IRS Published Taxpayer Determination Letter 201433016

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document. Native kind: determination letter; this is not a private letter ruling.

TREASURY
DEREVENUE BE

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

Release Number: 201433016

Release Date: 8/15/2014

Date: May 19, 2014

Uniform Issue List Numbers:

501.00-00

501.03-00
501.03-30

Contact Person:

Identification Number:

Contact Number:

Employer Identification Number:

Form Required To Be Filed:

Tax Years:

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

You must file Federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file. File the returns in accordance
with their instructions, and do not send them to this office. Failure to file the returns timely may
result in a penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at

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1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Tamera Ripperda
Director, Exempt Organizations
Rulings and Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

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TREASURY
REVENUE SB

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

# DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224

Date: March 26, 2014

Uniform Issue List Numbers:

501.00-00

501.03-00

501.03-30

Contact Person:

Identification Number:

Contact Number:

FAX Number:

Employer Identification Number:

LEGEND

Taxpayer

=

Department

=

Medical School

Hospital
\=

LLP

=

Center

=

Organization
\=

Foundation

=

Year 1

=

Year 2

=

Year 3

=

x
☒

=

Dear
:

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code section 501(a). Based on the information provided, we have
concluded that you do not qualify for exemption under Code section 501(c)(3). The basis for
our conclusion is set forth below.

Facts

You, Taxpayer, were organized in Year 1 as a nonprofit corporation under state law. According
to your Articles of Incorporation, your purpose is to support the work of Department faculty of
the Medical School in providing teaching, research and medical services at medical and
educational facilities in the state and surrounding geographical region.

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The primary purpose of Department is to train family medicine physicians through a three-year
accredited family medicine residency program (the "Program"). The Program is sponsored by
Hospital, an organization described in § 501(c)(3), and Medical School. Board-certified family
medicine physicians, all with Medical School faculty appointments (the "faculty physicians"),
train the resident physicians working at Hospital and at Hospital's outpatient clinic, Center.
Such training includes "precepting," which involves the active teaching and supervision of the
resident physician through demonstration and examination of clinical skills, assessing clinical
plans, and providing clinical guidance and information. Precepting of resident physicians at the
Center is provided by faculty physicians under a Professional Services Agreement (the
"Agreement"), the original parties to which were LLP, a limited liability partnership composed of
Department faculty members, and Hospital. When LLP ceased operations in Year 1, the
Agreement was assigned to you.

Under the Agreement, Hospital is responsible for all patient billings for physician services.
Hospital paid you a fixed fee for the teaching and precepting services provided by the faculty
physicians at the Center. You, in turn, allocated the fees, in amounts determined by the
Department chair, to the faculty physicians, in part to provide salary equity among the faculty
physicians. You told us that-

Entry base salaries for Department faculty physicians were determined by a Medical
School scale .... Over time, Deans of the Medical School utilized different policies
regarding the level where a new faculty member could enter. Some Deans mandated that
all new faculty enter at a level 1. Other Deans allowed negotiations to take place whereby
years of experience prior to academic medicine could be taken into account, hence a level
2 or level 3 was allowed at entry.

This discrepancy in entry levels created great disparity in faculty salaries. Physicians who
were assistant professors mandated to enter at a level 1 and who now worked in the
department for 5 years could have a total annual salary less than a new assistant
professor physician faculty who was able to negotiate a level 3 under a new Dean. This
balance created a management problem which was rectified by equity payments through
Taxpayer.

You had no formal relationship or written agreements with the faculty physicians working at the
Center. The faculty physicians were treated as independent contractors. In July of Year 2, the
Agreement was reassigned to a faculty practice organization created to support the clinical,
academic, and research activities of the faculty of Medical School.

During Year 2 and the first quarter of Year 3, you provided administrative support to
Organization, a nonprofit corporation, and Foundation, a § 501(c)(3) organization. You were
paid a fee for the administrative services rendered. You are not related to either Organization or
Foundation.

You continue to provide financial support to Department faculty. Specifically, you collect gifts,
grants, and contributions and make payments therefrom directly to individual faculty and staff
members to cover the cost of scholarly development, continuing medical education required to
maintain state licensure and state medical board certification, and related professional

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development expenses such as travel to educational conferences and seminars. Such
payments, which can amount to as much as $x per person annually, cover expenses that would
not otherwise be paid by Medical School as part of the total compensation and benefits paid to
such faculty or staff member under his or her employment contract with Medical School. The
amounts paid are approved by the Department chair.

