract addendum which will amend the sales contract to provide for the payment of fees to org at the closing of the sale monies will be wired to the settlement agent as a gift to the buyer from the seller’s proceeds org will be paid a fee which can then be used to gift the next down payment department ofthe treasury - internal_revenue_service form 886-a page schedule number of exbte form 886-a rev date ‘name of taxpayer ore explanations of ‘tems tax wlentiication number eap shot onset 12-31-20xx preservation of america’s housing stock-acquire distressed homes to rehabilitate preserve rent lease or sell to families with low or moderate incomes most of the homes in this program will be sold to first time homebuyers the properties will be made available to the general_public but preference will be given to low and moderate income first time homebuyers no fees will be charged but it is expected that excess revenues will be generated from the sales to continue program services brokerage services-org will be a licensed real_estate brokerage this will enable org to eam commissions when they purchase distressed real_estate org will act as a real_estate broker in the purchase sale lease or rental of properties management services-manage properties owned by org and or other_property owners itis expected that org will offer management services for foreclosed otherwise distressed properties and other properties for lenders co-1 co-2 other government agencies public and private charities elderly and or disabled owners churches and private owners as well as our own properties specialized housing needs-org hopes plans to offer specialized housing to meet the needs of elderly handicapped and other special need requirements such as interim housing ‘the organization's financial support will generate from individual donors business community governmental units and other c organizations by letter dated october 20xx the internal_revenue_service advised org that it did not qualify for exempt status as an organization described in sec_501 c org responded by letter dated november 20xx with an amendment of its planned activities these activities were described as follows gift of down payment program - the organization will make gifts of down payments to affordable housing homebuyers as defined by u s dept of co-1 co-1 revenue from other activities contributions made by home sellers and other donations will be used to enable future homebuyers to purchase homes immediately preservation of america’s housing stock - with revenue produced from various sources including loans we will acquire distressed homes these homes will be purchases from co-1 the co-2 co-3 co-4 as well as banks and private owners these homes will be rehabilitated preserved and rented leased or sold to affordable housing as defined by co-1 families brokerage services - the organization will be a licensed real_estate brokerage as brokers we will be able to earn commissions when we purchase distressed real_estate specialized housing needs - the organization hopes to be able to offer specialized housing to meet the needs of elderly handicapped and other special need requirements such as interim housing management services - day to day management of properties owned by the organization and or other nonprofits is an integral part of operations ‘départnent ofthe treasury - internal_revenue_service fom bbg-a page sohedule number or axhioit form bb6-a rev date explanations of items yearporad ended tax kentiication number name of taxpayer os org also provided statements signed by an authorized officer of the organization to comply with revproc_95_32 which states we agree that for each housing project that a at least percent of the units will be occupied by residents that qualify as low-income and b either at least percent of the units will be occupied by residents that also meet the very low-income limuit for the area or percent of the units will be occupied by residents that also do not exceed percent of the area’s very low-income_unit up to percent of the units may be provided at market rates to persons who have incomes in excess of the low-income_unit we will not require that sellers pay a fee to participate in our down payment assistance program federal returns org filed form_990 for the calendar_year ended december 20xx it did not file form 990-t for that year for 20xx org reported that its activities consisted of providing safe affordable housing to low moderate income families selling or renting housing to low and moderate income families administering a down payment gift program which makes gifts of down payments to those families which lack the funds and purchasing foreclosed and other distressed homes and restoring them for use as affordable housing org reported the following on its form_990 for 20xx dollar_figure in direct contributions which included donations and gift program contributions from sellers and builders dollar_figuredollar_figure in program service revenue which included management fee income rental income commission income condo property management income insurance refund interest_income late fee income and dollar_figuredollar_figure in inventory sales which included sales of homes org also reported payment of dollar_figuredollar_figure in commissions dollar_figuredollar_figure in down payment gifis dollar_figure in down payment gift fees dollar_figure in closing costs dollar_figuredollar_figure in real_estate_taxes org reported total assets in the amount of dollar_figure of which dollar_figuredollar_figure was reported as inventories for sale or use and dollar_figuredollar_figure was reported as fixed assets office space the information provided did not include data on the buyer’s income and gave no indication that org screened on such data org does not maintain closing statements on the individuals to whom it provides down payment assistance the following are transactions of org during 20xx on january 20xx org wired dollar_figure as a buyer’s gift and received a fee of dollar_figure on january 20xx org wired dollar_figure and received dollar_figure on january 20xx org wired dollar_figure and received dollar_figuredollar_figure on january 20xx org wired dollar_figuredollar_figure and received dollar_figure on january 20xx org wired dollar_figure and received dollar_figuredollar_figure gift amount-dollar_figures plus seller's fee of dollar_figure on february 20xx org wired dollar_figure and received dollar_figure gift amount-dollar_figure plus seller’s fee of dollar_figure and wired sand received gift amount-dollar_figure plus seller's fee of on march 20xx org wired sand received dollar_figure on march 20xx org wired sand received dollar_figure on match 20xx org wired sand received dollar_figure on april 20xx org wired and received on april 20xx org wired and received on april 20xx org wired dollar_figure and received dollar_figure on may 20xx org wired sand received dollar_figureon june 20xx org wired dollar_figureand received dollar_figure on july 20xx org wired dollar_figure and received on july 20xx org wired sand received dollar_figure on july 20xx org wired sand received dollar_figureon july 20xx org wired sand received dollar_figure on september 20xx org wired and received on september 20xx org wired dollar_figure and received dollar_figure and on december department of the treasury - internal_revenue_service form 886-a page behedule number or exhibk form 886-a ‘rev date name of taxpsyer ome explanations of items tox mentiication number yea cmod endear 12-91-20x 20xx org wired and received dollar_figure the amounts received ftom sellers’ fees were reported on the form_990 as contributions operation of org's down payment assistance program org through its website pamphlets and brochures promotes its down payment assistance program to buyers sellers realtors lenders builders and closing agents the organization is composed of many teal estate professionals with abundant experience in the home ownership field org’s website explains that the down payment assistance program works as follows qualifications- the buyer must qualify for a mortgage with a financial_institution of their choice the mortgage must allow gift funds the gift must be used towards the purchase of a home in which the buyer will reside process- apply with a lender that allows gift funds fha loans allow gift of down payment apply for the down payment gift program find a realtor and inform them of the use of the gift program and find a home that fits the mortgage qualifications incorporate the contract addendum’ into the offer to purchase a home the addendum must be signed by both the buyer and the seller and faxed to org for signature at least hours prior to closing the contract addendum asks the seller to pay a program fee equal to the buyer’s gift amount plus dollar_figure fully complete the application at least hours prior to closing ‘the gift funds will be wired to the closing agent’s escrow account designated on the application on the closing day the seller's program fee will be the gift amount plus