DocketNumber： Docket No. 46959-86X.
Filed Date： 10/19/1989
Status： Non-Precedential
Modified Date： 11/21/2020
P is a charitable trust created to provide assistance to the needy aged of Washington State. The Commissioner determined that P was a private foundation and not a supporting organization as defined in
MEMORANDUM OPINION
CLAPP,
The case was submitted upon the basis of the pleadings and the facts recited in the administrative record, which are assumed to be true for the purposes of this opinion. See Rules 122(a) and 217. Petitioner filed its Form 1023, Application for Recognition of Exemption (Form 1023), with the district office of the Internal Revenue Service in Seattle, Washington.
Petitioner was established on or about January 1, 1983, and was funded with a $10 donation from Raymond O. and Evelyn A. Sawyer (Sawyers), who have provided in their wills that their estate of approximately $1 million will pass to the trust upon their deaths. Copies of the Sawyers' wills are not in the record. Since 1983, no additional funds have been donated. In addition to the expectancy under the Sawyers' wills, petitioner, if it receives its
Petitioner's creators and trustees at all times relevant to this case were the Sawyers, Stan A. Long, an accountant, and Maggie Ellis, then the annual president-elect of the Washington Community Action *581 Agencies (WCAA). The WCAA is a consortium of salaried state agency executive directors who administer the daily needs of the Washington area charities, although not exclusively those which represent the needy aged. The annual president-elect of the WCAA will act as a trustee for the Roe Foundation. An attorney, Stephen Hansen, was listed as a trustee on the Form 1023 dated January 19, 1983, but unlike the other designated trustees, his signature does not appear on the trust instrument. Moreover, he was not listed as a trustee on the later submitted Form 1023 dated December 19, 1984.
The trust instrument provides in pertinent part that it is organized solely for charitable purposes and on its Form 1023 describes that its intended activity is "to supply funds, aid and assistance to aged persons who are poor and distressed and who are residents of the State of Washington," and that the funds, aid, and assistance will be given based on referrals from churches, senior citizens groups, and the WCAA. Petitioner's trust instrument authorizes the following distributions of principal and income:
Third: A. The principal and income of all property received and accepted by the trustees to *582 be administered under this Declaration of Trust shall be held in trust by them, and the trustees may make payments or distributions from income to or for the use of such charitable organizations, within the meaning of that term as defined in paragraph C, in such amounts and for such charitable purposes of the trust as the trustees shall from time to time select and determine; and the trustees may make payments or distributions from income directly for such charitable purposes, within the meaning of that term as defined in paragraph D, in such amounts as the trustees shall from time to time select and determine without making use of any other charitable organization. No part of the net earnings of this trust shall inure or be payable to or for the benefit of any private shareholder or individual, and no substantial part of the activities of this trust shall be the carrying on of propaganda, or otherwise attempting to influence legislation. No part of the activities of this trust shall be the participation in, or intervention in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.
* * *
C. In this Declaration *583 of Trust and in any amendments to it, references to "charitable organizations" or "charitable organization" mean corporations, trusts, funds, foundations, or community chests created or organized in the State of Washington, organized and operated exclusively for charitable purposes, no part of the net earnings of which inures or is payable to or for the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which do not participate in or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office. It is intended that the organization described in this paragraph C shall be entitled to exemption from Federal income tax under
The trust provides that any trustee may resign his office, but that the number of trustees may not fall below three. A trustee may, by written instrument, delegate all or part of his powers to another trustee for any period and subject to conditions determined by the *584 delegating trustee. On January 19, 1983, petitioner filed with respondent a Form 1023 requesting recognition of exemption from Federal income taxes under
On April 30, 1983, respondent discontinued consideration of petitioner's January 19, 1983, exemption application without making a determination because of petitioner's failure to provide adequate information and otherwise exhaust administrative remedies. On December 19, 1984, petitioner resubmitted an undated and unsigned Form 1023 again requesting exemption under
You fail to meet
You fail to meet
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Petitioner then brought this action under section 7428 for a declaratory judgment. The sole issue is whether petitioner is an organization described in
All
In order to qualify as a supporting organization an entity must meet all of three requirements. First,
Petitioner concedes it is not "operated, supervised, or controlled by" WCAA within the meaning of
Under this relationship test, there must be common supervision or control by the persons supervising or controlling both the supporting organization and the publicly supported *591 organization. This is generally established by the control or management of each organization being vested in the same persons. "In such a situation, the supporting and publicly supported organizations are compared to brother and sister organizations subject to common control. Sec. 1.509(a)-4(h)."