According to your Articles of Incorporation, you have no members. Your original Bylaws
provided for a three-member Board of Directors consisting of your President and two other
directors elected by the Board at its annual meeting. Whoever was the current chair of the
Department automatically served as your President. Your Second Amended and Restated
Bylaws removed the requirements that the chair of the Department serve as your President and
that your President serve on your Board of Directors. The resolution of the Board that
implemented the Second Amended and Restated Bylaws recites that these amended and
restated Bylaws "eliminate the special relationship between the Corporation [i.e., you] and the
Department .... " You do not now have, or plan to have, employees.

Law

I.R.C. § 501(a) provides for the exemption from federal income tax of organizations described in
§ 501(c).

I.R.C. § 501(c)(3) describes organizations organized and operated exclusively for charitable,
educational, and other enumerated exempt purposes, no part of the net earnings of which
inures to the benefit of any private shareholder or individual.

Treas. Reg. § 1.501(c)(3)-1(a)(1) provides that an organization is not exempt as an organization
described in § 501(c)(3) unless it is both organized and operated exclusively for one or more of
the purposes specified in such section.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that 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 § 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.

Treas. Reg. § 1.501(c)(3)-1(c)(2) provides 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.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(i) lists "charitable" and "educational" among the specified
purposes for which an organization may be exempt as an organization described in § 501(c)(3).

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph
unless it serves a public rather than a private interest. Thus, to meet the requirements of this
subdivision, it is necessary for an organization to establish that it is not organized or operated
for the benefit of private interests such as designated individuals, the creator or his family,

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shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests.

Treas. Reg. § 1.501(c)(3)-1(d)(2) provides that the term "charitable" is used in § 501(c)(3) in its
generally accepted legal sense. In Rev. Rul. 69-545, 1969-2 C.B. 117, it was recognized that
the promotion of health for the benefit of the community is a charitable purpose under the
common law of charity.

Treas. Reg. § 1.502-1(b) provides that if a subsidiary organization of a tax-exempt organization
would itself be exempt on the ground that its activities are an integral part of the exempt
activities of the parent organization, its exemption will not be lost because, as a matter of
accounting between the two organizations, the subsidiary derives a profit from its dealings with
its parent organization.

Rev. Rul. 58-194, 1958-1 C.B. 240, concerns a corporation organized to conduct a general book
and supply store on the campus of a State university for the convenience of its student body
and the members of its faculty. It is authorized to receive and disburse such funds as may be
collected in accordance with the laws of the State and with the approval of the State Director of
Education. The corporation's activities are conducted on the campus of the university. It is
controlled by a board of directors composed of the president of the university, three elected
faculty members and three elected student members. Membership in the corporation consists
of all regular employees of the university and students who have purchased a membership for a
nominal fee. The bylaws of the corporation provide that none of the profits or assets of the
corporation shall ever be distributed to the members but shall be used solely for the benefit of
the students and faculty of the university. The facilities of the corporation are available to
members as well as to non-members in order that all students are afforded an opportunity to
obtain their academic supplies without undue inconvenience. The ruling reasons that since the
corporation is controlled by and serves almost exclusively the members of the faculty and
student body, and since it is performing functions for their benefit and convenience and in
furtherance of the educational purposes of the university, it is for all intents and purposes an
integral part of the university. In view of the foregoing, since the corporation is organized for the
purpose of operating a book and supply store on the campus of a State university primarily for
the convenience of its student body and members of its faculty, and no part of its net earnings
inures to the benefit of any private shareholder or individual, it is held that the corporation is
operated exclusively for educational purposes and is exempt from Federal income tax under §
501(c)(3).

Rev. Rul. 68-26, 1968-1 C.B. 272, concerns an organization incorporated without stock by a
church to provide a standardized source of educational and religious material for the church's
parochial school system. Its affairs are managed by a board of directors composed of
clergymen appointed by the church and responsible to the church for the organization's finances
and operations. The organization prints material which is prepared and edited by the school
system. The organization sells the material exclusively to the parochial schools system. All
profits are returned annually to the school system. The ruling states that although a technical
parent-subsidiary relationship between the church and the organization is lacking because of
the nonstock character of the organization, a substantially similar relationship does in fact exist
through the control and close supervision of its affairs by the church. In printing material which

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has been prepared for the parochial school system, the organization is carrying out an integral
part of the activities of the church, the parent organization. Accordingly, it qualifies for
exemption under § 501(c)(3) because it is operated as an integral part of the exempt activities of
the parent.

