IRS revokes exemption of commercially operated lodging facility

View official IRS release (PDF)

Plain-English summary

The IRS revoked the section 501(c)(3) exemption of an organization that originally planned to operate a school but later offered short-term lodging to the public. The organization also hosted classes, workshops, community events, and nonprofit groups, but lodging operated around the clock and supplied most of its income. Its rooms, advertising, pricing, booking methods, staffing, and board discussions resembled those of commercial hotels and inns. The IRS concluded that the amended bylaws did not satisfy the organizational test and that the lodging business furthered a substantial nonexempt commercial purpose under the operational test. Exemption was revoked effective January 1 of the redacted year, contributions ceased to be deductible after that date, and the organization was required to file taxable corporate returns.

Ruling snapshot

• Question: Did an organization primarily operating paid public lodging remain organized and operated exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revoked.
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 7428; Treas. Reg. § 1.501(c)(3)-1.

Full text (IRS public release)

UIL 501.03-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION Date: June 24, 2014
Release Number: 201445018 Taxpayer Identification Number:

Release Date: 11/7/2014
Person to Contact:

Employee Identification Number:

Employee Telephone Number:

CERTIFIED MAIL — RETURN RECEIPT
Dear:

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal Revenue Code. Our favorable determination letter to you dated November 19XX is hereby revoked and you are no longer exempt under section 501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized and operated exclusively for exempt purposes. If an organization fails to meet either the organizational test or the operational test, it is not exempt.

You were not organized for an exempt purpose under your current bylaws. You are not operating exclusively for an exempt purpose under IRC section 501(c)(3). Your primary activity is offering short term lodging to the public for payment in a way that is similar to commercial enterprises. By operating in the manner described, you are furthering a substantial nonexempt purpose.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be filed with the appropriate Service Center for the tax year ending December 31, 20XX, and for all tax years thereafter in accordance with the instructions of the return.

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

If you decide to contest this determination under the declaratory judgment provisions of section

UIL 501.03-00

7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the district court of the United States for the District of Columbia must be filed before the 91st Day after the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed Publication

892. You may write to the United States Tax Court at the following address:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

You also have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal Appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

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

Sincerely,

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

UIL 501.03-00

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division

Date: March 11, 2014
Taxpayer Identification Number:

Form:

990 Return
Tax Year(s) Ended: X
42134/206%: 12/31/20%*; 12/31/20
Person to Contact/ID Number:

Contact Numbers:

Manager’s name/ID number:
Manager’s contact number:

Response due date: :

Certified Mail — Return Receipt Requested
Dear

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action - Section 7428, and return it to the contact person at the address listed above (unless you have already provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone conference with the supervisor of the IRS contact identified in the heading of this letter. You also

• may file a protest with the IRS Appeals office by submitting a written request to the contact
  person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the applicable law, and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally doesn’t apply after we issue this letter.

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

892. Please contact the individual identified on the first page of this letter if you are considering
     requesting technical advice. If we issue a determination letter to you based on a technical advice memorandum Issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court. They can, however, see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information ; ;
If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient

time to call if we need to contact you.

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Thank you for your cooperation.
Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

3 Letter 3618 (Rev. 6-2012)
Catalog Number 34808F

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994) .

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

ISSUES

Whether the organization's tax exempt status under Code §501(c) (3) should be revoked due to the following issues:

1. The - was not organized for an exempt purpose as required by Internal Revenue Code
   ("Code") §501(c) (3) based on the amended bylaws.

2. (“The ”) failed to operate exclusively for exempt purposes as required by Internal
   Revenue Code ("Code") §501(c)(3) during the years under examination.

3. The was operated primarily for commercial purposes.

FACTS

Organization Background

The organization was originally incorporated on November 1, 19XX with the name (“Organization”). The original Form 1023 showed the Organization intended to operate as a school when it. checked “yes” in Part III Question 15 of Form 1023.

Part Ill Question 15 asks: “Is the organization, or any part of it, a school?” If “Yes” complete Schedule B.

The Organization completed Schedule B and answered “yes” to Question 1 on page 16 of Form 1023, Schedule B Schools, Colleges and Universities.

Question 1 on page 16 asks:

“Does or will the organization regularly have a) regularly scheduled curriculum, b) faculty of qualified teachers, c) regularly enrolled student body, and d) facilities where educational activities are regularly carried on?”

Additionally, the original Form 1023 showed the Organization’s source of support was as follows (in order of size):

Tuition and enrollment fees of students

Income from seminar and cultural events

Donations

Weekly rental of rooms and guest cottages

RON>

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

The original Form 1023 showed the housing on the property was to be used for faculty and student housing. The Organization expected to charge each student $0 tuition per month.

The founder of the Organization is a is a voting board member and the Executive Director. He has a master’s degree in education.

Program Service Accomplishments on December 31, 19XX

The Organization filed its Form 990 for the year ending December 31, 19XX. Part III Statement of Program Service Accomplishments stated: “Presented seminars and lectures; maintained site and educational materials for self-study courses.”

Program Service Accomplishments on December 31, 20XX

The Organization filed its Form 990 for year ending December 31, 20XX. Part Ill Program Service Accomplishments stated: “Provides facilities for people of all backgrounds. It offers facilities for cultural and social events for the community.”

The Organization submitted amended articles of incorporation and bylaws to the Service with its
_ Form 990 for December 31, 20XX.

The amended bylaws read as follows:
Article 1 of the BYLAWS of this corporation reads now as follows: The purpose of this Corporation ( __) is to provide the following services:

a. It offers a place of for people of all backgrounds
b. It offers cultural events for the community the following areas:

c. It offers social events for the community:

The Organization completed Part IV: Other Information of the Form 990 for year ending December 31, 20XX. Question 76 asked the following question: Did the organization engage in any activities not previously reported to the IRS? The organization checked the box “No” in answer to this question

Name Change

The name of the Organization was changed to in 20XX. In 20XX, the organization changed its name to

Form 886-A (1-1994) Catalog Number 20810W — Page. publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A.

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number . Year/Period ended

20XX; 20XX:
20XX

Location and Guest Rooms

(The ) is located in . The has 0 guest rooms on a five acre property. These rooms include four cottages and four main houses. All 0 guest rooms are offered as lodging for payment to the general public 24 hours a day/ 7 days a week. The grounds also include a kitchen, Quiet Room and patio gardens. The also rents out its facilities to groups and holds

classes/workshops/seminars and community events. The is also available for weddings. The allows public charities to use its facilities free of charge. Advertising Website Advertising The website at www. .com advertises the asa The — home page describes itself as follows: “ ; ‘ is ideal for getaways, workshops, as well as conferences, and weddings.” Additionally, The stated that it does not allow children under 7 or dogs. It also offers

massage, Spa treatments, yoga classes, a variety of workshops and community events.

Telephone book Advertising

The paid to advertise in the 20XX Directory white pages. The contact information was listed in the Directory under the following headings: Bed and Breakfasts; Hotel and Motel; Lodging; and ,

Guides and Directories

Form 886-A (1-1994) Catalog Number 20810W > Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended 20XKX; 20XX; 20XX

In 20XX, The was listed in the News supplemental guide as being voted: “Best lodging in the 20XX.”

The is listed in the Chamber of Commerce business directory as “ -- under the heading /Lodging.”

Anyone may reserve a room online at the . website, www. .com. and pay online

with their credit card. Potential guests may also book a room on www.hotel.com and www. breadandbreakfast.com.

Sources of Revenue

The following chart shows the source of The revenue for three years:
% of 3 year
20XX | 20XX 20XX | total

REVENUE

Donations 0 0 %

Group s 0 0 %

individual s 0 0 So

Gift Certificates, rebates, etc. 0 0 %

Meeting Room Rental 0 0 0 %

Misc. Income (Classes) 0 0 %

Fundraiser Income 0 0 %

Program Income (Classes, events) 0 0 %

Reservation refunds accounted for

Total: 0 0 0 O
The - did not receive tuition or enrollment fees for students. The primary source of income came from individual . Individual refer to payments from anyone of the general public who pays for a stay in guest rooms. Group refer to payments for group use of the entire grounds or specific meeting rooms. The examination showed that group were primarily educational classes. The is not receiving more than 33 1/3% of its income from an exempt activity. The offered the facility free of charge for non-profit organizations to use for fundraisers or at a 50% discount for other uses. The has verbal arrangements with a yoga instructor and a massage instructor that hold Classes every week. The classes are open to guests as well as to the public. Guests are not required to attend. The classes are not part of a scheduled curriculum at . Class attendees

Form 886-A (1-1994) Catalog Number 20810W Page publish.no..irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A
(Rev January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX pay the instructors directly. The instructors pay a percentage of the fees collected from class attendees to , usually .% of gross proceeds. Expenses The chart below shows The expenses for three years:
% of 3
EXPENSES 20XX 20XX 20XX_ year total
Executive Director 0 Oo 0 I%
Other wages (Includes taxes, insurance, etc.) 0 0 0 ‘%
Advertising and marketing 0 0 0 %
Breakfasts 0 0 0 %
Credit card processing fees 0 0 0 %
Property: tax, insurance, maintenance, utilities, etc. 0 0 0 % Housekeeping: Linen cleaning and supplies 0 0 0 % Other expenses: 0 O 0 _% TOTAL EXPENSES (not including depreciation or interest accrual) 0 0 0 0 Employees Wages were the largest expense. The had 0 employees in the examination year. The founder of was employed full-time as Executive Director. The employed housekeepers; gardeners and maintenance workers; breakfast workers, and clerical workers. The did not employ any teachers. Please see the chart below for employee hours per position: Annual Employee hours Night Total Year Housekeeping Cierical Maintenance Breakfasts Grounds Manager Misc Hours 20XX 0 0 0 0 0 0 0 0 20xx 0 0 0 0 0 0 0 0 20xXxx 0 0 0 0 0 0 0 0

*Note Executive Director was salaried in 20XX and 20XX. Only night manager hours were included in 20XX and 20XX chart.

