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PLR 202321005

Religious, Charitable, etc., Institutions and Community Chest

Official textIRS Written Determinations (PLR · TAM · CCA)irs.gov
Summarize

# Issue

Schedule number or exhibit
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Year/Period ended Whether exempt status under IRC section 501 (c)(3) should be revoked on the grounds that it is operating for a substantial non-exempt purpose, operating a for-profit

# Facts

The exempt organization, was founded on , in the is a corporation under the laws of the . The organization was recognized as an exempt organization under Internal Revenue Code Section 501 (c)(3) on with effective date of , as per Internal Revenue Service's records. The current address of the organization is According to the organization's Articles of Incorporation, the organization is organized exclusively for the charitable purposes, more specifically to
Exempt Organization's Activities:
The Summary of Narrative Description of Activities on Form 1023 Application for Recognition of Exemption Under Section 501 (c)(3) of Internal Revenue Code. (See Exhibit 1 and 2 for detail) • The organization's activities described by the founder/executive director during the field examination on
• As stated by the executive director during the initial interview, the organization operates with a centralized purpose of organizing awareness events and presentations for local businesses, schools, and other facilities about
• The organization also provide training for to assist with the . The training is provided via a
• The organization partners with other organizations to provide funds for food and shelter.
• The organization educates the general public including youth to Catalog Number 2081 OW Page_1_ www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Schedule number or exhibit Year/Period ended
• The organization rents out a portion of the facility to other organizations and local businesses to host awareness events.
• Operates in which some of the proceeds from the sale are donated to exempt organizations.
• Sales of merchandizes made by The main activities identified during the field examination was the sales of from and other vendors. There was also income from the rental of the space by other organizations for events.
The profit is open to the general public to sell days a week, ( ), and The exempt organization's hours of operation are stated below:
• Monday to Friday: AM - PM
• Sunday: AM - PM
The employees of the in and were not similar to a forper the founder/executive director. Therefore, the organization was not providing employment opportunities for as stated on the organization's Form 1023.
The hours of operation of the annually are hours, in which hours in , and hours were spent related to the exempt activities. It was stated that most of the exempt activities were moved to virtual due to COVID-19 in but there were no supporting documents provided to verify that. (See Exhibit 3 and 4).
The tour of the facility revealed the organization is operating as a similar to a for-profit . The exempt activities appear not to be the main focus of the organization. The activities that are in furtherance of the exempt purpose are not conducted as regularly as the sales and other profit producing activities, and the proceeds from the profit producing activities are put back into the budget of the to pay expenses for operation of the facility.
Analysis of the exempt organization's books and records reveals that the majority of the organization's income is from the sales, apart from the donations from individuals and corporations.
The proceed from the goes to purchasing supplies.
The exempt organization's fund goes to paying the salaries and other benefits to the employees that are not Catalog Number 2081 OW PageL www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Schedule number or exhibit Year/Period ended The minutes of Board of Directors reviewed for the years under examination also revealed the main objectives of the organization, is to increase the sales of the merchandize, salaries, benefits of the founder/executive director, other employees, and to reduce cost in order to make profit. (See Exhibit 5).
The organization was granted an exemption on the fact that the organization will provide in-house training programs and employment opportunities for . It will provide support to enable to them to reintegrate back into society. These programs include counseling, childcare for employees, tutoring, group therapy sessions, job training, GED classes, resume writing and financial mentoring. It will operate a in which it will provide in-house training programs and employment opportunities for . The examination of the organization revealed that:
• The organization appears to have a small percentage of actual assistance to victim of , the emphasis is on operating the and obtaining profits from the sales.
• The program is the main method of exempt purpose activity and is not the full-time focus of the organization. The organization did not provide any documentation or records to support that they are operating a program to during the year and
