IRS determination 1046016: organization denied section 501(c)(3) exemption for commercial restaurant activities

Plain-English summary

The IRS issued a final adverse determination denying a nonprofit organization's application for recognition under section 501(c)(3). The organization planned to operate a large restaurant, membership program, job training, and other community programs. The IRS concluded that the restaurant would be a substantial commercial activity and would provide private benefits to members and patrons, so the organization was not operated exclusively for exempt purposes. The determination also stated that contributions would not be deductible under section 170 and that the organization must file federal tax returns. The attached proposed adverse letter explains the reasoning and the organization's appeal rights.

Ruling snapshot

• Question: Does the organization qualify for exemption under IRC section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 501(c)(3), 170, and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii), and 1.501(c)(3)-1(e)(1)

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201046016 Contact Person:
Release Date: 11/19/2010

Identification Number:
Date: August 27, 2010

Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.36-00; 501.36-01

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)(3). 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.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. 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.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if you have any questions about how this determination may
affect your State responsibilities and requirements.

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,

Robert 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: June 24, 2010 Contact Person:
Identification Number:
Contact Number:
FAX Number:

Employer Identification Number:

LEGEND: UIL:

M = Organization 501.36-00
D = City 501.36-01
E = State

F = Incorporation 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)(3). The basis for
our conclusion is set forth below.

Issues

Do you, M, qualify for exemption under section 501(c)(3) of the Code?

Facts
You were incorporated as a Not-for-Profit entity in the State of E on date F.
Per your Articles of Incorporation, the specific and primary purposes include the advancement

of charity and education and the operation of a restaurant and other food services with a
commitment to community outreach funding for families or individuals that exceed the income

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poverty guidelines for assistance and/or suffers a financial or economic crisis and other related
or corresponding charitable purposes by the distribution of funds for such purposes.

Your Articles of also include language that complies with the organizational test as
described in section 501(c)(3) of the Code.

Your bylaws indicate your primary purpose is to provide educational and career development
opportunities.

Your governing body includes the Executive Director/Human Resource Coordinator, the
Chairman/Director, the Vice Chairman/Director, the Secretary/Director, the Treasurer/Director,
the Senior Director of Operations, the Director of Dining Room Operations, the Director of
Membership and the Director of Membership and Call Center Operations.

The Executive Director/Human Resource Coordinator and the Senior Director of Operations are
husband and wife and also your founders and incorporators. Each is estimated to be paid

$ annually. The Director of Dining Room Operations is the daughter of the Senior
Director of Operation and the step-daughter of the Executive Director/Human Resource
Coordinator. The Director of Finance and Marketing is the mother of the Executive
Director/Human Resource Coordinator. The Director of Dining Room Operations, the Director of
Membership, and the Director of Membership and Call Center Operations each are estimated to
be paid $ annually. The Chairman/Director, The Vice Chairman/Director, the
Secretary/Director, and the Treasurer/Director are volunteers. One of the contractors, whose
company is selected to handle kitchen design and installation and architectural plans during the
renovation phase, is the spouse of the Director of Membership.

You describe your mission as follows: “strive to provide superior value, offer outstanding quality
customer service, quality fine foods and fine dining. We want our customer and members to
have the total experience of M. Not only will our clientele receive a fine quality meal, they will
also be provided with an enjoyable and relaxing atmosphere.” You later amended narrative
description of planned activities to state your mission is the respected dedication and
commitment to community outreach for working families and individuals in crisis in the
community.

Your business plan states the focus for the profits from the services will be instituted into your

for working families and individuals in D community that
otherwise do not qualify for assistance because the total household income exceeds the
Federal & State Income Poverty Guidelines to obtain assistance. Your requirements are the
family or individual must be experiencing an economic or financial crisis and the total household
income must exceed the Federal & State Income Poverty Guidelines for assistance.

