Commercial school services cause exemption revocation

Plain-English summary

The IRS revoked an educational organization's section 501(c)(3) exemption after its operations shifted toward fee-based transportation, technology-network, and property-leasing services for school districts and other organizations. Only a small portion of its revenue came from continuing professional education, while its other activities resembled services offered by taxable businesses. The IRS found no objective indication that government units treated the organization's activities as their own burdens: the organization was not created or controlled by government, school districts paid under contracts, and the organization bid like commercial providers. The services therefore did not qualify as educational activity or as lessening the burdens of government. Revocation was effective July 1, 2012, contributions were no longer deductible, and the organization was required to file corporate income tax returns.

Ruling snapshot

• Question: Did the organization's school transportation, technology, and leasing services remain exclusively charitable or educational?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 509(a)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 72-369; Rev. Rul. 85-2

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office
2525 Capitol Street, Suite 201 Employer Identification Number:
Fresno, CA 93721

Person to Contact:

Date: JUL 19 2017

Employee ID Number:

Number: 201741020 Tel:
Release Date: 10/13/2017 Fax:

UIL: 501.03-08
A
B

Certified Mail

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal
Revenue Code (the “Code”). It is determined that you do not qualify as exempt from Federal income tax
under section 501(c)(3) of the Code effective July 1, 2012.

Our revocation was made for the following reason(s):

A primarily performs activities which are substantially commercial in nature. A does not meet the
operational test under Code section 501(c)(3) as it conducts activities which have characteristics of a
trade or business. Thus, the organization is not operated exclusively for one or more exempt purposes
as set forth in section 501(c)(3) of the Code.

Contributions to your organization are not deductible under section 170 of the Code.

You are required to file Federal income tax returns on Forms 1120. File your return with the appropriate
Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and
information please visit www.irs.gov.

If you were a private foundation as of the effective date of the adverse determination, you are considered
to be a taxable private foundation until you terminate your private foundation status under section 507 of
the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th
Day of the fifth month after the end of your annual accounting period.

Processing of income tax returns and assessments of any taxes due will not be delayed should a petition
for declaratory judgment be filed under section 7428 of the Code.

We will make this letter and the proposed adverse determination letter available for public inspection
under Code section 6110 after deleting certain identifying information. We have provided to you, in a
separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the
documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for
filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write


to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication
892.

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is
not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have
to file a petition in a United States Court. The Taxpayer Advocate can however, see that a tax matter
that may not have been resolved through normal channels get prompt and proper handling. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this
letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate
for more information.

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

Sincerely Yours,

Joseph K. Phegley

Appeals Team Manager

Enclosure: Publication 892 and/or 556


Department of the Treasury Date:
Internal Revenue Service April 13, 2016
Tax Exempt and Government Entities Taxpayer Identification Number:
Exempt Organizations Examinations

Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager's Name/ID Number:

Manager's Contact Number:
Response due date:
Certified Mail — Return Receipt Requested
Dear

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action — Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren't an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

If we don't hear from you

If you don’t respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation
If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F


may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
requesting technical advice. If we issue a determination letter to you based on a technical
advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right
You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that _
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

Thank you for your cooperation. .
Sincerely,

Paul A. Marmolejo
Acting Director, EO Examinations
Enclosures:
Report of Examination
Form 6018
Publication 892
Publication 3498

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20
ISSUE:

1. Should the tax exempt status of the be revoked

because it is not operated exclusively for charitable purposes under Section
501(c)(3) of the Internal Revenue Code?

FACTS:

Original Incorporation dated April 20,19 _: , (the
“Center’) initially filed Articles of Organization dated April 20,19 , with the Secretary
of the . The Organization's purpose in Article 2 was:

“to provide improved and advanced education programs and methods in educational,
human services and like institutions, organizations and agencies through the
development and implementation of cooperative educational programs encompassing a
broad range of education areas and matters; to identify education needs and problems
of said educational human services institutions, organization and agencies and sponsor
collaborative efforts to meet such needs and problems; to receive and administer
financial support, assistance, grants and/or appropriations in support to new or ongoing
programs of the Corporation or in support of new or ongoing programs of educational
centers, institutions or agencies engaged in the providing of education and/or human
services, whether of a public or private character; to foster and implement the
distribution of needed and requested educational services; to foster, develop and
implement the establishment of exemplary education programs to serve as models for
said educational and human services organizations; to provide educational materials
and supplies to said education and human services organizations; and to do all those
things necessary and carry on all those activities deemed proper and incidental to effect
the aforecited purposes and generally to carry on any other activities which may be
advantageously pursued in conjunction with and in support of the Corporation.”