Rev. Rul. 68-422, 1968-2 C.B. 207, concerns an organization created pursuant to the will of a
stockholder of a company for the sole purpose of paying pension benefits to retired employees
of the company. The pension benefits are paid to all retired employees age 65 or over,
regardless of their economic resources. The company employs approximately 750 persons. In
an average year, 35 employees retire. The assets of the organization consist of various
investments and cash bequeathed to it by the testator. The company does not contribute funds
to the organization, nor does the company have any control over its affairs. The organization
claims it is organized for the relief of the poor. To come within the scope of the term "relief of
the poor", the organization must at least show that the class it benefits is lacking in the
necessities or comforts of life. Since this organization does not pay pensions on the basis of
need, and has not shown that the retired employees of the company as a class lack the
necessities or comforts of life, it does not qualify for exemption as a charitable organization
under § 501(c)(3).

Rev. Rul. 69-383, 1969-2 C.B. 113, concerns a hospital that, after arms-length negotiations,
entered into an agreement with a hospital-based radiologist to compensate him on the basis of
a fixed percentage of the radiology department's gross billings. The radiologist did not have any
management authority with respect to the hospital itself, but did have the right to approve the
amounts charged by the hospital for radiology services. The amount received by the radiologist
was not excessive when compared with amounts received by other radiologists having similar
responsibilities and handling comparable patient volume at other hospitals. The ruling notes
that, under certain circumstances, a method of compensation based on a percentage of income
might constitute prohibited inurement, e.g., when the arrangement transforms the organization's
principal activity into a joint venture between it and a group of physicians, or is merely a device
for distributing profits to persons in control. Under the circumstances, described above, the
radiologist did not control the organization and the agreement was negotiated at arm's length.
The amount the radiologist received was reasonable under the terms of the responsibilities and
activities that he assumed under the contract. For these reasons, it was held that the
arrangement entered into between the hospital and the radiologist did not constitute inurement
of net earnings to a private individual within the meaning of § 1.501(c)(3)-1(c)(2).

Rev. Rul. 69-528, 1969-2 C.B. 127, concerns an organization that was formed to provide
investment services on a fee basis exclusively to organizations exempt from income tax under §
501(c)(3). It receives funds from the participating exempt organizations, invests the funds, and
upon request liquidates the participant's interest and distributes the proceeds to the participant.
The organization is free from the control of the participants. The ruling states that providing
investment services on a regular basis for a fee is a trade or business ordinarily carried on for
profit. If such services were regularly provided by one tax-exempt organization for other tax-
exempt organizations, such activity would constitute unrelated trade or business. Thus, this
organization is not exempt under § 501(c)(3) since it is regularly carrying on the business of
providing investment services that would be unrelated trade or business if carried on by any of
the tax-exempt organizations on whose behalf it operates.

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Rev. Rul. 72-369, 1972-2 C.B. 245, concerns an organization that was formed to provide
managerial and consulting services for nonprofit organizations exempt from Federal income tax
under § 501(c)(3) to improve the administration of their charitable programs. The organization
enters into agreements with unrelated nonprofit organizations to furnish managerial and
consulting services on a cost basis. The ruling states that providing managerial and consulting
services on a regular basis for a fee is trade or business ordinarily carried on for profit. The fact
that the services in this case are provided at cost and solely for exempt organizations is not
sufficient to characterize this activity as charitable within the meaning of § 501(c)(3). Furnishing
services at cost lacks the donative element necessary to establish this activity as charitable.
Accordingly, it is held that the organization's activities are not charitable and, therefore, the
organization does not qualify for exemption under § 501(c)(3).

Rev. Rul. 73-126, 1973-1 C.B. 220, concerns an organization, exempt from Federal income tax
under § 501(c)(3), that carries out its charitable program through a staff of salaried employees.
It has no established retirement plan for these employees but has followed a general practice of
paying pensions to retired employees at the discretion of its board of directors. The pensions
are not gratuities but represent extra compensation paid for past services, are reasonable in
amount as compensation for such services, and would be deductible for Federal income tax
purposes if incurred in the conduct of trade or business. The ruling states that the payment of
pensions to retired employees is an accepted method of employee compensation used by many
public and private organizations. Since the payments for the pensions in this case are
reasonable compensation in light of the surrounding circumstances, they are a proper expense
in the operation of the organization's charitable program and do not constitute the improper use
of the organization's charitable resources, nor do they constitute inurement of the organization's
net earnings to private individuals within the meaning of § 501(c)(3). Accordingly, it is held that
the organization's payment of pensions to retired employees as described above does not
adversely affect its exemption under § 501(c)(3).

