Determination 1025078: IRS denied exemption to a wine-making club operated as a commercial business

View official IRS release (PDF)

Plain-English summary

The IRS denied exemption under IRC § 501(c)(7) to a proposed wine-making club. The organization advertised wine-making services and products to the public, treated customers as members without giving them meaningful governance rights, and expected members to take the finished wine home. The IRS also found private inurement because the organization was controlled by a married couple who leased the facility to it, planned to employ one of them, and promoted his winemaking business. The determination relied on the organization’s commercial operation, lack of genuine social membership and commingling, and private benefits to conclude that it did not qualify for exemption.

Ruling snapshot

• Question: Did the organization qualify for exemption under IRC § 501(c)(7)?
• Outcome: Denied
• Key authorities: IRC §§ 501(a), 501(c)(7), and 6110; Treas. Reg. § 1.501(c)(7)-1(b); Rev. Ruls. 55-716, 58-588, 58-589, 68-535, and 69-635.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Release Number: 201025078 Contact Person:

Release Date: 6/25/10

Date: 3/30/2010 Identification Number:

UIL Code: 501.07-05

501.07-01 Contact Number:

Employer Identification Number:
Form Required To Be Filed:
Tax Years:

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(7).

Recently, we sent you a letter in response to your application that proposed an adverse
determination. The letter explained the facts, law and rationale, and gave you 30 days to file a
protest. Since we did not receive a protest within the requisite 30 days, the proposed adverse
determination is now final.

You must file Federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file. File the returns in accordance
with their instructions, and do not send them to this office. Failure to file the returns timely may
result in a penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

2

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

If you have any questions about your Federal income tax status and responsibilities, please
contact IRS Customer Service at 1-800-829-1040 or the IRS Customer Service number for
businesses, 1-800-829-4933. The IRS Customer Service number for people with hearing
impairments is 1-800-829-4059.

Sincerely,

Rob Choi
Director, Exempt Organizations
Rulings & Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: 1/12/2010 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: VIL:
Mr. X = your President 512.09-03
Mrs. X = your Secretary 501-07-01
501.07-05
A = a state
B = a date
C = a date
D=adate
Dear

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code section 501(a). Based on the information provided, we have
concluded that you do not qualify for exemption under Code section 501(c)(7). The basis for
our conclusion is set forth below.

Issues

1. Do your commercial advertisements for public patronage constitute prima facie
   evidence that you are engaged in a commercial business rather than operating for
   social, recreational and similar non profit purposes? Yes, for the reasons described
   below.

2. Does your lack of a true social membership structure and your lack of significant social
   commingling between your reputed members prevent you from qualifying for
   exemption from income tax under section 501(c)(7) of the Internal Revenue Code?
   Yes, for the reasons described below.

3. Does inurement to your officers and founders also prevent you from qualifying for
   exemption from income tax under section 501(c)(7) of the Internal Revenue Code?
   Yes, for the reasons described below.

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Facts

You were incorporated in the State of A on date B. Your articles of incorporation were

signed only by Mrs. X, your Secretary and Director. You later made an amendment to

your articles of incorporation on date C. Your amendment was also just signed by Mrs.
X, your Secretary and Director.

A color brochure advertisement that you submitted with your application for exemption
stated that you were named for a village in Europe at which Mr. X, and prior to Mr. X,
his family and ancestors made wine for over 500 years. This advertisement touted the
heritage and expertise of Mr. X as a professional winemaker.

Your articles stated that you were formed for the following purposes:

a. To encourage the appreciation of winemaking, promote the responsible use of
wine, educate wine tasters and home wine makers, and to promote and support
the healthful creation of wine made without sulfites

b. To carry on any and all activities permitted to a non-stock corporation under the
laws of State A as may be helpful or appropriate for the achievement of the
foregoing goals and purposes.

Neither your original articles of incorporation nor the amendment thereto provided for a
membership structure, for voting rights for members or for any other privileges or
responsibilities for members.

Although you applied for exemption under section 501(c)(7) of the Code, the
amendments to your articles of incorporation unnecessarily added the routine purpose,
dissolution and other provisions required to meet the organizational test of an
exclusively educational organization described in section 501(c)(3) of the Code. In
particular, your amended dissolution clause effectively prevented your members from
sharing in the distribution of your assets upon your termination.

Your application for exemption, Form 1024, confirmed that you were formed by, and
continue to be controlled by your President and Director Mr. X and by your Secretary
and Director Mrs. X.

Initially, your application for exemption stated that your bylaws would include voting
rights for members, meaning persons other than your President and Director Mr. X and
your Secretary and Director, Mrs. X. However, you later provided a copy of your
bylaws that were just signed by Mrs. X. Your bylaws stated in Article 5.2.2, “Members
shall not be permitted to nominate or vote for directors.” The only other provision in
your bylaws that may pertain to members, meaning persons other than Mr. and Mrs. X,
was Article IV which simply said, “The corporation shall have members.”

Your application indicated that you are open for business with the general public and
that you charge fees to customers to make a barrel of wine. Although membership
requirements were completely missing from your articles and bylaws, your application

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for exemption stated that anyone over 21 years old automatically became a member
upon paying the fee to make a barrel of wine at your facility.

You submitted a copy of your “Harvest 2008 Fees and Application Form,” which
contained common commercial advertising terminology such as, “Space is limited so
please apply early. *See special offer.” Elsewhere this form said, “Exclusive Offer:

$ off your barrel membership. Be one of our first fifteen applicants to enjoy this
additional savings.”

Your advertisement and application form also stated that for an annual fee ranging
from approximately $ to $ , depending on the type of barrel selected, a
prospective member would receive from you grapes, a wooden barrel, bottles, corks,
customized labels, usage of equipment, club membership, climate-controlled storage
and daily monitoring of the wine for one year.

Your advertisement and application form also stated that a membership could be
shared between up to 6 persons. A space on the advertisement and application form
allowed the prospective member to list the, “Names and addresses of other members
sharing this barrel.”

