NONPROFIT ORGANIZATION IS DENIED EXEMPT STATUS, TAX COURT RULES.

Patricia Pierce Davis, for respondent.

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 as a licensed certified public accountant (C.P.A.) in both 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:

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.

D. Petitioner's Application for Exemption and Follow-up Correspondence

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 "nonprofit 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 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 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:

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 further stated that the trust is not prohibited from managing accounts on behalf of the director's relatives or clients (or relatives of clients).

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 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 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.

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.

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):

Most notably, when requested to provide the pooled trust master agreement, petitioner provided a sample pooled trust and 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.

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 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.

² The bylaws appear to equate members with shareholders.

³ The administrative record does not include any such manual.