T.C. Memo. 1999-165
UNITED STATES TAX COURT
TATE FAMILY FOUNDATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23092-96X. Filed May 17, 1999.
William J. Tully (an officer), for petitioner.
Kirk M. Paxson, for respondent.
MEMORANDUM OPINION
LARO, Judge: Petitioner petitioned the Court to declare
whether petitioner qualifies for exempt status under section
501(c)(3). See sec. 7428. The parties dispute whether
petitioner meets the operational test of section 1.501(c)(3)-1,
Income Tax Regs. We hold it does not. Unless otherwise stated,
- 2 -
section references are to the applicable versions of the Internal
Revenue Code. Rule references are to the Tax Court Rules of
Practice and Procedure.
Background
We decide this case on the basis of the entire
administrative record, see Rule 217(b)(1), which is incorporated
herein by this reference. Petitioner's mailing address was in
Ontario, California, when its petition was filed.
William J. Tully is a promoter of tax-exempt entities.
Michael D. Tate and his wife, Sylvia A. Goesele Tate
(collectively, the Tates), attended a seminar presented by Mr.
Tully and retained him to organize a tax-exempt family foundation
for them. Mr. Tully organized a corporation named "Tate Family
Foundation" (petitioner herein). Petitioner's officers are Mr.
Tully (vice president), Mr. Tate (president and treasurer), Ms.
Goesele Tate (secretary), James O. Goethe (vice president), Karl
H. Goesele (chief financial adviser), and Ann Villanueva (vice
president). Karl H. Goesele is Ms. Goesele Tate's father, Ann
Villanueva is Mr. Tate's mother, and James O. Goethe is a cousin
of the Tates. Most, if not all, of petitioner's officers also
serve as directors on its board.
Mr. Tully filed articles of incorporation for petitioner
with the Nevada secretary of state, and he prepared bylaws for
petitioner. The articles state that petitioner's primary purpose
- 3 -
is "TO PROVIDE FINANCIAL ASSISTANCE TO THE NEEDY"; petitioner's
submissions to the Commissioner indicate it intended to provide
this assistance through financial aid grants. The bylaws state
that petitioner's primary purpose is that set forth in the
articles. The bylaws further state that "Nothing herein
contained shall be construed to prevent any Director from
receiving compensation for services to the Corporation rendered
in a capacity other than Director."
On November 4, 1993, petitioner filed with the Commissioner
a Form 1023, Application for Recognition of Exemption Under
Section 501(c)(3) of the Internal Revenue Code (application), in
which it sought recognition as a tax-exempt entity. The
application reported that petitioner's activities were:
(1) Supplying money, goods or services to the poor, (2) providing
services for the aged, and (3) providing aid to the handicapped.
The information that petitioner provided to the Commissioner on
and with the application was vague as to the specifics of these
activities. The application indicated that petitioner had not
currently begun any activity, except for organizational
activities. As to sources of financial support, the application
stated:
At the present time this organization does not have any
procedure for the generation of income other than * * *
* * * * * * *
- 4 -
(a) Direct donations from the general
public at large,
(b) Larger sums from various fund
raising activities,
(c) A possible "thrift store" type
operation, and
(d) Donations of property (both
personal and real) which can be
turned into cash, and
(e) Various others as may be
recommended and implemented by the
organization.
On January 20, 1994, the Commissioner mailed petitioner a
letter seeking clarification of the information that it had
provided him on and with the application. The letter specified
the information that the Commissioner needed to rule on
petitioner's request for exempt status and listed the name and
phone number of a person at the Internal Revenue Service to
contact with any questions. The letter stated: "We can only
recognize you as exempt in advance of operations if you are able
to describe your proposed operations in sufficient detail to
enable us to determine that you will be organized and operated in
accordance with section 501(c)(3) of the Code."
On April 7, 1994, the Commissioner received a response to
his letter. The response, which was written by Mr. Tully in his
capacity as petitioner's vice president, gave vague answers to
the questions set forth in the Commissioner's letter and did not
explain in detail petitioner's proposed activities or operation.
- 5 -
On August 2, 1994, the Commissioner mailed petitioner
another letter seeking specificity as to petitioner's
organization, activities, and operation. The letter explained
that the Commissioner needed specific information before he could
rule that petitioner was exempt from taxation under section
501(c)(3). The letter, citing and quoting Rev. Proc. 90-27, sec.
5.02, 1990-1 C.B. 514, 515, stated that
"Exempt status will be recognized in advance of
operations if proposed operations can be described in
sufficient detail to permit a conclusion that the
organization will clearly meet the particular
requirements of the section under which exemption is
claimed. A mere restatement of purposes or a statement
that proposed activities will be in furtherance of such
purposes will not satisfy this requirement. The
organization must fully describe the activities in
which it expects to engage, including the standards,
criteria, procedures or other means adopted or planned
for carrying out the activities, the anticipated
sources of receipts, and the nature of contemplated
expenditures. Where the organization cannot
demonstrate to the satisfaction of the Service that its
proposed activities will be exempt, a record of actual
operations may be required before a ruling or
determination letter will be issued. * * *" [Emphasis
added in the letter.]