Respondent argues that the record fails to show who the persons are that control or manage the purported publicly supported organizations or that these persons are the same persons who control or manage petitioner. Respondent contends that petitioner has failed to establish in the record (1) who controls or manages the WCAA executive directors, (2) what relationship that organization has to the WCAA which petitioner purports to support, and (3) whether petitioner's trustees also control or manage these supported organizations.
Petitioner states that this special relationship exists pursuant to the regulation because the president-elect of the WCAA, whose agencies the foundation is assisting, will serve on petitioner's board of trustees. Petitioner contends that the Roe Foundation first made its intentions known to the State's Community *592 Action Agencies almost 6 years ago when the trust was organized and Maggie Ellis, the then president-elect of the agency's executive board, became a trustee. Petitioner continues that the trust will assist the State of Washington to aid its needy aged by donating funds to the state agencies who administer these programs and are funded by the state, and that Maggie Ellis' willingness to serve as a trustee, who will have full voting power on all matters, is sufficient to create a common supervision or control.
We do not believe that petitioner's relationship with the WCAA constitutes the type of common supervision or control envisioned by section 1.509(a)-4(f)(2)(ii) and (a)-4(h), Income Tax Regs. The regulations specifically state that in the case of a supporting organization which is "supervised or controlled in connection with" the "distinguishing feature is the presence of common supervision or control among the governing bodies of all organizations involved, such as the presence of common directors."
The Roe Foundation's relationship to WCAA falls short of the close relationship necessary to meet this test. This conclusion is highlighted by an example provided in the regulations. In Example (1), a philanthropist who has founded a school set up a trust into which he transferred all of the operating assets of the school, together with a substantial endowment for it. Under the trust, the same persons who control and manage the school also control and manage the trust. Under the circumstances, the trust is organized and operated for the *594 benefit of the school and is "supervised or controlled in connection" with such organization under
1.
The "responsiveness test" is designed to insure that the supported organization will have the ability to influence the activities of the supporting organization. The "responsiveness test" can be met by one of two alternative methods.
The first method of satisfying the responsiveness test is set out in
(
(
(
Once one or more of the arrangements have been shown, petitioner must demonstrate that by reason of such arrangement the officers, directors, or trustees of the publicly supported organization have a "significant voice in the investment policies of the supporting organization, the timing of grants, the manner of making them * * * and in otherwise directing the use of the income or assets of such supporting organization." See sec. 1.509-4(i)(2)(ii)(d). The word "significant" means "likely to have influence," not control. See
The alterative method of satisfying the *597 "responsiveness test" provided by
(a) The supporting organization is a charitable trust under State law;
(b) Each specified publicly supported organization is a named beneficiary under such charitable trust's governing instrument; and
(c) The beneficiary organization has the power to enforce the trust and compel accounting under State law.
Petitioner does not satisfy the first alternative to the responsiveness test. Although petitioner in its governing body includes the president-elect of the WCAA, the record fails to specify the exact role she will play in the foundation's policy making or in the selection of recipients of grants from the Roe Foundation. Petitioner has failed to indicate how the WCAA trustee will have a "significant" voice in any of the trust's activities and, in particular, in petitioner's investment policies or in directing the use of its income. In its application for exemption, petitioner states that "funds, aid, and assistance to aged, poor and distressed persons will be given based on referrals from churches, senior citizens groups, and the Washington Community Action Agencies." It thus appears *598 the WCAA publicly supported organizations will provide only some of the referrals, but the ultimate decision of who receives the aid and how much aid will be made by petitioner's trustees, only one of whom directly represents the interests of the publicly supported organizations.