Your business plan also describes membership are made available to any consumer;
membership dues are tax deductible; and your purpose is to provide quality fine foods,
excellence in fining dining, superior service to your members and customers, development or
financial knowledge, and valuable information which will support your financial decisions and

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along with many other charitable programs
once you are operational.

You state the restaurant industry is currently being dominated by a few larger restaurants and
you believe you can successfully enter the industry as the first of its kind 501(c)(3) not-for-profit
restaurant by offering quality fine dining and fine foods, excellence in customer service,
membership to the restaurant, special member only discounts, superior value and competitive
prices.

You state, “M will evolve into an incredibility customer-focused, member-focused, not-for-profit
restaurant, valued and devoted and committed to meeting all associated customer and member
needs and the responsibility to their satisfaction.” You state it is your long-term goal to be global
with your mission and be the restaurant of choice for the largest fine dining audience in the D
community and in America. You state that, once you have the opportunity to serve consumers
and offer benefits of the restaurant and membership along with your competitive prices, you
believe the consumer or member is less likely to move to your competitor. The last section of
your business plan states the following:

Due to intense competition, restaurants must look for ways to differentiate their
place of business and make it unique in order to achieve and maintain a
competitive advantage. The founders of M realize the need for differentiation and
uniqueness, and believe that combining a fine dining experience and a

will be the concept of success. The fact that no other national
restaurant has entered this arena, presents us with a window of opportunity and an
entrance into a profitable market.

You state your hours of operation will be consistent with other restaurants, Monday through
Saturdays with possibility of Special Events and Fundraisers scheduled on Sundays along with
one time per month open to provide Senior Citizens Brunches in conjunction with your Senior
Citizens Program. You will operate with both paid staff and volunteers. You will employ trainers
for the on-the-job training of the students. You will have about administrative staff members,

instructors/trainers, to students at any given time for training and employment
purposes, and 96 employees to run the restaurant. You also indicate % of your staff will be
employees (key staff, instructors and trainers) and % will be students.

To date, you have not opened your restaurant. You are currently in the start-up mode seeking
funding to begin operations. Although you do not obtained a facility, you describe the facility will
be at least 122,000 square feet and will seat over 1,000 guests in the dining area alone. You will
have a minimum of 600 parking spaces.

You project that the restaurant start-up expenses will be $ . This includes $
attributed to employee’s salaries and benefit; $ for building expenses and $
for food, beverage and equipment.

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You provide a start-up summary of expenses that lists Kitchen Design; Architectural Plans,
Manuals/Handbooks/Recipes/Brochures; Pre-Opening Labor; VIP Lunch/Dinner;
Building/Lease/Equipment/Accessories; Liquor License/Alcoholic Beverages; Program
Fundraising and Reserve.

Your revenues will include membership dues. You offer tax-deductible membership dues to any
consumer and can be paid under five membership categories: single, husband and
wife/couples, family, corporate and student. The membership benefits include discounts on
lunches, dinners, parties, banquets, parties, business meetings, weddings, and bridal and baby
showers. Your three-year growth forecast reads as follows:

Potential Customers Yr 1 Growth | Yr2 Growth | Yr3
Member — Lunch $ % $ - % $
Non-Member -— Lunch $ % $ % $
Member — Dinner $ % $ % $
Non-Member — Dinner $ % $ % $
Children (3 - 12) $ % $ % $
Member Parties/Banquets | $ % $ % $
Non-Member $ % $ % $
Parties/Banquets
Total Growth $ $ $
You also provide a five-year sales forecast, which shows the restaurant sales will $ for
year 1, $ for year 2, $ for year 3, $ for year 4 and $ for

year 5. You estimate there will be 100 employees to operate the restaurant.