dollar_figuredollar_figure a a gift amount contribution amount dollar_figuredollar_figure dollar_figure a dollar_figuredollar_figure dollar_figuredollar_figure most fha loans require down payment the real_estate agent will need to explain the gift program to potential clients complete and attach the contract addendum and have the potential buyer complete the gift application department ofthe treasury internal ravens sarvico form 886a page po schedule number of exhib form rev danuary name of taxpayer ors yaariperiod ended 12-84-20kx explanations of items tax mlentiication number the builders will increase the number of potential buyers for new homes built by working with the org gift program to provide gift funds to the buyers the gift funds which are up to of the purchase_price can be used for down payment assistance or closing costs gift amount contribution amount dollar_figure conisbutions are not directly applied to buyer's cit if the builder normally pay sec_3 in closing costs for buyers they will add the gift finds to the contract volume discounts are offered to builders after five transactions the contribution is reduced to only one-half percent above the gift amount as long as the builder bas a minimum of five transactions per year they will keep the lower rate the website also contains a link the living network to find the best in real estate-the best starter home the best waterfront property the best location for new company headquarters the best real_estate professionals the potential buyers then select the state in which they are interested the xyz living network site hes links for emergency housing xyz properties residential rentals find a buyer find a realtor find a real_estate firm specialty groups other states tips advice media terms of service and home page the pamphlets distributed to builders sellers state the following the builder seller has nothing to lose and everything to gain does the org program make financial sense for the builder seller it is common for a builder seller to negotiate or drop the sales_price in order to make a sale many builders sellers drop their price by or even more with the org gift program most builders sellers are able to obtain full listing price for their homes the benefit can easily be seen normal real_estate_transaction list price sale price’ comps dollar_figure homebuyer has down payment dollar_figure dollar_figure sec_2 less commission subtotal less closing net tom bbg-a page ‘bepariment of the treasury -internal revenue service ‘sohedule qumber of enn form 886-a ten doruesy name oftaxpayer org explanations of items tax weniffcation number ‘year period ended org transaction list price’ sale price less commission less fee for org subtotal less closing net dollar_figure dollar_figure dollar_figure s sec_3 comps full price y despite the representations in its application_for exemption org does not have any income limitations for its down payment gift program and did not screen applicants for down payment assistance based on income the information provided by org did not include data on the buyers’ income and gave no indication that org soreened on such data qualified for a loan rather org’s down payment gift program provided a gift to any homebuyer who ina letter dated august 20xx from org to co-5 org stated the following in part finally you org’s promotional material states the program is available to qualifying homebuyers interested in purchasing a single-family home priced up to dollar_figuredollar_figure or dollar_figuredollar_figure for multi-unit properties italso states the builder seller contribution fee paid_by the builder seller ensures the viability of the program the amount of the program contribution fee is equal to the amount_of_the_gift plus fot example a gift equals a fee until the elosing is complete your client's application can be approved for up to of the purchase_price depending on the mortgage qualification requirements and the purchase_price of the home that is selected will need to ensure that our addendum is attached to the purchase contract we ask our sellers to provide a program contribution fee to org based on the gift amount provided to you for instance if you require a gift from org we would ask the seller to provide contribution to us these seller fees are what allow us to keep our program funded so we can gift to the next buyer seller agrees to accept buyer’s terms for financing utilizing an eligible_loan program that allows charitable gifts from org seller understands that they are under no obligation to pay the program contribution fee if the buyer using the org program does not purchase the home the seller agrees to pay the program contribution fee upon successful settlement closing org strongly recommends the the builder seller is not obtigated to pay the program contribution fee the addendum to contract states the following in part bepanmant ofthe treasury - internal_revenue_service fom b86-a page sohedule number or axiioh form 886-a ev anuary explanations of items tax identification_number ‘yearpariod ended wome oftarnayer orc buyer obtain an independent home inspection and attend a co-1 approved homebuyer’s counseling class org does not require these items to allow this gift of funds law and analy 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 and that certain other requirements are met are exennpt from income_tax lr c sec_501 treasury regulation section big_number c -1 purposes only if it engages primarily in activities that accomplish exempt purposes specified in sec_501 c an organization must not engage in substantial activities that fail to further an exempt_purpose in 326_us_279 the supreme court held that the presence of single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exernpt purposes provides that an organization operates exclusively for exempt sec_1 c -1 ii 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 defines the term charitable for sec_501 purposes 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 id sec_1_501_c_3_-1 provides in part that the term educational for sec_501 c purposes relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of 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 in easter house v united_states cl_ct aff'd 846_f2d_78 fed cir the 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 department ofthe treasury - internal_revenue_service form 886-a page ‘schedule qumber or ean form 886-a thew anuary ama of taxpayer ore explanations of items tax wsnitication number year period ended x 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 in addition although the organization provided health care to indigent pregnant women it only did so when a family willing to adopt a woman’s child sponsored the care financially 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 cl_ct pincite accordingly the court found that the business_purpose and not the advancement of educational 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 - ii 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 section dollar_figure c the organization in cooperation with national craft agencies selected the handicrafts it would market from eraft cooperatives in communities identified as disadvantaged based on objective evidence collected by the bureau of indian affairs or other government agencies ‘the organization 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 department ofthe treasury - internal raveniue for sb6-a service page ‘schedule number or exw fom 886-a for pry name of taxpayer explanations of items tax kentiication number yeauperod ended org foundation v commissioner f_supp 2d d d c the court relied on the commerciality doctrine 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 applying the operational_test because of the commercial manner in which the organization 12-31-20xk in 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 reasonableness of financial reserves additional factors include inter commercial promotional methods eg advertising and the extent to which the organization receives charitable donations alia whether the organization uses pricing policies and 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 situation described an held that helping low-income persons obtain adequate and affordable revrul_67_138 c b housing is a charitable activity because it relieves the poor and distressed or underprivileged in revenue ruing the organization carried on sevetal activities ditected 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_70_585 1970_2_cb_115 discussed four situations of organizations providing housing and whether each qualified as charitable within the meaning of section dollar_figure c organization formed to construct new homes and renovate existing homes for sale to low-income families who could not obtain financing through conventional channels the organization also provided financial aid to low- income families who were eligible for loans under a federal housing program but did not have the necessary down payment the organization made rehabilitated homes available