Rev. Rul. 78-41, 1978-1 C.B. 148, concerns a trust created by a hospital that is exempt from tax
under § 501(c)(3). The sole purpose of the trust is to accumulate and hold funds for use in
satisfying malpractice claims against the hospital. The trustee of the trust is a banking
institution. Malpractice claimants are paid directly by the trustee upon the order of the hospital.
The hospital makes all decisions on the claims to pay, and the trustee merely acts as its agent
in disbursing funds. The ruling states that by serving as a repository for funds paid in by the
hospital, and by making payments at the direction of the hospital to persons with malpractice
claims against the hospital, the trust is operating as an integral part of the hospital. Of equal
importance is that the trust is performing a function that the hospital could do directly.
Accordingly the organization is operated exclusively for charitable purposes and, thus, is
exempt from Federal income tax under § 501(c)(3).

Squire v. Students Book Corp., 191 F. 2d 1018 (9th Cir. 1951), held that an organization that
operated a bookstore on the premises of a college for the accommodation of students and
faculty, and which was controlled by the college, qualified for exemption because it bore a
"close and intimate relationship" to the functioning of the college itself.

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B.H.W. Anesthesia Found., Inc. v. Comm'r, 72 T.C. 681 (1979), held that the Harvard Medical
School faculty clinical practice organization created by the anesthesiology department of
Harvard Medical School qualified for exemption under § 501(c)(3). A clinician could qualify for
membership in the organization only so long as he or she was a clinical faculty member at
Harvard Medical School. Control of the organization rested directly or indirectly with the
chairman of the Harvard Medical School department of anesthesiology. The patients served by
the organization were limited to patients of the teaching hospital. Although the organization's
revenues were used to supplement compensation paid to the members of the faculty practice,
compensation was capped at an amount that the Tax Court held was reasonable and was less
than the clinical faculty member would likely obtain in private practice. Accordingly, the
organization comprised an integral part of Harvard Medical School and its teaching hospital, the
Boston Hospital for Women. No private benefit accrued to the clinical faculty members of the
organization, which would otherwise disqualify it from exempt status.

University of Massachusetts Medical School Group Practice v. Comm'r, 74 T.C. 1299 (1980),
acq. 1980-2 C.B. 1, held that the organization serving as the clinical faculty practice group
comprised exclusively of clinical faculty of the University of Massachusetts Medical School, was
an integral part of the medical school and its teaching hospital. Members of the organization
participated in the clinical teaching program at the teaching hospital and divided their time
between academic pursuits (teaching and research) and clinical duties at the teaching hospital
and other smaller affiliated state hospitals. The opportunity for students to observe and assist in
the actual treatment of patients was considered to be a vital and necessary part of their medical
education. Accordingly, the faculty members' patient care activities at the hospital were
inseparable from the faculty members' teaching function. Members of the organization were
required to hold academic appointments at the medical school and to be engaged to some
degree in clinical practice. State conflict of interest laws precluded clinical faculty from
personally billing patients or third party payors for their clinical services. The organization
collected the fees generated by the faculty clinical services, deposited those funds into a trust
fund pursuant to statute, and expended in the funds for legislatively mandated purposes.
Although amounts generated through the clinical practice enhanced a clinician's overall
compensation, total compensation paid to the clinicians was subject to the same institutional
regulations as the clinician's academic salary. The provisions regulating the allocation of clinical
fees among the practicing clinicians prevented the organization from serving the private
interests of the clinicians. The Tax Court found that the organization provided vital clinical
training for medical students, interns, and residents and, therefore, comprised an integral
component of the medical school and the university hospital.