In addition to your “ 2008 Fees and Application Form,” you also submitted with
your application for tax exempt status the color brochure advertisement mentioned on
page 2 of this letter in the second bullet. That advertisement described to the public
the long history of Mr. X’s winemaking family. The color brochure advertisement
described Mr. X as a winemaker and it stated, “During fermentation and on a daily
basis for the following year, your wine will be individually monitored by our winemaker.”
Your color brochure advertisement also stated, “In personalized sessions with our
winemaker and his family, you can experience a centuries old tradition. You will be
assisted through each step of the process in our state of the art facility.”

Your color brochure advertisement also referred to the fun that prospective members
could have with their own friends, family and business associates (but not with other
unrelated club members) during their individual winemaking activities at your facility.

Your application for exemption indicated that your members’ winemaking activities
could occur either in a one on one session with your winemaker, or in a group
composed of individuals of your members’ own choosing with your winemaker. You
estimated that your winemaker’s activities would break down as follows.

a. Group sessions take up of 80% of your winemaker’s time. A group consists of
individual members who decide to share the cost of producing a barrel of wine,
possibly along with their own friends, family members or business associates
whom the individual member or members invite to their own winemaking
activities. Your entire membership is not invited to attend these group sessions.
You gave these examples of group sessions:

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i. A group had a wine crushing/baby shower. The men discussed wine
making and the women held a baby shower. The group combined to
crush the grapes then two weeks later they pressed the grapes and filled
the barrel. One day each month the group came to taste the wine and
top off the barrel.

ii, A local businessman with eight employees consisted of a group. The
event was paid for by the businessman. The group crushed
approximately 24 cases of wine. They discussed winemaking techniques
and enjoyed glasses of wine. ;

iii. Six families agreed to share a barrel of wine. They came to the club to
crush grapes.

The process for each group is to come to you to crush the grapes, at a later
date the group presses the grapes and approximately nine months later they
bottle the wine. After the wine is bottled it is for the members to take home.
b. Individual sessions make up 20% of the time. These are one-on-one discussions
and making of wine with the steward. Your application used the terms
winemaker and wine steward interchangeably.

You stated that when you are financially able, you plan to pay an annual salary of

$ to $ to your winemaker or wine steward, currently Mr. X. You stated
that this would constitute a reasonable amount of compensation for the services
provided to you in comparison to what other employers pay for services of this type.

You submitted a copy of a commercial lease dated D between you as the tenant and
Mr. and Mrs. X as the landlords. Mr. and Mrs. X signed the commercial lease under
the heading “Landlord” and under the Heading “Tenant,” your name appeared but the
only signature below your name was that of Mrs. X , using the title “Managing Director
Duly Authorized.”

Your commercial lease with Mr. and Mrs. X is for a square foot facility at a
monthly rent of $ _ The lease obliges you to pay late charges of % per month
and annual interest on other unpaid amounts under the lease of %. Upon execution
of the lease with Mr. and Mrs. X, Article 2.02 required you to pay to Mr. and Mrs. X a
security deposit of $ _ The lease required you to pay for the facility's maintenance
and insurance and all utility bills.

Almost a year after you entered into the commercial lease agreement with Mr. and Mrs.
X, they, as the landlords of the facility, obtained an appraisal which stated that the fair
market value of the facility should produce monthly lease payments of approximately

$ for themselves as the landlords.

Your application also included a copy of the minutes of the meeting of your Board of

Directors. The only persons present at that meeting were Mr. and Mrs. X. At this

meeting Mr. and Mrs. X nominated themselves and then elected themselves as your

initial Board of Directors and as your President and Secretary respectively. Also at this

meeting, Mr. and Mrs. X approved, ratified and adopted all acts taken by your
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incorporator, who was Mrs. X. The minutes of this meeting said nothing about
members or social activities.

• Your application for exemption stated that you had members. You also stated that
in the future, you plan to conduct more social activities for larger groups of your
members. However, Mr. and Mrs. X have made all of your business decisions thus far
with no participation whatsoever by the reputed members and Mr. and Mrs. X retained
complete control of you. Your reputed members still have no voting rights nor can they
participate in the distribution of your assets upon your dissolution.

• Your members will primarily bottle the wine on your premises and consume the wine
off of your premises.

Law

Section 501(c)(7) of the Internal Revenue Code exempts clubs organized for pleasure,
recreation, and other non-profitable purposes, substantially all of the activities of which are for
such purposes and no part of the net earning of which inures to the benefit of any private
shareholder.

Section 1.501(c)(7)-1(b) of the Income Tax Regulations states that a club which engages in
business, such as making its social and recreational facilities available to the general public or
selling real estate, timber, or other products, is not organized and operated for pleasure,
recreation and other non-profitable purposes, and is not exempt under section 501(a).
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.

Revenue Ruling 55-716, 1955-2 C.B. 263, stated that an organization formed for the purpose of
furnishing television antenna service to its members was not entitled to exemption from Federal
income tax under section 501(c)(7) of the Internal Revenue Code of 1954. That organization
was formed for the purpose of furnishing and providing television antenna service to members
upon payment of a stipulated membership fee and a monthly charge for maintenance of the
antenna. Income was derived from membership fees and service charges. Funds were
expended for equipment, maintenance and miscellaneous expenses. Per the ruling, the term
“club” as used in the Code contemplates the commingling of members, one with the other, in
fellowship. Personal contacts and fellowship must also play a material part in the life of an
organization in order for it to come within the meaning of the term “club”. The only activity of the
organization depicted in the ruling was the operation and maintenance of a television antenna
system providing television services to its members in their homes. Fellowship did not
constitute a material part of the life of the organization, since the services did not afford an
opportunity for personal contacts and fellowship among members receiving such service.

Revenue Ruling 58-588, 1958-2 C.B. 265 denied exemption under section 501(c)(7) to an
organization whose so-called members had no voice in the management of the organization
and whose only rights were to use the organization’s facilities upon the payment of the specified

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fees.

Revenue Ruling 58-589, 1958-2 C. B. 256 stated that in making a determination whether an
organization comes within the provisions of section 501(c)(7) of the Code, all facts pertaining to
its form of organization, method of operation and activities should be considered. An
organization must establish (1) that is a club both organized and operated for pleasure,
recreation and other non-profitable purposes and (2) that no part of its net earning inures to the
benefit of any private shareholder or individual. To meet the first requirement, there must be an
established membership of individuals, personal contacts and fellowship. A commingling of the
members must play a material part in the life of the organization.