The record clearly illustrates this fact. The president-elect of the WCAA has only one out of a possible four votes. Petitioner alleges that there are five trustees, the fifth presumably being an attorney, Steve Hansen, such that the Sawyers will not have two of the four votes and not control the decision making of the trust. Petitioner's later Form 1023, however, fails to validate this as it omits Steve Hansen as a trustee. Moreover, his name does not appear on the trust document. In any case, the focus is not on whether the Sawyers have control but whether the supporting organization's representatives are "likely to have influence." Under the facts presented, we think not. Additionally, the trust fails to safeguard the WCAA's role in the trust's decision making activities. The fifth paragraph of petitioner's trust instrument specifically allows one of the four trustees to resign without the appointment *599 of a new trustee, as long as petitioner has at least three trustees. Nowhere does the trust condition that a WCAA representative must always serve as a trustee. Thus, a time may come when no public charity individual is active on the trust committee. The facts on this record do not illustrate that the WCAA trustee has and will continue to have a significant voice in the foundation affairs.
Petitioner fails to satisfy the second alternative of the "responsiveness test." Although petitioner is a charitable trust under Washington State law, the second and third requirements of
Petitioner argues that it meets the second alternative of the "responsiveness test" because the State of Washington is the named beneficiary, and the state *600 has the power to enforce the trust through the state's attorney general. Petitioner argues that a broad reading of this section is necessary since the requirements of this section are met "when the language of the governing instrument is sufficiently unambiguous to leave no doubt as to the supported organization intended to be benefitted," citing
In
In
In granting scholarships to the graduating class of the public high schools, the trust is benefiting individual members of the charitable class benefited by the city [a sec. 170(c)(1) organization] through its public school system. Thus, the requirement of section 1.509(a)-4(e) of the regulations that the supporting organization be operated exclusively to support or benefit one or more publicity *602 supported organizations is also satisfied.
If, pursuant to the "operational test" of
Under
We also determined that under the relevant state law, the trustees would be accountable to the local district court and required to make detailed annual report to the court, which would become part of the public record. The records could be examined by the school district in the event of default by the trustees.
We do not, however, find that the "responsiveness test" is met in the instant case. By stating that the Roe Foundation trust will make payments to "charitable organizations" defined as "corporations, trusts, funds, foundations, or community chests created or organized in the State of Washington, organized and operated exclusively for charitable purposes," it fails to include as a named beneficiary any specified publicly supported organization. The State of Washington is not a properly named beneficiary because it leaves doubt as to the precise supported organizations intended to be benefitted. The fact that Washington State is a section 170(c)(1) organization does not remedy this defect. This section requires a showing that the supported organizations will have the ability to influence petitioners. To *604 simply state that the WCAA and the State of Washington are one and the same for purposes of the "responsiveness test," goes beyond the "broad reading of the section" required under the case law. In each of the cited cases, a specific school and a specific graduating class were listed and the intended beneficiary. In this case, there are not enough facts to determine the intended beneficiaries. Had petitioner specifically named the WCAA in the trust instrument, it is still unclear whether this would strengthen petitioner's position. The record gives no indication whether the WCAA is a publicly supported organization or just the coordinator of the organizations which are publicly supported.
2.
(iii)(a) The supporting organization makes payments of substantially all of its income to or for the use of one or more publicly supported organizations, and the amount of support *606 received by one or more of such publicly supported organizations, is sufficient to insure the attentiveness of such organizations to the operations of the supporting organization. In addition, a substantial amount of the total support of the supporting organization must go to those publicly supported organizations which meet the attentiveness requirement * * *.