“Executive Director changed to hourly in 20XX per board. Misc. includes Exec Dir hours.

“Misc hours includes holiday, vacation pay and other employees in 20XX and 20XX

**20XX - Misc hours include the above plus’ hours for development employees not included on 20XX or 20XX Development employees worked on fundraising and grant writing.

Form 886-A (1-1 994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Ren ere 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

Executive Director Position

The Executive Director is responsible to prepare educational activities for the . However, the Executive Director was unable to invest much time in preparing an educational program because the was struggling financially and has been struggling almost since inception. A major donor did not agree with direction and stopped contributing, so the Executive Director used his inheritance and also obtained loans to help finance The The Executive Director's duties were primarily to manage The and the employees. He also worked sporadically as the

night manager.

The has a secondary issue for employment taxes for its Executive Director who was allowed to stay in empty rooms at most nights. The FMV of the rooms were not included in compensation.

Other Employee Positions

The office manager checks guests in and out and receives guest payments, issues keys, maintains the office and The website. The housekeepers maintained the rooms. Gardening and maintenance personnel maintain the grounds and make facility repairs. Breakfast workers prepared and served the continental breakfasts. Clerical workers included a night manager, and weekend receptionist. None of theses employees were involved in preparing, presenting or publishing educational programs during the examination year or subsequent years.

Educational Activities

Actual Educational Program Hours

Year 20XX
Hours in one year (24 hrs x 360
days)

Day hours in one year (8 hrs x
360 days)

Actual annual educational
program hours at The in
20XX

Actual percentage annual
educational program day
hours %
Actual percentage annual
educational program year
hours "fo

Form 886-A (1-1994) Catalog Number 20810W Page (6 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

The had classes and workshops for eight to twenty-one hours each week in year ending December 31, 20XX. The also sponsored community events that are not considered educational such as poetry readings, wildlife memorial, informal get-togethers, concerts, etc. These are not included in the chart above. The posts its monthly events calendar on its website.

Guest Room Rates

The website www. .com, shows that its current room rates range from $0 to $0 per night depending on which day of the week the room is used. A room rate list for 20XX was not available during the examination. A room rate list from November 20XX showed the room rates were similar to the current rates.

The chart below shows a price comparison between The and three local hotels for similar rooms. rooms with a price range of $0 - $0 per night share bathrooms, refrigerator and microwave. The in also offers rooms with shared bathrooms. Their rates are $0 - $0.

These lower priced rooms are not included in the comparison below.

Comparison of quest room rates Price Ranges*
$0 - $0
The , $0 - $0
The , $0 - $0
$0 - $0

“Comparison of standard rooms with bathrooms in guest rooms and two room cottages/suites

LAW

Organized and Operated for an Exempt Purpose

Generally, an organization that is described in Code §501(c)(3), is exempt from income tax. These organizations include corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

Department of the Treasury-Internal Revenue Service

Form 886-A (1-1994) Catalog Number 20810W Page 7 publish.no.irs.gov

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

In order to be exempt as an organization described in Code §501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section.

An organization will be regarded as “operated exclusively” for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in Code §501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. The existence of a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the operational test.

An organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than private interest. Thus, an organization must establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or creator's family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

Operating for the benefit of private parties who are not members of a charitable class constitutes a substantial nonexempt purpose.

Code §501(c)(3) exempts from Federal income tax organizations organized and operated exclusively for charitable, educational, and other exempt purposes, provided that no part of the organization's net earnings inures to the benefit of any private shareholder or individual.

Treas. Reg. section 1.501(c)(3)-1(a) provides that in order to be exempt as an organization described in Code §501(c)(3), 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.

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

Treas. Reg. section 1.501(c)(3)-1. describes organizations exempt from tax under section 501(c
)(3) as organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.

(3) Educational purposes are defined

(i) In general. —The term “educational”, as used in section 501(c)(3) relates to

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A ,
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XKX;
20XX

(a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or

(b) The instruction of the public on subjects. useful to the individual and beneficial to the community.

Treas. Reg. section n1.501(c)(3)-1
(ii) Examples of educational organizations. —The following are examples of organizations which, if they otherwise meet the requirements of this section, are educational:

Example (1). An organization, such as a primary or secondary school, a college, or a professional or trade school, which has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on.

Example (2). An organization whose activities consist of presenting public discussion groups, forums, panels, lectures, or other similar programs. Such programs may be on radio or television.

Example (3). An organization which presents a course of instruction by means of correspondence or through the utilization of television or radio.

The operational test, formulated in Treas. Reg. Section 1.501(c)(3)-1(c)(1), provides: (c) Operational test.

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

The term “exclusively” has not been construed to mean “solely” or “absolutely without exception.” An organization that engages in exempt activities qualifies for exempt status so long as those nonexempt activities are only incidental and less than substantial. Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Copyright Clearance Center v. Commissioner, 79 T.C. 793, 804 (1982).

The term “charitable” is used in section 501(c)(3) 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. Treas. Reg. section 1.501(c)(3)-1(d)(2).

In Better Business Bureau of Washington, D.C., the Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will prevent exemption regardless of the number or importance of truly exempt purposes. The Court held that a trade association had an

Form 886-A (1-1994) Catalog Number 20810W Page 9 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A R
(Rev January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Peniod ended

20XX; 20XX;
20XX
“underlying commercial motive” that distinguished its educational program from that carried on by a university.

An organization is not described in I.R.C. section 501(c)(3) if it operates a trade or business that primarily furthers a nonexempt purpose. Treas. Reg. Section 1.501(c)(3)-1(e) Similarly, the courts have denied exempt status under what is generally known as the commerciality doctrine. See, e.g., B.S.W. Group v. Commissioner, 70 T.C. 352 (1978); Airlie Foundation v. Commissioner, 283 F. Supp.2™ 58 (D.D.C. 2003). Courts have found that, due to the “commercial” manner in which an organization conducts its activities, the organization is operated for nonexempt commercial purposes rather than for exempt purposes. Among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities; extent and degree of below cost services provided; pricing policies; reasonableness of financial reserves; whether the organization uses commercial promotional methods; and the extent to which the organization receives charitable contributions. Airlie Foundation, and cases cited therein.

Competition with commercial firms is strong evidence of the predominance of nonexempt commercial purposes. See American Institute for Economic Research v. United States, 302 F.2d 934 (Ct.Cl. 1962); Scripture Press Foundation v. United States 285 F.2d 800, 806 n 11 (Ct. Cl. 1961); United Hospital Services, Inc. v. United States, 384 F. Supp. 776, 780 (S.D. Ind. 1974). In Airlie Foundation, the organization operated a conference center that was not limited to tax- exempt entities. The Court found that the fact that the organization’s conference center derived substantial income from events that competed with commercial and non-commercial entities constituted strong evidence of a commercial nature and purpose. In B.S.W Group, the Tax Court found that a corporation formed to provide consulting services in the area of rural-related policy and program development to tax-exempt and not-for-profit clients was not entitled to section 501(c)(3) status because it was primarily engaged in an activity that was characteristic of a trade or business. The Court found that the organization’s planned service areas were of the sort normally carried on for profit by commercial businesses and the organization's financing was not typical of section 501(c)(3 organizations. The organization did not provide any free or below-cost services; its clientele was not limited to section 501(c)(3) exempt organizations; its support came from fees for services, and it did not receive or solicit charitable contributions.

In Easter House v. United States, 12 CI.Ct. 476 (1987), aff'd. 846 F.2d 78 (Fed. Cir. 1988), the Court determined that the organization was not exempt because its conduct of adoption services was in furtherance of a non-exempt commercial purpose.

In The Schoger Foundation v. Commissioner, 76 T.C. 380, a not-for-profit corporation owns and operates a mountain lodge that it characterizes as a religious facility. The lodge makes available to its guests numerous activities, religious, recreational, and social, none of which are regularly scheduled or required. The record does not show the extent to which the guests participated in any of the activities, religious or otherwise.

Although the organization's mountain lodge offered guests religious, recreational, and social activities; however, none were regularly scheduled or required. The court concluded that the

Form 886-A (1-1994) Catalog Number 20810W Page 10 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 880-4 EXPLANATIONS OF ITEMS
(Rev. January 1994) .

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

organization had not met its burden of proof to show that the lodge was operated primarily for an exempt religious purpose and that the recreational and social activities at the lodge were only incidental to a religious purpose. In making that finding the court stated:

Wholesome family recreation or just sitting on a rock contemplating nature way well provide a family or individual with a religious, or at least a spiritually uplifting experience, but it is difficult to see how that experience differs, if it does, from the same experience one can have at any quiet inn or lodge in the beautiful mountains of Colorado.