Application for Charitable Status received February 28, 19 __: The IRS received
Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the

Internal Revenue Code, from the Center on February 28,19 . The Center filed Form .
1023 to receive a definitive ruling as to their status under section 509(a)(3). The
Organization completed Part VII of Form 1023 stating that it is not a private foundation
because it operates solely for the benefit or in connection with one or more exempt
“organizations. The Form 1023 instructions for Part III Question 1 state: “give a narrative
description of the activities presently carried on by the organization, and also those that
will be carried on.” The Center attached a schedule with the detailed activities, which is
included as Attachment 1, pages 1 through 5. The Form 1023 listed —_ city and town
school systems in Northeastern as the qualifying supported
organizations. The list of city and town systems is on page 6 of Attachment I.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20

Determination Letter dated June 9,19:
On June 9, 19° , the iRS office in issued a letter, signed by

District Director, determining the organization’s status. The organization was
granted exemption under Section 501(c)(3) because they are an organization
described in 509(a)(3). A footnote to the determination letter stated, “This letter is
conditioned on the submission, within 90 days, of a conformed copy of the April 27,
19 amendment to the Articles of Incorporation.”

Articles of Amendment dated April 27,19 _: The Center filed Articles of Amendment
with the Secretary of the , dated April 27,19 , that
changed its purpose. The amended purpose in Article 2 was: “the Corporation is
organized exclusively for charitable, religious, education and scientific purposes,
including, for such purposes, the making of distributions to organizations that qualify as
exempt organizations under [.R.C. Section 501(c)(3) or as such law may be amended in
the future. Further, it is the purpose of the Corporation to serve and perform its services
on the behalf, among others, certain public organizations to wit
Committee, School Committee; School Committee,
School Committee, School Committee, School Committee,

School Committee, School Committee, School
Committee, School Committee, ; School Committee,
School Committee, School Committee, School Committee,

School Committee, School Committee.”

Determination Letter dated September 21,19 °° The IRS , Office issued
a letter, signed by , District Director, superseding the letter of June 9,
19 .The Center was granted exemption under Section 501(c)(3) because they are an
organization described in 509(a)(3). The determination letter states, “Based on
information supplied, and assuming your operations will be as stated in your application
for recognition of exemption, we have determined you are exempt from Federal Income
Tax under section 501(c)(3) of the Internal Revenue Code. We have further determined
that you are not a private foundation within the meaning of section 509(a) of the Code
because you are an organization described in section 509(a)(3). If your sources of
support, or your purposes, character, or method of operation change, please let us
know so we can consider the effect of the change on your exempt status and
foundation status.”

Restated Articles of Organization dated January 30,20 _: The Center filed
Restated Articles of Organization with the Secretary of the

, dated January 30,20 that changed the purpose of the corporation in
Article 2. The amended purpose is: “to provide improved and advanced educational
programs and methods in educational, human services and like institutions,
organization and agencies through the development and implementation of cooperative

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20

educational programs encompassing a broad range of educational area and matters; to
identify educational needs and problems of said educational and humans services
institutions, organizations and agencies and sponsor collaborative efforts to meet such
needs and problems; to receive and administer financial support, assistance, grants
and/or appropriations in support of new or ongoing programs of the Corporation or in
support of new or ongoing programs of educational centers, institutions or agencies
engaging in the providing of educational and/or human services, whether of a public or
private character; to foster and implement the distribution of needed and requested
educational services; to foster, develop and implement the establishment of exemplary
educational programs to serve as models for said educational and human services
organizations; to provide educational materials and supplies to said educational and
human services organizations; and to do all those things necessary and to carry on all
those activities deemed proper and incidental to effect the aforecited purposes and
generally to carry on any other activities which may be advantageously pursued in
conjunction with and in support of the Corporation and which are not in conflict with
Chapter 180 of the General laws or with the Corporation's status as an
organization described in Section 501(c)(3) of the Internal Revenue Code.”

Current Activities and Operational Information-Form 990 Part III:

Question 1 of Part III of Form 990 for tax year ending June 30,20 _ states “briefly
describe the organization's mission. The Center answered that it is “a diversified
educational and technological resource for schools, cities and towns and other non-
profit organizations...offers a broad range of professional development, facilities
management, transportation services and technology programs and solutions.”
Question 4 of Part III of Form 990 for tax year ending June 30,20 , states “describe
the organization’ program service accomplishments for each of its three largest
program services, as measured by expenses.” The following chart details the Center's
answer:

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
, Page: -3-


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20°
Revenue
Expenses Revenue Percentage Description of Program Services

%

Transportation services provided to
special needs students on behalf of
local school districts and other human
service agencies

Continuing professional education
programs, including programs offering
college credits, to teachers and
administrators from local school
districts and throughout eastern

%

Management of technology networks,
implementation of school based
technology systems, primarily for local
public school districts

