Determination 200850041: a four-word parenthesis carries the finding the blank charts were meant to show

Plain-English summary

On August 15, 2008 the Dallas office issued a final adverse letter revoking a trust's exemption under section 501(c)(3), effective January 1 of a redacted year. The organization agreed, on a signed Form 6018. The trust had been formed by a donor and a trustee to support one named charity as its primary beneficiary, plus the organizations on a schedule attached to the declaration of trust. The report notes there are over 80 organizations listed on Schedule A. It had been recognized as a supporting organization under section 509(a)(3). The letter gives three reasons for revoking: the trust was not operated exclusively for exempt purposes, a substantial part of its activities furthered private interests, and it was organized and operated for private rather than public interests, with net earnings and assets inuring to its creators, trustees, and directors.

The whole file turns on four words. Every number in the revenue and expense chart, the asset chart and the grants chart is redacted, and the narrative about the trust's investment losses keeps its adjectives and loses its figures. The only concrete statement anywhere of what became of the money is a parenthesis inside the second reason: "(monies returned to trustee)". A four-word aside carries the finding the blanked charts were there to prove.

The findings that need no numbers are damaging on their own. The trust held no board meeting from inception. It met with none of the supported charities in three years. It made no grants. Substantially all of its losses came from bad investments in, and loans to, three companies that went bankrupt. Two of five board seats were held by members of the donor family, and no board member was ever connected with, or selected by, the primary supported charity.

The primary and alternative issues order different returns for the same years, and neither instruction is withdrawn. Under the revocation the trust must file Form 1041. Under the alternative holding, that it be reclassified as a private foundation, it must file Form 990-PF, and the letter adds that the Form 990-PF obligation continues until private foundation status is terminated under section 507. A reader receiving only this package cannot tell which return to file.

The enclosure contradicts the letter it sits behind. Behind the August 15, 2008 revocation is a Letter 3620 dated August 14, 2007, a year and a day earlier, which proposes only to modify the trust's private foundation status and states plainly: "Your exempt status under section 501(c)(3) of the Code is still in effect." The enclosure documents the alternative issue. The final letter in front of it adopts the primary one.

The trustee's stated position is recorded in the report. Rendered with they and them, since the document does not state the trustee's pronouns: no member of the donor family ever derived personal gain or tax benefit from the organization; had they known the complex rules and regulations required of a section 509(a)(3) supporting organization they never would have established it; and they never received any guidance from the promoter who recommended the organization be formed.

The letter tells the trust to petition the Tax Court before the ninety-first day after the letter is mailed, and names November 13 of a redacted year as the deadline. November 13 is exactly ninety days after August 15, 2008, which is printed unredacted at the top. The X-ed year therefore conceals nothing, the same arithmetic that holds in 0850044, 0850043 and 0850042.

This document was scanned, so it carries ocr: true. Eight corrections were applied, one occurrence each, every count verified before replacement: "Intemal Revenue Service" and "Interna] Revenue Service" each corrected to Internal Revenue Service; "1.501 (c)(3) -1(d)" corrected for citation spacing; "subdivision (ii1)" and "(i11)(d)" corrected to the roman numeral iii; "organizations, 1.e., that" corrected to i.e.; "trustees and directors., which" corrected for the stray period; and "subdivision (1) of this subparagraph" corrected to subdivision (i). Nothing else was altered.

A long list of defects was left as released. The effective date prints as "January 1, 20X°X", with a degree sign inside the redaction token. Ordinals are lost throughout, appearing as forms like (7" for a circuit and The 3" for a numbered item. Two legend bands are garbled past repair: "18¢ & 2"¢ board members" and "157, 2%?, 38? ¢ 4™ Companies". One legend token prints lowercase where its siblings are capitalized. The Podolece citation prints "T.C. Memo 1922-227" beside "1992 Tax Ct. Memo Lexis 268", and whether the impossible 1922 is a scanning error or a typo in the source cannot be settled from the scan, so it stands as released. The phrases "the trust corpurs is to small", "one or more’of such", and the heading ending "a private foundation.." are reproduced as printed. Four regulation citations are malformed and are therefore omitted from the code_sections list above: "1.509(a)-4()(1)", "1.509-4(4)(3)(i1)", "1.509(a)-4(i)(3)(d)" and "1.509(a)-4-(1)(3)(iii)(d)". The correct forms of the same regulations that the report does print are listed, including 1.509(a)-4(j), which appears once, and 1.509(a)-4(i)(3)(iii), which appears five times. The "Dallas, TX 75424" letterhead is left as released on the corpus evidence recorded in 0850040: the variant appears in 36 separate releases and is a template trait, not a scan defect.

Three provisions are listed above that the report cites in compound form rather than separately: section 508(e)(1)(B) is printed as part of "section 508(e)(1)(A) and (B)", section 509(a)(2) as part of "sections 509(a)(1) and (2)", and Regulation 1.509(a)-4(c)(1)(iv) as part of "1.509(a)-4(c)(1)(iii) and (iv)". Each is broken out as its own entry because the corpus convention is one entry per distinct cited provision.

Every citation below is reproduced exactly as the release prints it, and none was independently confirmed, because the citation-verification tool was unavailable in this session. No case name, year, reporter or page has been supplied from memory. The document cites Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Founding Church of Scientology v. United States, 412 F. 2d 1197 (Ct. Cl. 1969); Petzoldt v. Commissioner, 92 T.C. 661, 686-687 (1989); Podolece; Menequzzo v. Commissioner, 43 T.C. 824, 831 (1965); a 1956 court of appeals decision at "237 F.2d 830, 838 (ha Cir. 1956)" whose circuit ordinal is garbled and whose name and circuit are not guessed here; Roe Foundation Charitable Trust v. Commissioner, T.C. Memo. 1989-566, 58 T.C.M. (CCH) 402, 404 (1989), cited again at 58 T.C.M. at 408; Quarrie Charitable Fund v. Commissioner, 603 F.2d 1274, 1277; Cuddeback Foundation v. Commissioner, T.C. Memo. 2002-300; and Revenue Rulings 67-5 and 76-32. Section 446 is listed in code_sections as printed. The report cites it twice, in identical form, for the proposition that where a taxpayer fails to keep required books the Service may reconstruct income. Because the same form appears twice it is the source's own text rather than a one-off scan slip, and the house rule is to reproduce it and say so.