In Living Faith, Inc. v. Commissioner, 950 F. 2d 365 (7th Cir. 1991) aff'g 70 T.C. 352 (1978), the court held that a vegetarian restaurant and health foods store that adhered to the principles of the Seventh Day Adventist Church was not operated exclusively for exempt religious purposes, but rather for a substantial commercial purpose. The court examined the method of operations to infer the purposes. 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

The organization's primary activities were managing a restaurant and health food store that was operated in competition with commercial entities, charging competitive prices set by formulas common in the retail food business, and using commercial promotional methods.

In American Institute for Economic Research v. United States, 302 F.2d 934, 157 Ct. Cl. 548 (Ct.
~ Cl. 1962), the Court considered the status of an organization that provided analyses of securities and industries and of the economic climate in general. The organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities. Although the court noted that education is a broad concept, and assumed for the sake of argument that the organization had an educational purpose, it held that the organization had a significant non- exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt. The court found that the corporation's sales of its publications were more analogous to commerce than to education. The court concluded that the business purpose was primary and not incidental to any educational purpose which might have been present.

Form 886-A (1-1994) Catalog Number 20810W — Page‘. publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

In United Missionary Aviation, Inc. v. Commissioner, T.C.M. (CCH) 1990-566, the Tax Court held an organization formed to support religious missionary work not exempt under IRC 501(c)(3) because it had a substantial nonexempt commercial purpose. The court focused on how the organization carried on its primary activity, a tape and equipment supply division. No one factor was determinative, but the court considered the following operations particularly relevant:

a. The supply division was operated in the same manner as any profitable commercial enterprise;

b. The majority of equipment and tapes sold by the organization were also sold by commercial firms;

In Goldsboro Art League, Inc. v. Commission of Internal Revenue, 75 T.C. 337 (1980) the operational test focuses on the purpose and not on the nature of the activity.

In Forest Press, Inc. v. Commissioner of Internal Revenue ‘as long as the corporation was created to further an exempt purpose and its activities are consistent with that purpose, it is irrelevant that other for-profit enterprises engage in the same activity.’

In Peoples Translation Service, on the surface the entity's activities were conducted in an ordinary commercial manner, the operation was not sufficiently like a commercial enterprise because there was no intent to make a profit.

In Hawaii, Inc. v. Commissioner, 71 T.C. 1067 (1979) ‘an organization may engage in trade or business as long as its operation furthers an exempt purpose and its primary objective is not a production of profits and provided it serves a public rather than a private interest.’

In Colorado State Chiropractic Society v. Commissioner, 93 T.C. 487, at 496 (1989), the Court stated, “Petitioner’s original articles of incorporation are not the only evidence from which petitioner's purposes might be determined. Rather, petitioner's bylaws are also indicative of the ‘objects motivating’ petitioner and, therefore, must also be considered.”

In Copyright Clearance Center, Inc. v. Commissioner, 79 T.C. 798, 807-808 (1982), the “potential” for a substantial profit driving operations and organization are good enough to show a nonexempt purpose.

Form 886-A (1-1994) Catalog Number 20810W Page 12 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS

(Rev. January 1994)

Name of taxpayer Tax Jdentification Number Year/Period ended

20XX; 20XX;
20XX

Taxpayer Positions:

The taxpayer provided six written responses to oral discussion with the agent. The details of the taxpayer's written correspondences are shown below in chronological order.

1) Taxpayer Correspondence dated June 13, 20XX
In correspondence dated June 13, 20XX, The stated the following:

1) They were not informed about the IRS tax-exempt criteria for educational organizations.

2) Requested that the IRS define the tax-exempt requirements for an education center and, possibly, harmonize the definition with the definition of law.

3) It submitted a proposed schedule of events for July 20XX and asked if these events would meet the IRS criteria.

4) it has been zoned by the County of fora . No motel or hotel would be allowed to operate on this property. 5) Because it has all of the following amenities it is designed and operated as a and nota

motel or hotel:
i. It's a quiet place (no young children), surrounded by nature. The rooms are simple with no TV, radio, or telephone

ii. We have a Quiet Room (with a library of spiritual, philosophical and psychological books) for reading, writing and meditation.

iii. We have a Conference Room with an Author’s Library and a general library. The County allows us to have educational events for up to 100 people in this room (or outside)

iv. We have two outdoor event areas: a waterfall garden and Outdoor Event Center with a stage (to be built)

2) Taxpayer Correspondence dated June 16, 20XX

in correspondence dated June 16, 20XX, The included the following:

1) Reports from the to grant welfare exemption from property tax dated 4/24/20XX.

2) Two pages from Report 20XX that included a partial list of the events held at the in 20XX. The stated that it offered over events that focused on the environment, health & healing, spirituality, the arts and culture, and an ongoing film series. The also discussed its cooperation with local business, and its board and staff.

3) Statement that it supports local non-profit organizations by allowing them to use their facility free of charge for fundraising events and ata ‘% discount for other types of events.

4) Comparison on the differences between and three for-profit hotels in National Parks. (lt referred to'Old-Faithful Inn, Lake Yellowstone Hotel and Wawona Hotel in Yosemite, as part of the interview. This referral was in answer to statement that unlike hotels and motels always have television and telephones.)

a. The stated these hotels differ from in that they do not provide all of the following:

Form 886-A (1-1594) Catalog Number 20810W —Page__-13 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number } Year/Period ended

20XX; 20XX;
20XX

i. Events for their guests and the community (except tours which appear to be organized by the Park) ii. Events organized by community groups iii. Yoga iv. A conference room for events v. A quiet room for meditation, reading and writing vi. A spiritual and educational library

vii. no charitable component (such as supporting other non-profit organizations, providing work-exchange programs, etc). The stated that according to law, an educational center has to have a charitable component as well as a community and educational component. viii. None of these hotels are in locations zoned for

ix. “These hotels are rustic national park lodges, where there is some emphasis on connecting guests to nature, which is probably why they don't offer TVs, radios, etc. (or they are just trying to save money). However, centers, such as , do not have these amenities because they want to provide a quiet, peaceful place.”

x. “If we were simply a hotel, we would have transformed the quiet room into a bedroom, because it would increase our revenue. We have always refused to do so, despite many suggestions, because a quiet room is an important part ofa center.”

3) Taxpayer Correspondence dated July 11, 20XX

In correspondence dated July 11, 20XX, The stated the following:

1) When they sent in their change of name and orientation, they never heard anything about the “51% clause” and that they always followed all the rules they were informed about.

2) They are in the process of having more and more educational programs. i They received a $0 grant for educational activities on July 9, 20XX.

3) The is seriously planning for educational § /Aworkshops in the areas of their mission statement: i Writing workshops (Sept 20XX) ii Film Studies (Nov 20XX) iii Non-Violent Communication iv Spirituality & Science, Etc.

4) Taxpayer Correspondence dated July 15, 20XX
In correspondence dated July 15, 20XX, The stated the following:

1) Requested “a clear definition of an Educational Center in and how it relates to educational programs and TAX-EXEMPT STATUS.”

Form 886-A (1-1994) Catalog Number 20810W — Page__—-14 ~_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;

20XX

2) Requested “SAMPLES of Educational Centers” that comply with the Service definition.

3) Requested an explanation of the “51% CLAUSE’ be sent with the appropriate text, and an exact description as to how this applies to . They expressed their desire to comply and stated that the rules are simple for a school but not so simple for an educational center.

4) The was granted a welfare exemption from the County of and the State of

based on a study of educational programs, community and charitable aspects, non- profit status, educational facility (conference room, library/Quiet Room, etc.), and zoning.

5) The flow of people to educational events exceeds 50% of their traffic and that income should not be the determining factor. This correspondence also stated that over 51% of the

people visiting The are given educational events or courses and that “even a stay at is educational.” 6) The received a $0 yearly renewable grant that will increase educational programs substantially. 7) The listed four differences between and hotel and a motel. i They are located in a county zone for a . The has to be in a quiet place and in a quiet neighborhood. i The whole tayout of a is different from the hotel or motel. They have a

Meeting Room, Quiet Room, two Outdoor Event Centers, three libraries, and no TVs and no Tel’s in the rooms. The regular hotel or mote! guests will not come to a like theirs. The only attracts a specific segment of the population. ii People go toa ‘for quietness, reflection, writing, reading and learning. “It is real “GET-AWAY’ from it all, a “ . iii They also offer regular educational and cultural programs. They rent out their facility to other educational groups.

5) Taxpayer Correspondence on July 21, 20XX

In correspondence dated July 21, 20XX and July 29, 20XX, The sent a tentative schedule for educational programs for August, September, October & November 20XX and asked for a review. The wants to know if the revised schedule meets the Service's criteria.

September 20XX - 16 days of classes/workshops/seminars and two events

October 20XX - 13 days of classes/seminars/workshops and a community event on environmental achievements & ecological projects

November 20XX - 15 days of workshops and 5 days for an artistic center & gallery/seminars

6) Taxpayer Correspondence on July 29, 20XX

In correspondence dated July 29, 20XX, The sent their schedule for educational programs for August 20XX and asked for a review. The wants to know if the revised schedule meets the Service's criteria.