Revenue Ruling 68-535, 1968-2 C. B. 219 stated that a social club that regularly sold liquor to
its members for consumption off its premises was not entitled to exemption under section
501(c)(7) of the Code. The club provided a variety of social and athletic activities for its
members. It operated a clubhouse, which included restaurant and bar facilities. In addition to
selling liquor to members in the bar and restaurant, the club also regularly sold liquor by the
bottle to members for consumption off the premises. Purchases could be made by members
only. The ruling held that the regular sale of liquor under the circumstances described was a
service to the members that was not in furtherance of a social club's exempt purpose. Since
such activity was neither social nor recreational, the club was not operated for pleasure,
recreation and other non-profitable purposes within the meaning of section 501(c)(7) of the
Code.

Under Revenue Ruling 69-635, 1969-2 C. B. 125, an automobile club whose principal activity
was rendering automobile services to its members but which had no significant social activities
did not qualify for exemption under section 501(c)(7) of the Code. The purpose of the
organization was to promote highway safety and to provide various motoring conveniences to its
members. The organization did not carry on any significant social activities. The principal
activity of this organization was the rendering of automobile services to its members. Most of
the services offered were of a type generally available to motorists on a commercial basis. The
rendition of such services was not in the nature of pleasure or recreation within the meaning of
the statute.

Application of Law

You fail to meet the requirement of section 501(c)(7) of the Code that your earnings must not
inure to the benefit of private individuals. You are completely controlled by your founders Mr.
and Mrs. X, who are in the winemaking business or who have winemaking as their profession.
Mr. and Mrs. X, acting as both landlord and tenant, rented their winemaking facility to you. The
fact that Mr. and Mrs. X charged you rent based on the fair market value of their facility (which
was only established almost a year after the date of the lease agreement) does not mean that
they did not realize a financial gain from this transaction. On the contrary, a prudent landlord
would expect to make a financial gain by leasing a facility at a monthly rent equivalent to its fair
market value. Renting the facility to you, an entity that they completely controlled, also relieved
Mr. and Mrs. X of the expense of marketing the facility to an unknown, unrelated tenant. Thus,
the lease between the closely related parties produced prohibited inurement and this reason,

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standing alone, constitutes sufficient justification for denying your request for exemption from
income tax under section 501(c)(7), independent of the other reasons described in this letter.
Please refer back to Issue #3 on page 1 of this letter.

Your plan to pay Mr. X as your wine steward or winemaker as soon as you are financially able
to do so confirms that your earnings will inure to the benefit of your founders, Mr. and Mrs. X.
You asserted that the annual salary that you will pay Mr. X will be reasonable in comparison to
salaries paid by other employers for employees providing similar services. However, the
inurement derives more from your hiring methodology than from the specific amount of the
compensation. As stated above, Mr. and Mrs. X formed you and made all of your business
decisions. Your plan (formulated by Mr. and Mrs. X) to hire Mr. X provides a valuable economic
benefit to Mr. X even if his salary does not exceed what is reasonable for his services. At a
minimum, this arrangement relieves Mr. X of the time, effort and expense of seeking
employment from an unrelated employer. This second form of inurement, standing alone,
provides sufficient justification for the proposed denial of exemption independent of the other
reasons described in this letter. Please refer back to Issue #3 on page 1 of this letter.

The third way in which your earnings inured to the benefit of Mr. X was through your commercial
advertisements that touted his winemaking heritage and expertise, thus promoting his career
and improving his earning potential at no expense to Mr. X. This third form of inurement,
standing alone, provides sufficient justification for the proposed denial of exemption,
independent of the other reasons described in this letter. Please refer back to Issue #3 on page
1 of this letter.

Turning from the Code to section 1.501(c)(7)-1(b) of the Regulations, we found that your
commercial advertisements for public patronage of your wine making facility constituted prima
facie evidence that you are running a business rather than operating a club for social,
recreational and similar non profit purposes under Code section 501(c)(7). Your advertisements
and application forms stated that any person wishing to purchase your services and products
automatically becomes one of your members upon payment of a large fee. Membership, as you
define it, confers no voting rights or any other of the privileges and responsibilities normally
associated with membership in a genuine social club. Based on the facts and circumstances,
the persons whom you call members are essentially the customers of your commercial business
operation. Thus your commercial advertising for public patronage of your facilities, standing
alone, provides sufficient justification for the proposed denial of exempt status, independent of
the other reasons described in this letter. Please refer back to Issue #1 on page 1 of this letter
of this letter.

Turning from the Regulations to the various revenue rulings cited above, we found that the
common theme is that to qualify for exemption under section 501(c)(7) of the Code, an
organization must have a genuine social membership structure and that the central function of
an organization must be the provision of non profit social and recreational activities at which a
substantial commingling of the members occurs. As stated above, your reputed members
cannot vote for your officers or directors and they cannot participate in any distribution of your
assets upon your termination. You were not formed by your reputed members but rather by Mr.
and Mrs. X. You designate persons as your members as soon as they pay the fee to obtain

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your services and products. However, aside from your designation, the facts and circumstances
indicate that these persons are essentially customers of your business operation and not
genuine members of a non profit social club. Your lack of a genuine social membership
structure provides sufficient justification, standing alone, for the proposed denial of exempt
status, independent of the other reasons described in this letter. Please refer back to Issue #2
on page 1 of this letter.

Another common theme that we noticed in the above cited revenue rulings is that to qualify for
exemption under section 501(c)(7), an organization must attain a substantial degree of social
commingling of members in conjunction with its activities, events and services. Your
advertisements to the public stress that in exchange for their substantial fees to you, your
members will receive value in the form of winemaking services and winemaking products from
you. Your advertisements and your application confirm that any social enjoyment and
commingling of your members is at the option of the individual members and is incidental to
their purchase of your winemaking services and winemaking products. A substantial part of
your winemaking activities are “one on one” between one of your members and your
winemaker. Admittedly, you also have a large number of winemaking activities at which your
winemaker serves small sub groups of your members, but these sub groups primarily define
themselves through your commercial advertising and application process, often for the purpose
of saving themselves money by splitting your fee for winemaking services and products. We
also acknowledge that you now plan to begin sponsoring larger, more formal social gatherings
to which you will invite a higher percentage of your membership. However, our analysis of your
application and all of the relevant facts and circumstances indicates that adding some social
events for larger numbers of members will not alter your core business function of providing
winemaking services and winemaking products to the public for a fee. Thus, the lack of
substantial social commingling of your members during your activities, events, and services,
provides sufficient justification, standing alone, for the proposed denial of exempt status,
independent of the other reasons described in this letter. Please refer back to Issue #2 on page
1 on this letter.