Ruling snapshot

• Question: May a trust formed to support one named charity and over eighty others keep exemption under section 501(c)(3) as a section 509(a)(3) supporting organization when it never held a board meeting, never met the supported charities, made no grants, lost substantially all its assets in investments in and loans to three companies that went bankrupt, and returned monies to its trustee?
• Outcome: No. Exemption revoked effective January 1 of a redacted year on the organization's consent, with an alternative holding reclassifying it as a private foundation.
• Key authorities: Sections 501(c)(3), 509(a)(3) and its subparagraphs (A), (B) and (C), 507 and 7428(b)(2); Regulations 1.501(c)(3)-1(c) and (d) and 1.509(a)-4 throughout, including the organizational, operational, responsiveness and integral part tests; Roe Foundation, Quarrie Charitable Fund and Cuddeback Foundation.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations

1100 Commerce Street
Dallas, TX 75424

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

August 15, 2008

Release Number: 200850041
Release Date: 12/12/08

LEGEND

ORG = Organization name XX = date Address = address
ORG Person to Contact:

ADDRESS Identification Number:

Contact Telephone Number:
In Reply Refer to: TE/GE Review Staff
EIN:

UIL: 501.03-01

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: November 13, 20XX

CERTIFIED MAIL — RETURN RECEIPT

Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the code is hereby revoked effective January 1, 20X°X. You have agreed
to this adverse determination, per signed Form 6018, on June 19, 20XX.

Our adverse determination was made for the following reasons:

1. ORG is not operated for an exclusive exempt purpose, as is required by IRC section
501(c)(3) and Treas. Reg. section 1.501(c)(3)-1(d).

2. A substantial part of the activities of ORG furthers private interests (monies
returned to trustee) rather than public interests, which is prohibited by Treas. Reg.
section 1.501(c)(3)-1(d)(1)(i). The foundation failed to make financial distributions
or provide any activity as a supporting organization to a specified organization.

3. The organization did not operate exclusively for exempt purposes because it was
organized and operated for the benefit of private interests, rather than public
interests and its net earnings and assets inured to the benefit of its creators,
trustees and directors, which is prohibited by IRC section 501(c)(3).

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code. You are required to file Federal income tax returns on Form 1120.

These returns should be filed with the appropriate Service Center for the year ending
December 31, 20XX, and for all years thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should
a petition for declaratory judgment be filed under section 7428 of the Internal Revenue
Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District
Court of the United States for the District of Columbia before the 91" day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment.

You also have the right to contact the office of the Taxpayer Advocate. However, you
should first contact the person whose name and telephone number are shown above since
this person can access your tax information and can help you get answers. You can call and
ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer Advocate from the
site where the tax deficiency was determined by calling: 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 reverse legal or
technically correct tax determinations, nor extend the time fixed by law that you have to file
a petition in the United States Tax Court. The Taxpayer Advocate can, however, see that a
tax matter that may not have been resolved through normal channels gets prompt and
proper handling.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely yours,

Vicki L. Hansen
Acting, Director EO
Examinations

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31 /20XX,
12/31/20XX
LEGEND
ORG = Organization name XX = Date XYZ = State Donor Family = donor
family Donor = Donor Trustee = trustee BM-1 & BM-2 = 18¢ & 2"¢
board members CO-1, CO-2, CO-3 & CO-4 = 157, 2%?, 38? ¢ 4™ Companies

PRIMARY ISSUE: Whether the IRC § 501(c)(3) tax exempt status of ORG should be
revoked, effective January 1, 20XX, because it is not operated exclusively for tax exempt
purposes?

FACTS:
DECLARATION OF TRUST

ORG (the “Organization”) was created with a Declaration of Trust (Declaration) by Trustee and
Donor (hereinafter sometimes collectively referred to as “Donor’”) and Trustee (hereinafter
sometimes referred to as “Trustee.”) on February 1, 19XX. Pursuant to the Declaration, the
Organization was created for the purpose of establishing an organization which is described in
Internal Revenue Code (IRC) section 501(c)(3) and IRC section 509(a)(3) .

The Declaration provides, in part:

The Trust is organized, and at all times thereafter will be operated exclusively to support
or benefit, as defined by Treasury Regulation 1.509(a)-4(b)(1), one or more publicly
supported organizations, including the CO-1 as the primary charity. . . No part of the net
earnings of this Trust shall inure to the benefit of any individual, and no part of the
activities of this Trust shall consist of carrying on propaganda, or otherwise attempting to
influence legislation or participating in or intervening in (including the publication or
distribution of statements) any political campaign on behalf of any candidate for public
office.

The Trust shall be irrevocable. Donor hereby expressly waives the right and the power to
alter, amend, revoke, or terminate the Trust or any of the terms of this Declaration.
Donor hereby renounces any power to determine or control or control, by alteration,
amendment, revocation, termination or otherwise, and Donor renounces any interest in
either vested or contingent, including any reversionary interest or possibility of reverter,
in the income or principal of the trust estate.

Each year the Trustee shall distribute thirty-five percent (35%) of the net income the
Trust to the CO-1. For purposes of this Agreement, net income shall be determined
pursuant to the laws of the State of XYZ. It is intended that the distributions to the CO-1
will help the CO-1 perform its functions and carry out it purposes. In order to insure that
this happens, the Board shall meet with the governing body of the CO-1, or a
representative thereof, to determine the use of such distributions.

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31 /20XX,
ORG 12/31 /20XX,
12/31/20XX

In addition to this distribution, each year the Trustee shall distribute a total of 50% of the
net income of this Trust to one or more organizations listed on Schedule A, which by this
reference is made a part hereof, or to the CO-1 as is directed by the Board in writing
signed by at least (3) members of the Board.

In the event the Trustee determines, in Trustee’s sole and complete discretion, that the
Trust Fund, is too small to economically administer, then in such event the Trustee shall
distribute the Trust Fund in its entirety outright and free of trust to such organizations as
described in IRC 170(c)(2) as the Trustee, in Trustee’s total and complete discretion, shall
determine.

Upon winding up and dissolution of this Trust, after paying or adequately providing for
the debts and obligations of the Trust, the remaining assets shall be distributed to a non-
profit fund, foundation, or corporation which is organized and operated exclusively for
charitable, educational, religious, and/or scientific purposes and which has established its
tax exempt status under section 501(c)(3) of the Code. In the event that the Trust does
not obtain tax exempt status under sections 501(c) (3) and 509(a)(3) of the Code, the
assets of the Trust shall go to the Donor Family, as defined herein, as a contingent
remainder.

