T.C. Memo. 2009-261
UNITED STATES TAX COURT
OHIO DISABILITY ASSOCIATION, AN OHIO NON-PROFIT CORPORATION,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25436-07X. Filed November 12, 2009.
Charles S. Lineback, for petitioner.
Patricia Pierce Davis, for respondent.
MEMORANDUM OPINION
ARMEN, Special Trial Judge: Petitioner, Ohio Disability
Association, An Ohio Non-Profit Corporation, brought this action
for declaratory judgment and relief pursuant to section
7428(a)(2) and Rule 211 on the ground that respondent failed to
make a determination regarding whether petitioner qualifies as a
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tax-exempt organization under section 501(c)(3).1 The issues for
decision are whether petitioner will operate exclusively for
charitable purposes within the meaning of section 501(c)(3) and
whether no part of its net earnings will inure to the benefit of
a private shareholder or individual.
Background
This case was submitted fully stipulated pursuant to Rule
122. Pursuant to Rule 217(b), the parties filed with this Court
the administrative record relating to the request for a
determination that petitioner qualifies as an exempt
organization. The facts in the administrative record are assumed
to be true for purposes of this proceeding. The record shows
that petitioner has exhausted its administrative remedies. It is
noted that the administrative record is not a model of clarity
and its imperfection has complicated our fact-finding.
A. Charles S. Lineback
Charles S. Lineback (Mr. Lineback) is petitioner’s counsel
in the instant action. Mr. Lineback formed petitioner as an Ohio
non-profit corporation on March 16, 2004. Petitioner has not yet
begun to operate.
Mr. Lineback is a licensed attorney in the State of Ohio as
well as a licensed certified public accountant (C.P.A.) in both
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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the State of Ohio and the State of Florida. During his 28 years
as an attorney Mr. Lineback has managed attorney trust accounts.
Mr. Lineback has also passed the exam for licensure as an
insurance agent; however, he has never sold insurance.
B. Articles of Incorporation and Bylaws
Petitioner’s articles of incorporation filed March 16, 2004,
state that petitioner was “formed for the purpose of establishing
and managing a pooled trust authorized by” 42 U.S.C. section
1396p(d)(4)(C) and Ohio Admin. Code 5101:1-39-27.1(C)(3)(c) and
that the corporation is authorized to engage in any act permitted
by section 501(c)(3). On January 18, 2006, the articles of
incorporation were amended to state the purpose of the
corporation as follows:
(1) This non-profit corporation is organized
exclusively for charitable purposes within the meaning
of section 501(c)(3) * * *, including, for such
purposes, the making of distributions to organizations
that qualify as exempt organizations under section
501(c)(3) * * *.
(2) Upon the winding up and dissolution of this non-
profit corporation, after paying or adequately
providing for the debts and obligations of this non-
profit corporation, the remaining assets shall be
distributed for one or more exempt purposes within the
meaning of section 501(c)(3) * * *.
(3) No part of the net earnings of this non-profit
corporation shall inure to the benefit of, or be
distributable to, any of its members, trustees,
officers or other private persons, except that this
non-profit corporation shall be authorized to pay
reasonable compensation for services rendered and to
make payments and distributions in furtherance of the
exempt purposes.
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(4) No substantial part of the activities of this non-
profit corporation shall be the carrying on of
propaganda, or otherwise attempting to influence
legislation, and this non-profit corporation shall not
participate in, or intervene in (including the
publishing or distribution of statements) any political
campaign on behalf of or in opposition to any candidate
for public office.
(5) Notwithstanding any other provision of these
articles, this non-profit corporation shall not carry
on any other activities not permitted to be carried on
(a) by a corporation exempt from [F]ederal income tax
under section 501(c)(3) * * *, or (b) by a corporation,
contributions to which are deductible under section
170(c)(2) * * *.
Petitioner’s bylaws were adopted on January 18, 2006. The
bylaws do not include any statements regarding the specific
purposes or objectives of the corporation. The bylaws make
reference to the incorporators of the corporation as the initial
members.2 The bylaws further describe the process for calling
member meetings and voting procedures for the election of the
board of directors and passing on business matters.
C. Board of Directors, Officers, and Members
Petitioner’s articles of incorporation list Mr. Lineback as
the sole incorporator and the bylaws provide that Mr. Lineback is
the sole director. The record demonstrates that Mr. Lineback is
also the president and sole officer and employee and will serve
without compensation. According to the bylaws, Mr. Lineback is
also the only member of the corporation.