Here are our observations as to how the above cited revenue rulings reinforce the proposed
denial of your application for exempt status under section 501(c)(7):

• You are substantially similar to the organization denied in Revenue Ruling 55-716 in that
the core of your business operation is to provide valuable services and products to
customers for a fee. In that case, fellowship did not constitute a material part of the life
of the organization. That organization was formed to sell a valuable service to the public
and the so-called members of that organization joined that organization for the purpose
of buying those services. You were formed to sell winemaking services and winemaking
products to the public for a fee and the main reason that your so-called members join
you is to purchase your winemaking services and winemaking products. The fellowship
and social enjoyment that your members may experience in conjunction with your
events, activities and services is incidental and secondary to your core business mission
of selling your services and products to the public for a fee. Please refer back to Issue

1 and Issue #2 on page 1 of this letter.

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A major reason for the denial of the organization described in Revenue Ruling 58-588
was that the so-called members of the organization had no voice in the management of
the organization and that their true relationship to the organization was that of a
customer to a service providing business. You are similar in that Mr. and Mrs. X formed
you and completely control you. Your so-called members have no voice in your
management. Please refer back to Issue #1 and Issue #2 on page 1 of this letter.

Revenue Ruling 58-589 confirms that to qualify for exemption under section 501(c)(7),
there must be an established membership of individuals and that an organization's
earnings must not inure to private persons. You fail these criteria because you do not
have a genuine membership structure but are instead completely controlled by Mr. and
Mrs X. and your earnings inure to them in the three ways described above. Please refer
back to Issue #2 and Issue #3 on page 1 of this letter.

•

One of the main reasons that the organization described in Revenue Ruling 68-535 was
denied was that a substantial part of its business was the sale of liquor to its members to
consume off premises. You sell your members winemaking services and winemaking
products in order that you and they may produce bottles of wine that the members
primarily consume off premises. In a manner similar to the organization described in the
revenue ruling, this confirms that your operation is more similar to a commercial
business than to a non-profit social club. Please refer back to Issue #1 and Issue #2 on
page 1 of this letter.

•

Revenue Ruling 69-635 described another organization that was denied exemption
under section 501(c)(7) because it was primarily formed to sell valuable services to the
public for a fee. That organization’s core business was not providing its membership
with opportunities to commingle with one another in the venue of a non profit social club.
The facts in your case indicate that your sale of winemaking services and winemaking
products to the public for a fee is not inherently social in nature. We acknowledge that
some fellowship and social enjoyment happens during some of your winemaking
activities but that is secondary and incidental to your core business function of selling the
winemaking services and winemaking products to the public for a fee. Please refer back
to Issue #1 and Issue #2 on page 1 of this letter.

•

Applicant’s Position

As to the lack of social commingling as your core business function, you stated that you plan to
start sponsoring weekly social activities to which you will invite all members.

As to inurement from the lease, you provided an appraisal obtained by Mr. and Mrs. X which
stated that they, as the landlords, should expect to receive monthly lease payments of about
$3,600 based on the fair market value of their facility.

As to future inurement from Mr. X’s salary, you asserted that $ to $ would be a
reasonable amount of compensation based on what similar employers would pay for similar
services.

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10

Service Response to Applicant’s Position

After considering your position, we concluded that all of the reasons that we previously cited for
proposing to deny your application for exemption under section 501(c)(7) are still valid.

As we stated above, a lease with a fair market rent paid to the landlord still conveys a financial
gain to the landlord, especially if, as in this case, the landlord controls the tenant. Likewise,
there is an economic benefit in securing employment even when the salary is comparable to
that paid by other employers for similar services, especially if, as in this case, the employee
controls the employer.

As to adding more purely social events for larger groups of your members to achieve more
commingling among your general membership, we concluded that, even if that could be
deemed an effective corrective measure, it would only correct one of the above described
reasons for the proposed denial and therefore the correction would be insufficient to justify the
approval of exempt status under section 501(c)(7). Also, even if this was deemed to be an
effective corrective measure, we decided that it would only help you to claim exemption
prospectively and not retroactively.

However, we do not believe that adding the broader social events will help you to achieve
exemption at all, either retroactively or prospectively. Even with the new broader social
activities, your core business operation will remain the selling of winemaking services and
winemaking products to the public for a fee, and therefore, fellowship and social commingling
among your so-called members will remain secondary and incidental to that core business
function. Furthermore, your actual relationship to your members will continue to be that of a
commercial service provider to its customers.

Conclusion
You do not qualify for exemption under 501(c)(7) of the Code.

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, under the penalties of perjury, within 30 days from the
date of this letter.

We will consider your statement and decide if that information affects our determination. If your
statement does not provide a basis to reconsider our determination, we will forward your case to
our Appeals Office. You can find more information about the role of the Appeals Office in the
enclosed Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues.

Types of information that should be included in your protest can be found on page 2 of
Publication 892. The statement of facts (item 4) must be declared true under penalties of
perjury. This may be done by adding to the appeal the following signed declaration:

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11

“Under penalties of perjury, I declare that I have examined the statement of facts presented in
this appeal and in any accompanying schedules and statements and, to the best of my
knowledge and belief, they are true, correct, and complete.”

Your protest will be considered incomplete without this statement.

Your protest should also clearly say that if the issues cannot be resolved at our level, you
request that we transfer your case to our independent Appeals office.