The Board shall be that body that has the authority, power, and discretion as described
herein. The Board shall consist of (5) members. The members of the Board shall be
determined as follows: One Board member shall be appointed by the CO-1 or its
designated agent; Two Board members shall be from the class consisting of Trustee and
Donor and each of their descendants (the “Donor Family”); The other members of the
Board shall be appointed by a majority vote of the board. The initial remaining Board
members shall be BM-1 and BM-2.

In 19XX, the Donors donated $ in cash and $ in noncash items (notes receivable to companies
and stock). The loans and investments were reported on the 19XX Form 990. The companies
later went bankrupt and the loans and investments were subsequently written off.

There are approximately 80 organizations listed on Schedule A.
TAX EXEMPT STATUS

Based on its representations during the application process, by letter dated August 20XX, the
Organization was recognized by the Service as exempt from Federal income tax under section
501(a) as an organization described in section 501(c)(3) and classified as an organization that is
not a private foundation because it is described in section 509(a)(3).

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

tenn 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX
BOARD OF DIRECTORS
In 20XX, 20XX and 20XX, the members of the Board of Directors were and Donor, and
BM-2 and . From inception, no board members of the Organization had any

connection with the primary supported organization and no members were chosen by the primary
supported organization. Neither the primary supported organization or any other public charity
had any voice in the Organization’s operations.

BOARD OF DIRECTORS MEETING MINUTES

From inception, the Organization has never conducted any board of directors meetings.

MEETINGS WITH PRIMARY AND SECONDARY CHARITIES

The Organization did not meet with any charity during calendar years 20XX, 20XX and
20XX.

ORG FORMS 990
This chart shows sources of revenue, expenses, assets, liabilities and net assets.
Revenue TY 20XX TY20XX #£4xTY 20XX
Contributions
Interest
Dividends

Gain(Loss) on Sale of Assets
Total Revenue

Expenses

Grants

Accounting Fees

Investment fees

Total Expenses

Assets, Liabilities and Net Assets
Cash

Other notes & loans receivable
Investments — Other

Other Assets

Total Assets

Total liabilities

Net assets/fund balance

Form 886-A Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

GRANTS AND CONTRIBUTIONS
The chart shows grants and contributions to charitable entities:

TY 20XX TY20XX TY 20XX

LOANS AND INVESTMENTS

The 20XX Form 990 of the Organization showed a $ loss on securities and a $ loss on notes and
accounts receivable. At the end of 20XX both assets were deemed worthless and written off due
to the dot.com collapse, terrorist attacks and stock market decline. The Organization failed to
maintain adequate books and records, could provide only partial records to substantiate the
losses, questioned amounts reported on Forms 990 as reported by their accounting firm and were
unable secure requisite records from the accounting firm. The Organization stated substantially
all losses were due to bad investments in and loans to the CO-2, CO-3 and CO-4.

LAW:

IRC § 501(c)(3) exempts from Federal income tax: corporations, and any community chest,
fund, or foundation, organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes, or for the prevention of cruelty to
children or animals, no part of the net earnings of which inures to the benefit of any private
shareholder or individual, no substantial part of the activities of which is carrying on propaganda,
or otherwise attempting to influence legislation and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf of any
candidate for public office.

Regulation section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in activities
which accomplish one or more of such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Regulation section 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively
for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of
private shareholders or individuals. The words “private shareholder or individual” refer to
persons having a personal and private interest in the activities of the organization.

Regulation section 1.501(c)(3)-1(d)(1)(ii) provides an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service

Page: -4-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31 /20XX,
ORG 12/31/20XX,
12/31/20XX

interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to
establish that it is not organized or operated for the benefit of private interests such as the creator
or his family, shareholders of the organization, or persons controlled, directly or indirectly, by
such private interests.

Section 1.6001-1(c) of the Income Tax Regulations provides, "Exempt organizations. In
additional to such permanent books and records as are required by paragraph (a) of this section
with respect to the tax imposed by section 511 on unrelated business income of certain exempt
organizations, every organization exempt from tax under section 501(a) shall keep such
permanent books of account or records, including inventories, as are sufficient to show
specifically the items of gross income, receipts and disbursements. Such organizations shall also
keep such books and records as are required to substantiate the information required by section
6033. See section 6033 and 1.6033-1."

Section 1.6001-1(e) of the Income Tax Regulations provides, “Retention of records. The books
or records require by this section 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.”

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the United States Supreme
Court held that regardless of the number of truly exempt purposes, the presence of a single
substantial non-exempt purpose will preclude exemption under section 501(c)(3).

In Founding Church of Scientology v. U.S., 412 F. 2d 1197 (Ct. Cl. 1969) the court stated that
loans to an organization’s founder or substantial contributor can constitute inurement that is
prohibited under section 501(c)(3). In that case, the church made loans to its founder and his
family and failed to produce documentation that demonstrated that the loans were advantageous
to the church. The church also failed to produce documentation to show that the loans were
repaid. Significantly, the court stated that “the very existence of private source of loan credit
from an organization’s earnings may itself amount to inurement of benefit.”

In Walter Mack Podolece, Petitioner v. Commissioner of Internal Revenue, Respondent, T.C.
Memo 1922-227; 1992 Tax Ct. Memo Lexis 268; T.C.M.(CCH) 2785, the court found: “. .
.Where a taxpayer fails to keep the required books and records, respondent is authorized under
section 446 to reconstruct income in accordance with a method which clearly reflects the full
amount of income received. Petzoldt v. Commissioner, 92 T.C. 661, 686-687 (1989).”

In Petzoldt v. Commissioner, 92 T.C. 661; 1989 U.S. Tax Ct. LEXIS 42, 92 T.C. No. 37, the
court found: “. . ."Section 6001 requires all taxpayers to maintain sufficient records to determine
their correct tax liabilities. Where a taxpayer fails to keep the required books and records, or if
the records he or she maintains do not clearly reflect income, then respondent is authorized by

Form 886-Aev.4-68) Department of the Treasury - Internal Revenue Service

Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

section 446 to reconstruct income in accordance with a method which clearly reflects the full
amount of income received. Menequzzo v. Commissioner, 43 T.C. 824, 831 (1965). See also
Miller v. Commissioner, 237 F.2d 830, 838 (ha Cir. 1956),...”