2
The bylaws appear to equate members with shareholders.
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D. Petitioner’s Application for Exemption and Followup
Correspondence
1. Application for Recognition of Exemption
Mr. Lineback signed petitioner’s Form 1023, Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code (application), and dated it February 3, 2006. On
the application Mr. Lineback stated:
This corporation is formed to assist the poor and
needy, as defined by Medicaid standards, that is, a
person who has one thousand five hundred dollars or
less in countable assets. Our activity will not be
primarily fundraising but rather managing a non-profit
‘Pooled Trust’ agreement.
The application also stated: “The Ohio Disability
Association will reach out to the poorest of the disabled. There
will be no minimums and our investments will be limited to
government insured checking and savings accounts.” The
application further stated that the corporation would “provide
‘Pooled Trust’ services to impoverished individuals who have been
declared disabled by the Social Security Administration” who also
“must be applying for Medicaid benefits”. The application
explained that services will be limited to individuals who are 65
years of age or older, blind, or disabled.
2. Requests for Additional Information
On August 17, 2006, an exempt organization specialist for
respondent sent petitioner a letter requesting additional
information under penalties of perjury including: (1) Whether
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petitioner would modify the board of directors to include
unrelated individuals selected from the community the corporation
will serve; (2) a complete description of all compensation paid
to Mr. Lineback; (3) a description of the organization’s staff,
including their experience and qualifications; (4) a copy of the
pooled trust master agreement; and (5) any informational
materials about the organization and/or the pooled trust that
would be distributed to potential applicants.
Mr. Lineback replied to respondent’s request for additional
information in the form of two letters. In the letters Mr.
Lineback replied that: (1) The board of directors would not be
modified and instead he provided an amended application
designating petitioner as a nonoperating private foundation; (2)
the compensation “to be paid to Charles Lineback = None”; (3)
“the organization’s staff is limited to myself”; (4) the pooled
trust master agreement had not yet been prepared as the “non-
profit status, i.e., [an IRS] determination letter, is a
prerequisite to signing the trust” citing Ohio Admin. Code
5101:1-39-27.1(C)(3)(c) (2006) and providing a sample pooled
trust; and (5) there are no informational materials about the
organization and/or the pooled trust.
Following this initial exchange of letters, Mr. Lineback and
respondent exchanged numerous additional letters and faxes.
Respondent’s letters repeatedly requested the same or similar
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information, and at times the inquiries were not coherent.
However, it was clear that respondent desired additional details
about petitioner’s proposed activities. Although Mr. Lineback
responded to respondent’s requests for additional information,
the answers were often curt and, for the most part, referred
respondent back to prior letters and the initial application.
Mr. Lineback’s letters also included conclusory statements that
petitioner had satisfied the requirements for tax-exempt status
and stated that a favorable determination letter should be
issued.
Respondent’s letters requested additional information
regarding, inter alia, the implementation of the conflict of
interest policy, the qualifications and experience of Mr.
Lineback, the modifications petitioner would make to the sample
pooled trust, the procedures for managing the pooled trust fund,
the eligibility criteria for the trust beneficiaries, and the
standards by which disbursements from the trust would be
approved.
In response to respondent’s question regarding how the
conflict of interest policy would be implemented, petitioner
stated: “The Conflict of Interest Policy was copied directly
from Appendix A of the Form 1023 instructions.”
Regarding Mr. Lineback’s qualifications and experience,
petitioner stated: “I have 32 years experience as a CPA. I
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suggest that if I am legally qualified to audit such an entity,
then I am also qualified to do the bookkeeping.”
With respect to the modifications to the sample pooled
trust, petitioner stated: “The document must be converted to 6th
grade plain English for easy comprehension. The fundamental
changes are that fees will be limited to $10.00 per year and no
interest will be paid.”
In response to a question regarding the procedures for
managing the pooled trust, petitioner referred respondent back to
its original application, which stated:
Our director, Charles Lineback, will be directly responsible
for conducting the charitable activities which will consist
of adopting a standard Pooled Trust master agreement and
managing the same * * *. He will serve without
compensation. This will involve accepting applicant sub-
trust joinder agreements, making deposits and
approving/rejecting requests for disbursements as well as
reconciling accounts on a monthly basis. The physical bank
account(s) will operate in a manner similar to attorney
trust accounts.