to families who could not qualify for any type of mortgage when possible the organization recovered the cost of the homes through very small periodic_payments but its operating fuunds wore obtained from federal loans and contributions from the general_public ‘the revenue_ruling held that by providing homes for low-income families who otherwise could not afford them the organization relieved the poor and distressed situation described an organization formed to ameliorate the housing needs of minority groups by building housing units for sale to persons of low and moderate income on an open-occupancy basis the housing was made available to members of minority groups who were unable to obtain adequate housing because of local discrimination the housing units were located to help reduce racial and ethnic imbalances in the community as the activities were designed to eliminate prejudice and discrimination and to lessen neighborhood tensions the revenue_ruling held that the organization was engaged in charitable activities within the meaning of section department of the treasury - internal_revenue_service form 886-a page ‘schedule number or exhibit fon 8b6-a rev date aie of taxpayer ons yearparid ended 34-200x explanations of items tax weniicalion number situation described an organization formed to formulate plans for the renewal and rehabilitation of a particular area in a city as a residential community the median income level in the area was lower than in other sections of the city and the housing in the area generally was old and badly deteriorated the organization developed an overall plan for the rehabilitation of the area sponsored a renewal project and involved residents in the area renewal plan the organization also purchased an apartment building that it rehabilitated and rented at cost to low and moderate income families with a preference given to residents of the area the revenue_ruling held that the organization was described in sec_501 because its purposes and activities combated community deterioration situation described an organization formed to alleviate a shortage of housing for moderate-income families in a particular community the organization planned to build housing to be rented at cost to moderate-income families the revenue_ruling held that the organization failed to qualify for exemption under sec_501 e because the organization's program was not designed to provide relief to the poor or further any other charitable purpose within the meaning of sec_501 and the regulations revrul_2006_27 2006_21_cb_915 in part discusses whether down payment assistance organizations described in situations operate exclusively for charitable purposes those described in situation sec_1 and are relevant to this discussion the organization described in situation helps low-income families to purchase decent and safe homes in the metropolitan area in which it is located individuals are eligible to participate if they have the employment history to qualify for a mortgage with the exception that they do not have the funds necessary for down payments the organization in situation offers financial seminars conducts educational activities to prepare the individuals for home ownership and requires a home inspection report before providing funds for down payment assistance to fund the program the organization conducts broad based fundraising that attracts gifts grants and contributions from the general_public further the organization has policies in place to ensure that the grant making staff does not know the identity or contributor status of the home seller or other parties who may benefit from the sale and does not accept contributions contingent on the sale of particular properties because the organization described in situation relieves the poor and distressed requires a home inspection to ensure the house is habitable conducts educational seminars had a broad based funding program and has policies to ensure that the organization is not beholden to particular donors the service held that the organization is operated exclusively for charitable purposes and qualifies for exemption from federal income_taxation as an organization described in section s01 c ‘the organization described in situation is similar to the organization described in situation except that i its staff knows the identity of the party selling the home and ma know the identify of the parties involved in the sale the organization receives a payment from the seller the amount of which bears a direct correlation to the amount of down payment assistance provided in substantially_all the cases in which the organization provides assistance to the home buyers and most of its financial support comes form home sellers and department ofthe tweasury - intemal revenue service form 886-a page ‘schedule number of extiba form 8b6-a row janvery warne of taxpayer org ‘year period ended explanations of items tax identification nambar telated businesses that my benefit from the sale of homes to buyers who receive assistance from the organization because the organization described in situation provides down payment assistance amounts that directly correlate to the amounts provided by home sellers and relies primarily on payments from home sellers and real_estate related businesses that stand to benefit from the transactions to finance the program the service held that he organization described in situation is not operated exclusively for exempt purposes and does not qualify for exemptions from federal_income_tax as an organization described in sec_501 c 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 sec_1 -i d 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 166f 3d 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for the distribution to charitable causes did not qualify for exemption under sec_501 c because its activities resulted in substantial private benefit to its founders the organization derived most of its funds form lottery ticket sales which took place during regular business hours of the lounge owned by the founders the tax_court found that that the availability of lottery tickets attracted new patrons to the lounge and discouraged existing customers from patronizing lounges which did not sell such tickets therefore the organization was operated for the benefit of its founders and was not operated exclusively for exempt purposes 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 2003_1_cb_123 dollar_figure ctoss-referencing dollar_figure et seq 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 n ii revproc_90_27 c b dollar_figure treas reg for s86-a deparment ofthe treseury - internal_revenue_service page explanations of items ‘schedule number of exh form rev janvary narva of taxpayer org the commissioner may revoke favorable determination_letter for good cause treas reg sec_1 -1 a 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-refecencing dollar_figure et sea yeu parlod ended tax identifestion namber analysis is not an organization described in sec_501 because it operates a program that does not exclusively serve an exempt_purpose described in sec_501 and provides substantial private benefit o persons who do not belong to a charitable_class _ the sellers and buyers result in a citcular flow of the money --_-provides the finds to the buyers the buyers use the funds to make the down payment necessary to purchase homes from the sellers in essence the transactions of the sellers make payments to does not have any did not screen applicants for down records do not include data on the buyers’ income instead the of the poor and distressed see treas reg sec_1_501_c_3_-1 down payment gift program does not limit assistance to certain geographic areas or target those areas charitable purposes include relief down payment gift 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 rey rul situation the down payment assistance program did not serve exclusively low-income persons despite the representations in its application_for exemption income limitations for participation in its down payment gift program payment assistance based on income program is open to anyone without any income limitations who otherwise qualified for these loans the program is not limited to first time homebuyers experiencing deterioration or neighborhood tensions see revrul_70_585 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 only an insubstantial portion of the activity of an exempt_organization may further a nonexempt purpose as the supreme court held in better business bureau of washingion d c the presence of a single non-exempt purpose if substantial in nature will destroy the exemption down payment gift program regardless of the nuniber ot importance of truly exempt purposes even if were directed to exclusively low-income individuals or disadvantaged communities total reliance for financing its down payment gift activities on home sellers or other real-estate related businesses standing to benefit from the transactions demonstrates that the program is operated for the substantial