In Revenue Ruling 67-5, 1967-1 C.B. 123, it was held that a foundation controlled by the
creator’s family was operated to enable the creator and his family to engage in financial activities
which were beneficial to them, but detrimental to the foundation. It was further held that the
foundation was operated for a substantial non-exempt purpose and served the private interests of
the creator and his family. Therefore, the foundation was not entitled to exemption from Federal
income tax under section 501(c)(3).

GOVERNMENT’S POSITION:

The IRC § 501(c)(3) tax exempt status of ORG (the “Organization”) should be revoked because
it is not operated exclusively for tax exempt charitable purposes.

The Organization conducted no charitable activities in 20XX, 20XX and 20XX. No grants were
made to charities, no board meetings were held, and no contact was made with any charities.

As substantial contributors, Trustee and Donor are disqualified persons and insiders. There is no
indication that the investments and terms of the notes were considered by the entire board, that
alternative investments for the Organization were ever considered, that the investments and notes
were reviewed by anyone acting in the interests of charity and there is no evidence that the
Organization made any attempts at collection.

There is no evidence that the board attempted to ensure that the Organization received the
payments due on the loan. It does not appear that any attempt was made to ensure the
Organization’s assets or income were protected.

The lack of charitable activities, the continued failure to protect the value of the investments, the
lack of board of directors’ meetings to discuss alternative investments, and the lack of oversight
of any investment, all establish that the Organization is operated for non-exempt purposes.

The “loans” were not conducted in a business-like fashion, they were not secured, there was no
evidence at attempt to recover the losses.

The Organization fails to serve a public, rather than a private interest, and therefore is not
operated exclusively for charitable purposes. Accordingly, ORG is operated for a substantial
non-exempt purpose and fails to qualify for exemption from Federal income tax as an
organization described under Section 501(c)(3) . See Revenue Ruling 67-5.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

CONCLUSION:

Accordingly, the Organization’s status as an organization described under section 501(c)(3)
should be revoked, effective January 1, 20XX, because it did not operate exclusively for exempt
purposes.

Form 1041 U.S. Income Tax Return for Estates and Trusts should be filed for tax years ending
December 31, 20XX through December 31, 20XX. Subsequent returns are due no later than the
15" day of the 4" month following the close of the trust’s accounting period.

Returns for years ended December 31, 20XX through December 31, 20XX should be sent to the
following mailing address:

TAXPAYER’S POSITION:

The Organization agrees to revocation of their IRC 501(c)(3) tax exempt status. Trustee stated
that no personal gain or tax benefit was ever derived by any member of the Donor Family from
the Organization, that had he known the complex rules and regulations required of a IRC
509(a)(3) supporting organization he never would have established the Organization and that he
never received any guidance from the promoter who recommended the Organization be formed.

ALTERNATIVE ISSUE: In the alternative, whether ORG should be reclassified as a
private foundation..

FACTS:
See prior discussion.
LAW:

Income Tax Regulations section 1.509(a)-4(c) regarding the organizational test a 509(a)(3)
organization must meet provides:

(1) In general. —An organization is organized exclusively for one or more of the purposes ~
specified in section 509(a)(3)(A) only if its articles of organization (as defined in §1.501(c)(3)-

1(b)(2)):

(i) Limit the purposes of such organization to one or more of the purposes set forth in section
509(a)(3)(A);

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

(ii) Do not expressly empower the organization to engage in activities which are not in
furtherance of the purposes referred to in subdivision (i) of this subparagraph;

(iii) State the specified publicly supported organizations on whose behalf such organization is to
be operated (within the meaning of paragraph (d) of this section); and

(iv) Do not expressly empower the organization to operate to support or benefit any organization
other than the specified publicly supported organizations referred to in subdivision (iii) of this
subparagraph.

Income Tax Regulations section 1.509(a)-4(e) regarding the operational test a 509(a)(3)
organization must meet provides:

(1) Permissible beneficiaries. —A supporting organization will be regarded as “operated
exclusively” to support one or more specified publicly supported organizations (hereinafter
referred to as the “operational test”) only if it engages solely in activities which support or benefit
the specified publicly supported organizations. Such activities may include making payments to
or for the use of, or providing services or facilities for, individual members of the charitable class
benefited by the specified publicly supported organization. A supporting organization may also,
for example, make a payment indirectly through another unrelated organization to a member of a
charitable class benefited by a specified publicly supported organization, but only if such a
payment constitutes a grant to an individual rather than a grant to an organization. In determining
whether a grant is indirectly to an individual rather than to an organization the same standard
shall be applied as in §53.4945-4(a)(4) of this chapter. Similarly, an organization will be
regarded as “operated exclusively” to support or benefit one or more specified publicly supported
organizations even if it supports or benefits an organization, other than a private foundation,
which is described in section 501(c)(3) and is operated, supervised, or controlled directly by or in
connection with such publicly supported organizations, or which is described in section
511(a)(2)(B). However, an organization will not be regarded as operated exclusively if any part
of its activities is in furtherance of a purpose other than supporting or benefiting one or more
specified publicly supported organizations.

(2) Permissible activities. —A supporting organization is not required to pay over its income to
the publicly supported organizations in order to meet the operational test. It may satisfy the test
by using its income to carry on an independent activity or program which supports or benefits the
specified publicly supported organizations. All such support must, however, be limited to
permissible beneficiaries in accordance with subparagraph (1) of this paragraph. The supporting
organization may also engage in fund raising activities, such as solicitations, fund raising dinners,
and unrelated trade or business to raise funds for the publicly supported organizations, or for the
permissible beneficiaries.

Income Tax Regulations section 1.509(a)-4(f) regarding the nature of relationships required for
section 509(a)(3) organizations provides:

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

(1) In general. —Section 509(a)(3)(B) describes the nature of the relationship required between a
section 501(c)(3) organization and one or more publicly supported organizations in order for
such section 501(c)(3) organization to qualify under the provisions of section 509(a)(3). To meet
the requirements of section 509(a)(3), an organization must be operated, supervised, or controlled
by or in connection with one or more publicly supported organizations. If an organization does
not stand in one of such relationships (as provided in this paragraph) to one or more publicly
supported organizations, it is not an organization described in section 509(a)(3).

(2) Types of relationships. —Section 509(a)(3)(B) sets forth three different types of relationships,
one of which must be met in order to meet the requirements of subparagraph (1) of this
paragraph. Thus, a supporting organization may be:

(i) Operated, supervised, or controlled by,
(ii) Supervised or controlled in connection with, or
(iii) Operated in connection with, one or more publicly supported organizations.