If your representative submits the protest, a substitute declaration must be included stating that
the representative prepared the protest and accompanying documents; and whether the
representative knows personally that the statements of facts contained in the protest and
accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the Internal
Revenue Service may represent you during the appeal process. To be represented during the
appeal process, you must file a proper power of attorney, Form 2848, Power of Attorney and
Declaration of Representative, if you have not already done so. For more information about
representation, see Publication 947, Practice Before the IRS and Power of Attorney. All forms
and publications mentioned in this letter can be found at www.irs.gov, Forms and Publications.

lf you do not intend to protest this proposed determination, you do not need to take any further
action. If we do not hear from you within 30 days, we will issue a final adverse determination
letter to you. That letter will provide information about filing tax returns and other matters.

If you do decide to protest, please send your protest statement, Form 2848 and any supporting
documents to the applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201
Also, mark your protest to the attention of the IRS contact person shown on page 1 of this letter.
You may also fax your protest using the fax number shown in the heading of this letter. If you

fax your protest please call the person identified in the heading of this letter to confirm that he
received your fax.

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

12

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

Sincerely,

Robert S. Choi
Director, Exempt Organizations
Rulings & Agreements

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: 1/12/2010 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: VIL:
Mr. X = your President 512.09-03
Mrs. X = your Secretary 501-07-01
501.07-05
A= a state’
B = a date
C = a date
D = a date
Dear

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code section 501(a). Based on the information provided, we have
concluded that you do not qualify for exemption under Code section 501(c)(7). The basis for
our conclusion is set forth below.

Issues
1.

Do your commercial advertisements for public patronage constitute prima facie
evidence that you are engaged in a commercial business rather than operating for
social, recreational and similar non profit purposes? Yes, for the reasons described
below.

Does your lack of a true social membership structure and your lack of significant social
commingling between your reputed members prevent you from qualifying for
exemption from income tax under section 501(c)(7) of the Internal Revenue Code?
Yes, for the reasons described below.

Does inurement to your officers and founders also prevent you from qualifying for
exemption from income tax under section 501(c)(7) of the Internal Revenue Code?
Yes, for the reasons described below.

Letter 4034(CG) (11-2005)
Catalog Number 47628K

Facts

You were incorporated in the State of A on date B. Your articles of incorporation were
signed only by Mrs. X, your Secretary and Director. You later made an amendment to
your articles of incorporation on date C. Your amendment was also just signed by Mrs.
X, your Secretary and Director.

A color brochure advertisement that you submitted with your application for exemption
stated that you were named for a village in Europe at which Mr. X, and prior to Mr. X,
his family and ancestors made wine for over 500 years. This advertisement touted the
heritage and expertise of Mr. X as a professional winemaker.

Your articles stated that you were formed for the following purposes:

a. To encourage the appreciation of winemaking, promote the responsible use of
wine, educate wine tasters and home wine makers, and to promote and support
the healthful creation of wine made without sulfites

b. To carry on any and all activities permitted to a non-stock corporation under the
laws of State A as may be helpful or appropriate for the achievement of the
foregoing goals and purposes.

Neither your original articles of incorporation nor the amendment thereto provided for a
membership structure, for voting rights for members or for any other privileges or
responsibilities for members.

Although you applied for exemption under section 501(c)(7) of the Code, the
amendments to your articles of incorporation unnecessarily added the routine purpose,
dissolution and other provisions required to meet the organizational test of an
exclusively educational organization described in section 501(c)(3) of the Code. In
particular, your amended dissolution clause effectively prevented your members from
sharing in the distribution of your assets upon your termination.

Your application for exemption, Form 1024, confirmed that you were formed by, and
continue to be controlled by your President and Director Mr. X and by your Secretary
and Director Mrs. X.

Initially, your application for exemption stated that your bylaws would include voting
rights for members, meaning persons other than your President and Director Mr. X and
your Secretary and Director, Mrs. X. However, you later provided a copy of your
bylaws that were just signed by Mrs. X. Your bylaws stated in Article 5.2.2, “Members
shall not be permitted to nominate or vote for directors.” The only other provision in
your bylaws that may pertain to members, meaning persons other than Mr. and Mrs. X,
was Article IV which simply said, “The corporation shall have members.”

Your application indicated that you are open for business with the general public and
that you charge fees to customers to make a barrel of wine. Although membership
requirements were completely missing from your articles and bylaws, your application

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

for exemption stated that anyone over 21 years old automatically became a member
upon paying the fee to make a barrel of wine at your facility.

You submitted a copy of your “Harvest 2008 Fees and Application Form,” which
contained common commercial advertising terminology such as, “Space is limited so
please apply early. *See special offer.” Elsewhere this form said, “Exclusive Offer:

3 off your barrel membership. Be one of our first fifteen applicants to enjoy this
additional savings.”

Your advertisement and application form also stated that for an annual fee ranging
from approximately $ to $ , depending on the type of barrel selected, a
prospective member would receive from you grapes, a wooden barrel, bottles, corks,
customized labels, usage of equipment, club membership, climate-controlled storage
and daily monitoring of the wine for one year.

Your advertisement and application form also stated that a membership could be
shared between up to 6 persons. A space on the advertisement and application form
allowed the prospective member to list the, “Names and addresses of other members
sharing this barrel.”

In addition to your “ 2008 Fees and Application Form,” you also submitted with
your application for tax exempt status the color brochure advertisement mentioned on
page 2 of this letter in the second bullet. That advertisement described to the public
the long history of Mr. X's winemaking family. The color brochure advertisement
described Mr. X as a winemaker and it stated, “During fermentation and on a daily
basis for the following year, your wine will be individually monitored by our winemaker.”

Your color brochure advertisement also stated, “In personalized sessions with our
winemaker and his family, you can experience a centuries old tradition. You will be
assisted through each step of the process in our state of the art facility.”

Your color brochure advertisement also referred to the fun that prospective members
could have with their own friends, family and business associates (but not with other
unrelated club members) during their individual winemaking activities at your facility.