• Also, the organization had no records of assisting , no programs to reintroduce them into society as stated in the application in any form. The only assistance was donations to other assistors.
• The newsletters and the seminars assist the knowledge and awareness, but more help needs to be provided to the actual victims since the purpose is to assist the victims.
• Per the organization's minutes of meetings, the menu of the was enhanced with to increase the profit of the organization.
• The internal controls of the organization are not adequate, founder/executive director was in charge of opening the organization's mail, making deposits, writes and signs the checks.
Internal Revenue Code (IRC) Section 501 (c)(3) exempts from Federal income tax corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.
Catalog Number 20810W PageL www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
Schedule number or exhibit
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Year/Period ended Treasury. Regulation Section 1.501 (c)(3)-1 (d)(i) states that an organization may be exempt as an organization described in 501 (c)(3) if it is organized and operated exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals.
Treas. Reg. 1.501 (c)(3)-1 (a)(1) of the regulations provides that in order to be exempt as an organization described in section 501 (c)(3) of the Code, the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section.
Treas. Reg. 1.501 (c)(3)-1 (c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501 (c)(3).
IRC Section 501 (c)(3), an organization which is organized and operated exclusively for an exempt purpose (and meets the other requirements of the provision) qualifies as a tax-exempt organization. In order for an organization to be exempt from Federal income taxes under Section 501 (a) and (c)(3), it must satisfy both the organizational and operational tests of Section 1.501 (c)(3)-1 (b) and 1.501 (c)(3)-1 (c), Income Tax Regs.
In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court of the United States interpreted the requirement in Section 501 (c)(3) that an organization be "operated exclusively" by indicating that an organization must be devoted to exempt purposes exclusively. This plainly means that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number and importance of truly exempt purposes.
In Fides Publishers Assoc. v. United States, 263 F. Supp. 924 (1967), the government retroactively revoked the taxpayer's exempt status, concluding that, for the previous five years, the taxpayer was engaged primarily, if not solely, in publishing activities. The court noted that, to qualify for Section 501 (c)(3) exemption, the taxpayer must be "organized and operated exclusively for" an exempt purpose. The court rejected the taxpayer's argument that, rather than its primary activity, the court should focus on the end to which that activity was taken, namely, religious education. The court pointed out that the taxpayer's sole activity and purpose was the carrying on of the publishing trade and held that the taxpayer's purpose, rather than its goals, were the focus of Section 501 (c)(3).
In Living Faith Inc. v. Commissioner, T.C. Memo 1990-484, aff'd950 F. 2d 365 (7th Cir. 1991), the court said that the activities were conducted as a business and the organization was in direct competition with other restaurants and health food stores; thus, it did not qualify for exemption under Section 501 (c)(3). The appellate court stated the factors that the court relied upon to find commerciality and thus offered the best contemporary explanation of the commerciality doctrine.
These factors include:
Catalog Number 2081 OW Page.A_ www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits)
1. The organization sold goods and services to the public.
2. The organization was in direct competition with for profit businesses.
Schedule number or exhibit
Year/Period ended
3. The prices set by the organization were based upon pricing formulas common in retail food businesses.
4. The organization utilized promotional material and "commercial catch phrases" to enhance sales.
5. The organization advertised its services and food.
6. The organization did not receive any charitable contributions.
In Airlie Found. v. IRS, 283 F. Supp. 2d 58 (D.D.C. 2003), the court laid out the factors for determining whether an organization's activity is of a commercial nature. It said:
"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."
The court also decreed that the organization derived substantial income from business entities that rented the facility, but that the center did not provide services at substantially below cost to other Section 501 (c)(3) organizations nor did it show that the facility was used by organizations to promote educations with the meaning of Section 501 (c)(3).
In Federation Pharmacy Services, Inc. v. Commissioner, 625 F.2d 804 (8th Cir. 1980) aff'g 72 T.C.