(3) Requirements of relationships. —Although more than one type of relationship may exist in
any one case, any relationship described in section 509(a)(3)(B) must insure that:

(i) The supporting organization will be responsive to the needs or demands of one or more
publicly supported organizations; and

(ii) The supporting organization will constitute an integral part of, or maintain a significant
involvement in, the operations of one or more publicly supported organizations.

(4) General description of relationships. —In the case of supporting organizations which are
“operated, supervised, or controlled by” one or more publicly supported organizations, the
distinguishing feature of this type of relationship is the presence of a substantial degree of
direction by the publicly supported organizations over the conduct of the supporting
organization, as described in paragraph (g) of this section. In the case of supporting organizations
which are “supervised or controlled in connection with” one or more publicly supported
organizations, the distinguishing feature is the presence of common supervision or control among
the governing bodies of all organizations involved, such as the presence of common directors, as
described in paragraph (h) of this section. In the case of a supporting organization which is
“operated in connection with” one or more publicly supported organizations, the distinguishing
feature is that the supporting organization is responsive to, and significantly involved in the
operations of, the publicly supported organization, as described in paragraph (i) of this section.

Income Tax Regulations section 1.509(a)-4(g) provides guidance on the meaning of “operated,
supervised, or controlled by” as follows:

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service

Page: -9-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

(1)

(i) Each of the items “operated by”, “supervised by”, and “controlled by”, as used in section
509(a)(3)(B), presupposes a substantial degree of direction over the policies, programs, and
activities of a supporting organization by one or more publicly supported organizations. The
relationship required under any one of these terms is comparable to that of a parent and
subsidiary, where the subsidiary is under the direction of, and accountable or responsible to, the
parent organization. This relationship is established by the fact that a majority of the officers,
directors, or trustees of the supporting organization are appointed or elected by the governing
body, members of the governing body, officers acting in their official capacity, or the
membership of one or more publicly supported organizations.

(ii) A supporting organization may be “operated, supervised or controlled by” one or more
publicly supported organizations within the meaning of section 509(a)(3)(B) even though its
governing body is not comprised of representatives of the specified publicly supported
organizations for whose benefit it is operated within the meaning of section 509(a)(3)(A). A
supporting organization may be “operated, supervised, or controlled by” one or more publicly
supported organizations (within the meaning of section 509(a)(3)(B)) and be operated “for the
benefit of” one or more different publicly supported organizations (within the meaning of section
509(a)(3)(A)) only if it can be demonstrated that the purposes of the former organizations are
carried out by benefiting the latter organizations.

Income Tax Regulations section 1.509(a)-4(h) provides guidance on the meaning of “supervised
or controlled in connection with” as follows:

(1) In order for a supporting organization to be “supervised or controlled in connection with” one
or more publicly supported organizations, there must be common supervision or control by the
persons supervising or controlling both the supporting organization and the publicly supported
organizations to insure that the supporting organization will be responsive to the needs and
requirements of the publicly supported organizations. Therefore, in order to meet such
requirement, the control or management of the supporting organization must be vested in the
same persons that control or manage the publicly supported organizations.

(2) A supporting organization will not be considered to be “supervised or controlled in
connection with” one or more publicly supported organizations if such organization merely
makes payments (mandatory or discretionary) to one or more named publicly supported
organizations, even if the obligation to make payments to the named beneficiaries is enforceable
under state law by such beneficiaries and the supporting organization's governing instrument
contains provisions whose effect is described in section 508(e)(1)(A) and (B). Such arrangements
do not provide a sufficient “connection” between the payor organization and the needs and
requirements of the publicly supported organization to constitute supervisions or control in
connection with such organizations.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -10-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

Income Tax Regulations section 1.509(a)-4(i) provides guidance on the meaning of “operated in
connection with” as follows:

(1) General rule

(i) Except as provided in subdivisions (ii) and (iii) of this subparagraph and subparagraph (4) of
this paragraph, a supporting organization will be considered as being operated in connection with
one or more publicly supported organizations only if it meets the “responsiveness test” which is
defined in subparagraph (2) of this paragraph and the “integral part test” which is defined in
subparagraph (3) of this paragraph.

(2) Responsiveness test

(i) For purposes of this paragraph, a supporting organization will be considered to meet the
“responsiveness test” if the organization is responsive to the needs or demands of the publicly
supported organizations within the meaning of this subparagraph. In order to meet this test, either
subdivision (ii) or subdivision (iii) of this subparagraph must be satisfied.

(ii)
(a) One or more officers, directors, or trustees of the supporting organization are elected or
appointed by the officers, directors, trustees, or membership of the publicly supported

organizations;

(b) One or more members of the governing bodies of the publicly supported organizations are
also officers, directors or trustees of, or hold other important offices in, the supporting
organizations; or

(c) The officers, directors or trustees of the supporting organization maintain a close and
continuous working relationship with the officers, directors or trustees of the publicly supported
organizations; and

(d) By reason of (a), (b), or (c) of this subdivision, the officers, directors or trustees of the
publicly supported organizations have a significant voice in the investment policies of the
supporting organization, the timing of grants, the manner of making them, and the selection of
recipients of such supporting organization, and in otherwise directing the use of the income or
assets of such supporting organization.

(iii)

(a) The supporting organization is a charitable trust under State law;

(b) Each specified publicly supported organization is a named beneficiary under such charitable
trust's governing instrument; and

Form 886-A ceev.4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31 /20XX,
ORG 12/31/20XX,
12/31 /20XX

(c) The beneficiary organization has the power to enforce the trust and compel an accounting
under State law.

(3) Integral part test; general rule

(i) For purposes of this paragraph, a supporting organization will be considered to meet the
“integral part test” if it maintains a significant involvement in the operations of one or more
publicly supported organizations and such publicly supported organizations are in turn dependent
upon the supporting organization for the type of support which it provides. In order to meet this
test, either subdivision (ii) or subdivision (iii) of this subparagraph must be satisfied.

(ii) The activities engaged in for or on behalf of the publicly supported organizations are
activities to perform the functions of, or to carry out the purposes of, such organizations, and, but
for the involvement of the supporting organization, would normally be engaged in by the publicly
supported organizations themselves.

