The opinion
T.C. Memo. 1999-216
UNITED STATES TAX COURT
SHARE NETWORK FOUNDATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23091-96X. Filed July 2, 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,
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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. Karl
H. Goesele attended a seminar presented by Mr. Tully, and Mr.
Goesele retained Mr. Tully to organize a tax-exempt foundation
for Mr. Goesele. Mr. Tully organized a corporation named "Share
Network Foundation" (petitioner herein). Petitioner's officers
are Mr. Tully (vice president), Mr. Goesele (president and
treasurer), Michael D. Tate (vice president), Sylvia A. Goesele
(secretary), and Ven. N. Kunga Gyaltsen (secretary). Karl H.
Goesele is Sylvia A. Goesele's father, and Ms. Goesele is Mr.
Tate's wife. Messrs. Goesele, Tate, and Tully serve as directors
on petitioner's 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
is "TO PROVIDE AND MAINTAIN A PHYSICAL FACILITY FOR SPIRITAL
[sic] WORSHIP." The bylaws state that petitioner's primary
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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) A
church, synagogue, etc., (2) an association or convention of
churches, and (3) missionary activities. 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 * * *
* * * * * * *
(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
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(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, 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.
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
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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
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
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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. On February 2, 1995, petitioner notified the
Commissioner that it 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. On
or about August 10, 1995, petitioner filed with the Commissioner
a second Form 1023. Petitioner's second 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 [sic] 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.
The second Form 1023 did not list specifics as to petitioner's
operations, including the manner in which petitioner would effect
its primary purpose. The second 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 vice president of petitioner,
explaining that petitioner had not yet described its operations
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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 second Form 1023.
By way of an undated letter, Mr. Tully responded to the
Commissioner's letter of April 15, 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.
Included in this immediate need might be
considered a doctor appointment for life threatening
situations.
On July 24, 1996, the Commissioner issued to petitioner a
final adverse determination letter. The letter stated:
Our adverse determination was made for the following
reason(s):
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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
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.
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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
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.
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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
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
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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
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
1
Petitioner's representative, Mr. Tully, is no stranger to
(continued...)
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2
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 Tamaki
Found. v. Commissioner, T.C. Memo. 1999-166; Tate Family Found.
v. Commissioner, T.C. Memo. 1999-165; Larry D. Bowen Family
Found. v. Commissioner, T.C. Memo. 1999-149, wherein we reached
the same result based on administrative records that were
virtually identical to the administrative record at hand; as is
true with the case here, Mr. Tully also organized the
1
(...continued)
litigation. In addition to the cases cited in the last paragraph
of this memorandum opinion, 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).
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corporations in Tamaki Found., Tate Family Found., and Larry D.
Bowen Family Found. and represented all three taxpayers before
this Court. Accordingly,
Decision will be entered
for respondent.