Your application for exemption indicated that your members’ winemaking activities
could occur either in a one on one session with your winemaker, or in a group
composed of individuals of your members’ own choosing with your winemaker. You
estimated that your winemaker’s activities would break down as follows.

a. Group sessions take up of 80% of your winemaker’s time. A group consists of
individual members who decide to share the cost of producing a barrel of wine,
possibly along with their own friends, family members or business associates
whom the individual member or members invite to their own winemaking
activities. Your entire membership is not invited to attend these group sessions.
You gave these examples of group sessions:

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

i. A group had a wine crushing/baby shower. The men discussed wine
making and the women held a baby shower. The group combined to
crush the grapes then two weeks later they pressed the grapes and filled
the barrel. One day each month the group came to taste the wine and
top off the barrel.

ii. A local businessman with eight employees consisted of a group. The
event was paid for by the businessman. The group crushed
approximately 24 cases of wine. They discussed winemaking techniques
and enjoyed glasses of wine.

iii. Six families agreed to share a barrel of wine. They came to the club to
crush grapes.

The process for each group is to come to you to crush the grapes, at a later
date the group presses the grapes and approximately nine months later they
bottle the wine. After the wine is bottled it is for the members to take home.
b. Individual sessions make up 20% of the time. These are one-on-one discussions
and making of wine with the steward. Your application used the terms
winemaker and wine steward interchangeably.

You stated that when you are financially able, you plan to pay an annual salary of

$ to $ to your winemaker or wine steward, currently Mr. X. You stated
that this would constitute a reasonable amount of compensation for the services
provided to you in comparison to what other employers pay for services of this type.

You submitted a copy of a commercial lease dated D between you as the tenant and
Mr. and Mrs. X as the landlords. Mr. and Mrs. X signed the commercial lease under
the heading “Landlord” and under the Heading “Tenant,” your name appeared but the
only signature below your name was that of Mrs. X , using the title “Managing Director
Duly Authorized.”

Your commercial lease with Mr. and Mrs. X is for a square foot facility at a
monthly rent of $ . The lease obliges you to pay late charges of % per month
and annual interest on other unpaid amounts under the lease of %. Upon execution
of the lease with Mr. and Mrs. X, Article 2.02 required you to pay to Mr. and Mrs. X a
security deposit of $ . The lease required you to pay for the facility's maintenance
and insurance and all utility bills.

Almost a year after you entered into the commercial lease agreement with Mr. and Mrs.
X, they, as the landlords of the facility, obtained an appraisal which stated that the fair
market value of the facility should produce monthly lease payments of approximately

$ for themselves as the landlords.

Your application also included a copy of the minutes of the meeting of your Board of
Directors. The only persons present at that meeting were Mr. and Mrs. X. At this
meeting Mr. and Mrs. X nominated themselves and then elected themselves as your
initial Board of Directors and as your President and Secretary respectively. Also at this
meeting, Mr. and Mrs. X approved, ratified and adopted all acts taken by your

Letter 4034(CG) (11-2005)
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incorporator, who was Mrs. X. The minutes of this meeting said nothing about
members or social activities.

• Your application for exemption stated that you had members. You also stated that
in the future, you plan to conduct more social activities for larger groups of your
members. However, Mr. and Mrs. X have made all of your business decisions thus far
with no participation whatsoever by the reputed members and Mr. and Mrs. X retained
complete control of you. Your reputed members still have no voting rights nor can they
participate in the distribution of your assets upon your dissolution.

• Your members will primarily bottle the wine on your premises and consume the wine
off of your premises.

Law

Section 501(c)(7) of the Internal Revenue Code exempts clubs organized for pleasure,
recreation, and other non-profitable purposes, substantially all of the activities of which are for
such purposes and no part of the net earning of which inures to the benefit of any private
shareholder.

Section 1.501(c)(7)-1(b) of the Income Tax Regulations states that a club which engages in
business, such as making its social and recreational facilities available to the general public or
selling real estate, timber, or other products, is not organized and operated for pleasure,
recreation and other non-profitable purposes, and is not exempt under section 501(a).
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.

Revenue Ruling 55-716, 1955-2 C.B. 263, stated that an organization formed for the purpose of
furnishing television antenna service to its members was not entitled to exemption from Federal
income tax under section 501(c)(7) of the Internal Revenue Code of 1954. That organization
was formed for the purpose of furnishing and providing television antenna service to members
upon payment of a stipulated membership fee and a monthly charge for maintenance of the
antenna. Income was derived from membership fees and service charges. Funds were
expended for equipment, maintenance and miscellaneous expenses. Per the ruling, the term
“club” as used in the Code contemplates the commingling of members, one with the other, in
fellowship. Personal contacts and fellowship must also play a material part in the life of an
organization in order for it to come within the meaning of the term “club”. The only activity of the
organization depicted in the ruling was the operation and maintenance of a television antenna
system providing television services to its members in their homes. Fellowship did not
constitute a material part of the life of the organization, since the services did not afford an
opportunity for personal contacts and fellowship among members receiving such service.

Revenue Ruling 58-588, 1958-2 C.B. 265 denied exemption under section 501(c)(7) to an
organization whose so-called members had no voice in the management of the organization
and whose only rights were to use the organization's facilities upon the payment of the specified

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

fees.

Revenue Ruling 58-589, 1958-2 C. B. 256 stated that in making a determination whether an
organization comes within the provisions of section 501(c)(7) of the Code, all facts pertaining to
its form of organization, method of operation and activities should be considered. An
organization must establish (1) that is a club both organized and operated for pleasure,
recreation and other non-profitable purposes and (2) that no part of its net earning inures to the
benefit of any private shareholder or individual. To meet the first requirement, there must be an
established membership of individuals, personal contacts and fellowship. A commingling of the
members must play a material part in the life of the organization.

Revenue Ruling 68-535, 1968-2 C. B. 219 stated that a social club that regularly sold liquor to
its members for consumption off its premises was not entitled to exemption under section
501(c)(7) of the Code. The club provided a variety of social and athletic activities for its
members. It operated a clubhouse, which included restaurant and bar facilities. In addition to
selling liquor to members in the bar and restaurant, the club also regularly sold liquor by the
bottle to members for consumption off the premises. Purchases could be made by members
only. The ruling held that the regular sale of liquor under the circumstances described was a
service to the members that was not in furtherance of a social club's exempt purpose. Since
such activity was neither social nor recreational, the club was not operated for pleasure,
recreation and other non-profitable purposes within the meaning of section 501(c)(7) of the
Code.

