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 Exemption was revoked effective January 1 of the redacted year, contributions ceased to be deductible after that date, and the organization was required to file taxable corporate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.

Form 886-A (1-1994) Catalog Number 20810W Page 24 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

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.

Form 886-A (1-1994) Catalog Number 20810W —Page_-25 ~—_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

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.

Form 886-A (1-1994) Catalog Number 20810W Page 26 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

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:

Form 886-A (1-1994) Catalog Number 20810W —Page_27 _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

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

Form 886-A (1-1994) Catalog Number 20810W — Page_28 _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
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

Form 886-A (1-1994) Catalog Number 20810W Page 29 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

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”

Form 886-A. (1-1994) Catalog Number 20810W —Page_30 _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
“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

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

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

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

Form 886-A (i-1994) Catalog Number 20810W — Page_32 ~_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 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.

Form 886-A (1-1994) Catalog Number 20810W — Page__ 33 ~_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

(Re 886-4 EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX; 20XX;
20XX

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

Form 886-A (1-1994) Catalog Number 20810W Page 34 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

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.)

Form 886-A (1-1994) Catalog Number 20810W —Page__-35 _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

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