You state you will offer a wide menu variety, atmosphere, ambience, a friendly, professional
staff in a casual environment. The menu will be established by the Assistant Director of
Operation. The menu will consist of standard items and will be altered for training and by
member/patron demand. The restaurant will offer some 125 various menu entrees of fine
quality food and fine dining, including a vegetarian selection and a children’s menu. You also
have suggested dinner wines along with a discrete wine list. You state all of these qualities will
be consistent with your goal of providing quality fine foods and a remarkable fine dining
experience. You state that you will inform your patrons/members their meals are tax deductible
on all menus, advertisements, brochures, consumer receipts and all marketing data.

You state prices of the menu are set consistent with market value and then discounted to fit a
charitable organization. You also state the menu prices have been set below cost of.market
value to fit a charitable organization. As part of membership benefits, your members receive

% discount on menu items. The percentage of discounts fluctuates between %to % for
soups and appetizers, and %to % for larger items on the menu such as special salads and
entrée items with respect to fine dining.

You state a second method of funding is through sponsorship. You state you will depend solely
upon grant and sponsorship funding for the start-up component of this “Charitable

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Organization.” You state you will rely on grant and sponsorship funds for special events and
fundraisers dedicated to your charitable cause. You forecast you will raise $ in
semiannual fundraising.

You state that you will offer each donor, contributor, grantor, or sponsor the ability to maintain a
separate contribution accounts under which they have the right to give advice on the use or
distribution of their funds. You state the donor, contributor, grantor, or sponsor may also provide
advice on the types of investments, distribution from the types of investments, or the distribution
from the contribution account, including the specific program or start-up expenses for the first
year of your operation.

You state nonmembers also have the benefit of a tax deductible charitable contribution; the
difference in the members and nonmember price of a meal, party, banquet, etc. is the charitable
contribution for nonmember. There are four levels of sponsorship (

). The
sponsorship benefits include complimentary dinner, advertisement in your newsletter and menu,
a plaque, and membership. Sponsorship receipts will be used to defray the capitalization costs
necessary to purchase the restaurant equipment.

Aside from operating the restaurant, you state you will be involved in other charitable activities.
The Special Programs listed in your application include Tuition Program; Job Training Program;
Community Outreach Funding Program; Welfare to Work; Homeless Shelter Program;
Christmas Program; and Senior Citizens Program and Building Program.

You indicate that you will provide two types of scholarships: College Tuition Program and Pre-
College Tuition Program. The College Tuition Program will be offered to those going to college
that have a dedication to Community Outreach. The Pre-College Tuition Program will be for
working families experiencing financial difficulties and want their child to attend parochial,
private or Christian school.

You state Job Training is based on a two-week classroom course schedule and 60-day on-the-
job training course schedule which takes into account the difficulty, hazard and liability that
training people for food service trade entail. Each employee will be paid for both work and
attending of the job training classes. The remaining training period will be spent in community
outreach activities.

You state the Community Outreach Funding Program will provide an opportunity for families and
individuals to obtain assistance for rent/mortgage, utilities, food and clothing. Your Welfare to
Work Program will provide an opportunity for a job training program and an opportunity for
employment with you

You state you will implement a Homeless Shelter Program, which will provide an opportunity for
the homeless shelters to receive quality food from you. The volunteering committee when
selected will be members and will have extensive contacts with Homeless Shelters as well as
the various city agencies that serve the homeless.

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The Senior Citizens Program will provide funding for seniors experiencing financial difficulties.
The Building Program will work with families due to crisis repair and rebuild their home that
homeowners/renters insurance does not cover and to be eligible their income must exceed the
Federal & State poverty guidelines for assistance and funding.

You have an agreement with another entity who will handle the transfer of the funds for your
special programs. Your application states that you will be transferring funds for your special
programs to only one liaison organization, which has agreed to aid in the screening and
distribution of funds for all of the Charitable Special Programs that you intend to offer.