Under Revenue Ruling 69-635, 1969-2 C. B. 125, an automobile club whose principal activity
was rendering automobile services to its members but which had no significant social activities
did not qualify for exemption under section 501(c)(7) of the Code. The purpose of the
organization was to promote highway safety and to provide various motoring conveniences to its
members. The organization did not carry on any significant social activities. The principal
activity of this organization was the rendering of automobile services to its members. Most of
the services offered were of a type generally available to motorists on a commercial basis. The
rendition of such services was not in the nature of pleasure or recreation within the meaning of
the statute.

Application of Law

You fail to meet the requirement of section 501(c)(7) of the Code that your earnings must not
inure to the benefit of private individuals. You are completely controlled by your founders Mr.
and Mrs. X, who are in the winemaking business or who have winemaking as their profession.
Mr. and Mrs. X, acting as both landlord and tenant, rented their winemaking facility to you. The
fact that Mr. and Mrs. X charged you rent based on the fair market value of their facility (which
was only established almost a year after the date of the lease agreement) does not mean that
they did not realize a financial gain from this transaction. On the contrary, a prudent landlord
would expect to make a financial gain by leasing a facility at a monthly rent equivalent to its fair
market value. Renting the facility to you, an entity that they completely controlled, also relieved
Mr. and Mrs. X of the expense of marketing the facility to an unknown, unrelated tenant. Thus,
the lease between the closely related parties produced prohibited inurement and this reason,

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

standing alone, constitutes sufficient justification for denying your request for exemption from
income tax under section 501(c)(7), independent of the other reasons described in this letter.
Please refer back to Issue #3 on page 1 of this letter.

Your plan to pay Mr. X as your wine steward or winemaker as soon as you are financially able
to do so confirms that your earnings will inure to the benefit of your founders, Mr. and Mrs. X.
You asserted that the annual salary that you will pay Mr. X will be reasonable in comparison to
salaries paid by other employers for employees providing similar services. However, the
inurement derives more from your hiring methodology than from the specific amount of the
compensation. As stated above, Mr. and Mrs. X formed you and made all of your business
decisions. Your plan (formulated by Mr. and Mrs. X) to hire Mr. X provides a valuable economic
benefit to Mr. X even if his salary does not exceed what is reasonable for his services. At a
minimum, this arrangement relieves Mr. X of the time, effort and expense of seeking
employment from an unrelated employer. This second form of inurement, standing alone,
provides sufficient justification for the proposed denial of exemption independent of the other
reasons described in this letter. Please refer back to Issue #3 on page 1 of this letter.

The third way in which your earnings inured to the benefit of Mr. X was through your commercial
advertisements that touted his winemaking heritage and expertise, thus promoting his career
and improving his earning potential at no expense to Mr. X. This third form of inurement,
standing alone, provides sufficient justification for the proposed denial of exemption,
independent of the other reasons described in this letter. Please refer back to Issue #3 on page
1 of this letter.

Turning from the Code to section 1.501(c)(7)-1(b) of the Regulations, we found that your
commercial advertisements for public patronage of your wine making facility constituted prima
facie evidence that you are running a business rather than operating a club for social,
recreational and similar non profit purposes under Code section 501(c)(7). Your advertisements
and application forms stated that any person wishing to purchase your services and products
automatically becomes one of your members upon payment of a large fee. Membership, as you
define it, confers no voting rights or any other of the privileges and responsibilities normally
associated with membership in a genuine social club. Based on the facts and circumstances,
the persons whom you call members are essentially the customers of your commercial business
operation. Thus your commercial advertising for public patronage of your facilities, standing
alone, provides sufficient justification for the proposed denial of exempt status, independent of
the other reasons described in this letter. Please refer back to Issue #1 on page 1 of this letter
of this letter.

Turning from the Regulations to the various revenue rulings cited above, we found that the
common theme is that to qualify for exemption under section 501(c)(7) of the Code, an
organization must have a genuine social membership structure and that the central function of
an organization must be the provision of non profit social and recreational activities at which a
substantial commingling of the members occurs. As stated above, your reputed members
cannot vote for your officers or directors and they cannot participate in any distribution of your
assets upon your termination. You were not formed by your reputed members but rather by Mr.
and Mrs. X. You designate persons as your members as soon as they pay the fee to obtain

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

your services and products. However, aside from your designation, the facts and circumstances
indicate that these persons are essentially customers of your business operation and not
genuine members of a non profit social club. Your lack of a genuine social membership
structure provides sufficient justification, standing alone, for the proposed denial of exempt
status, independent of the other reasons described in this letter. Please refer back to Issue #2
on page 1 of this letter.

Another common theme that we noticed in the above cited revenue rulings is that to qualify for
exemption under section 501(c)(7), an organization must attain a substantial degree of social
commingling of members in conjunction with its activities, events and services. Your
advertisements to the public stress that in exchange for their substantial fees to you, your
members will receive value in the form of winemaking services and winemaking products from
you. Your advertisements and your application confirm that any social enjoyment and
commingling of your members is at the option of the individual members and is incidental to
their purchase of your winemaking services and winemaking products. A substantial part of
your winemaking activities are “one on one” between one of your members and your
winemaker. Admittedly, you also have a large number of winemaking activities at which your
winemaker serves small sub groups of your members, but these sub groups primarily define
themselves through your commercial advertising and application process, often for the purpose
of saving themselves money by splitting your fee for winemaking services and products. We
also acknowledge that you now plan to begin sponsoring larger, more formal social gatherings
to which you will invite a higher percentage of your membership. However, our analysis of your
application and all of the relevant facts and circumstances indicates that adding some social
events for larger numbers of members will not alter your core business function of providing
winemaking services and winemaking products to the public for a fee. Thus, the lack of
substantial social commingling of your members during your activities, events, and services,
provides sufficient justification, standing alone, for the proposed denial of exempt status,
independent of the other reasons described in this letter. Please refer back to Issue #2 on page
1 on this letter.