With respect to bookkeeping procedures, petitioner stated,
“there are no sub-accounts and no sub-trusts.” Petitioner
further explained: “there is a single (one) trust fund with a
separate account (book entry) maintained for each beneficiary.”
Regarding the criteria for trust beneficiary applicants,
petitioner indicated that in addition to there being no minimums,
there would be no maximum limitation per account and no maximum
limitation on the level of income or assets owned by the
individual that may be transferred to the trust. Petitioner
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further stated that the trust is not prohibited from managing
accounts on behalf of the director’s relatives or clients (or
relatives of clients).
Regarding disbursements to beneficiaries, petitioner stated:
Beneficiaries cannot make claims. Beneficiaries can request
that certain payments be made, such as an upgrade from a
semi-private room to a private room. The criterion
generally, is whether the service is covered by an existing
social program such as Medicaid. Please refer to the
Medicaid Providers manual for a complete list of Medicaid
covered services.3
Despite the extensive correspondence between respondent and
petitioner, respondent failed to issue a determination letter.
On November 5, 2007, petitioner filed a petition for declaratory
judgment with this Court. The petition was filed more than 1-1/2
years after petitioner filed its initial application for
exemption. By Order of the Court dated February 20, 2009, it was
determined that this Court has jurisdiction because petitioner
had exhausted the administrative remedies available to it within
the Internal Revenue Service. See sec. 7428(b); see also Rules
210(c)(4), 211(g)(4).
Discussion
A. Declaratory Judgment
A declaratory judgment action pursuant to section 7428(a)(2)
is commenced on the ground that the Commissioner failed to make a
determination with respect to a taxpayer’s request for initial
3
The administrative record does not include any such
manual.
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qualification as a tax-exempt organization. See generally Rules
210-218. This Court may issue a declaratory judgment once the
organization involved has exhausted all administrative remedies
and 270 days have passed since the date the application was
filed. Sec. 7428(b)(2); Rule 210(c); Natl. Paralegal Inst. Coal.
v. Commissioner, T.C. Memo. 2005-293. Disposition of a
declaratory judgment action concerning the initial qualification
of an exempt organization is ordinarily made on the basis of the
administrative record. Rule 217(b); Church in Boston v.
Commissioner, 71 T.C. 102, 105 (1978); Houston Lawyer Referral
Serv., Inc. v. Commissioner, 69 T.C. 570, 573 (1978).
B. Whether Petitioner Is Entitled to Exempt Status
Tax exemption is a matter of legislative grace, and an
organization seeking an exemption must prove that it “comes
squarely within the terms of the law conferring the benefit
sought.” Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958); see
also Fla. Hosp. Trust Fund v. Commissioner, 103 T.C. 140, 153
(1994), affd. 71 F.3d 808 (11th Cir. 1996).
Pursuant to section 501(a), an organization described in
section 501(c)(3) shall be exempt from Federal income tax. To
qualify as an exempt organization under section 501(c)(3), an
organization must satisfy all of the requirements stated therein,
specifically including the requirements that the corporation must
be both organized and operated exclusively for one or more exempt
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purposes, and no part of the net earnings may inure to the
benefit of any private shareholder or individual. A failure to
satisfy any one of the requirements is fatal to qualification.
Columbia Park & Recreation Association v. Commissioner, 88 T.C.
1, 13 (1987), affd. without published opinion 838 F.2d 465 (4th
Cir. 1988); see sec. 1.501(c)(3)-1(a)(1), Income Tax Regs.
An organization may seek tax-exempt status before it begins
operations, but the administrative record must set forth
sufficient detail about its prospective operations to provide the
basis for the granting of exemption. Peoples Prize v.
Commissioner, T.C. Memo. 2004-12 (citing La Verdad v.
Commissioner, 82 T.C. 215, 219 (1984), and World Family Corp. v.
Commissioner, 81 T.C. 958, 964 (1983)). Without adequate
information, the denial of exemption is warranted. See Church in
Boston v. Commissioner, supra; Gen. Conference of the Free Church
of Am. v. Commissioner, 71 T.C. 920, 929 (1979).
Petitioner has, for the most part, provided only
generalizations and conclusory statements in response to repeated
requests by respondent for more detail regarding its proposed
activities. Such generalizations do not demonstrate that
petitioner qualifies for exemption. Peoples Prize v.
Commissioner, supra; see also La Verdad v. Commissioner, supra at
221; World Family Corp. v. Commissioner, supra at 966.