July 29 — August 20XX — 9 events that include three film showings/discussion; one fundraiser; and five teacher/speakers.

Form 886-A (1-1994) Catalog Number 20810W —Page_—-15 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number ~ Year/Period ended

20XX; 20XX;
20XX

Government's Positions and Responses:

Issue 1: The was not organized for an exempt purpose as required by Internal Revenue Code ("Code") §501(c)(3) based on the amended bylaws.

Based upon the amended bylaws, the is not organized for an exempt purpose.

In relevant part, I.R.C. section 501(c)(3 limits charitable exemption to an organization organized and operated “exclusively for exempt purposes.” The organizational test, formulated in Treas. Reg. Section 1.501(c)(3)-1(b)(1), provides in relevant part:

(6) Organizational test.

(1) In general. (i) An organization is organized exclusively for one or more exempt purposes only if its articles of incorporation. . .(a) limit the purposes of such

organization to one or more exempt purposes. . .

i (iii) An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in section 501(c)(3). Thus, an organization that is empowered by its articles “to engage in a manufacturing business”, or “to engage in the operation of a social club” does not meet the organizational test regardless of the fact that its articles may state that such organization is created “for charitable purposes within the meaning of section 501 (c) (3) of the Code.” (iv) in no case shall an organization be considered organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in section 501(c ) (3). The fact that the actual operations of such an organization have been exclusively in furtherance of one or more exempt purposes shall not be sufficient to permit the organization to meet the organizational test. Similarly, such an organization will not meet the organizational test as a result of statements or other evidence that the members thereof intend to operate only in furtherance of one or more exempt purposes.

Issue 2. (‘The ”) failed to operate exclusively for exempt purposes as required by Internal Revenue Code ("Code") §501(c)(3) during the years under examination.

The Service has incorporated its position on Issue 2 into its responses to the taxpayer's correspondences, as shown below, and as requested by the taxpayer.

Issue 3. The was operated primarily for commercial purposes.

The Service has incorporated its position on Issue 3 into its responses to the taxpayer’s correspondences, as shown below, and as requested by the taxpayer.

Form 886-A (1-1994) Catalog Number 20810W Page 16 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

(Rew 886-4 EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number - Year/Period ended

20XX; 20XX;
20XX

Government Response to correspondence dated June 13, 20XX

2) Notinformed about educational requirements: The was informed of the educational requirements of Section 501 (c)(3) of the Internal Revenue Code.

i The . ‘s Newsletter No. 3 was included with the original Form 1023 application for exemption. The first paragraph of the newsletter stated the following description in part:
. is an educational organization which offers a creative and individualized approach to university level education.”

ii The original determination Letter 947 was issued based on information in the original Form 1023. The subsequent letter dated May 7, 20XX that recognized ’s change in its Articles of Incorporation notified that it should inform the Service of changes to its purposes and stated the continuance of exemption was based on the original application. In its original application for exemption stated that it would be a school and an educational institution. It would charge tuition, employ teachers and have a curriculum.

3) Definition of tax-exempt requirements for educational. __: The Service does not address a specific meaning in the Code for educational ; however, it does define “educational” as noted in Regulations §1.501(c)(3)-1.

i The is subject to Regulations §1.501(c)(3)-1 which define educational as (1) (i) In general. —The term “educational”, as used in section 501(c)(3) relates to

(a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or

(b) (b) The instruction of the public on subjects useful to the individual and beneficial to the community.

ii The federal law does not require organizations exempt for educational purposes to have a community or charitable component.

(a) Regulations §1.501(c)(3)-1(a) provides that in order to be exempt as an organization described in Code §501(c)(3), 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.

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

iii Article V of The original Article of Incorporation states that The would dedicate its assets to charitable and educational purposes within the meaning of the meaning of Internal Revenue Code section 501(c)(3) and The would not be able to truthfully make the statement in Article V if it did not know the meaning of the sections of the Internal Revenue and Codes.

Form 886-A (1-1994) Catalog Number 20810W Page —=17 ~_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

4) July 20XX proposed schedule of events: The proposed July 20XX educational program increased the regular schedule by 30.30 hours. The —==—s normal schedule is 22 hours per month. See chart below for total hours for July 20XX:

Jul-13 Mon Tues Wed Thurs Fri Sat Sun
Daily hours 6 4 4 4 4 0 0
Monthly dst 2nd 3rd 4th ~— Sth
hours week week week week week
July Hours:
52.3 0 2° 25.3 3 0

i Adding 30.3 hours of classes and workshops to its primary activity of offering lodging for payment 24 hours a day/7 days a week does not make the educational. For-profit hotels operate 24 hours a day/7 days a week and also add classes to their primary activity of offering lodging for payment. ,

ii For example: The 's website at , shows thatis a that is also located in

iii The Standard Spa in Miami Beach website, www.standardhotels.com/spa-miami-beach, shows that it offers many different yoga classes seven(7) days a week, three(3) or more hours per day. The Standard also customizes for groups and offers its own The Standard offers weekend , many types of yoga classes, and guided meditation. The : shows its teacher's biographies on its website. The Standard’s schedule for July 29 through August 4 shows about 35 hours of yoga classes for the week. In addition, they have a film series and other classes this same week.

iv Athird example: The in offers regular yoga classes and massage. The website, www. .com, advertises it as a_ . Children under 18 are not allowed and neither are pets.

5) Zoning as a : The assessor's parcel number 0 shows it is zoned as rural — agricultural on the County Assessor website at www. —_.org. The County of zoning map does not show specific zoning for . The has a conditional use permit to operate. The location and style of cottages on 0 acres appear as residential homes and fit in with the residential landscape it is located in. A different type of hotel or motel may not be allowed to operate in this location; however, County is allowing The to operate in a residential area as an establishment that provides lodging on a short term basis as hotels and motels do.

6) Designed as a : The stated its facility is designed and operated as a and not as a motel or hotel. A hotel is not required to have all of the same characteristics as to

Form 886-A (1-1994) Catalog Number 20810W —Page_—-18 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Ren 886-A EXPLANATIONS OF ITEMS

“Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

be comparable. Commercial enterprises each compete in the free market with their own version of a . Potential guests select lodging depending on individual tastes. The Service responds to The distinction below:

i Aquiet place surrounded by nature, simple rooms without TV, radio or telephone. Having a quiet place surrounded by nature, simple rooms without TV, radio or telephone does not distinguish the organization from for-profit hotels or motels. The is similar to the organization described in the court case - The Schoger Foundation v. Commissioner, 76 T.C. 380 (1981). In the Schoger Foundation v. Commissioner, supra, the court stated that “... just sitting on a rock contemplating nature may well provide a family or individual with a religious, or at least a spiritually uplifting experience, but it is difficult to see how that experience differs, if it does, from the same experience once can have at any quiet inn or lodge in ... the mountains ....”

ii A Quiet Room and library: Having a Quiet Room or library does not distinguish from hotels or motels.

(1) For example: The Library Hotel in New York City, shows on it’s website: www.libraryhotel.com, that it has thousands of books available for guests as well as a reading room, writer's den, and poetry garden. The reading room is open 24 hours a day. The Post Ranch previously mentioned also has a library.

(2) Another example: The Crowne Plaza Hotel’s website
http:/Awww.ihg.com/crowneplaza/hotels/us/en/global/exp/sleep_adv#scmisc=nav_sle ep_adv_cp_ shows that it has a Quiet Zone. The Crowne Plaza Hotel is in the city of

,. Guests can request a room in the Quiet Zone to relax or rest. In the Quiet Zone there will be no room attendant, housekeeping or engineering activities Sunday through to Thursday carried out from 9.00pm to 10.00am, unless specifically requested by a guest.

iii Conference Room with library: Having a conference room does not distinguish The from hotels or motels. Many hotels have conference rooms or outside facilities available to rent for any purpose, including educational events.

(1) For example: Crowne Plaza Hotel shows on its website: that it has ten meeting rooms available with ocean views.

(2) As mentioned above, hotels also have libraries.

iv Awaterfall garden and Outdoor Event Center: Having a waterfall garden and Outdoor Event Center with a stage does not distinguish from hotels or motels. Many hotels have gardens, including those hotels previously mentioned. Hotels also have outdoor event areas.

(a) For example: The -a for-profit hotel in , the same city as states the following on its website: “

| a

n

(2) Another example: The sister hotel of ____ mentioned above is . The website: /meeting-and-event-spaces.htm! shows that it has an outdoor event area. Like ' many hotels have outdoor event areas.

Form 886-A (1-1994) Catalog Number 20810W Page. (19 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

v The conference room and other rooms at are also available for a fee and

the contracts are drawn up in a for-profit, commercial manner much like those described in B.S.W. Group Inc. v. Commissioner, 70 T.C. 352 (1978). The provided sample rental agreements for the use its conference room; Quiet room; Waterfall and Gardens and Group Rentals. The sample agreements show basic fees, required security deposits; damage fees; set up and clean up fees and cancellation policies. Weddings are required to pay an additional flat fee depending on whether the party has 0 people or 0 people.