687 (1979), the appellate court held that a pharmacy was not exempt as a charitable organization because it was operated for the substantial commercial purpose of selling prescription drugs to the public. Although it provided special discounts for handicapped and senior citizens, it did not provide any drugs below cost or free to indigent persons. Therefore, although its services did improve health in the area, it was primarily a commercial venture operated in competition with other area pharmacies.
TAXPAYER'S POSITION:
The taxpayer's position on the issue is unknown at this time.
Governments Position:
IRC 501 (c)(3) requires an organization to be both "organized" and "operated" exclusively for one or more IRC 501 (c)(3) purposes. If the organization fails either the organizational test or the operational test, it doesn't qualify for exemption under IRC section 501 (c)(3) (See Treas. Reg.
Catalog Number 2081 OW Page__L www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
Schedule number or exhibit
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Year/Period ended 1.501 (c)(3)-1 (a)(1 )). The operational test applies to the organization's activities and how it furthers exempt purposes.
An organization will be regarded as operated exclusively for exempt purposes only if it engages primarily in activities which accomplish one or more of the following exempt purposes: religious, charitable, scientific, testing for public safety, literary, educational, fostering national or international sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), prevention of cruelty to children or animals (See Treas. Reg. 1.501 (c)(3)-1 (d)).
An organization won't meet the operational test if:
• More than an insubstantial part of its activities isn't in furtherance of an exempt purpose.
See Treas. Reg. 1.501 (c)(3)-1 (c)(1 ).
• Its net earnings inure in whole or in part to the benefit of private shareholders or individuals, furthering private (rather than public) interests. See Treas. Reg. 1.501 (c)(3)-1 (c)(2).
• A substantial part of an organization's activities is attempting to influence legislation by its direct contact, or in urging the public to contact members or employees of a legislative body to propose, advocate and support for the adoption or the rejection of legislation and it is regarded as an "action" organization. See Treas. Reg. 1.501 (c)(3)- 1 (c)(3). For more detail, see Special Rules Related to Lobbying Activities.
Treas. Reg. Section 1.501 (c)(3)-1 (e)(1) provides that an organization may meet the requirements of Section 501 (c)(3) even though it operates a trade or business as a substantial part of its activities unless its primary purpose is carrying on of a trade or business that does not further charitable purposes. Based on the tables listed below, primary purpose was carrying on a trade or business which does not further charitable purposes, because it was operated for the substantial commercial purpose of selling to the public. The time spent on the activities unrelated to the exempt purpose was substantial, the income generated from activities unrelated to the exempt purpose was substantial and the expenses related to the activities unrelated to the exempt purpose was substantial.
Tax Year Time Spent on Time Spent on Activities Percentage of time spent Ending Exempt Activities unrelated to the exempt purpose on activities unrelated to ( ooeratina the ) the exemot ouroose hours hours % hours hours % Tax Year Income from Income from Activities unrelated Percentage of income from Ending Exempt Activities to the exempt purpose activities unrelated to the ( ooeratina the ) exemot ouroose $ $ % $ $ % Catalog Number 2081 OW Page..§_ www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
Tax Year
Ending
Expenses related to Exempt
Activities
$
$
Schedule number or exhibit
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Year/Period ended Expenses related to Activities Percentage of expenses unrelated to the exempt purpose related to activities ( operating the ) unrelated to the exempt purpose $ % $ % The tour of the facility during the examination shows that the exempt organization was not just selling to the public as stated on the organization Form 1023 but also selling to the public just like for profit organizations. The menu of the was enhanced with to increase the profit of the organization per the meeting minutes. The paid employees of the exempt organization in the years under examinations are not survivors of as stated on the Form 1023 during the determination process. The organization is not operating as a charitable organization because it was operated for the substantial commercial purposes of selling to the public, see Federation Pharmacy Services, Inc. v. Commissioner, 625 F.2d 804 (8th Cir. 1980) aff'g 72 T.C. 687 (1979), The was in direct competition with other for-profit and operated primarily as a commercial business, therefore it does not qualify for exemption under IRC Section 501 (c)(3).
See In Living Faith Inc. v. Commissioner, T.C. Memo 1990-484, aff'd 950 F. 2d 365 (7th Cir.
1991 ).