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Respondent has conceded that petitioner is organized for
exempt purposes but contends that petitioner has failed to
demonstrate that it will be operated exclusively for exempt
purposes and that no earnings will inure to the benefit of a
private shareholder or individual. Petitioner maintains that the
administrative record demonstrates it will operate exclusively
for exempt purposes and no earnings will inure to the benefit of
a private shareholder or individual. For reasons discussed
below, we agree with respondent.
1. Whether Petitioner Is Operated Exclusively for
Charitable Purposes
Whether an organization is operated exclusively for
charitable purposes is often referred to as the operational test.
Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs. An organization will
satisfy the operational test if it engages primarily in
activities which accomplish one or more of the exempt purposes in
section 501(c)(3). Id. Petitioner listed charitable purposes as
its section 501(c)(3) exempt purpose. Charitable means, inter
alia, relief of the poor and distressed or of the
underprivileged. Sec. 1.501(c)(3)-1(d)(2), Income Tax Regs.
Elderly and disabled individuals have been recognized by the
Commissioner as charitable classes. See Rev. Rul. 79-19, 1979-1
C.B. 195; Rev. Rul. 76-244, 1976-1 C.B. 155. The individuals for
whom petitioner purports to manage the pooled trust are
considered members of charitable classes. However, this fact
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alone does not demonstrate that petitioner will operate
exclusively for exempt purposes.
Petitioner has described its purpose as establishing and
managing a pooled trust to assist the poor and needy as defined
by Medicaid standards and as provided for in Ohio Admin. Code
5101:1-39-27.1(C)(3) (2006) and 42 U.S.C. 1396p(d)(4)(C) (2006
and Supp. 2009). “Medicaid provides health coverage for low-
income children and adults, medical and long-term care coverage
for people with disabilities, and assistance with health and
long-term care expenses for low-income seniors.”
http://www.familiesusa.org/issues/medicaid/. Although Medicaid
is jointly funded by the Federal and State governments, each
State administers its own program. Id. In general, under
Federal and State law, funds in a trust and payments made
therefrom are considered in determining eligibility for programs
such as Medicaid. 42 U.S.C. 1396p(d)(3) (2006 and Supp. 2009);
Ohio Admin. Code 5101:1-39-27.1(C) (2006). However, under Ohio
Admin. Code 5101:1-39-27.1(C)(3) (2006) certain trusts, including
pooled trusts, are not considered in determining eligibility.
In order to qualify as a pooled trust a trust must satisfy
all of the following provisions of Ohio Admin. Code 5101:1-39-
27.1(C)(3)(c) (2006):
(i) The trust contains the assets of an individual
of any age who is disabled as defined in rule 5101:1-
39-03 of the Administrative Code.
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(ii) A separate account is maintained for each
beneficiary of the trust but, for purposes of
investment and management of funds, the trust pools the
funds in these accounts.
(iii) Accounts in the trust are established by the
individual, the individual’s parent, grandparent, or
legal guardian, or a court solely for the benefit of
individuals who are disabled.
(iv) To the extent that any amounts remaining in
the beneficiary’s account upon the death of the
beneficiary are not retained by the trust, the trust
pays to the state the amount remaining in the account
equal to the total amount of medical assistance paid on
behalf of the beneficiary. To meet this requirement,
the trust must include a provision specifically
providing for such payment.
(v) Cash distributions to the individual are
counted as unearned income. All other distributions
from the trust are treated under the rules governing
in-kind income.
(vi) Transfers of assets to a pooled trust are not
subject to the improper transfer provisions in rule
5101:1-39-07 of the Administrative Code. However,
assets held prior to the transfer to this trust are
countable assets and/or income.
Similar to Ohio Admin. Code 5101:1-39-27.1 (2006), 42 U.S.C.
section 1396p(d)(4)(C) (2006 and Supp. 2009) provides that a
trust containing the assets of a disabled individual is not
considered in determining Medicaid eligibility if:
(i) The trust is established and managed by a
nonprofit association.
(ii) A separate account is maintained for each
beneficiary of the trust, but, for purposes of
investment and management of funds, the trust pools
these accounts.
(iii) Accounts in the trust are established solely
for the benefit of individuals who are disabled * * *
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by the parent, grandparent, or legal guardian of such
individuals, by such individuals, or by a court.
(iv) To the extent that amounts remaining in the
beneficiary’s account upon the death of the beneficiary
are not retained by the trust, the trust pays to the
State from such remaining amounts in the account an
amount equal to the total amount of medical assistance
paid on behalf of the beneficiary under the State plan
* * *.