The letter asked for specific information that the Commissioner
needed to rule on petitioner's request for exemption and listed
the name and phone number of the person at the Internal Revenue
Service to contact with any questions.
By way of an undated letter to the Commissioner, petitioner
responded to the Commissioner's letter of August 2, 1994. This
response was no more informative than the prior response as to
- 6 -
the specifics of petitioner's organization, activities, or
operation. The latest response repeated many of the statements
set forth on the prior response.
On December 13, 1994, the Commissioner issued to petitioner
a 30-day letter reflecting the Commissioner's determination that
petitioner did not qualify under section 501(c)(3) because it
failed the operational test of section 1.501(c)(3)-1(c), Income
Tax Regs. Approximately 1 month later, Mr. Tully, in his
capacity as petitioner's vice president, notified the
Commissioner that petitioner was appealing that determination,
and approximately 6 months after that, Mr. Tully met with one of
the Commissioner's Appeals officers to discuss petitioner's case.
Shortly after this meeting, petitioner filed with the
Commissioner an amended Form 1023. As amended, petitioner's Form
1023 stated that
the primary purpose of the foundation, as stated in its
oroginal [sic] application for exemption, * * * [was]
amended to read as follows:
"The primary purpose of the foundation will be to
raise funds for financially strap families living
within the immediate area of the foundation's base of
operation with all funds being administered by other
IRS approved 501(c)(3) charitable organizations such as
the Salvation Army, United Way and the Catholic
Church".
* * * the foundation will limit its currect [sic] fund
raising activities to raising funds directly from its
officers, directors and their immediate familites
[sic], friends and business associates.
- 7 -
The amended Form 1023 did not list specifics as to petitioner's
operations, including the manner in which petitioner would effect
its amended primary purpose. The amended Form 1023 did not
address any safeguards against private inurement.
On April 9, 1996, the Commissioner mailed a letter to
Mr. Tully, in his capacity as petitioner's vice president,
explaining that petitioner had not yet described its operations
in sufficient detail. The letter set forth four items of
information that the Commissioner lacked as to petitioner
including a definition of the term "financially strap" as set
forth in the amended Form 1023.
By way of an undated letter, Mr. Tully responded to the
Commissioner's letter of April 9, 1996. The response was
generally vague as to the information sought. As to the
definition of the term "financially strap", the letter stated:
This organization defines the term "financially
strap" as a temporary condition wherein the person, or
family, under consideration is without "immediate funds
in sufficient amount to provide the very necessities of
life for the present day, or week, at most".
It is not to bail out any person or family from
their current financial psoition [sic]. Rather, it is
a temporary means of relief that is intended to assist
that person or family in their immediate need of foods
and or lodging for at least a day or two, perhaps a
week at the most until they can get on relief or find
other assistance, if that be the case.
It is to make sure that the person or persons in
question do not have to go hungry over night or not
have a safe place to stay.
- 8 -
Included in this immediate need might be
considered a doctor appointment for life threatening
situations.
On September 25, 1996, the Commissioner issued to petitioner
a final adverse determination letter. The letter stated:
Our adverse determination was made for the following
reason(s):
You did not meet the operational test under
section 1.501(c)(3)-1 of the Income Tax
Regulations. In order to qualify under Code
section 501(c)(3), an organization must be
both organized and operated exclusively for
one or more purposes specified in that
section. You did not describe your proposed
activities in sufficient detail as required
by section 1.501(c)(3)-1 of the Regulations.
Discussion
Respondent has determined that petitioner does not meet the
requirements of section 501(c)(3). Petitioner must prove this
determination wrong. See Rule 217(c)(2)(A); Church By Mail, Inc.
v. Commissioner, 765 F.2d 1387, 1391 (9th Cir. 1985), affg. T.C.
Memo. 1984-349; Church of Scientology v. Commissioner, 83 T.C.
381, 491 (1984), affd. 823 F.2d 1310 (9th Cir. 1987). In order
for petitioner to do so, the administrative record upon which
this case is to be decided must contain enough evidence to
support a finding contrary to the grounds set forth in the notice
of determination, and petitioner must demonstrate the merits of
its claim by at least a preponderance of the evidence. See
Estate of Gilford v. Commissioner, 88 T.C. 38, 51 (1987); see
- 9 -
also Rule 217(c)(2)(A); Fed. R. Evid. 301. If petitioner fails
to carry its burden, respondent will prevail. See Rockwell v.
Commissioner, 512 F.2d 882, 885 (9th Cir. 1975), affg. T.C. Memo.
1972-133; American Pipe & Steel Corp. v. Commissioner, 243 F.2d
125, 126 (9th Cir. 1957), affg. 25 T.C. 351 (1955); Estate of
Gilford v. Commissioner, supra at 51.