Government Response to correspondence dated June 16, 20XX

1) Welfare exemption: The received its original determination letter dated August 2, 19XX that approved its federal exemption. The approval for property tax exemption dated 4/24/20XX was after the date the Service approved The Form 1023 Application for Exemption. The requested the federal exemption letter as part of its process to determine that The was tax exempt from property taxes. The argument that used the approval for property tax exemption to determine whether it was in compliance with federal exemption is erroneous.

i The did not request a ruling on its change of activity from that which was presented on the original Form 1023 Application for Exemption.

ii There is a significant difference between charging tuition, employing teachers and having a curriculum for self-study courses at a university level as contrasted with offering lodging for payment to the general public as an individual

2) Events in 20XX: The submitted an events schedule that listed the names of 16 multi- cultural programs that it held in 20XX and a statement that it offered over 100 events that year.

The Service cannot determine how many hours the events covered, or whether the events

were primarily educational in a way that differs from for-profit hotels that also offer classes,

workshops, and events. The reports topics on cooperation with local business, the board and staff are not relevant to this discussion.

3) Nonprofit support: The listed seven (7) charitable organizations as a partial list of organizations that it has provided meeting space free of charge or at a 50% discount. The Service agrees that providing free or discounted meeting space to nonprofits is a charitable activity. However, whether these organizations contributed to the educational requirement significantly is not shown. It seems that each event may be a few hours long and not more than a few days each. Thus, providing facilities for educational events combined with other classes and workshops are not primary activities. Additionally, there are for-profit entities that offer free or discount space to charities.

i Forexample: The American Saddlebred Horse Association (ASHA) website, www.asha.net/,news shows that the Holiday Inn Express in Springfield, Illinois offers discount rooms for the Midwest Charity Horse Show.

ii Another example: Half-Price Books, a Dallas bookstore shows on their website, www.hpb.com that it offers free meeting space to nonprofit organizations in its community room.

Form 886-A (1-1994) Catalog Number 20810W Page 20 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

iii Another example: Clarkson Davis, a consulting firm and Caddo Holdings a real estate firm offer free meeting space in Lakewood Towers in Dallas Texas for nonprofits.

iv In Airlie Foundation v. Commissioner, it was clear that the plaintiff engaged in conduct of both a commercial and exempt nature, the question was whether the organization was entitled to tax-exempt status turned to whether its activities were conducted primarily for a commercial or for an exempt purposes.

4) Comparison of with hotels in national parks:

i Events for their guests and the community: The three hotels mentioned do not provide the same events as ; however, other hotels do have events.

i For example: The Standard Spa- High Line New York City shows on its website: http://standardhotels.com/high-line/meetings-events/the-high-line-room availability for many different events. (The Standard — Miami Beach mentioned above has events

similar to .)

ii The Hotel operates in ; , shows on its website that it offers:
. The mentioned some like activities in its event calendar.

iii How much events held at contribute towards its educational requirement is

important to determine if it operates primarily educational. ii Events organized by community groups: As shown above hotels offer conference and meeting rooms to anyone who wants to-use them. This includes community groups. i For example: The Visitors & Convention Bureau website, , States the following about meeting facilities: “

iii Yoga: As shown above for The Standard Miami Beach and _ hotels offer yoga. The Standard offers about 35 hours a week of yoga. offers free yoga six days a week. The offers 7.5 hours of yoga five days a week.

iv Conference room for events: As already shown, many hotels have conference rooms available for a variety of events. ;

v Aquiet room for meditation, reading and writing: The Library Hotel as previously mentioned has a reading room, writer's den, and poetry garden.

vi Aspiritual and educational library: The Library Hotel and previously mentioned both have libraries that include many types of books.

vii No Charitable component (supporting other non-profit organizations, providing work exchange programs, etc.): i As previously shown, some hotels offer discount rooms during charity events, such as

Holiday Inn Express for Midwest Charity Horse Show in Springfield, IL.

ii Jazz Hostels and Pink Hostels in New York City and Miami have a work exchange program for living accommodations.

(1) The difference between for-profit hotels and non-profit organizations is that non-profit organizations primarily engage in exempt activities. Hotels and motels engage primarily in commercial activities such as offering short term lodging for payment to the general public.

viii zoning: As shown above, The zoning is Rural-Agricultural. The County does not have zoning.

Department of the Treasury-Internat Revenue Service

Form 886-A (1-1994) Catalog Number 20810W — Page 2:1 publish.no.irs.gov

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

ix Quiet, peaceful place: The hotels mentioned offer their facilities for similar reasons as The

i For example: The Lake Yellowstone Hotel and Cabin
Website:http://Awww.usparklodging.com/yellowstone/lake_hotel.php, states that “radio, television, and Internet hook-ups are not available in order to accentuate the natural essence of Yellowstone.”

ii Additionally, The Wawona Hotel in Yosemite website:
http:/Awww. yosemitepark.com/wawona-hotel-lodging.aspx, states: “There are no telephones or televisions, allowing guests to completely escape and relax while on vacation.”

x As demonstrated above there are several for-profit entities that provide a similar “get-away” experience such as quietness, reflection, writing, reading, and learning. They are not

required to have exactly the same or all characteristics of The . However, The is required to not operate in a commercial manner as hotels and motels do.

xi The is operating like the organization in Airlie Foundation v. Commissioner by setting fees which are comparable to those of similar for-profits and by spending significant resources on publicity. The has not shown how its lodging sales are not commercial in nature.

xii_In Airlie Foundation v. Commission, The courts applied the operational test by relying on what has come to be termed the "commerciality" doctrine. In many instances, courts have found that, due to the "commercial" manner in which an organization conducts its activities, that organization is operated for nonexempt commercial purposes rather than for exempt purposes. Among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities; extent and degree of below cost services provided; pricing policies; and reasonableness of financial reserves. Additional factors include, whether the organization uses commercial promotional methods (e.g., advertising) and the extent to which the organization receives charitable donations. i As shown in the chart above ’, fee structure is in direct competition with local

hotels. ,

(1) The . primary source of revenue is from guest room rates. The primary expenses are to maintain the facilities and operation of for offering guest rooms as shown by expenses for types of employees, breakfasts, credit card processing fees, and property expenses.

ii The uses commercial promotional methods such as advertising on its website, other websites and printed brochures. iii The is like the organization in American Institute for Economic Research v. United

States It is obvious that the service offered by the organization is one commonly associated with a commercial enterprise. The subscribers received full value in exchange for their money.

Government Response to correspondence dated July 11, 20XX

1) “51% Clause” The states that when they sent in their change of name and orientation, they never heard anything about the “51% clause” and that they always followed all the rules they were informed about.

Form 886-A (1-1994) Catalog Number 20810W —Page_22 ~_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)

Schedule number or exhibit

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

i The original purpose of was to be a school as shown in the original Form 1023 application for exemption. The amended bylaws submitted to the Service with the 20XX Form 990 showed the purpose of The was to have group and individual

2)

3)

_ However, Part VI Other Information Question 76 Did the organization engage in any activity not previously reported to the IRS? was checked, “No.”

ii The Service issued a letter dated May 7, 20XX that recognized change in its Articles of Incorporation and notified The that it should inform the Service of changes fo its purposes and stated the continuance of exemption was based on the original application.

iii The did not inform the Service that its purposes had significantly changed from its original application. The did not request a ruling to determine whether they still qualified for exemption.

iv Organizations exempt from tax under section 501(c )(3) must be organized and operated - exclusively for one or more of the purposes specified in such section.

v_ Anorganization will be regarded as “operated exclusively” for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in Code §501(c)(3).

vi The Code does not have strict guidelines for interpreting the terms “exclusively”, “primarily” and “insubstantial”, however, there is practical guidance found in Treas. Reg. section 53.4942(b)-1(a)(2)(ii) that shows that more than 50% of total activities is considered “primary.” ;

vii The definition of Insubstantial is defined as less than 15%. This definition is defined as a derivative in terms of the 85% “substantially all” test shown in Treas. Reg. section 53.4942(b)-1(c). The held educational programs for 2% of the year and 7% of the daytime (8 hour day) hours of the year. However, using an eight hour day is not fair to for- profit entities, such as The Standard Miami Beach that offers 35 hours a week of yoga classes in additional to workshops and events.

viii The financial records show that 89% of income comes from individuals who pay for guest rooms. The employee hours and duties show that their primary efforts are also towards maintaining guest stays. _

ix Although operated at a loss, priced its rooms at comparable rates that competed with local hotels as shown above. Therefore, similarly to United Missionary Aviation, Inc. v. Commissioner, T.C.M. (CCH) 1990-566, The guest room lodging was operated in the same manner as any profitable commercial enterprise and similar rooms were available as those available commercial enterprises;

Grant for educational activities: Whether this receipt of a $0 grant will increase the educational

activities of to “operate exclusively” for exempt purposes is not determinable at this time.

Proposed use of the grant was not provided to The Service.

Planned /workshops: The ___.workshops/ and classes are merely

additional amenities instead of primary activities. As previously, noted for-profit hotels such as

The Standard also have and workshops as well as a significant amount of yoga class

hours each week which exceed those at

Government Response to correspondence dated July 15, 20XX

Form 886-A (1-1994) Catalog Number 20810W ——Page_23 ~_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;

20XX_.-

1) Definition of education: As stated above in our response to correspondence dated June 13, 20XX, The Service does not address a specific meaning in the Code for “educational : however, it does define educational as noted in Regulations §1.501(c)(3)-1. This Regulation is quoted above.