(iii)

(a) The supporting organization makes payments of substantially all of its income to or for the
use of one or more publicly supported organizations, and the amount of support received by one
or more’of such publicly supported organizations is sufficient to insure the attentiveness of such
organizations to the operations of the supporting organization. In addition, a substantial amount
of the total support of the supporting organization must go to those publicly supported
organizations which meet the attentiveness requirement of this subdivision with respect to such
supporting organization. Except as provided in (b) of this subdivision, the amount of support
received by a publicly supported organization must represent a sufficient part of the
organization's total support so as to insure such attentiveness. In applying the preceding sentence,
if such supporting organization makes payments to, or for the use of, a particular department or
school of a university, hospital or church, the total support of the department or school shall be
substituted for the total support of the beneficiary organization.

(b) Even where the amount of support received by a publicly supported beneficiary organization
does not represent a sufficient part of the beneficiary organization's total support, the amount of
support received from a supporting organization may be sufficient to meet the requirements of
this subdivision if it can be demonstrated that in order to avoid the interruption of the carrying on
of a particular function or activity, the beneficiary organization will be sufficiently attentive to
the operations of the supporting organization. This may be the case where either the supporting
organization or the beneficiary organization earmarks the support received from the supporting
organization for a particular program or activity, even if such program or activity is not the
beneficiary organization's primary program or activity so long as such program or activity is a
substantial one.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -12-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

(d) All pertinent factors, including the number of beneficiaries, the length and nature of the
relationship between the beneficiary and supporting organization and the purpose to which the
funds are put (as illustrated by subdivision (iii)(b) and (c) of this subparagraph), will be
considered in determining whether the amount of support received by a publicly supported
beneficiary organization is sufficient to insure the attentiveness of such organization to the
operations of the supporting organization. Normally the attentiveness of a beneficiary
organization is motivated by reason of the amounts received from the supporting organization.
Thus, the more substantial the amount involved, in terms of a percentage of the publicly
supported organization's total support the greater the likelihood that the required degree of
attentiveness will be present. However, in determining whether the amount received from the
supporting organization is sufficient to insure the attentiveness of the beneficiary organization to
the operations of the supporting organization (including attentiveness to the nature and yield of
such supporting organization's investments), evidence of actual attentiveness by the beneficiary
organization is of almost equal importance. An example of acceptable evidence of actual
attentiveness is the imposition of a requirement that the supporting organization furnish reports at
least annually for taxable years beginning after December 31, 1971, to the beneficiary
organization to assist such beneficiary organization in insuring that the supporting organization
has invested its endowment in assets productive of a reasonable rate of return (taking
appreciation into account) and has not engaged in any activity which would give rise to liability
for a tax imposed under sections 4941, 4943, 4944, or 4945 if such organization were a private
foundation. The imposition of such requirement within 120 days after October 16, 1972, will be
deemed to have retroactive effect to January 1, 1970, for purposes of determining whether a
supporting organization has met the requirements of this subdivision for its first two taxable
years beginning after December 31, 1969. The imposition of such requirement is, however,
merely one of the factors in determining whether a supporting organization is complying with
this subdivision and the absence of such requirement will not preclude an organization from
classification as a supporting organization based on other factors.

(e) However, where none of the beneficiary organizations is dependent upon the supporting
organization for a sufficient amount of the beneficiary organization's support within the meaning
of this subdivision, the requirements of this subparagraph will not be satisfied, even though such
beneficiary organizations have enforceable rights against such organization under State law.

Revenue Ruling 76-32, 1976-1 C.B. 160, held that so long as the agreement of the supporting
organization to provide reports to the supported organization is observed, it will be considered
evidence of actual attentiveness within the meaning of section 1.509(a)-4-(1)(3)(iii)(d) of the
Regulations for purposes of determining whether the attentiveness requirement of the integral
part test of section 1.509(a)-4(i)(3)(iii) is satisfied. However, while the agreement will be
considered evidence of actual attentiveness under section 1.509(a)-4(i)(3)(iii)(d), it will not, in
itself, satisfy the attentiveness requirement of the integral part test of section 1.509(a)-4(i)(3)(iii).

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -13-

loyal 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

Rather, in order to satisfy that requirement, all of the factors mentioned in the regulations must
be taken into consideration.

Income Tax Regulations section 1.509(a)-4(j) regarding control by disqualified persons provides:

(1) In general. —Under the provisions of section 509(a)(3)(C) a supporting organization may not
be controlled directly or indirectly by one or more disqualified persons (as defined in section
4946) other than foundation managers and other than one or more publicly supported
organizations. If a person who is a disqualified person with respect to a supporting organization,
such as a substantial contributor to the supporting organization, is appointed or designated as a
foundation manager of the supporting organization by a publicly supported beneficiary
organization to serve as the representative of such publicly supported organization, then for
purposes of this paragraph such person will be regarded as a disqualified person, rather than as a
representative of the publicly supported organization. An organization will be considered
“controlled”, for purposes of section 509(a)(3)(C), if the disqualified persons, by aggregating
their votes or positions of authority, may require such organization to perform any act which
significantly affects its operations or may prevent such organization from performing such act.
This includes, but is not limited to, the right of any substantial contributor or his spouse to
designate annually the recipients, from among the publicly supported organizations of the income
attributable to his contribution to the supporting organization. Except as provided in
subparagraph (2) of this paragraph, a supporting organization will be considered to be controlled
directly or indirectly by one or more disqualified persons if the voting power of such persons is
50 percent or more of the total voting power of the organization's governing body or if one or
more of the total voting power of the organization's governing body or if one or more of such
persons have the right to exercise veto power over the actions of the organization. Thus, if the
governing body of a foundation is composed of five trustees, none of whom has a veto power
over the actions of the foundation, and no more than two trustees are at any time disqualified
persons, such foundation will not be considered to be controlled directly or indirectly by one or
more disqualified persons by reason of this fact alone. However, all pertinent facts and
circumstances including the nature, diversity, and income yield of an organization's holdings, the
length of time particular stocks, securities, or other assets are retained, and its manner of
exercising its voting rights with respect to stocks in which members of its governing body also
have some interest, will be taken into consideration in determining whether a disqualified person
does in fact indirectly control an organization.

GOVERNMENT POSITION:

It is the government’s position that ORG’s tax exempt status should be revoked. Alternatively, it
should be reclassified as a private foundation.