# Conclusion

You are not operated exclusively for charitable, religious, or educational purposes consistent with Section 501 (c)(3) of the Code and Treas. Reg. Section 1.501 (c)(3)-1 (d)(1 )(i) and therefore fail to meet the operational test under Treas. Reg. Section 1.501 (c)(3)-1 (b)(4). Specifically, the facts above indicate that you are not operated for exempt purposes but that you are operated in a commercial manner.
Per Treas. Reg. Section 1.501 (c)(3)-1 (c)(1 ), you are not operated exclusively for one or more exempt purposes because you do not engage primarily in activities that accomplish one or more of such exempt purposes specified in Section 501 (c)(3). Under this Treasury Regulation, an organization will not be regarded as exempt if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Catalog Number 2081 OW Page.1_ www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits)
Alternative Position, if the proposed revocation is not sustained
Unrelated Business Income (UBI}

# Issue

Schedule number or exhibit
Year/Period ended
1. Whether the Exempt Organization (EO) is subject to IRC section 511 tax on Unrelated Business Income from the income it received from the activities.
2. Whether Failure to File IRC 6651 (a)(1) and Failure to Pay IRC Section 6651 (a)(2) applies to the unrelated business income.

# Facts

The Facts of the case remain the same as stated above.
IRC Section 512(a)(1) defines the term "unrelated business taxable income" as gross income derived by any organization from any unrelated trade or business regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with certain modifications.
Section 1.513-1 (a) of the Federal Tax Regulations provides that unless one of the specific exceptions of section 512 or 513 is applicable, gross income of an exempt organization subject to the tax imposed by section 511 is includible in the computation of unrelated business taxable income if (1) it is income from trade or business, (2) such trade or business is regularly carried on by the organization, and (3) the conduct of such trade or business is not substantially related (other than through the production of funds) to the organization's performance of its exempt functions.
Treas. Reg. 1.512(a)-1 (a) provides that in general, except as otherwise provided in Section 1.512(a)-3, Section 1.512(a)-4, or paragraph (f) of this section, Code Section 512(a)(1) defines "unrelated business taxable income" as the gross income derived from any unrelated trade or business regularly carried on, less those deductions allowed by chapter 1 of the Code which are directly connected with the carrying on of such trade or business, subject to certain modifications referred to in Treas. Reg. Section 1.512(b)-1. To be deductible in computing unrelated business taxable income, therefore, expenses, depreciation, and similar items not only must qualify as deductions allowed by chapter 1 of the Code, but also must be directly connected with the carrying on of unrelated trade or business. Except as provided in paragraph (d)(2) of this section, to be "directly connected with" the conduct of unrelated business for purposes of Code Section 512, an Catalog Number 2081 OW Page_§_ www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Schedule number or exhibit Year/Period ended item of deduction must have proximate and primary relationship to the carrying on of that business.
Treas. Reg. Section 1.512(a)-1(b) provides that expenses, depreciation, and similar items attributable solely to the conduct of unrelated business activities are proximately and primarily related to that business activity, and therefore qualify for deduction to the extent that they meet the requirements of Code Section 162, Code Section 167, or other relevant provisions of the Code.
Thus, for example, salaries of personnel employed full-time in carrying on unrelated business activities are directly connected with the conduct of that activity and are deductible in computing unrelated business taxable income if they otherwise qualify for deduction under the requirements of Code Section 162. Similarly, depreciation of a building used entirely in the conduct of unrelated business activities would be an allowable deduction to the extent otherwise permitted by Code Section 167.