You indicate the training program is designed to not only educate the students but also to open
up jobs for your graduates. If employment is unavailable at your facility upon completion of the
job training program, your recruiter will then begin job placement services for employment
elsewhere. There will be approximately 25 to 50 trainees. You estimate about 25% to 50% of
trainees will remain as employees. You state the wages will be set according to guidelines of
the Labor Board Laws consistent with other Restaurants employees and taking into
consideration the wages of a non-profit or 501(c)(3) corporation. Staff members will work a 40-
hour week and students will have a 40-hour training/work week. After training, most hired wait-
staff/buss persons will work approximately 32 hours a week consistent with other restaurant
establishments.

You state no one will be paid for the Christmas program, which will take at least 3 months to
establish. Your patrons will volunteer to adopt a less fortunate family for the Christmas Holiday;
each family will provide a list of things needed for the family and the Volunteer Committee will
disburse the lists to the adopting patrons and the restaurant will donate gift cards to local
grocery stores so the families can obtain their traditional family Christmas dinner. The Tuition
and the Senior and Building Programs will also be operated by a Volunteer Committee. You
project the Tuition Program will provide ten $1,000 tuition/scholarship awards. You estimate the
Senior Citizen Program will have 250 to 500 seniors attending brunch one Sunday per month.
The Building Program will be based on victims who go through hardships and disasters in a
fiscal year; and if not qualified for other assistance, you would then extend an application for
assistance from you.

Law

Section 501(c)(3) of the Code provides for the exemption from federal income tax of
organizations organized and operated exclusively for charitable purposes.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations states that , in order to be exempt as
an organization described in section 501(c)(3) of the Code, an organization must be both
organized and operated exclusively for one or more of the purposes specified in such section. If
an organization fails to meet either the organizational test or the operational test, it is not
exempt.

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Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as
“operated exclusively” of 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) of the
Code. An organization will not be so regarded if more than an insubstantial part of its activities
is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations states that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest. Thus, to meet the requirement of this subdivision, it is necessary for an
organization to establish that it is not organized or operated for the benefit of private interest
such as designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interest.

Section 1.501(c)(3)-1(d)(2) of the regulations provides that the term "charitable" is used in

• section 501(c)(3) of the Code in its generally accepted legal sense and includes relief of the
  poor and distressed or of the underprivileged as well as the advancement of education.

Section 1.501(c)(3)-1(d)(3) of the regulations provides that the "educational" refers to as the
instruction or training of the individual for the purpose of improving or developing his
capabilities, or the instruction of the public on subjects useful to the individual and beneficial to
the community.

Section 1.501(c)(3)-1(e)(1) of the regulations provides that an organization may meet the
requirements of section 501(c)(3) although it operates a trade or business as a substantial part
of its activities, if the operation of such trade or business is in furtherance of the organization's
exempt purpose or purposes and if the organization is not organized or operated for the primary
purposes of carrying on an unrelated trade or business.

In Rev. Rul. 73-127, 1973-1 C.B. 221, the Service held that an organization that operated a cut-
price retail grocery outlet and allocated a small portion of its earnings to provide on-the-job
training to hard-core unemployed did not qualify for exemption. The corporation was formed to
operate a retail grocery store to sell food to residents of a poverty area at prices substantially
lower than those charged by competing grocery stores, to provide free grocery delivery service
‘to residents who need it, to participate in the Federal food stamp program, and to provide job
training for unemployed residents. The organization's purpose of providing job training for hard-
core unemployed was charitable and educational within the meaning of the common law
concept of charity; however the organization’s purpose of operating a retail grocery store, where
food was sold to residents of a poverty area at low prices, was not recognized as a charitable
purpose under the basic common law concept of charity. The ruling went on to say the
operation of the store and the operation of the training program are two distinct purposes, that
was, ends or objects sought to be accomplished by the organization through use of its
resources; and since the former purpose was not a recognized charitable purpose, the
organization was not organized and operated exclusively for chartable purposes.