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -14-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

Due to Congressional concerns about wide-spread abuses of their tax-exempt status by private
foundations, private foundations were defined and subjected to significant regulations and
controls by the Tax Reform Act of 1969. The definition of a private foundation was intentionally
inclusive so that all organizations exempted from tax by section 501(c)(3) are private foundations
except for those specified in section 509(a)(1) through(4), Roe Foundation Charitable Trust v.
Commissioner, T.C. Memo. 1989-566, 58 T.C.M. (CCH) 402, 404 (1989); Quarrie Charitable
Fund v. Commissioner, 603 F.2d 1274, 1277 (7" Cir. 1979).

Publicly supported organizations as defined in sections 509(a)(1) and (2) are excepted from
private foundation status on the theory that their exposure to public scrutiny and their dependence
on public support keep them from the abuses to which private foundations are subject.
Supporting organizations are similarly excepted from private foundation status. Supporting
organizations are excepted if they are subject to the scrutiny of public charities that provide
sufficient oversight to keep supporting organizations from the types of abuses to which private
foundations are prone. Quarrie Charitable Fund, 603 F.2d at 1277-78.

IRC § 509(a)(3) organizations must meet all three of the following tests:

1) Organizational and Operational Tests under IRC § 509(a)(3)(A).
2) Relationship Test under IRC § 509(a)(3)(B).
3) Lack of Disqualified Person Control Test under IRC § 509(a)(3)(C).

Overall, these tests are meant to ensure that a supporting organization is responsive to the needs
of a public charity and intimately involved in its operations and that the public charity (or
publicly supported organization) is motivated to be attentive to the operations of the supporting
organization and that it is not controlled, directly or indirectly, by disqualified persons.

Organizational and Operational Test

ORG is not organized to benefit one or more specified publicly supported organizations.
Pursuant to Treas. Reg. § 1.509(a)-4(c)(1)(iii) and (iv), an organization’s governing instrument
must state the specified publicly supported organization(s) on whose behalf the organization is to
be operated and cannot expressly empower the organization to support or benefit any
organizations other than the specified publicly supported organizations(s).

The Declaration of Trust (and Schedule A thereto) of ORG specifically names the CO-1 and
organizations listed on Schedule A as the organizations that will be supported. All of these
organizations have received a ruling that they are described in Section 501(c)(3) of the Internal
Revenue Code of 1986 and are not a private foundation because they are described in Section
509(a)(1) and 170(b)(1)(A)(vi). The Declaration of Trust mandates annual distributions and
restricts those grants to the specified publicly supported charities.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -15-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/ Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

However, the Trustee has the power to determine the trust corpurs is to small to economically
administer and can distribute it to any charity he selects. Furthermore, upon dissolution, the
trust’s assets can be distributed to any public charity. Distributions are not limited to the
specified public charities. See Quarrie, supra (holding that the organizational test is not satisfied
where the trustee has the power to substitute beneficiaries when, in the judgment of the trustee,
the uses of the named beneficiaries become unnecessary, undesirable, impracticable, impossible
or no longer adapted to the needs of the public). Thus, the organizational test is not satisfied.

Relationship Test

As set forth in Treas. Reg. § 1.509(a)-4(f)(2), there are three permissible relationships: (a)
operated, supervised, or controlled by; (b) supervised or controlled in connection with; and (c)
operated in connection with one or more publicly supported organizations.

The relationships “operated, supervised or controlled by” and “supervised or controlled in
connection with” presuppose a substantial degree of direction over the policies, programs and
activities of the supporting organization by a publicly supported organization. The “operated,
supervised or controlled by” relationship is established by the fact that a majority of the officers,
directors, or trustees of the supporting organization are appointed or elected by the governing
body, members of the governing body, officers acting in their official capacity or the membership
of the publicly supported organization. The “supervised or controlled in connection with”
relationship is established by the fact that there is common supervision or control by the persons
supervising or controlling both the supporting and the publicly supported organizations, i.e., that
control or management of the supporting organization is vested in the same persons that control
or manage the publicly supported organization.

In the present case, the facts indicate that none of the five board members was appointed by the
publicly supported organization, the CO-1. Therefore, the requirements to meet one of the first
two types of relationship are not met.

The 3" and final relationship possible for section 509(a)(3) organizations is the “operated in
connection with” relationship which requires that the supporting organization be responsive to
the needs or demands of the publicly supported organization and constitute an integral part of, or
maintain a significant involvement in the affairs of the publicly supported organization. This
relationship is satisfied where the supporting organization meets both the “responsiveness” and
“integral part” tests. Neither test has been met in this case.

ORG does not satisfy the responsiveness test. In order to meet the responsiveness test, either
Treas. Reg. § 1.509(a)-4(i)(2)(ii) or (iii) must be satisfied. Income Tax Regulations section
1.509(a)-4(i)(2)(ii) requires a supporting organization to demonstrate that one or more of the

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -16-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/ Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

officers, director or trustees of the supporting organizations either (a) be appointed or elected
by specified representatives of the publicly supported organizations or (b) be members of the
governing body of the publicly supported organizations or (c) maintain a close and continuous
working relationship with the officers, directors or trustees of the publicly supported
organizations. There is no evidence that the officers, directors or trustees of ORG satisfy any
of these relationships. Even if such a relationship existed, by virtue of the relationship the
officers, directors or trustees of the publicly supported organizations would have to have a
significant voice in the investment policies of the supporting organization, the timing of
grants, the manner of making grants, the selection of recipients by the supporting organization
and in otherwise directing the use of the income or assets of the supporting organization.
There is no evidence that the CO-1 has a significant voice in ORG’s operations. The board
did not exercise oversight — it did not meet.

If this test is not met, there is a second way to satisfy the responsiveness test that is set forth in
Income Tax Regulations section 1.509(a)-4(i)(2)(iii). The second method requires that (a) the
supporting organization be a charitable trust under state law; (b) each specific publicly
supported organization be a named beneficiary under the trust’s governing instrument; and (c)
the beneficiary organization have the power to enforce the trust and compel an accounting
under state law. The Declaration of Trust requires the trustee to distribute 35% of the net
income of the trust to the CO-1 and a total of 50% of the net income to one or more of the
organizations listed on Schedule A. There are over 80 organizations listed on Schedule A that
the trustee can select as grant recipients. Only the CO-1 is entitled to receive a specified
portion of the Foundation’s net income. The Foundation is not required to make any specified
distributions to any of the other organizations. Therefore, the Foundation has not established
that any of these organizations are beneficiaries to the trust or that they have the power to
enforce the trust under state law. Thus this test is also not satisfied by ORG.