Treas. Reg. 1.512(a)-1 (c) discusses dual use of facilities or personnel. Where facilities are used both to carry on exempt activities and to conduct unrelated trade or business activities, expenses, depreciation, and similar items attributable to such facilities (as, for example, items of overhead) shall be allocated between the two uses on a reasonable basis. Similarly, where personnel are used both to carry on exempt activities and to conduct unrelated trade or business activities, expenses, and similar items attributable to such personnel (as, for example, items of salary) shall be allocated between the two uses on a reasonable basis. The portion of any such item so allocated to the unrelated trade or business activity is proximately and primarily related to that business activity and shall be allowable as a deduction in computing unrelated business taxable income in the manner and to the extent permitted by Code Section 162, Code Section 167 or other relevant provisions of the Code. Thus, for example, assume that X, an exempt organization subject to the provisions of Code Section 511, pays its president a salary of $20,000 a year. X derives gross income from the conduct of unrelated trade or business activities. The president devotes approximately 10 percent of his time during the year to the unrelated business activity.
For purposes of computing X's unrelated business taxable income, a deduction of $2,000 (10 percent of $20,000) would be allowable for the salary paid to its president.
IRC Section 162, trade or business expenses shall be allowed as a deduction all ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business including.
IRC Section 162 (a)(1) a reasonable allowance for salaries or other compensation for personal services actually rendered.
In Iowa State University of Science and Technology v. United States, 500 F.2d 508 (Ct. Cl. 1974), the Court of Claims held that an educational institution could not offset expenses from a university's nonprofit radio station against the unrelated business income from a university's nonprofit radio station against the unrelated business income from its for-profit television station.
In its opinion, the court stated that "a nonprofit endeavor, even if operated by a profit-making concern, does not constitute a trade or business for the purpose of deduction of expenses under Code Section 162," supra at 521.
Catalog Number 2081 OW PageJL www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Schedule number or exhibit Year/Period ended In Portland Golf Club v. Commissioner, supra, at 2787, the court held that deductions claimed by a Code Section 501 (c)(7) club were allowable, if at all, only under Code Section 162. Since the court had previously ruled that a taxpayer's activities fall within the scope of Code Section 162 only if an intent to profit has been shown, the court found that expenses will be deductible only if the income producing the activity was performed with an intent to profit.
In Rensselaer Polytechnic Institute v. Commissioner, 732 F. 2d 1058 (2d Cir. 1984), the court held that whether or not a method of allocating expenses is a reasonable one is a factual determination.
Penalties:
Understatement Penalty
Internal Revenue Code Section 6651 (a) Addition to The Tax In case of failure Internal Revenue Code Section 6651 (a)(1) Failure to file any return required under authority of subchapter A of chapter 61 (other than part Ill thereof), subchapter A of chapter 51 (relating to distilled spirits, wines, and beer), or of subchapter A of chapter 52 (relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), or of subchapter A of chapter 53 (relating to machine guns and certain other firearms), on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate;
Internal Revenue Code Section 6651 (a)(2) To pay the amount shown as tax on any return specified in paragraph (1) on or before the date prescribed for payment of such tax (determined with regard to any extension of time for payment), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate; or Internal Revenue Code Section 6651 (a)(3) To pay any amount in respect of any tax required to be shown on a return specified in paragraph