purpose of benefiting private parties sellers who down payment gift program benefit from achieving access to a wider pool of buyers like the organization considered in 92_tc_1053 is structured and operated to assist the private parties who fund it and give it business ino v united_states 326_us_279 participate in for bb6-a department of tie treasury - internal_revenue_service page 12-34-20xx ‘schedule number of exnior form b86-a rev date name oftanpayer explanations of items tax wenificalion number yeurpariod ended org thereby decreasing their risk and the length of time the home is on the market they also benefit by being able o 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 home without having to commit more of their own funds real_estate professionals who participate in down payment program from real_estate brokers to escrow companies benefit from increased sales volume and the attendant increase in their compensation down payment program provides ample private benefit to the various parties in each home sale down payment program benefit by being able to purchase a activities was the intended outcome of operated its down payment gift program shows that the private benefit to the various the manner in which participants in such operations 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 _relies exclusively on sellers and other real-estate related businesses such as the sale of homes and rental and management of facilities before providing down payment assistance down payment assistance procedures are designed to channel funds in a circular operations rather than a mere incident of staff takes into account whether there home seller is willing to adhere to the contract addendum and requires the home make a payment to cover the down payment assistance the applicant has requested seller to reimburse it dollar-for-dollar for the amount of funds expended to provide down payment assistance on the seller’s home plus an administrative fee of several hundred dollars per home sale secures an agreement from the seller stipulating to this arrangement prior to the closing no down payment assistance transactions take place unless paid_by the seller upon closing escrow the seller’s contribution along with any closing a payment from the 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 outeome of 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 is assured that the amount of the down payment plus the fee is or will be instructions to title and escrow companies provide that at the close of operations in this respect at least hours prior to fees must be sent to receipt of is promotional material and its marketing activities show that _-_opetated 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 was in section dollar_figure the manner in which the business of facilitating the sales of homes in a manner indistinguishable from an ordinary trade_or_business in this respect operated a conference center for commercial purposes see airlie foundation v commissioner f_supp 2d dollar_figure d d c operations were similar to an organization which was denied exemption because it operated its down payment gift program shows that operating a trade_or_business of facilitating home sales is not an inherently charitable activity unlike the trade_or_business in aid to artisans ine utilized as a mere instrument of furthering charitable purposes but was an end initself to home sellers for which it charged a market rate fee department ofthe treasury - internal_revenue_service form 886-a did not market its services primarily to persons v commissioner 71_tc_202 trade_or_business was not provided services page name of taxpayer tax weniication number schedule number of exnie fon bbg form bbg-a explanations of items one within a charitable_class sales of real_property down payment transactions like the organizations considered in 92_tc_1053 and easter house cl_ct a substantial part of exempt purposes of finds indicates that the primary goal of and to maximize the fees paid to like the organization described in situation of revrul_2006_27 the citcular flow did not solicit or receive any funds from parties that did not have interest in the primary goal consisted of maximizing the fees it derived from facilitating the was benefit the private patties involved in the transaction --_rather than to accomplish an exempt_purpose activities furthered commercial rather than year pated onde sec_2 9te20xxx based on the foregoing cntitled to exemption under sec_501 has not operated exclusively for exempt purposes and accordingly is not also signed statements that sereened on such data rather further despite the representation that would comply with revproc_95_32 and exemption effective the date of the organization’s inception down payment gift program provided gifts to any homebuyer acquire distressed homes and sell them to first time homebuyers the government proposes revoking because the organization operated in a manner materially different from that represented in its application_for exemption in its application_for exemption and subsequent correspondence _represented that its purpose was to make gifts of down payments to affordable housing homebuyers assist first time homebuyers and others denied access to housing ownership bea licensed real_estate brokerage firm manage properties owned by _and others will offer specialized housing to meet the needs of the elderly handicapped and other special need requirements an authorized officer of would not require sellers to pay fees to participate in their down payment assistance program despite these representations _ did not have any income limitations for its down payment gift program or housing program and did not screen applicants for down payment assistance or the housing program based om ineome the records provided by _did not include data on the buyers’ income and gave no indication that who qualified for a loan would not charge fees to sellers did in fact require each seller to pay a fee called the seller’s program contribution fee revocation of exempt status may be retroactive if the organization operated in a manner materially different from that originally represented operation of its down payment assistant activities in a manner materially different from that represented in its application_for exemption justifies retroactive revocation 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 org's down payment gift program is not operated in accordance with sec_501 and the regulations thereunder governing qualification for tax exemption org provides down payment assistance to individuals and families to purchase homes regardless of their income levels org's down payment assistance activities do not target neighborhoods in need of rehabilitations or other relief such as lessening neighborhood tensions or eliminating prejudice and discrimination fom b86-a sec_601_201 revproc_2003_4 deparment ofthe treasury - internal revenus service conclusion page ‘sonedule number or exhib form 886-a rev jenuery explanations of items nante of taxpayer or yeodperted ended 12-51-20xx tax waentication number org operates in a manner indistingvishable from a commercial enterprise org’s primary activity is brokering transactions to facilitate the selling of homes org’s primary goal is to maximize the fees from these transactions org’s brokering services are marketed to homebuyers sellers realtors lenders home builders and title companies regardless of the buyers’ income level or need and regardless of the condition of the community in which the home is located alliances are built with the realtors lenders home builders and title companies to assure future business for the mutual benefit of the participants org does not have any type of educational or counseling activities that further charitable purposes because org’s primary activity is not conducted in a manner designed to further section dollar_figure c purposes org is not operated exclusively for exempt purposes within the meaning of sec_501 for the foregoing reasons revocation of exempt status is proposed because the facts show that in 20xx org operated in a manner materially different from that represented in its form_1023 application the government proposes that the revocation be effective retroactively to the date of the organization’s inception taxpayer's position org’s position with respect to the issues facts applicable law and government’s position as discussed in this report is unknown org will be allowed days to review this report and respond with a rebuttal if considered necessary - internal_revenue_service for 8b6-a department ofthe treasury page eee