While the responsiveness test guarantees that the publicly supported organization can influence
the activities of the supporting organization, the integral part test ensures that the publicly
supported organization will be motivated to attend to the operations of the supporting
organization. The integral part test is considered to have been satisfied if the supporting
organization maintains a significant involvement in the operations of one or more publicly
supported organizations and the publicly supported organizations are in turn dependent upon the
supporting organization for the type of support which it provides. Treas. Reg. § 1.509(a)-
4(i)(3)(i). In order to meet the integral part test, either Treas. Reg. § 1.509-4(4)(3)(i1) or (iii) must
be satisfied.

Treas. Reg. § 1.509(a)-4(i)(3)(ii) provides that the activities engaged in for or on behalf of the
publicly supported organizations must be activities to perform the functions of, or to carry out the
purposes of, such organizations and, but for, the involvement of the supporting organization,
would normally be engaged in by the publicly supported organizations themselves. Thus, this

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -17-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

part of the integral part test applies in those situations in which the supporting organization
actually engages in activities which benefit the publicly supported organizations as opposed to
simply making grants to support the publicly supported organizations. See Roe Foundation, 58
T.C.M. at 408; Cuddeback Foundation v. Commissioner, T.C. Memo. 2002-300. ORG does not
meet this test because it does not perform any activities the publicly supported organizations
conduct themselves.

Because the Organization did not perform any activities for or on behalf of publicly supported
organizations that the publicly supported organizations would otherwise perform themselves,
the applicable rules for satisfying the integral part test are in Treas. Reg. § 1.509(a)-4(i)(3)(iii).
This section of the regulation has the following 3 basic requirements: 1) payment of
substantially all of its income to publicly supported organizations; 2) the amount received by
one publicly supported organization must be sufficient to motivate it to pay attention to the
operations of the supporting organization; and 3) a substantial amount of the total support of
the organization must go to those publicly supported organizations that meet the attentiveness
requirement. The second requirement is not satisfied so the third requirement cannot be
satisfied.

The Organization had no income during the years under examination so the first requirement is
moot.

Treas. Reg. § 1.509(a)-4(i)(3)(iii)(a) provides that the amount of support received by a publicly
supported organization must represent a sufficient part of the organization’s total support so as to
insure such attentiveness. Treas. Reg. § 1.509(a)-4(i)(3)(iii)(b) provides that a supporting
organization can meet the attentiveness requirement, even where the amount of support received
by the publicly supported organization does not represent a sufficient part of the publicly
supported organization’s total support, if it can be demonstrated that support is earmarked for a
substantial program of the publicly supported organization that would be interrupted without the
supporting organization’s support. And finally, Treas. Reg. § 1.509(a)-4(i)(3)(d) provides that
“all pertinent factors. . . will be considered in determining whether the amount of support
received by a publicly supported organization is sufficient to insure the attentiveness of such
organization to the operations of the supporting organization. It goes on to note the importance
of the percentage of the income received from the supporting organization is in determining if the
publicly supported organization will have the requisite degree of attentiveness and concludes that
evidence of actual attentiveness is almost as important.

The Organization did not make any grants to the CO-1 or any other public charity during the
years under examination. Receiving -0- is not sufficient to motivate a public charity to be
attentive to the Organization’s operations.

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -18-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX,
ORG 12/31/20XX,
12/31/20XX

Furthermore, the facts show the CO-1 was not attentive to the operations of the Organization.
The board members of ORG have not met with the CO-1’s board members to discuss the specific
needs of the CO-1. The CO-1 was not involved in determining the investment strategies and
options and the amount of the grants. The CO-1 did not appoint a board member to represent it.
There is no evidence that the CO-1 inquired about the lack of grants or reasons therefor.

Taking into consideration all pertinent factors, the amount of support provided to the CO-1 by
ORG was insufficient to ensure its attentiveness.

Control Test

Internal Revenue Code § 509(a)(3)(C) and Treas. Reg. § 1.509(a)-4()(1) provides that a
supporting organization may not be controlled, directly or indirectly by disqualified persons.
Trustee and Donor are substantial contributors to ORG and are, therefore, disqualified persons to
ORG.

There are five members of the Board of Directors of ORG. The board of ORG have never met to
approve the grants and investment activity. Therefore, the founders, Trustee and Donor,
disqualified persons, exercised total control in determining who would be grant recipients and in
determining the investment strategies. The board exercises no oversight.

Conclusion

ORG alternatively should be reclassified as an organization that is a private foundation defined in
section 509(a), effective January 1, 20XX. ORG should not be classified as a supporting
organization because it has not established that it has met the requirements set forth in Treas.
Reg. § 1.509(a)-4(c) through (j).

The effect of this determination will be that the Organization is required to file Form 990-PF
Return of Private Foundation. Form 990-PF should be filed for tax years ending December 31,
20XX through December 31, 20XX. Subsequent returns are due no later than the 15" day of the
5"" month following the close of the Organization’s accounting period.

Send your returns to the following mailing address:

Note: Form 990-PF is required for each year until Private Foundation status is terminated under
IRC § 507.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -19-

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

August 14, 2007
Taxpayer Identification Number:
Form:

Tax Year(s) Ended:

ORG
ADDRESS 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 propose
modifying your private foundation status under section 509(a) of the Internal Revenue
Code (Code).

Your exempt status under section 501(c)(3) of the Code is still in effect.

If you accept our findings, take no further action. We will issue a final letter modifying
your private foundation status.

If you do not agree with our proposed modification of private foundation status, you may
provide additional information that you would like to have considered, or you may
submit a written appeal. The enclosed Publication 3498, The Examination Process, and
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues, explain
how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also
includes information on your rights as a taxpayer and the IRS collection process.

If you request a conference with Appeals, you must submit a written protest within 30
days from the date of this letter. 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.

Letter 3620 (04-2002)
Catalog Number 34811R

2

You may also request that we refer this matter for technical advice as explained in
Publication 892. 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.

If we do not hear from you within 30 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 30 days from the date of this letter, the
IRS will consider it to be a failure to exhaust your available administrative remedies.
Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this section shall not be issued in any proceeding unless the Tax Court, the
Claims Court, or the District Court of the United States for the District of Columbia
determines that the organization involved has exhausted its administrative remedies
within the Internal Revenue Service." We will then issue a final letter.

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 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you
prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter. If you write, please provide a telephone number and
the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 3498
Publication 892
Report of Examination

Letter 3620 (04-2002)
Catalog Number 34811R