(1) which is not so shown (including an assessment made pursuant to section 6213(b)) within 21 calendar days from the date of notice and demand therefor (10 business days if the amount for which such notice and demand is made equals or exceeds $100,000), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the Catalog Number 2081 OW Page...1.Q_ www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Schedule number or exhibit Year/Period ended amount of tax stated in such notice and demand 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.
Internal Revenue Code Section 6662(a) of the Code provides that if this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20% of the portion of the underpayment to which this section applies.
Internal Revenue Code Section 6662(b) of the Code identifies the portion of underpayment to which the section applies as attributable to, among others, negligence or disregard of rules or regulations, and any substantial understatement of income tax.
Internal Revenue Code Section 6662(c) of the Code defines "negligence" as any failure to make a reasonable attempt to comply with the provisions of this title, and the term "disregard" as any careless, reckless, or intentional disregard.
Internal Revenue Code Section 6662(d) of the Code provides there is a substantial understatement of income tax for any taxable year when the amount of the tax understated exceeds the greater of 10 percent of the tax required to be shown on the return for taxable year, or $5,000.
Internal Revenue Code Section 1.6662-2(c) of the Regulations provides the maximum accuracyrelated penalty imposed on a portion of an underpayment may not exceed 20 percent of such portion (40 percent of the portion attributable to a gross valuation misstatement), notwithstanding that such portion is attributable to more than one of the types of misconduct described in paragraph (a) of this section. For example, if a portion of an underpayment of tax required to be shown on a return is attributable both to negligence and a substantial understatement of income tax, the maximum accuracy-related penalty is 20 percent of such portion. Similarly, the maximum accuracy-related penalty imposed on any portion of an underpayment that is attributable both to negligence and a gross valuation misstatement is 40 percent of such portion.
Internal Revenue Code Section 1.6662-3(b)(1) of the Regulations provides that the term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. Negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit or exclusion on a return which would seem to a reasonable and prudent person to be "too good to be true" under the circumstances.
Internal Revenue Code Section 1.6662-3(b)(2) of the Regulations provides that the term "disregard of the rules or regulations" includes any careless, reckless, or intentional disregard of the provisions of the Internal Revenue Code, temporary or final Treasury regulations issued under the Code, and revenue rulings or notices issued by the IRS and published in the Internal Revenue Bulletin. A disregard of rules or regulations is "careless" if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. A disregard is "reckless" if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances that demonstrate a substantial deviation from the Catalog Number 2081 OW Page...11. www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
Schedule number or exhibit
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Year/Period ended standard of conduct that a reasonable person would observe. A disregard is "intentional" if the taxpayer knows of the rule or regulation that is disregarded. Nevertheless, a taxpayer who takes a position contrary to a revenue ruling or a notice has not disregarded the ruling or notice if the contrary position has a realistic possibility of being sustained on its merits.
Treasury Reg. 1.6664-4 provides for Reasonable cause and good faith exception to section 6662 penalties.
Governments Position:
Section 513(a) of the Code defines the term 'unrelated trade or business' as any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of the purpose or function constituting the basis for its exemption under section 501 of the Code.
Organizations exempt from Federal income taxes under Section 501 (c)(3) may operate trades or businesses which further their exempt purpose, but organizations are not operated for their exempt purposes if their primary activity is carrying on a business with the general public in a manner similar to organizations operated for profit. If they operate trades or businesses which are unrelated to their exempt purposes aside from the need for the profits therefrom, they are subject to tax on income on their unrelated taxable income from such unrelated trades or business under Section 511 The operation of the without any victims of as employees only serves as a source of income for the organization. Also, the organization sold items created by vendors and non- vendors, with no emphasis on the vendors as a selling point.
"Unrelated business taxable income" is "the gross income derived by any organization from any unrelated trade or business ... regularly carried on by it," subject to certain allowable deductions.
Section 512(a)(1 ).
Exempt Organizations are subject to the unrelated business income tax, and must submit the Form 990-T, Exempt Organization Business Income Tax Return, for each taxable year they have gross unrelated taxable income of $1000 or more.
Allocation of Expenses:
According to Treasury Regulations Section 1.512(a)-1 (a), only expenses directly connected with the carrying on of the unrelated trade or business and which is attributable solely to the conduct of unrelated business activities that are proximately and primarily related to that business activity, Catalog Number 2081 OW Page_R www.irs.gov Form 886-A (Rev. 5-2017) Form 886-A
(Rev. May 2017)
Name of taxpayer
Schedule number or exhibit
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Year/Period ended qualify as a deduction. Operation of for-profit and are separate activities from the organization's exempt activities and are an unrelated business subject to unrelated business income tax. The expenses that are related to both activities (i.e., rent of the facility, utilities, etc.) must be allocated between the two using a reasonable allocation method, per Treasury Regulations Section 1.512(a)-1 (c).
According to Treasury Regulation Section 1.512(a)-1 (f)(6)(i), the time allocation method accurately reflects the salaries, wages, and contract labor expenses, however, the time allocation method is not a reasonable method for allocating the rent, utilities, maintenance and repair, and other expenses. The gross receipts method reasonably reflects each activity use of the space.
Therefore, the gross receipts allocation method is a reasonable method to allocate the rent, utilities, maintenance and repair, and other expenses.
We have used the gross-to-gross receipt method to allocate the expenses that are related to both exempt activities and . We have determined that the gross-to-gross receipt allocation method was reasonable in this situation for the years ended , and . The method was used to compute the ordinary and necessary expenses by dividing the total gross receipts by the total receipts (total contributions and receipts), which produced the ratio of % for the tax year ended , and % for the tax year . The expenses were allocated to the exempt activities and the operation of the . Please see Exhibit 6,7, and 8 for the allocation of expenses between the exempt activities and the expenses.