In Rev. Rul. 76-94, 1976-1 C.B. 171, the Service held that an exempt organization's operation of a
retail grocery store as part of its therapeutic program for emotionally disturbed adolescents, almost

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fully staffed by the adolescents, and on a scale no larger than was reasonably necessary for the
performance of the organization's exempt functions, was not unrelated trade or business.

In American Institute for Economic Research v. United States, 302 F.2d 934 (Ct. Cl. 1962), the
Court considered the status of an organization that provided analysis of securities and industries
and of the economic climate in general. It sold subscriptions to various periodicals and services
providing advice for purchases of individual securities. The Court noted that education is a
broad concept, and assumed argued that the organization had an educational purpose. The
Court concluded, however, that the totality of the organization's activities, which included the
sale of many publications as well as the sale of advice for a fee to individuals, was more
indicative of a business than that of an educational organization. The Court held that the
organization had a significant non-exempt commercial purpose that was not incidental to the
educational purpose and that the organization was not entitled to be regarded as exempt.

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991), the Court of Appeals upheld
a Tax Court decision, T.C. Memo. 1990-484, that an organization operating restaurants and
health food stores in a manner consistent with the doctrines of the Seventh Day Adventist
Church does not qualify under IRC 501(c)(3). The court found substantial evidence to support a
conclusion that the organization's activities furthered a substantial nonexempt purpose,
including:

a. The organization's operations were presumptively commercial;
b. The organization competed directly with other restaurants and food stores;

c. The organization used profit-making pricing formulas common in the retail food
business;

d. The organization engaged in a substantial amount of advertising;

e. The organization's hours of operation were competitive with other commercial
enterprises; and

f. The organization lacked plans to solicit donations.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the
Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature,
will destroy a claim for exemption regardless of the number or importance of truly exempt
purposes.

In Nelson v. Commissioner, 30 T.C. 1151 (1958), the court held that an applicant for tax exempt
status under section 501(c)(3) has the burden of showing it “comes squarely within the terms of
the laws conferring the benefit sought.”

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Application of Law

You are not as described in section 501(c)(3) because you are not organized and operated
exclusively for charitable, educational, scientific or religious purpose. Your restaurant does not
further the exempt purpose described in section 501(c)(3).

You are not as described in section 1.501(c)(3)-1(c)(1) of the regulations because more than an
insubstantial part, specifically the restaurant, of your activities is devoted to non-exempt
purposes.

You are not as described in section 1.501(c)(3)-1(d)(1)(ii) of the regulations because your
activities serve private benefits of your members and patrons, who not only receive a discount
for their meals but also a tax deductibility for their membership fees and/or meals.

You are similar to the organization described in Rev. Rul. 73-127 because the operation of the
restaurant and the operation of the training and other charitable programs are two distinct
purposes. Since the operation of the restaurant is the main part of your activities and is not a
recognized charitable purpose, you are not organized and operated exclusively for charitable
purposes. Your restaurant hours, prices, menu items and services are competitive to for-profit
restaurants. Your restaurant is staffed by paid employees and trainees may be hired as your
employees after their training. Your paid staff is mainly for the operation of the restaurant rather
than for the training program or any charitable functions. Your restaurant operation is no different
from those of for-profit restaurants; therefore, you are in competition with for-profit restaurants.
Furthermore, you serve private benefits to your patron members and patron non-members by
giving them discounts and tax deductibility benefits to lure them from your competitors.

You are not similar to the organization ruled in Rev. Rul. 76-94 because your restaurant operation
is your main function and your planned training and charitable programs are secondary to your
total activities and are added programs as the way to attract customers to your restaurant. As you
indicated, you believe that the consumers or members are less likely to move to your
competitors once you have the opportunity to serve the consumers and offer benefits of the
restaurant and membership along with competitive prices. Therefore, any charitable and training
programs are secondary and incidentally to your overall activities.