Section 501 provides in part:
SEC. 501(a). Exemption From Taxation.--An
organization described in subsection (c) * * * shall be
exempt from taxation under this subtitle unless such
exemption is denied under section 502 or 503.
* * * * * * *
(c) List of Exempt Organizations.--The following
organizations are referred to in subsection (a):
* * * * * * *
(3) Corporations, and any community
chest, fund, or foundation, organized and
operated exclusively for religious,
charitable, scientific, testing for public
safety, literary, or educational purposes,
* * * 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 * * * any
political campaign on behalf of (or in
opposition to) any candidate for public
office.
From this text, we understand that an organization is entitled to
exempt status if it is organized and operated exclusively for
charitable purposes. See also sec. 1.501(c)(3)-1(a)(1), Income
- 10 -
Tax Regs. We also understand that an organization that fails
this test does not qualify for exempt status under section
501(c)(3). See also id.
Respondent focuses entirely on petitioner's failure to
satisfy its burden as to the operational test. So do we.
Section 1.501(c)(3)-1(c), Income Tax Regs., provides as follows
as to the operational test:
(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.
(2) Distribution of earnings. An organization is
not operated exclusively for one or more exempt
purposes if its net earnings inure in whole or in part
to the benefit of private shareholders or individuals.
* * *
From the text of these regulations, we understand that an
organization is not operated exclusively for one or more exempt
purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals. See sec.
1.501(c)(3)-1(c)(2), Income Tax Regs. The concept of private
inurement as expressed therein ensures that the organization
serves public rather than private interests. See Church of
Scientology v. Commissioner, supra at 491. Tax exemption is a
matter of legislative grace; it is not a matter of right. See
- 11 -
Christian Echoes Natl. Ministry, Inc. v. United States, 470 F.2d
849, 857 (10th Cir. 1972).
We have previously observed that the opportunity for abuse
is present when the affairs of an organization are controlled by
its creators who belong to the same family. See Bubbling Well
Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531, 535
(1980), affd. 670 F.2d 104 (9th Cir. 1981). In such a situation,
therefore, we require an open and candid disclosure of all facts
bearing upon the organization, its operations, and its finances
so that we may be assured that we are not sanctioning an abuse of
the revenue laws by granting a claimed exemption. See id.; see
also United Libertarian Fellowship, Inc. v. Commissioner, T.C.
Memo. 1993-116. Where such a disclosure is not made, the logical
inference is that the facts, if disclosed, would show that the
taxpayer fails to meet the requirements of section 501(c)(3).
See Bubbling Well Church of Universal Love, Inc. v. Commissioner,
supra at 535.
Petitioner leaves us no choice but to draw such an inference
here. The record is devoid of sufficient documentation or other
substantive information regarding petitioner's organization,
activities, or operations. What little information petitioner
did provide, pursuant to respondent's requests, was extremely
vague and, in our view, simply an attempt by petitioner to avoid
- 12 -
disclosing the requested information. Petitioner has completely
failed to establish its entitlement to tax-exempt status.
We also note that petitioner has failed to prosecute its
case properly.1 Petitioner failed to file a brief, as ordered by
the Court and required by Rule 151, and it has failed to explain
its failure to do so. We have previously treated such inaction
by a party as an abandonment of those issues not addressed. See
Calcutt v. Commissioner, 84 T.C. 716, 721 (1985). We also have
held that the failure to file a brief may justify the dismissal
of all issues as to which a taxpayer has the burden of proof.
See Stringer v. Commissioner, 84 T.C. 693, 708 (1985), affd.
without published opinion 789 F.2d 917 (4th Cir. 1986).
We sustain respondent's determination. See also Larry D.
Bowen Family Found. v. Commissioner, T.C. Memo. 1999-149, wherein
we reached the same result based on an administrative record that
was virtually identical to the administrative record at hand; as
1
Petitioner's representative, Mr. Tully, is no stranger to
litigation. He has filed cases in this Court on at least three
prior occasions, see Tully v. Commissioner, an Order of this
Court dated Jan. 8, 1998 (dismissing the case for failure to
prosecute), vacated and remanded without published opinion
164 F.3d 631 (9th Cir. 1998) (with instructions to dismiss
petition for lack of jurisdiction); Tully v. Commissioner,
T.C. Memo. 1997-310, on appeal (9th Cir., July 29, 1997);
Oliver Family Found. v. Commissioner, T.C. Memo. 1997-220, he has
prosecuted or is prosecuting the appeal of two of these cases
before the Court of Appeals for the Ninth Circuit, and he
prosecuted one case before a Federal District Court, see Tully v.
Kaply, 81 AFTR 2d 98-2125 (C.D. Cal. 1998).
- 13 -
is true with the case here, Mr. Tully also organized the
corporation in Larry D. Bowen Family Found. and was its
representative before this Court. Accordingly,
Decision will be entered
for respondent.