department of the treasury internal_revenue_service washington d c office_of_chief_counsel number info release date uil date cc psi b01 genin-153845-02 dear reference this letter is in response to your letter dated date on behalf of seeking a reinstatement of s_corporation status sec_1361 of the internal_revenue_code defines a s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate other than a_trust described in sec_1361 and other than an organization described in c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1362 of the code provides that a corporation is treated as continuing to be a s_corporation during the period specified by the secretary if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the termination was inadvertent no later than a reasonable period of time after discovery of the terminating event steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to that period sec_1362 of the code referenced above provides a listing of the ways to terminate a valid s_corporation_election in relevant part sec_1362 provides for termination of an s_corporation_election by revocation sec_1362 provides that a corporation may terminate its s_corporation status by ceasing to be a small genin-153845-02 business corporation finally sec_1362 provides that a valid s_corporation_election is terminated if the passive_investment_income of the corporation exceed sec_25 percent of gross_receipts for consecutive taxable years and the corporation has accumulated_earnings_and_profits as noted above there are only two instances where a termination of an s_corporation_election may be ignored by the internal_revenue_service -- either by the corporation ceasing to be a small_business_corporation sec_1362 or through the earning of excessive passive_income as outlined in sec_1362 of the code terminations by revocation located in sec_1362 are not afforded relief under sec_1362 of the code sec_1362 of the code states that if a small_business_corporation has made an election under subsection a and if such election has been terminated under subsection d such corporation and any successor_corporation shall not be eligible to make an election under subsection a for any taxable_year before it sec_5th taxable_year which begins after the 1st taxable_year for which such termination is effective unless the secretary consents to such election we appreciate this opportunity to provide you with assistance if you have further questions please contact us at not a toll free number sincerely david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service tege eo examinations commerce street mc dal dallas tx number release date legend org - organization name xx - date address - address co-1 company org address date date employer_identification_number person to contact id number contact numbers voice fax certified mail - return receipt requested dear in a determination_letter dated november 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code as a subordinate organization to the co-1 pursuant to a group ruling group exemption number based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on april 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code as a taxable entity you are required to file form s u s corporate_income_tax return with the appropriate service_center indicated in the instructions for the return you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service town country commons drive attention te_ge eo 7956as chesterfield mo date 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 an adjustment of your organization's exempt 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 number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues lf a 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 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 letter catalog number 34801v thank you for your cooperation sincerely nanette m downing acting director eo examinations enclosures publication publication form_6018 report of examination envelope letter catalog number 34801v form_886 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx legend org - organization name address - address companies president - vice president bm-2 bm-3 - bm org-1 - dba organization name xx - date city - city state - state president - president president-1 - president-1 co-1 co-2 - vice secretary - secretary cpa - cpa bm-1 issues issue whether org org’ doing business as org-1 meets the requirements for exemption under sec_501 of the internal_revenue_code irc issue whether org operated exclusively for purposes listed in sec_1 c - c background information facts co-1 is a veterans organization that holds a group exemption for veterans organizations described in sec_501 hereinafter co-1 will be referred to as co-1 co-1 web page states that its mission is to unite veterans and their families by forming social clubs throughout the united_states which interact with other social veterans clubs co-1 website lists several advantages to be included in its group exemption as a subordinate organization these advantages include selling liquor operating on sundays holding bingo_games and obtaining liquor licenses in dry counties co-1 website markets the co-1 organization and its group exemption to existing bars and restaurants located in state as a way to avoid restrictive local liquor laws and as a way to operate on a tax-exempt basis co-1 website states that it will assist in a club’s formation and application_for a liquor license co-1 refers to its subordinate organizations as clubs co-1 website requires that its clubs have at least veteran members it also requires its subordinate organizations to send it proof of all veteran affiliation one question that appears on co-1 web page is do have to be a member's only club the response is a lthough the tax advantages of being a members only club are greater we do not require you to limit your bar to members your doors may be kept open by incorporating separately you keep control of your own club it is your choice if you wish form 886-a rev department of the treasury - internal_revenue_service page -1- form_8 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx to keep your doors open or closed we only ask that you honor members of other chapters org’s formation and purpose org doing business as org-1 was incorporated by bm-1 bm-2 and bm-3 according to org’s articles of incorporation dated april 20xx the corporation was formed to better the lives of all veterans and their families and any other powers permitted a general non-profit corporation the articles further provide org is a membership_organization the articles provide that in the event of dissolution after paying all liabilities of the corporation all assets will be given to other veterans’ organizations covered under the same c org became a subordinate organization of co-1 effective april 20xx org’s governing documents include the co-1 constitution and by laws a governing instrument provided to it by co-1 according to section iii of the bylaws for co-1 corporations org’s stated purpose is uniting fraternally veterans and the families of veterans in order to work together to better the lives of all veterans and their families and to assist with any difficulties encountered by them these purposes include but are not limited to the following a helping fellow veterans and their families receive the benefits for which they are entitled b finding employment for veterans and their families c helping the homeless veterans find housing and re-adjust to civilian life d carrying on programs to perpetuate the memory of deceased veterans and members of the armed_forces and to comfort their survivors e sponsoring or participating in activities of a patriotic nature f providing social and recreational activities for its members g assisting the disabled and needy war veterans and their dependents h promoting awareness of the prisoners of war and the missing in action issues form 886-a rev department of the treasury - internal_revenue_service page -2- form_886 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org 20xx 20xx year period ended promoting the general welfare and prosperity of all co-1 corporations and presenting and supporting the purposes of co-1 before the public and the j government according to corporate annual registration reports filed by org between june 20xx and august 20xx with the state secretary of state officers and board members of the corporation are as follows 20xx 20xx 20xx president president president president vice-president vice president vice president vice president secretary secretary secretary secretary treasurer none named none named none named secretary secretary board member vice president vice president board member board member vice president secretary president president president the corporation’s current registered agent is president address city state org’s business operations business activities and members org d b a org-1 is located at address city state accurint provides and it has been confirmed during the opening conference that the building is owned by president president and commander of org assets identified within the facility are three flatscreen color televisions a bar bar stools booths and tables with about four chairs each two coin operated pool tables a beer cooler juke box commercial cooler cash register and miscellaneous neon liquor signs all of the assets are located in the bar area there is a store room for inventory and two restrooms