You are similar to the organizations described in the American Institute for Economic Research
v. United States, supra, and Living Faith, Inc. v. Commissioner, supra. You plan to operate a
fine dining restaurant in competition with other for-profit fine dining restaurants. Your restaurant
is viewed as commercial. Your hours, prices and menu items are competitive to those of for-
profit restaurants. Your sources of revenues are mainly from restaurant sales and your
expenses are mainly for the restaurant operation. Taking in totality, your restaurant is a
significant non-exempt commercial activity that is not incidental.

As held in Better Business Bureau of , supra, a single non-exempt purpose, if
substantial, will preclude tax exemption under section 501(c)(3) of the Code. Your restaurant
operation, a substantial part of your activities, is a non-exempt purpose; therefore, you are not
operating exclusively for an exempt purpose as described in section 501(c)(3).

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According to the findings in Nelson v. Commissioner, supra, you have the burden of proving that
you satisfy the requirements of the particular exemption statute. Whether you meet this
requirement is a statement of fact. The facts indicate that your primary activities are the
operations of a fine dining restaurant that is similar to any other for-profit restaurants. Thus, you
do not appear to qualify under Section 501(c)(3).

Applicant's Position

You state that you are operating for charitable purposes and you do not wish to separate the
charitable programs from the operation of the restaurant. You state that, if you separate the
restaurant operation from the charitable programs umbrella, it leaves entirety of your operations
cut-off and isolated completely form obtaining any opportunity for funding and bank loans from
financial institution.

You provide copies of information from the Internet about other organizations, which may have
been recognized under section 501(c)(3) of the Code. You state that those organizations have
great similarities in their charitable purpose comparable to your charitable purpose but not
offering all of the exact programs you would be offering. You also provide letters of support from
Senators and Representatives.

Service Response to Applicant’s Position

Your activities mainly comprise of a restaurant operation, which is in competition with any for-
profit restaurants. Your restaurant is commercial in nature and not as described under section
1.501(c)(3)-1(a)(1) of the regulations. In addition, you provide private benefits to your members
and patrons by giving them a discount for their meals as well as a tax deduction for membership
fee and/or part of restaurant tabs. Although you change your mission statement to sound more
charitable, your proposed activities, mainly the operation of the restaurant, remain unchanged.
The training and other outreach program that you may have are insignificant to the commercial
aspects of the restaurant operation.

Finally you believe you are exempt under section 501(c)(3) of the Code, because other similar
organizations are exempt under section 501(c)(3). However, each determination is based on
facts. Qualification or operations of another organization have no bearing on the determination
of your status. You have not proved that you qualify for exemption under section 501(c)(3). See
Nelson v. Commissioner, supra.

Conclusion

Based on the facts and circumstances presented, the Service concludes that you do not qualify
for recognition of exemption from federal income tax as an organization described in section
501(c)(3) of the Code. Your activities are indistinguishable from similar activities of an

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ordinary commercial enterprise. Accordingly, you must file Federal tax returns and contributions
to you are not deductible under section 170 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, within 30 days from the date of this letter. We will
consider your statement and decide if the 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
Publication 892; Exempt Organization Appeal Procedures for Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal’. The statement of facts (item 4)
must be accompanied by the following declaration:

“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.”

The declaration must be signed by an officer or trustee of the organization who has personal
knowledge of the facts.

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be included
stating that the representative prepared the appeal and accompanying documents; and whether
the representative knows personally that the statements of facts contained in the appeal 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. If you want representation
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. You can find more
information about representation in 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 file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to appeal
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

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If you do not intend to protest this 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. That
letter will provide information about filing tax returns and other matters.

We have sent a copy of this letter to your representative as indicated in your power of attorney.

Please send your protest statement, Form 2848, and any supporting documents to the
applicable address:

Mail to: Deliver to:

You may fax your statement using the fax number shown in the heading of this letter. If you fax
your statement, please call the person identified in the heading of this letter to confirm that he or
she received your fax.

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

Enclosure:
Publication 892

Letter 4036 (CG) (11-2005)
Catalog Number 47630W