Although petitioner states that it will establish and manage
a pooled trust under the aforementioned provisions, petitioner
has not sufficiently described its proposed activities to
demonstrate that it will operate exclusively for exempt purposes.
Mr. Lineback’s responses to respondent’s requests for additional
information failed to supplement the initial application or
clarify petitioner’s purpose and proposed activities, but rather
were mere repetitions of the statements in the initial
application. Petitioner indicated that the pooled trust would be
managed similar to an attorney trust account but did not describe
specific procedures for managing the pooled trust. Petitioner
stated only that Mr. Lineback’s experience as an attorney and
C.P.A. qualified him to manage the pooled trust by adopting the
master pooled trust agreement, accepting applicant subtrust
joinder agreements, making deposits and approving/rejecting
requests for disbursements as well as reconciling accounts on a
monthly basis.
Most notably, when requested to provide the pooled trust
master agreement, petitioner provided a sample pooled trust and
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indicated that respondent’s favorable determination letter was
necessary prior to signing the trust agreement. However,
petitioner was not precluded from submitting the pooled trust
agreement that Mr. Lineback intended to sign after receipt of the
favorable determination letter. The sample pooled trust is just
that, a sample.
Petitioner indicated that the sample pooled trust would be
modified to be written in “6th grade plain English” and include
provisions to limit fees to $10 per year and state that no
interest will be paid. But because the pooled trust in the
record is a sample, this Court cannot rely on it as indicative of
the actual pooled trust provisions.
Petitioner also did not clearly state the criteria for
accepting applicants and making disbursements. Petitioner merely
stated that Mr. Lineback would have the authority to accept
applicants with no monetary minimums or maximums, and he would
make disbursements for services not covered by Medicaid referring
to a “Medicaid Providers manual”.
In sum, the generalizations made by petitioner do not
provide sufficient detail to determine that petitioner will be
operated exclusively for charitable purposes. See, e.g., La
Verdad v. Commissioner, 82 T.C. at 219-220.
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2. Whether Any Part of the Net Earnings Inures to the
Benefit of a Private Shareholder or Individual
An organization is not operated exclusively for one or more
of the exempt purposes in section 501(c)(3) unless it serves a
public rather than private interest. Sec. 1.501(c)(3)-1(d)(1),
Income Tax Regs. To satisfy this requirement, the organization
must not be organized and operated for the benefit of private
interests, such as those of its creator or the creator’s family.
Am. Campaign Acad. v. Commissioner, 92 T.C. 1053, 1065-1067
(1989).
The Commissioner has ruled that an organization will not be
denied tax-exempt status merely because the organization is
controlled by one individual. Rev. Rul. 66-219, 1966-2 C.B. 208.
However, such a situation provides an obvious opportunity for
abuse and calls for an open and candid disclosure of the
taxpayer’s organization and operations. Bubbling Well Church of
Universal Love, Inc. v. Commissioner, 74 T.C. 531, 535 (1980),
affd. 670 F.2d 104 (9th Cir. 1981). If such 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). Id. (citing Founding Church of Scientology v.
United States, 188 Ct. Cl. 490, 412 F.2d 1197, 1201 (1969)).
The record demonstrates Mr. Lineback is the sole director,
officer, employee, and member. Thus he is vested with all of the
decisionmaking power within petitioner’s organization. Although
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petitioner has a stated conflict of interest policy and the
articles of incorporation state that there will be no private
inurement, there are no procedures or personnel in place to
ensure that either the stated policy will be followed or private
inurement will not occur. Although the bylaws establish
procedures for member meetings and voting, Mr. Lineback is the
only member. Further, petitioner states that Mr. Lineback will
serve without compensation; however, the articles of
incorporation state that “this non-profit corporation shall be
authorized to pay reasonable compensation for services rendered”.
In sum, the record does not demonstrate that there is oversight
to prevent the organization from being operated to benefit Mr.
Lineback or his legal and accounting practices.
C. Conclusion
The administrative record does not permit us to conclude
that petitioner will operate exclusively for exempt purposes and
that no part of the net earnings will inure to the benefit of a
private shareholder or individual. Our holding, however, does
not preclude petitioner from filing a new application for
exemption. See Houston Lawyer Referral Serv., Inc. v.
Commissioner, 69 T.C. at 577-578.
To reflect the foregoing,
Decision will be entered for
respondent.