there are chips hanging behind the bar form 886-a rev department of the treasury - internal_revenue_service page -3- form_8 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org 20xx 20xx year period ended miscellaneous sports paraphernalia adorn the walls of the very clean very neat establishment business and liquor licenses are displayed behind the bar a banner displaying the establishment's affiliation with co-1 is draped across the entire front of the building a small sign on the front door identifies the establishment as org entry into the building is not restricted however just inside the building there is a sign in book on a podium president advised that the banner and sign in book are new additions recently added to bring the establishment closer to compliance with the membership requirements an operational interview was conducted by correspondence due to bad weather with a follow-up field visit on august 20xx in attendance were president president-1 cpa and cpa of president-1’s firm president provided that she became affiliated with co-1 as a means to attract patronage of the bar she has been affiliated with co-1 since 20xx which is when she came to express interest in operating the establishment as liquor licenses are only available where there is a full kitchen and org has no food preparation facilities it would not have been possible to get a license without being an exempt_organization she purchased the building in 20xx via quit claim deed the organization provided a list of its membership effective november 20xx the list provides for members copies of department of defense form dd-214 were included for each member listed on the handwritten member roster attached she is in the process of trying to sell the building she explained that she joined co-1 in order to give her more power to attract veterans to her facility because as it stands org is in direct competition with a co-2 within a few blocks of org and restaurant even closer than that both the restaurant and the co-2 are older establishments most of the area veterans are members of and frequent the co-2 leaving the patronage of org to everyone else president-1 provided that president had recently expressed to him an interest in dissolving the corporation altogether in fact he has already begun the application to the secretary of state’s office for the dissolution president added that since co-1 has had all of the problems with the irs and the subordinates such as her have all been targets of examinations she feels she was mislead with regard to how co-1 really operated she was unaware of all of the provisions of the law affiliated with the operation of an organization exempt under sec_501 and provided that the organization’s primary activity is in fact social and recreational in that the primary activity is the operation of a bar that is open to the general_public and has always been the case so while she has provided documents and information to substantiate the revenue and expenses on the return she can not provide information to show that the form 886-a rev department of the treasury - internal_revenue_service page -4- form_886 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org yeat period ended 20xx 20xx organization has a legitimate membership or that the receipts of the organization came from such membership president stated that she realizes this puts the exempt status of the club in jeopardy but she wants to be honest and would rather be shut down than be always worried about another visit from the irs law and analysis tax exemption - veterans organizations prior to the enactment of sec_501 by public law 1972_2_cb_675 many veterans organizations qualified for exemption from federal_income_tax under sec_501 because most of the traditional activities of these organizations were recognized by the irs as primarily promoting social welfare staff of joint comm on taxation cong historical development and present law of the federal tax exemption for charities and other tax-exempt organizations jcx-29-05 no comm print 20xx the traditional activities of veterans organizations that were social welfare organizations included promoting patriotism preserving the memory of those who died in war and assisting veterans in need id a veterans organization whose primary activity consisted of operating social facilities for its members was not able to qualify for exemption as a sec_501 social_welfare_organization but it could qualify as a social_club under sec_501 revrul_66_150 1966_1_cb_147 s rep no 92d cong 2d sess reprinted in 1972_2_cb_713 h_r rep no 92d cong 2d sess in congress enacted sec_501 and sec_512 to address the concern that a veterans organization exempt under sec_501 or may be subject_to unrelated_business_income_tax on the provision of insurance to its members s rep no 92d cong 2d sess reprinted in 1972_2_cb_713 ’ sec_512 excludes amounts attributable to or set_aside by a sec_501 veterans organization for the payment of life sick accident_or_health_insurance benefits for their members and their members’ dependents public law 1972_2_cb_675 the sec_501 exemption requirements xk k kk ' before the enactment of the tax reform act of there was no tax on the insurance activities of the veterans’ organizations since the unrelated_business_income did not apply to social welfare organizations and social clubs however the act extended the application of the unrelated_business_income_tax to virtually all exempt_organizations including social welfare organizations and social clubs s rep no 92d cong 2d sess reprinted in 1972_2_cb_713 form 886-a rev department of the treasury - internal_revenue_service page -5- form_8 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx in general sec_501 of the internal_revenue_code provides for the exemption from federal_income_tax of a post or organization of past or present members of the united_states armed_forces if it is a organized in the united_states or any of its possessions b at least percent of its members are past or present members of the armed_forces_of_the_united_states c substantially_all of its other members are individuals who are cadets or are spouses widows widowers ancestors or lineal_descendants of past or present members of the armed_forces of the unites states or of cadets and d no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual membership requirements under sec_501 at least percent of an organization’s members must be past or present members of the armed_forces_of_the_united_states veterans’ sec_501 does not define the term armed_forces_of_the_united_states the regulations under sec_501 likewise do not define the term sec_7701 of the code however defines armed forces’ to include all regular and reserve components of the uniformed_services which are subject_to the jurisdiction of the secretary of defense the secretary of the army the secretary of the navy or the secretary of the air force and the coast guard in addition sec_501 requires that substantially_all other members of an organization be cadets or spouses widows widowers ancestors or lineal_descendants of veterans or cadets according to the senate report accompanying the legislation substantially_all mean sec_90 percent see s rep no cong 2d sess reprinted in 1972_2_cb_713 therefore of the percent of the members that do not have to be veterans percent must be cadets or spouses etc consequently no more than percent x of an ilr c sec_501 organization’ s total membership may consist of individuals not mentioned in the statute k k k ok prior to 20xx ancestors and lineal descendent were not included in the statutory list of persons permitted to be members in 20xx congress amended sec_501 to include ancestors or lineal footnote continues next page form 886-a rev department of the treasury - internal_revenue_service page -6- form_886 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx neither sec_501 its legislative_history nor the regulations under r c sec_501 define what it means to be a member of a veterans organization however whatever the organization requires for one to become a member the organization must maintain records tracking who its members are and the proportions in the various categories of membership permitted under r c sec_501 member of armed_forces cadet relative etc to substantiate that its members are veterans or other permitted members see sec_6001 and sec_1 -1 c operational_test sec_1_501_c_19_-1 of the regulations provides that an organization exempt under r c sec_501 must be operated exclusively for one or more of the following purposes to promote the social welfare of the community as defined in sec_1_501_c_4_-1 of the regulations to assist disabled and needy war veterans and members of the united_states armed_forces and their dependents and widows and orphans of deceased veterans to provide entertainment care and assistance to hospitalized veterans or members of the armed_forces_of_the_united_states tocarry on programs to perpetuate the memory of deceased veterans and members of the armed_forces and to comfort their