University of Maryland Physicians, P. A. v. Comm'r, T.C. Memo. 1981-23, found that the
medical practice comprised exclusively of clinical faculty of the cardiology, nephrology,
pulmonary diseases, and nuclear medicine departments of the University of Maryland Medical
School qualified for exemption as an integral part of the medical school and its teaching
hospital. The organization's members provided clinical services exclusively to patients at the
medical school teaching hospital and were precluded from holding concurrent positions at any
other medical facility or with any other practice groups. The Tax Court found that clinical
instruction is an indispensable primary component of training undergraduate and graduate
students at the medical school. The clinical practice group's organizing documents limited its
activities to serving the interests of the medical school and teaching hospital. The organization's

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clinical practice revenues were subject to the control of the medical school. Although each
clinician owned shares in the stock in the organization, a shareholder could obtain no more than
the nominal par value for his or her shares upon leaving the practice group. These factors
precluded the faculty members from deriving an impermissible private benefit from the
organization's operations. Accordingly, the organization qualified for exempt status as an
integral part of the University of Maryland Medical School.

IHC Health Plans, Inc. v. Comm'r, 325 F.3d 1188 (10th Cir. 2003), further develops the principle
of vicarious exemption under the integral-part doctrine. In general, an entity seeking exemption
from tax under § 501(a) must show that it is entitled to exemption on its own merits. However,
an entity that cannot qualify for tax exemption on its own merits, may be entitled to derivative or
vicarious exemption under the "integral part" doctrine if its sole activity is an integral part of the
exempt affiliate's activities. Citing the example of the power company described in § 1.501-1(b),
the court stated that an essential nexus must exist between the parent and the subsidiary
seeking exemption under the integral part doctrine. Important factors are whether the goods or
services provided by the subsidiary to the parent are essential to the accomplishment of the
parent's exempt purposes; whether the subsidiary provides services solely to the parent (and
the subsidiary does not engage in a trade or business that would be an unrelated trade or
business if engaged in by the parent); and whether the parent exercises control over the
subsidiary. These factors must be considered in conjunction with the exempt purpose for which
the parent operates and must support a finding that the subsidiary operates for the same
purpose as the parent.

## Analysis

To qualify as an organization described in § 501(c)(3) you must engage primarily in activities
that accomplish one or more exempt purposes. Treas. Reg. § 1.501(c)(3)-1(c)(1). You have
not been engaged in activities that primarily accomplish exempt purposes. Your original role
was to replace LLC as party to the Agreement. The Agreement called for Department faculty
physicians to precept resident physicians at Center. While the precepting of resident physicians
may have furthered the exempt purposes of Medical School or Hospital, these activities were
conducted by faculty physicians who were neither your employees nor your members, but who
were treated as independent contractors with respect to the Agreement. Therefore, such
activities could not be attributed to you for purposes of determining whether you have been
operated in furtherance of an exempt purpose. Your role with respect to the Agreement was to
receive fees from Hospital and to distribute such fees to the faculty physicians in amounts
determined by the Medical School. Such activities are nothing more than administrative duties
that do not, in and of themselves, directly further either charitable or educational purposes.
Since you do not have employees, even these administrative duties must have been performed
by someone else.

Under certain facts and circumstances, a faculty group practice organization may qualify for
exemption under § 501(c)(3) on the grounds that its activities constitute an integral part of the
exempt activities of its parent medical school and affiliated teaching hospital. See, B.H.W.
Anesthesia Found., Inc. v. Comm'r, Univ. of Massachusetts Medical School Group Practice v.
Comm'r, Univ. of Maryland Physicians, P.A. v. Comm'r . However, you do not qualify as a
faculty group practice organization because the Department faculty physicians whom you serve

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are not your members or employees. Furthermore, you do not bear the kind of connection to
Medical School that supports a finding of vicarious exemption under the integral part doctrine
described in § 1.502-1(b). Under that doctrine, when an organization performs essential
services for an exempt organization, the former organization may qualify for exemption even
though such activities, standing alone, would not justify exemption. See Rev. Rul. 58-194; Rev.
Rul. 78-41. However, for activities to be treated as an integral part of the activities of an already
existing exempt organization, there must be, in substance, a parent-subsidiary relationship
whereby the existing exempt organization exercises control and close supervision of the
organization seeking exemption under the integral part doctrine. See Rev. Rul. 68-26; Squire v.
Students Book Corp. You have never been under the close supervision and control of Medical
School. Although under your original bylaws one of your three directors was the chair of the
Department, the other two directors were not required to have any connection with Medical
School. And even this less than controlling relationship was removed from your Second
Amended and Restated Bylaws.