# Conclusion

If the revocation is not sustained, we have the alternative position to assess unrelated business income tax on the income from the sale of The Unrelated Business Taxable Income is subject to IRC 511 at the tax rate stated in IRC 11 as %. conducted activities subject to UBI and the taxes and penalties for calendar year and are stated below:
Summary of taxes, penalties, and interest Balance Due/Taxes Failure to File - IRC 6651 (a)(1) Failure to Pay - IRC 6651 (a)(2) Interest Tax Deficiency and Penalties Subject to Adjusted Interest Rate $ $ $ $ TBD Catalog Number 2081 OW Page_Ll_ www.irs.gov $ $ $ TBD $ Form 886-A (Rev. 5-2017)
Form886-A
(Rev. May 2017)
Name of taxpayer
Schedule number or exhibit
EXPLANATIONS OF ITEMS
Tax Identification Number (Last 4 digits) Year/Period ended We have prepared Form 4945 and exhibits to unrelated business income tax for the periods other penalties: provide detailed deductions in assessing the , and Interest to be calculated at the date of payment by Service Center.
Catalog Number 2081 OW Page--11_ www.irs.gov Form 886-A (Rev. 5-2017)

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  3. plr-202321015 · Homeowners Association
  4. plr-202321014 · Social Clubs
  5. plr-202321013 · Religious, Charitable, etc., Institutions and Community…
  6. plr-202321012 · Religious, Charitable, etc., Institutions and Community…
  7. plr-202321011 · Religious, Charitable, etc., Institutions and Community…
  8. plr-202321010 · Religious, Charitable, etc., Institutions and Community…
  9. plr-202321009 · Religious, Charitable, etc., Institutions and Community…
  10. plr-202321008 · Religious, Charitable, etc., Institutions and Community…
  11. plr-202321007 · Religious, Charitable, etc., Institutions and Community…
  12. plr-202321006 · Religious, Charitable, etc., Institutions and Community…
  13. plr-202321005 · Religious, Charitable, etc., Institutions and Community…
  14. plr-202321004 · Extension of Time for Making Certain Elections
  15. plr-202321003 · Extension of Time for Making Certain Elections
  16. plr-202321002 · Inadvertent Terminations
  17. plr-202321001 · Section 442; Accounting Periods
  18. plr-202320005 · Other
  19. plr-202320004 · Other
  20. plr-202320003 · Section 754; Manner of Electing Optional Adjustment to…
  21. plr-202320002 · Section 442; Accounting Periods
  22. plr-202320001 · R and D Expenditures
  23. plr-202319025 · Religious, Charitable, etc., Institutions and Community…
  24. plr-202319024 · Social Clubs
  25. plr-202319023 · Civic Leagues and Social Welfare Groups (See Also…
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