survivors continued footnote descendents of present or former members of the united_states armed_forces or cadets in the statutory list of individuals who may be members of an organization the regulations have not been updated to reflect this change nor do they reflect the statutory change eliminating a requirement that veterans be veterans of war sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury of his delegate may from time to time proscribe every organization exempt from tax under sec_501 and subject_to the unrelated_business_income_tax including veterans organizations must keep such records sec_1 a these books_and_records are required to be available for inspection by the service sec_1_6001-1 in addition veterans organizations are required to keep books_and_records to substantiate information reported on their information_return see r c sec_6033 and sec_1_6001-1 they are also required to submit additional information to the service for the purpose of enabling the service to inquire further into its exempt status form 886-a rev department of the treasury - internal_revenue_service page -7- form_8 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx to conduct programs for religious charitable scientific literary or educational_purposes to sponsor or participate in activities of a patriotic nature to provide insurance benefits for their members or the dependents of their members or both or to provide social and recreational activities for their members sec_1 c social and recreational activities for members while sec_1_501_c_19_-1 does not address what it means to exclusively provide social and recreational activities for members it is similar to the exempt_purpose contained in r c sec_501 as both provisions permit an exempt_organization to operate social and recreational facilities for its members in fact prior to the enactment of sec_501 a veterans organization whose primary activity consisted of operating a bar or restaurant for the benefit of its members would have to qualify as sec_501 social_club to be tax-exempt see revrul_60_324 and revrul_69_219 these organizations prior to were required to operate exclusively for the pleasure and recreation of its members see sec_501 thus the rulings and case law under sec_501 are useful for purposes of determining whether an sec_501 veterans organization is providing social and recreational activities exclusively for its members sec_1_501_c_7_-1 provides that a club that engages in business such as making its social and recreational facilities available to the general_public is not organized and operated exclusively for pleasure recreation and other nonprofit purposes and is not exempt under sec_501 solicitation by advertisement 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 ek kk in congress amended sec_501 replacing exclusively with substantially_all this change was effected to establish that social clubs will not jeopardize their exempt status if they receive of their gross_receipts from non-membership sources only of their gross_receipts however may be derived from nonmembers’ use of club facilities or services pub_l_no s rep cong 2d sess form 886-a rev department of the treasury - internal_revenue_service page -8- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit form 6018-a year period ended 20xx 20xx in west side tennis club v commissioner f 2d cir cert_denied 311_us_674 the second circuit upheld the board_of_tax_appeals determination that a social_club was not exempt because a substantial amount of its income was received from the general_public west side tennis club was organized to provide tennis facilities for the use and enjoyment of its members the facilities were only available to members for most of the year the club hosted annual national championship tennis matches however that were open to the general_public the club shared in the ticket proceeds from these matches the second circuit upheld the board_of_tax_appeals determination that the national championship matches were a substantial and profitable business which jeopardized the club’s exemption west side tennis club f 2d at p in revrul_60_324 1960_2_cb_173 and revrul_69_219 1969_1_cb_153 the service held that a sec_501 social_club is not operated exclusively for the pleasure or recreation of its members if it makes its facilities available to the general_public to a substantial degree id however this does not mean that all dealings with the general_public are necessarily inconsistent with the club’s exempt purposes for instance in revrul_60_324 1960_2_cb_173 the service stated that w hile the regulations indicate that a club may lose its exempt status if it makes its facilities available to the general_public it does not mean that any dealings with outsiders will automatically cause a club to lose its exemption a club will not lose its exemption merely because it receives some income from the general_public is persons other than members and their bona_fide guests or because the general_public may affairs provided such occasionally be permitted to participate participation is incidental to and in furtherance of its general club purposes and the income therefrom does not inure to members that its in in the service issued revproc_71_17 1971_1_cb_683 which contains guidelines for determining the impact of an organization’s nonmember gross_receipts on its exempt status under sec_501 the revenue_procedure provides that a significant factor reflecting the existence of a nonexempt purpose is the amount of gross_receipts derived from use of a club's facilities by the general_public the k kk in congress amended sec_501 replacing exclusively with substantially_all this change was effected to establish that social clubs will not jeopardize their exempt status if they receive of their gross_receipts from non-membership sources only of their gross_receipts however may be derived from nonmembers’ use of club facilities or services pub_l_no s rep cong 2d sess form 886-a rev department of the treasury - internal_revenue_service page -9- form_8 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx revenue_procedure went on to provide a safe_harbor for organizations serving the general_public as an audit_standard the gross_receipts derived from the general_public alone will not be relied upon by the service if annual gross_receipts from the general_public for use of the club’s facility is dollar_figure or less or if more than dollar_figure where gross_receipts from the general_public for use is five percent or less of total gross_receipts of the organization revproc_71_17 1971_1_cb_683 at sec_3 the term general_public is defined as persons other than members or their dependents or guests id at sec_2 section dollar_figure of revproc_71_17 provides four instances in which nonmembers are assumed to be the guests of the members the assumptions include where a group of eight or fewer individuals at least one of whom is a member uses club facilities it will be assumed for audit purposes that the nonmembers are the guests of the member provided payment for such use is received by the club directly from the member or the member's employer where percent or more of a group using club facilities are members it will likewise be assumed for audit purposes that the nonmembers in the group are guests of members provided payment for such use is received by the club directly from one or more of the members or the member's employer revproc_71_17 sec_3 in 615_f2d_600 cir the third circuit upheld the commissioner's determination that a social_club failed to qualify for exemption from income_tax as a sec_501 organization because it was operated for business and not for the pleasure and recreation of its members the pittsburgh press club was organized for the purpose of providing a professional and social meeting place for its members during the years under exam however the pittsburgh press club hosted several functions for nonmember outside groups although each such group had been member sponsored based on the amount of nonmember revenues dollar_figure of nonmember receipts as well as the percentage of those revenues to percent of gross_receipts the third circuit upheld the revocation stating that the exemption from federal_income_tax for sec_501 organizations is to be strictly form 886-a rev department of the treasury - internal_revenue_service page -10- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit form 6018-a year period ended 20xx 20xx construed pittsburgh press club f 2d pincite the court stated that such strict construction cannot be reconciled with the fact that a substantial amount of the club’s activities and income consisted of nonmember functions and nonmember income therefore the court held revocation of its exemption was proper id recordkeeping and reporting requirements every organization exempt from tax under every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe see sec_6001 r c sec_501 and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 see sec_1_6001-1 and sec_4 c the books_or_records required by