In addition to the control requirement, the activities of a subsidiary organization do not constitute
an integral part of the activities of the tax-exempt parent organization unless they are essential
to the accomplishment of the parent's exempt purposes. See IHC Health Plans, Inc. v. Comm'r.
Under the Agreement, you provided no services to Medical School other than to make equity
payments out of fees collected from Hospital. You have failed to show, and we fail to find, that
the making of equity payments to the faculty physicians is essential to the accomplishment of
Medical School's exempt purposes.

Therefore, since your activities under the Agreement do not, in themselves, further exempt
purposes, and since such activities are not an integral part of the exempt activities of a parent
organization, such activities do not form any basis for exemption under § 501(c)(3).

In addition, the making of "equity payments" to employees of another organization for the
purpose of rectifying perceived disparities in the employing organization's entry base salary
scales would appear to constitute inurement of your net earnings for the benefit of private
individuals within the meaning of § 1.501(c)(3)-1(c)(2). An organization will not qualify for
exemption under § 501(c)(3) unless no part of its net earnings inures to the benefit of any
private shareholder or individual. For these purposes, the term "private shareholder or
individual" means a person having a personal and private interest in the activities of the
organization, such as the directors and officers of the organization. Reg. § 1.501(a)-1(c). An
exempt organization may pay reasonable compensation for services actually rendered without
violating the inurement prohibition. Rev. Rul. 73-126. The compensation plan of an exempt
organization does not result in prohibited inurement if: (1) it is not merely a device to distribute
profits to principals or transfer the organization's principal activity into a joint venture; (2) the
compensation plan is the result of arm's-length bargaining; and (3) the compensation plan
results in reasonable compensation. Rev. Rul. 69-383. The faculty physicians to whom you
make payments are not your employees and they do not provide services to you. These
payments do not appear to be based on any objective measure of the value of the services
rendered under the Agreement, but appear, at least in part, to represent a device for the
gratuitous transfer of your net earnings to a group of persons that have a personal and private
interest in your activities, i.e., Department faculty members.

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In addition to administering the Agreement, you also provided administrative support to
Organization and Foundation for a fee. You did not tell us the nature of this support. The
provision of administrative services to unrelated exempt organizations for a fee is an activity
similar to a commercial trade or business carried on for profit, and does not further exempt
purposes. If the services were regularly carried on by one tax-exempt organization for other
tax-exempt organizations, such activity would constitute unrelated trade or business. See Rev.
Rul. 69-528, 1969-2 C.B. 127; Rev. Rul. 72-369, 1972-2 C.B. 245. Consequently, your
provision of such administrative services did not further any exempt purpose.

Finally, your sole current activity is to accept contributions and make payments therefrom to
Department faculty members to reimburse the personal professional development expenses
incurred by those members. Such payments are not based on need, nor are they provided to a
charitable class of individuals. Therefore they do not further a charitable purpose. See Rev.
Rul. 68-422.

Furthermore, you told us that such payments were not to be considered part of the total
compensation and benefits paid to such faculty or staff member under his or her employment
contract with Medical School and do not cover expenses that would otherwise be paid by
Medical School. Nor can the payments be considered the result of an arm's-length transaction,
since the chair of the Department who approves the payments is also a member of the
Department faculty and, presumably, would also be eligible for payments. Therefore, such
payments do not represent compensation for services as in Rev. Rul. 73-126, but appear to be
gratuitous transfers to a non-charitable class of private individuals as in Rev. Rul. 68-422
resulting in inurement of your net earnings in violation of § 1.501(c)(3)-1(c)(2).

Finally, insofar as such payments are made to cover the personal expenses of a small group of
designated individuals, i.e., Department faculty and staff, we conclude that you are operated to
benefit private, not public, interests in violation of § 1.501(c)(3)-1(c)(1)(ii).

Consequently, we conclude that you have not engaged in activities that further exempt
purposes in violation of § 1.501(c)(3)-1(c)(1), that you are operated to benefit private, not public,
interests in violation of § 1.501(c)(3)-1(d)(1)(ii), and that you have allowed your net earning inure
to the benefit of private shareholders or individuals in violation of § 1.501(c)(3)-1(c)(2).

## Conclusion

In light of the above, we conclude that you do not qualify as an organization described in §
501(c)(3).

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

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Under penalties of perjury, I declare that I have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement
contains all the relevant facts, and such facts are true, correct, and complete.

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done
so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to this address:

Internal Revenue Service
Attn:

1111 Constitution Ave, NW
Washington, DC 20224-0002

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Michael Seto
Manager, EO Technical