All pertinent factors must be considered in determining whether the amount of support received by the publicly supported beneficiary organizations is sufficient to insure the attentiveness of such organizations to the operation of the supporting organization. These factors include the number of beneficiaries, the length and nature of the relationship, and the purpose to which the funds are put. Generally, the attentiveness of a beneficiary organization is motivated by reason of the amounts received from the supporting organization. The more substantial the amount involved as a percentage of the supported organization's total support, the greater the likelihood that the required degree of attentiveness is present.
The first alternative of the "integral part test" clearly is not satisfied since petitioner has not demonstrated it is engaged in any activities or is performing any functions that,
Next, petitioner argues it satisfies the second alternative. In order to establish that this second alternative of the "integral part test" is satisfied, the organization must demonstrate that (1) it has income and earnings available for support, (2) the amount of support it provides to each beneficiary organization, and (3) the amount of total support received by each beneficiary organization.
Respondent argues that the record in this case fails to establish any of these facts. The sum total of the financial information submitted by petitioner during the administrative process which started on January 19, 1983, shortly after petitioner was organized, and ended on September 10, 1986, the date of the final adverse determination, is as follows: (1) that the total income received by petitioner to the date of the determination was $10, which amount was received from its trustees and organizers, the Sawyers, at the time of the organization of the *609 trust; (2) that funds for support may come from earnings of assets which the Sawyers may eventually (but had not yet at the time of determination) transfer to the trust in an amount which could approximate $1 million; (3) that petitioner anticipated public support during the first 2 years of operations "may well amount to $50,000 or more," when in fact it has shown petitioner had only $10 of support during this 2-year period; and (4) that petitioner's "expected figures" of public support may "well be as high as $50,000 per year" initially and "as much as $120,000 eventually."
Respondent points out that petitioner consistently has not provided any detailed financial information requested by respondent during the administrative process. Thus, the record contains no indication of where these projections come from, how they were determined, or how petitioner expects to achieve such optimistic results.
Petitioner argues that --
It is ludicrous to label a million dollar trust fund as incapable of producing at least a
None of the requirements of this test have been established by petitioner. Nowhere in the record are copies of the Sawyers' wills, and petitioner contends elsewhere in the record that the $50,000 is to be received by virtue of public donation, not return on investment. Petitioner is totally contradictory in its contentions. It has not been demonstrated it makes payments of substantially all of its income to the publicly supported organizations or that it will have the income to make any payments at any time in the near future. Petitioner's argument that respondent can always audit it in the future to ascertain whether it operates in compliance with the
The organizations which have met the "integral part test" have all involved situations where an actual trust had been created and funds actually expended for charitable causes. For example, in
For the reasons stated, petitioner fails the "integral part test" just as it fails the "responsiveness test." We conclude that petitioner was not "operated in connection with one or more publicly supported organizations," within the contemplation of
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩
2. Petitioner has satisfied the prerequisites for this declaratory judgment. See section 7428(b)(1)-(3). See also Rule 210(c).
3.
(a) GENERAL RULE. -- For purposes of this title, the term "private foundation" means a domestic or foreign organization described in
(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii));
(2) an organization which --
(A) normally receives more than one-third of its support in each taxable year from any combination of --
(i) gifts, grants, contributions, or membership fees, and
(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year,
from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and
(B) normally receives not more than one-third of its support in each taxable year from the sum of --
(i) gross investment income (as defined in subsection (e)) and
(ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511;
(3) an organization which --
(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2),
(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and
(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organization described in paragraph (1) or (2) * * *.↩
4.
5.
(h) Meaning of "supervised or controlled in connection with". (1) In order for a supporting organization to be "supervised or controlled in connection with" one or more publicly supported organizations, there must be common supervision or control by the persons supervising or controlling both the supporting organization and the publicly supported organizations to insure that the supporting organization will be responsive to the needs and requirements of the publicly supported organizations. Therefore, in order to meet such requirement, the control or management of the supporting organization must be vested in the same persons that control or manage the publicly supported organizations.