2) Samples of educational programs and examples of how education relates to tax-exempt status:

i Regulations §1.501(c)(3)-1

i (ii) Examples of educational organizations. —The following are examples of organizations which, if they otherwise meet the requirements of this section, are educational:

ii Example (1). An organization, such as a primary or secondary school, a college, or a professional or trade school, which has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on.

iii Example (2). An organization whose activities consist of presenting public discussion groups, forums, panels, lectures, or other similar programs. Such programs may be on radio or television.

3) Explanation of the 51% clause: As stated above, the appropriate text in Treas. Reg. section 53.4942(b)-1(a)(2)(ii) that shows that more than 50% of total activities is considered “primary.” The is open 24 hours a day/7 days a week as are for-profit hotels. The current schedule does not consider that for profit hotels offer similar and even more hours of classes and are not exempt from taxation. The states that rules are simple for a school but not so simple for an educational retreat center. Thus, should have notified the Service about its significant change in activity and requested a ruling to determine whether it still qualified for tax exempt status.

4) Welfare exemption: As shown above, the partially relied on the Federal exemption letter that was dated 8/2/19XX for its determination to grant welfare exemption in April 20XX. As discussed above, this federal exempt status letter was issued for the activity shown in the original application for exemption. The letter was not reliable for the change in activities that were not covered by the letter. Additionally, educational programs, relevance of community and charitable aspects, non-profit status, educational facility (conference room, library/Quiet Room, etc.), and zoning are examined against federal law for federal tax exemption.

5) Flow of people exceeds 50% of traffic: The advertises in a similar manner to a hotel; charges similar rates as hotels, and its income, expenses, and employee duties are similar to hotels. Income as well as these other factors are determining factors. In Living Faith, Inc. v. Commissioner, 950 F. 2d 365 (7th Cir. 1991) aff'g 70 T.C. 352 (1978), the court held that a vegetarian restaurant and health foods store was operated for substantial commercial purpose. The court examined the method of operations to infer the purposes. The organization operated in competition with commercial entities, charging competitive prices set by formulas common in the retail food business, and using commercial promotional methods. Like Living Faith is operated in competition with commercial entities and operates in a similar commercial manner. i In Better Business Bureau of Washington, D.C. Inc. v. United States, the court determined

that a single non-educational purpose, if substantial in nature will destroy the exemption

regardless of the number or importance of truly educational purposes.

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20XX

i The activity of providing lodging for payment is substantial as it occurs 24 hours a day/7 days a week.

ii Astay at is not educational. Guests are paying for lodging. Education is not the primary reason for guest stays.

6) As-previously stated, whether receipt of the $0 renewable annual grant will cause to increase educational activities so that they operate exclusively for exempt purposes is not determinable at this time. What proposes to use the grant for was not stated in taxpayer correspondence.

7) The differences the taxpayer listed between and hotels or motels are addressed below:

i Layout: As demonstrated above there are several for- profit hotels that have similar layout as with meeting rooms, quiet room, event centers, libraries, no TV and no telephones in rooms.

ii : Each hotel attracts a different type of guest depending on the accommodations, location and amenities these guests desire.

i. As demonstrated above there are several for-profit hotels that provide a similar “get-away” experience such as quietness, reflection, writing, reading, and learning. Some offer much a much larger library and more hours of classes than . Many hotels rent meeting rooms for all kinds of purposes. As demonstrated above, hotels and businesses offer discount meeting rooms to

nonprofits. They are not required to be exactly like the . The key factor is whether activities are primarily educational. iii Programs: According to payroll records the currently has one to three persons

working on grant writing and fundraising. Fundraising and grant writing are not educational activities; however, they do make educational activities possible. However, the majority of employees manage and maintain for the purpose of offering lodging.

Government Response to correspondence dated July 21, 20XX

In correspondence dated July 21, 20XX The sent a tentative schedule for educational programs for September, October, & November 20XX and asked for a review. The wants to know if the revised schedule meets the Service’s criteria.

The agent prepared the chart below of proposed educational hours and percentage of facility use and assumed an eight(8) hour day to give consideration to proposal. How many actual hours are included and whether each day is an eight(8) hour day was not stated in the taxpayer's correspondence.

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Schedule numbers or exhibit

Form 886-A
ee eee ot) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

The operates 24 hours a day/ 7 days

a week

Month Sept | Oct] Nov

Hours in one month (24 hrs x

30/31 days) 720 | 744} 720

Day hours in one month (8 hrs x

30/31 days) 240 | 264] 240

Proposed monthly

educational program hours if
8 hour day 150 | 157 | 176
Proposed percentage of day
hours 63% | 59% | 73%
Proposed percentage of month
hours 21% | 21% | 24%

As stated above, is operating 24 hours a day/7 days a week as other hotels. Therefore, may be primarily educational if guests primarily stayed at The as participants enrolled in educational courses, educational events, educational workshops or educational seminars that were held for at If guest stays at without enrolling in a program are insubstantial, the lodging revenue should be treated as unrelated business income.

Classes are offered, but are not mandatory to visitors. The adjustments to . schedule do not negate unfair competition to taxable entities that provide similar location, layout, experience, amenities and as many or more classes. The has no activities that can be deemed educational in nature for guests that would distinguish it or demonstrate an exclusively educational or charitable purpose. The operates in a manner consistent with a commercial business.

Likewise, as in United Missionary Aviation, Inc. v. Commissioner, the particular manner in which an organization's activities are conducted, the commercial hue of those activities, competition with commercial firms are all relevant evidence in determining whether an organization has a substantial nonexempt purpose. This Court and others have consistently held that an organization's purposes may be inferred from its manner of operations.

Government Response to Correspondence dated July 29, 20XX

in correspondence dated July 29, 20XX, The sent their schedule for educational programs for August 20XX and asked for a review. The wants to know if the revised schedule meets the Service's criteria.

The correspondence showed July 29 — August 20XX — 9 events that include three film showings/discussion; one fundraiser; and five teacher/speakers.

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Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

July 29 — August 20XX - None of the events appear to be longer than a few hours. Event hours are in addition to regular classes. Regular classes include yoga five days a week for 1.5 hours each day and a weekly dialogue for 2 hours a week. This is a total of 9.5 hours of regular classes.

Taxpayer’s Response to Government's Preliminary Report:

On October 24, 20XX, the examining agent issued a preliminary report proposing revocation of The exempt status under section 501(c)(3) for the tax years ended December 31, 20XX; December 31, 20XX, and December 31, 20XX.

The representative replied to The Service's preliminary report on January 16, 20XX with a 31 page letter and 119 pages of attachments. (See attached 31 page letter.)

The follow up response stated that satisfied the requirements for the organizational and operational tests of Treasury Regulations section 1.501(c )(3)-1(a)(1). The * representative also raised arguments that The activities further an exempt purpose and are fundamentally different from for-profit entities such as hotels and inns.

Government’s Rebuttal to Taxpayer’s Response:

The "response does not alter the Government's position.

1. Organizational Test

The is incorrect in stating that only the articles of incorporation are considered in meeting the organizational test.

The Tax Court has stated that original articles of incorporation are not the only evidence from which an organization’s exempt purposes might be determined. In Colorado State Chiropractic Society v. Commissioner, 93 T.C. 487, at 496 (1989), the Court stated, “Petitioner's original articles of incorporation are not the only evidence from which petitioner's purposes might be determined. Rather, petitioner's bylaws are also indicative of the ‘objects motivating’ petitioner and, therefore, must also be considered.”

The Court further stated:

The question of whether petitioner is organized exclusively for one or more exempt purposes is purely a factual inquiry. We could not judiciously decide such a factually intensive question if we were to myopically consider only petitioner's original articles of incorporation, to the exclusion of all other evidence relevant to the issue. As we have previously stated:

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Form 886-A
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It is well settled that:

The issue of "organized" * * * is primarily a question of fact not to be determined merely by an examination of the certificate of incorporation but by the actual objects motivating the organization and the subsequent conduct of the organization. Taxation With Representation v. United States, 585 F.2d 1219, 122 (4" Cir. 1978); Samuel Friedland Foundation v. United States, 144 F. Supp. 74, 85 (D. N.J. 1956). * * * [Peoples Translation Service v. Commissioner, 72 T.C. 42 48 (1979.]

The organization's purposes are determined when articles and enacted bylaws are read together. It is not permissible for bylaws to specifically allow an organization to engage in substantially nonexempt purposes. Thus, the Service maintains that the fails the organizational test because its bylaws allow it to devote more than an insubstantial part of its activities to purposes which are not in furtherance of an IRC section 501(c)(3) exempt purpose.

The examination is based on the bylaws in effect during the examination as shown in Form 886-A page 2; page 15; page 22 and page 27. As we previously discussed with your representative, amendments to bylaws made after the examination must be evaluated by the filing of anew Form 1023 Application for Recognition of Exemption under Section 501 (c)(3) of the Internal Revenue Code.

a. IRS Letter dated May 7, 20XX

The letter from the Service dated May 7, 20XX indicates that the Service acknowledged the name change shown in the organization’s Articles of Incorporation filed with the state on March 28, . 20XX. As a result of the Service’s examination of bylaws in effect during our examination, we have proposed revocation effective as of January 1, 20XX.