sec_1_6001-1 shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law see sec_1_6001-1 except as provided every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe see sec_6033 every organization which is exempt from tax whether or not it is required to file an annual information_return shall submit such additional information as may be required by the service for the purpose of inquiring into its exempt status and administering the ie r c sec_501 and following chapter of subtitle a of provisions of subchapter_f the code sec_6033 and chapter of subtitle d of the code see sec_1_6033-2 see also r c sec_6001 sec_1_6001-1 an organization’s failure or inability to file required information returns or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the organization’s exempt status based on the grounds that the organization has not established that it is observing the conditions that are required these conditions for the continuation of its exempt status see revrul_59_95 require the filing of a complete and accurate annual information_return and other form 886-a rev department of the treasury - internal_revenue_service page -11- form_886 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer year period ended org 20xx 20xx required federal tax forms and the retention of records sufficient to determine whether the organization is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax id revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year its records were so incomplete however that the organization was unable to furnish such statements the internal_revenue_service held that the organization’s failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of its exempt status government’s position and conclusions issue org has not established it meets the membership requirements of sec_501 the irc provides that an exempt veterans organization must meet certain membership requirements to maintain its exempt status at least of the members must be past or present members of the armed_forces_of_the_united_states veterans substantially_all which the irc defines as of all other members must be cadets or spouses widows or widowers of veterans or cadets specifically of the of the organization’s members that are not veterans must be cadets spouses etc only of the organizations total membership may consist of individuals who are not veterans cadets or spouses widows or widowers of these individuals an organization failing to meet the membership requirements will no longer qualify for exemption to illustrate where a veterans organization consists of members at least must be veterans of the remaining members must be cadets or spouses widows or widowers of veterans or cadets the remaining people may be members who are not veterans cadets spouses etc the instruction offered by co-1 to its subordinates org among them is that it requires only ten members and the proof of the veteran status of such members and a lthough the tax advantages of being a members only club are greater it does not require it subordinates to limit their bar to members form 886-a rev department of the treasury - internal_revenue_service page -12- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit form 6018-a year period ended 20xx 20xx the tax advantages of being a members only club are greater for an organization exempt under sec_501 because as the statute clearly provides it is the organizational requirement for such exempt status an organization that does not meet the membership requirements is not exempt the statutes as cited above further provide that in order that it may be clear that such membership exists the organization must maintain records tracking who its members are and the proportions in the various categories of membership permitted members of the armed_forces cadets spouses etc to substantiate that its members are veterans or other permitted members org provided information for veterans claiming to be members however based on the oral testimony of president and her accountants the organization does not have a membership application process nor has it taken any steps to secure additional members during the august 20xx interview president provided that the veterans are not legitimate members in fact the organization does not have members as it is open to the general_public the organization therefore does not meet the membership requirements under sec_501 for veterans organizations issue org has not established that it operates exclusively for exempt purposes listed in sec_1_501_c_19_-1 as is discussed more fully above an organization described in sec_501 carries out activities in furtherance of its exempt purposes only when such activities are carried out exclusively in furtherance of the purposes listed in sec_4 c -1 c among these purposes is the provision of social and recreational activities for its members accordingly when a veterans organization described in sec_501 provides social and recreational activities for its members or for guests whose expenses are paid_by members the organization is engaged in activities in furtherance of its exempt purposes if such an organization makes its facilities available to the general_public to a substantial degree and or a significant amount of the organization’s income is received from the general_public the organization may lose its tax exemption the statute is clear that an organization recognized as exempt under sec_501 is a membership_organization patronage of the facility and the participation in the activities of an organization so exempt is limited to the exclusively to the organization's membership and guests form 886-a rev department of the treasury - internal_revenue_service page -13- form_886 a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx the statute provides that a club that engages in business such as making its social and recreational facilities available to the general_public is not organized and operated exclusively for pleasure recreation and other nonprofit purposes and is not exempt under sec_501 solicitation by advertisement 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 evidence of such solicitation is further suggested by making the facility easily accessible to the general_public and by failing to denote that the facility is a members’ only establishment revproc_71_17 provides that a significant factor reflecting the existence of a nonexempt purpose is the amount of gross_receipts derived from use of a club’s facilities by the general_public however gross_receipts alone will not be relied upon by the service where gross_receipts from non-member use of the organization’s facility is dollar_figure or less or if more than dollar_figure where gross_receipts from non-member use i sec_5 or less of the organization’s total gross_receipts the recordkeeping requirements under the code if followed enable the service to engage the audit_standard afforded by the revenue_procedure that is a member organization whose exempt status is predicated on its ability to establish that its facility meets the exclusive use test as defined by the statute is required to maintain books_and_records to account for patronage of its facility and the relationship of its patrons to the exempt_organization member guest of member spouse etc additionally adequate books_and_records sufficient to establish how the amount of gross_receipts and related expenses are allocated to each type of patronage are required where the organization has failed to maintain such a recordation the audit standards require that all receipts and expenses of the organization are treated as if from non-member sources in the instant case the oral testimony of the only established officer of the organization owner operator and registered agent president admitted during the august 20xx interview that the only activity of the organization is the operation of a bar that is open to the general_public as the operation of a bar is not consistent with the purposes of a veterans’ organization exempt under sec_501 and the organization has not established it has met the membership requirements of the same and has always been the case according to president it is proposed that the exempt status of the organization be revoked effective january 20xx if you accept our findings please sign the enclosed form 6018-a consent to proposed action-non declaratory_judgment please return it to the following address within days of the date of this letter form 886-a rev department of the treasury - internal_revenue_service page -14- department of the treasury - internal_revenue_service form_886 a explanation of items schedule no or exhibit form 6018-a name of taxpayer org year period ended 20xx 20xx as a taxable entity you are required to file form_1120 u s_corporation income_tax return please submit the completed returns to the address shown above within days of this report if you would like to schedule a conference to discuss this report please call agent between a m and p m to schedule form 886-a rev page -15- department of the treasury - internal_revenue_service