Here are our observations as to how the above cited revenue rulings reinforce the proposed
denial of your application for exempt status under section 501(c)(7):

• You are substantially similar to the organization denied in Revenue Ruling 55-716 in that
the core of your business operation is to provide valuable services and products to
customers for a fee. In that case, fellowship did not constitute a material part of the life
of the organization. That organization was formed to sell a valuable service to the public
and the so-called members of that organization joined that organization for the purpose
of buying those services. You were formed to sell winemaking services and winemaking
products to the public for a fee and the main reason that your so-called members join
you is to purchase your winemaking services and winemaking products. The fellowship
and social enjoyment that your members may experience in conjunction with your
events, activities and services is incidental and secondary to your core business mission
of selling your services and products to the public for a fee. Please refer back to Issue

1 and Issue #2 on page 1 of this letter.

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

• A major reason for the denial of the organization described in Revenue Ruling 58-588
was that the so-called members of the organization had no voice in the management of
the organization and that their true relationship to the organization was that of a
customer to a service providing business. You are similar in that Mr. and Mrs. X formed
you and completely control you. Your so-called members have no voice in your
management. Please refer back to Issue #1 and Issue #2 on page 1 of this letter.

• Revenue Ruling 58-589 confirms that to qualify for exemption under section 501(c)(7),
there must be an established membership of individuals and that an organization's
earnings must not inure to private persons. You fail these criteria because you do not
have a genuine membership structure but are instead completely controlled by Mr. and
Mrs X. and your earnings inure to them in the three ways described above. Please refer
back to Issue #2 and Issue #3 on page 1 of this letter.

• One of the main reasons that the organization described in Revenue Ruling 68-535 was
denied was that a substantial part of its business was the sale of liquor to its members to
consume off premises. You sell your members winemaking services and winemaking
products in order that you and they may produce bottles of wine that the members
primarily consume off premises. In a manner similar to the organization described in the
revenue ruling, this confirms that your operation is more similar to a commercial
business than to a non-profit social club. Please refer back to Issue #1 and Issue #2 on
page 1 of this letter.

• Revenue Ruling 69-635 described another organization that was denied exemption
under section 501(c)(7) because it was primarily formed to sell valuable services to the
public for a fee. That organization’s core business was not providing its membership
with opportunities to commingle with one another in the venue of a non profit social club.
The facts in your case indicate that your sale of winemaking services and winemaking
products to the public for a fee is not inherently social in nature. We acknowledge that
some fellowship and social enjoyment happens during some of your winemaking
activities but that is secondary and incidental to your core business function of selling the
winemaking services and winemaking products to the public for a fee. Please refer back
to Issue #1 and Issue #2 on page 1 of this letter.

Applicant’s Position

As to the lack of social commingling as your core business function, you stated that you plan to
start sponsoring weekly social activities to which you will invite all members.

As to inurement from the lease, you provided an appraisal obtained by Mr. and Mrs. X which
stated that they, as the landlords, should expect to receive monthly lease payments of about
$3,600 based on the fair market value of their facility.

As to future inurement from Mr. X’s salary, you asserted that $ to $ would be a
reasonable amount of compensation based on what similar employers would pay for similar
services.

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

10

Service Response to Applicant’s Position

After considering your position, we concluded that all of the reasons that we previously cited for
proposing to deny your application for exemption under section 501(c)(7) are still valid.

As we stated above, a lease with a fair market rent paid to the landlord still conveys a financial
gain to the landlord, especially if, as in this case, the landlord controls the tenant. Likewise,
there is an economic benefit in securing employment even when the salary is comparable to
that paid by other employers for similar services, especially if, as in this case, the employee
controls the employer.

As to adding more purely social events for larger groups of your members to achieve more
commingling among your general membership, we concluded that, even if that could be
deemed an effective corrective measure, it would only correct one of the above described
reasons for the proposed denial and therefore the correction would be insufficient to justify the
approval of exempt status under section 501(c)(7). Also, even if this was deemed to be an
effective corrective measure, we decided that it would only help you to claim exemption
prospectively and not retroactively.

However, we do not believe that adding the broader social events will help you to achieve
exemption at all, either retroactively or prospectively. Even with the new broader social
activities, your core business operation will remain the selling of winemaking services and
winemaking products to the public for a fee, and therefore, fellowship and social commingling
among your so-called members will remain secondary and incidental to that core business
function. Furthermore, your actual relationship to your members will continue to be that of a
commercial service provider to its customers.

Conclusion
You do not qualify for exemption under 501(c)(7) of the Code.

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, under the penalties of perjury, within 30 days from the
date of this letter.

We will consider your statement and decide if that information affects our determination. If your
statement does not provide a basis to reconsider our determination, we will forward your case to
our Appeals Office. You can find more information about the role of the Appeals Office in the
enclosed Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues.

Types of information that should be included in your protest can be found on page 2 of

Publication 892. The statement of facts (item 4) must be declared true under penalties of
perjury. This may be done by adding to the appeal the following signed declaration:

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

ll

“Under penalties of perjury, I declare that I have examined the statement of facts presented in
this appeal and in any accompanying schedules and statements and, to the best of my
knowledge and belief, they are true, correct, and complete.”

Your protest will be considered incomplete without this statement.

Your protest should also clearly say that if the issues cannot be resolved at our level, you
request that we transfer your case to our independent Appeals office.

If your representative submits the protest, a substitute declaration must be included stating that
the representative prepared the protest and accompanying documents; and whether the
representative knows personally that the statements of facts contained in the protest and
accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the Internal
Revenue Service may represent you during the appeal process. To be represented during the
appeal process, you must file a proper power of attorney, Form 2848, Power of Attorney and
Declaration of Representative, if you have not already done so. For more information about
representation, see Publication 947, Practice Before the IRS and Power of Attorney. All forms
and publications mentioned in this letter can be found at www.irs.gov, Forms and Publications.

If you do not intend to protest this proposed determination, you do not need to take any further
action. If we do not hear from you within 30 days, we will issue a final adverse determination
letter to you. That letter will provide information about filing tax returns and other matters.

If you do decide to protest, please send your protest statement, Form 2848 and any supporting
documents to the applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201
Also, mark your protest to the attention of the IRS contact person shown on page 1 of this letter.
You may also fax your protest using the fax number shown in the heading of this letter. If you

fax your protest please call the person identified in the heading of this letter to confirm that he
received your fax.

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

12

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

Sincerely,

Robert S. Choi
Director, Exempt Organizations
Rulings & Agreements

Letter 4034 (CG) (11-2005)
Catalog Number 47628K