2. Operational Test

a. Goldsboro Art League, Inc. v. Commission of Internal Revenue, 75 T.C. 337 (1980) .

The cites Goldsboro Art League, Inc. v. Commission of Internal Revenue, 75 T.C. 337 (1980) for the proposition that the operational test focuses on the purpose and not on the nature of the activity. While Goldsboro does stand for that proposition, the court further stated, “Among the factors we consider in determining whether an organization is operated to further a substantial commercial purpose are the particular manner in which an organization's activities are conducted, the commercial hue of these activities, and the existence and amount of profit from these - activities.” [citing roup, Inc. missioner, 70 T.C. 352 (1978

in Goldsboro, the organization operated two art galleries which exhibited and sold artworks without a written contract in a county where there were no other galleries or similar facilities in competition with it. Conversely, is in competition with other for profit establishments as

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evidenced by its own advertisements and monitoring of its reviews on travel websites. (Exhibit 1 shows the 's letter to the Chamber of Commerce to protest not being included in the Visitor's Guide under “places to stay” and the , subsequent ad.) Additionally, the letterhead The used for its letter to the Chamber is different than that used in its ad. The

described itself as “ A non-profit corporation 501(c)(3)” to the Chamber in its correspondence. However, in its ads described itself as “ \" (See Exhibit 1 and Exhibit 2.) Nothing in the ad would attract guests to the for educational purposes. This is the same way described itself on its website.

The is unlike Goldsboro, in which the purpose of the art gallery and art market was primarily to foster community awareness and appreciation of contemporary artists. It also provided a constant flow of art for students to study art and painting techniques. The fact that there were no other art museums or galleries in the area and that works were chosen for representation of modern trends, not salability, significantly influenced the court to conclude the petitioner's purpose was primarily to educate rather than to sell. Conversely, the board of director discussions on occupancy rates in comparison with other local entities, profi it and loss discussions, and commercial advertising, and emphasis on gaining market share of the industry show that

had a substantial nonexempt purpose.

Excerpts from Board Reports, set forth below, demonstrate the commercial manner in which The was operated.

“2, We are still late with some bills, but it seems that we should be okay by the end of the month. The reservations are clearly picking up even nationwide (according to our marketing expert, .” Email from to Board Feb 13, 20XX Item 2.

“7. Guestroom prices: we moved them slightly up (for March and April): $0 in average for weekdays and $0 in average for weekends. See prices now with “9”, and there is a room

for all price ranges from $0 to $0. “Email from to Board Feb 13, 20XxX Item 7. “11. Trip Advisor: we have moved up in rank from No. 4 to No. 3.” Email from to

Board Apr 01, 20XX Item 11.

“4. Occupancy Rate April 23 — May 31, 85%"
“Occupancy Rate June 1 - 4(weekdays): 95%”
“Occupancy Rate June 1 — 30(as projected): 75% (will increase).” Email from to Board Jun 06, 20XX Item 4.

“44. National rating: all guest comment websites combined (TripAdvisor, Yelp, Travel.com,

etc) we are No. 0 in the category of similar sized places in and No 0 in the category of all places in (independent of size). This includes the . On Trip Advisor alone, however, we are No. 0 (but very close to 0).” Email from to

Board July 31, 20XX Item 14

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Form 886-A EXPLANATIONS OF ITEMS

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

Excerpts from Board Meeting Minutes, set forth below, also demonstrate the commercial manner in which was operated.

“An eco friendly spa will generate more income and can be used for multiple purposes such

as special events, weddings, etc. It was decided by the board that all room rates can be

raised for the use of the spa. If special events are planned, guests will be notified for the

time period that the spa is in use for a special event.” Board Minutes dated Feb 2, 20XX re: Project- Last paragraph page 1 and first paragraph on page 2

“6. Various Items: ... reported that the online Trip Advisor service rates the as
#0 in popularity among B&Bs in ( is #0). At this point in time, has 0 total guest reviews on this site of which 0 are rated excellent and 0 are rated very good (there are no average, poor or terrible ratings). and staff work diligently each day of the week to provide the best experience possible. Their efforts are paying off handsomely.” Board Minutes dated July 6, 20XX Item 6.

“We went over the April occupancy, is way above average for , and the industry in general. We agreed occupancy should be April 1-30, not till May 1, and that it should be this way from now on, i.e. from the first day till the last day of that month.”

‘P&L statement- $0 was a record high ($0 was added in due to a bookkeeping error)” Board Minutes dated May 3, 20XX

“6. Finances”

“a) Occupancy rate May 20XX = 77.9%"

“b) P/L = it was negative (apprx. $0) due to extremely high and unusual expenses.” Board Minutes dated June 9, 20XX

“June Profit — Income was $0 with an 87% occupancy rate and a profit of $0.” Board Minutes dated July 7, 20XX

“Jan — June 20XX average $7,000 monthly profit compared to 20XX which was $1,000 loss each month.” Board Minutes dated July 7, 20XX

“3) The Overall Balance Sheet and improvement of the Profit and Loss Overview for January 1 to June 30, 20XX was explained by ‘ he showed that the average monthly profit was $0 — a great improvement over 20XX, 20XX, and all previous years before the remodeling was undertaken and finally completed about July 20XX.”

“4) Strategies for improving the financial condition of for the rest of 20XX were suggested and analyzed as follows:”

“a) Focusing on attracting guests between the weekends;”

“b) Gradually, increasing some room rates while leaving a couple of inexpensive ones;”

“c) Taking a second look at internet booking companies like Expedia, Orbitz, and Priceline;” “d) Continue to transfer as many bills as possible to “level pay plans”

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Name of taxpayer Tax Identification Number Year/Period ended

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20XX
“e) Sell “Memberships” in , a 501 (c)(3) non-profit, and offer appropriate “rewards” for

various levels of contributions;”

“f) Continue to have fundraising events for the General and Reserve Funds as well as for the Development Fund, half of which would go back into the Reserve Fund;”

“e) Making a yearly appeal for donations and hiring a professional fundraiser who should or should not be a member of the National Fundraising Foundation and abide by its guidelines.” Board Minutes dated August 10, 20XX

“2) The current financial condition of the was reviewed by Director

and he noted that a record higher occupancy rate in April and prepayments by some guests for future stays helped with two major payments in April...” Board Minutes dated April 29, 20XX

“5, GRANT WRITING PROJECTS: b) A grant writing committee has been created. The Board requests that priority be given to grants that pay for operating expenses and/or general maintenance expenses (mainly for the gardens).” Board Minutes dated June 5, 20XX

“6. OVERALL FINANCIAL SITUATION: Even though the occupancy rate is increasing (82.5% in May), there is a monthly shortfall of approx. $0. - due to a high mortgage interest rate. is in the process of applying for a better rate with several banks.” Board Minutes dated June 5, 20XX

(See Exhibit 3 for details of the board reports and meeting minute discussions from 20XX through 20XX. Also included in Exhibit 3 are The newsletters from 20XX that show substantial promotion of the as, “The Place to Stay ” rather than primarily as an educational center.)

b. Forest Press, Inc. v. Commissioner of Internal Revenue, 22 T.C. 265 (1954)

The | relies on Forest Press, Inc. v. Commissioner of Internal Revenue, and states that “as long as the corporation was created to further an exempt purpose and its activities are consistent with that purpose, it is irrelevant that other for-profit enterprises engage in the same activity.”

In Forest Press, the Tax Court determined that an organization “devoted to developing and propagating the use of the Dewey Decimal Classification System and Related Index” was a charitable organization. Forest Press' primary activity was the ongoing development of the system, which required continuous revision. To this end, Forest Press regularly employed an editor-in-chief and four editorial assistants and an additional two to three editorial assistants as publication dates approached. By the time Forest Press was formed, the System had “been adopted by more than 90 percent of the libraries in the United States to classify and index their collections” and was “in

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use in 42 countries.” Thus, the court concluded that the System was “an important aid to education and research and not a commercial enterprise.”

In Forest Press, the organization did not fix prices with any intent to make a profit over and above the expenses involved in the corporation and publishing the system. Additionally, the organization in the Forest Press case did not advertise its publications in the conventional sense. The organization's creation as well as the activities it engaged in was for educational purposes. This is not true of the .. The board reports and meeting minutes show that the board regularly monitored its position in the industry and was in competition with other inns for guest room occupancy. The board also made adjustments in guest room rates to maximize profitability. (See Exhibit 2 for sample advertising and Exhibit 3 board meeting minutes.)

As shown above and in Form 886-A pages 15 and 16, the examination determined that

fails the organizational test due to nonexempt purposes included in its bylaws. Unlike Forest, was not created to further an exempt purpose. Additionally, __ activities are inconsistent

with a charitable purpose. Instead they show a substantial nonexempt purpose.

c. Educational Programs

In Exhibit 6 of its reply to the Service, submitted a list of programs that were offered to its overnight guests and the community at large from January 14, 20XX — December 31, 20XX.

The stated that it averaged 26 educational programs per month. This average is inaccurate as it does not include the 20XX examination year which only offered approximately 200 hours of educational programs for the entire year. The list also includes scheduling changes made after the examination ensued. Since is open 24 hours a day/7 days a week, hours are a more accurate measurement of activities as noted on Form 886-A page 17.

Likewise, even if the agent counted all of activities in 20XX as charitable, literary, or educational, the total is still insignificant in comparison to its promotion and maintenance of its lodging activity. Additionally, subsequent changes to _ calendar and whether the organization offers a significant amount of charitable programs were previously discussed with

_ representative. The representative was referred to Rulings and Agreements to file a new Form 1023 Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.

d. Overnight Accommodations Relative to Educational Programs

The stated that overnight guests stay at the because they have come to the for an educational or literary purpose. The listed the number of persons it believes attended educational programs compared to overnight stays. The does not have a breakdown of the number of overnight guests versus local attendees at various events held at the

Additionally, the advertising as an Inn, the proximity and similarities to other for-profit hotels, the

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Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Tdentification Number Year/Period ended 20XX; 20XX; 20XX emphasis on competing for travelers’ accommodations, and the intent to make a profit, contradict The statement that overnight guests come for educational or literary purposes.

e. Peoples Translation Service/Newsfront International v. Commissioner of Internal Revenue, 72 T.C. 42 (1979)

The refers to Peoples Translation Service to support its argument that, while on the surface the entity's activities were conducted in an ordinary commercial manner, the operation was not sufficiently like a commercial! enterprise because there was no intent to make a profit. The facts in the Peoples case are distinguishable from the facts in the instant case. For example, the Peoples court's determination was based on publication services below cost. Conversely,

specifically considered its pricing to make a profit and priced its guest rooms competitively as shown on Form 886-A page 7 and Exhibit 3. The “potential” for a substantial profit driving operations and organization are good enough to show a nonexempt purpose. See Copyright Clearance Center, Inc. v. Commissioner, 79 T.C. 798, 807-808 (1982). Moreover, in Peoples, the organization spent an insignificant amount on advertising even in comparison to its small budget and the organization did not engage in practices associated with commercial publishing. Conversely, as shown in Form 886-A page five, The spent significant amounts on advertising. Advertising costs were: $0 in 20XX; $0 in 20XX; and $0 in 20XX. Further, objected to its exclusion from the Visitor's Guide to . Instead, it wrote a complaint letter to the Chamber asking to be included and advertised in the Guide as * .” Additionally, intended to raise room rates after adding a spa and pool, as shown in its meeting minutes. Adding a pool and spa would also increase comparability to the local hotels and inns that also had a pool and spa. Additionally, the has surcharges for cancellations and increased its room rates during peak area events such as during the .

These charges are above cost. (See Exhibit 4, the terms and policies.)

g. Percent of Expenses

The states that the Service should allocate wage expense by designating employee upkeep of facilities that directly support educational programs. The lists the outdoor event venues; conference room; three libraries; and a Quiet Room and states that these facilities directly support educational programs. However, all of these areas are open to anyone who stays at The not just those who come for events or programs. As previously stated in Form 886-A page 6 The

had approximately 200 hours of educational programs during 20XX, the first examination year. Adjusting wages for this amount of hours in comparison to total wage hours of 11,000 hours (rounded) is insignificant and unwarranted.

The states that its teachers are for the most part volunteers, however, the primary teachers at were paid directly by class participants. The yoga and massage teachers were the primary teachers during the examination years, as they taught weekly classes for about 7.5 hours a week. The teachers usually paid the = -—-—~°‘% of the fees collected from participants. As shown in Form 886-A pages 4-5, had verbal payment agreements with its yoga and massage teachers.

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h. Advertising

The argues that it is listed as a member of Chamber of Commerce as a and does not dictate categories it is advertised in. However, during the examination year

the wrote a letter to Chamber of Commerce that argued that it should be included in the Visitors Bureau website, under “Places to Stay” (See Exhibit 1.) This letter was subsequently followed by a contract to advertise in the Visitor's Guide (See Exhibit 2 for a copy of the advertising submitted to the Chamber by )

i. Comparisons to Other Organizations

The Service concedes that the County does specifically define“ .” The has stated that the Service did not compare the to any other entity that fits the definition of a

. However, the Service reiterates that its comparisons to for-profit lodging entities and in Form 886-A was at the request of _. . The stated that other for-profit lodgings ~ did not have the same or similar amenities that it specifically identified in its correspondence. Thus, the Service comparisons answer the __ inquiry and show that is not unique in the~ areas it proposed in its correspondence.

The has suggested the Service review the websites of three organizations that it considers similar to The and which hold 501(c)(3) recognition of exemption. These websites are for:

' Institute , and Educational Center. The Service reviewed these websites and a significant difference is that all three organization's websites emphasize workshops/programs more than lodging. The website emphasizes a certain philosophy and encourages lodging for inquiry into this philosophy. The website clearly emphasizes its workshops and boasts 600 workshops and programs per year. Lodging is offered primarily to those who first find a workshop they wish to attend. The website shows that it has specific dates for personal however, no personal dates were available when the Service accessed its website. The Educational Center has several large group events during the year and a staff of educators. It also customizes . Individual lodging seems to be incidental if at all, as the majority of its accommodations are for large groups.

The new information presented in the _ ‘response on pages 14 through page 31 is primarily based on changes the has made or plans to make subsequent to the audit. The

amended its bylaws, is revising its website to emphasize educational programs more than guest rooms; and revised its calendar subsequent to the examination. The Service previously notified

. the _. representative that changes to structure should be evaluated by Rulings and
: Agreements by following formal procedures. Formal procedures entail completing Form 1023 Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code and submitting it to Rulings and Agreements for evaluation.

The proposed revocation of The ____ exempt status applies to its organization and operation in the examination years of 20XX through 20XX. The Service’s position is based on

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activities during the exam years, not subsequent changes made after the examination and future intentions. .

j. Schoger Foundation v. Commissioner of Internal Revenue, 76 T.C. 380 (1980)

The states that it differs significantly from Schoger Foundation because it offers overnight accommodations incidental to offering a forum for group education, libraries and quiet space for study. The Service disagrees and concludes that as it advertised, The boasts itself as a “real get away from it all.” The _. Operations as a for profit inn or bed and breakfast are a substantial nonexempt purpose. Like Schoger, it is difficult to see how the experience at differed, if it did, from the same experience one can have at any quiet inn or lodge in beautiful surroundings.

During the examination, the Service received permission from to take pictures. The agent took photographs of the libraries on grounds on June 13, 20XX. One photograph shows one bookcase, which is the local author's library. The second photograph partially shows the Quiet Room that included three bookcases consisting of the spiritual and educational library. (See Exhibit 5 for photographs of the bookshelves.) The exaggerates the library component.

~ Additionally, participation in educational events was incidental. At , guests could participate in yoga, massage, Quiet Room, gardens, and occasional events. However, primarily emphasized its quiet and beautiful location and serene atmosphere as reasons to stay at the location.

The relies on est of Hawaii, Inc. v. Commissioner, 71 T.C. 1067 (1979) and concludes that “an organization may engage in trade or business as long as its operation furthers an exempt purpose and its primary objective is not a production of profits and provided it serves a public rather than a private interest.” The Service takes the position that promotion, reservation, and maintenance of its guest rooms for overnight guests is a substantial disqualifying nonexempt purpose. As stated in Copyright Clearance Center, Inc. v. Commissioner, 79 T.C. 793, 804 (1982):

*** It is nevertheless plain that the word “exclusively” places a definite limit on the “purpose” at issue. And that limit has been clearly articulated by the Supreme Court in Better Business Bureau v. United States, 326 U.S. 279 (1945), as follows (p. 283):

the presence of a single [nonexempt] * * * purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [exempt] * * * purposes.
[Emphasis supplied.]

We are, of course, aware that in some cases the test has been restated in terms of “whether an organization's primary purpose is exempt or nonexempt.” (Emphasis supplied.)

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(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended 20XX; 20XX; 20XX

See est of Hawaii, Inc. v. Commissioner, 71 T.C. 1067, 1079 (1979), affd. 647 F.2d 170 (9th Cir. 1981); cf. B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 357 n.2 (1978). However, regardless of whether any real differences may be thought to exist between these two formulations, we are obviously bound by the Supreme Court's authoritative exposition, and will proceed to consider whether, in the language of the Supreme Court, there is present here a disqualifying nonexempt purpose that is “substantial in nature.”

Conclusion:

The response to The Service’s preliminary report does not alter the government's position. The Service maintains that should be revoked of its exempt status under Code §501(c)(3).

The tax exemption should be revoked because Treas. Reg. section 1.501(c)(3)-1(a)

provides that in order to be exempt as an organization described in Code §501(c)(3), 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.

The was not organized for an exempt purpose under its current bylaws. The is not operating exclusively for an exempt purpose under IRC section §501(c)(3). The primary activity is offering short term lodging to the public for payment in a way that is similar to commercial enterprises. This activity should not be treated as unrelated business income because the activity is substantial. By operating in the manner described, is furthering a substantial nonexempt purpose.

Form 886-A (1-1994) Catalog Number 20810W Page 36 publish.no.irs.gov Department of the Treasury-Internal Revenue Service