% |

Various programs related to public,
private and special needs education,
the majority of which is real estate
services including rental of facilities to
educational organizations. Expenses
related to these programs are not
separately identified but are included in
management and general expenses

$

$

TS

Total

Additional Information Provided in the Center’s Response:

Corporate Structure: In 19[redacted], approximately [redacted] school districts formed
a regional organization for education and innovation, which operated until 19[redacted] when it
split into two entities, the Center and the [redacted]
(the “Collaborative”). The Collaborative operated as a government entity providing direct
student services while the Center provided the support services listed in the chart
above, plus human resources and administrative support for the Collaborative. As of
May 31, 20[redacted], the partnership between the Center and the Collaborative ended due to
a statute passed by the [redacted], “An Act
Relative to Improving Accountability and Oversight of Education Collaboratives.” This
legislation mandated separation between an education collaborative and any related
for-profit or non-profit organization. During this timeframe and ongoing, the U.S.
Department of Justice and the [redacted] Attorney General have investigated
several employees who have since been terminated. The investigations and separation
from the Collaborative generated multiple changes to the Center's senior personnel,
contracts and agreements, board members, by-laws and organizational structure.

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -4-


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20°
Law:

An organization described in subsection (c) or (d) or section 501(a) shall be exempt
from taxation under this subtitle unless such exemption is denied under section 502 or

503. [Section 501(a) of the Code].

The following organizations are exempt from Federal income tax: corporations, and any
community chest, fund, or foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to
foster national or international amateur sports competition (but only if no part of its
activities involve the provision of athletic facilities or equipment), or for the prevention of
cruelty to children or animals, 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 (except as
otherwise provided in subsection (h)), and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf
of (or in opposition to) any candidate for public office. [Section 501(c)(3) of the

Code].

In order to be exempt as an organization described in section 501(c)(3) of the Code,

‘an organization must be both organized and operated exclusively for one or more of the

purposes specified in such section. If an organization fails to meet either the
organizational test or the operational test, it is not exempt. [Treas. Reg. § 1.501(c)(3)-

1(a)(1)].

An organization is organized exclusively for one or more exempt purposes only if
its articles of organization (a) limit the purposes of such organization to one or
more exempt purposes and (b) do not expressly empower the organization to
engage, otherwise than as an insubstantial part of its activities, in activities which
in themselves are not in furtherance of one or more exempt purposes.

[Treas. Reg. § 1.501(c)(3)-1(b)(1)].

An organization is operated exclusively for charitable purposes only if it engages
primarily in one or more of the following activities: religious; charitable; scientific;
testing for public safety; literary; educational; fostering national or international sports
competition (but only if no parts of its activities involve the provision of athletic facilities
or equipment);prevention of cruelty to children or animals. It is not so operated if more
than an insubstantial part of its activities do not further these purposes: [Treas. Reg.

§ 1.501(c)(3)-1(c)(1)].

Form 886-A Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer - REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20

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.
The words “private shareholder or individual” refer to persons having a personal and
private interest in the activities of the organization. [Treas. Reg. § 1.501(c)(3)-1(c)(2)].

An organization may be exempt as an organization described in section
501(c)(3) if it is organized and operated exclusively for one or more of the
following purposes: (a) religious, (b) charitable, (c) scientific, (d) testing for public
safety, (e) literary, (f) educational, or (g) prevention of cruelty to children or
animals. [Treas. Reg. § 1.501(c)(3)-1(d)(1)(i)]

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 requirement 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, shareholders of the organization, or persons controlled,
directly or indirectly, by such private interests. [Treas. Reg. § 1.501(c)(3)-

1(d)(1)(ii)]-

The term “charitable” is used in section 501(c)(3) of the Code in its generally accepted
legal sense, and includes the promotion of education and lessening the burdens of
government. [Treas. Reg. § 1.501(c)(3)-1(d)(2)].

The term educational, as used in Section 501(c)(3) of the Code relates to: (a) the
instruction or training of the individual for the purpose of improving or developing his
capabilities; or (b) the instruction of the public on subjects useful to the individual and
beneficial to the community. [Treas. Reg. § 1.501(c)(3)-1(d)(3)(i)].

Exemption was denied to an organization formed to provide managerial and consulting
services at cost to unrelated exempt organizations on the ground that it was not
“operated exclusively” for exempt purposes under section 501(c)(3). The ruling states:
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 section 501(c)(3) of the Code. Furnishing the
services at cost lacks the donative element necessary to establish this activity as
charitable. [Rev. Rul. 72-369, 1972-2 C.B. 245].

However, an organization providing investment management services to other exempt
organizations at substantially below cost was granted exempt status. [Rev. Rul. 71-529,
1971-2 C.B. 234].

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20

Exemption was granted to an organization formed to initiate and develop plans and
programs to reduce vehicle deaths and injuries by providing free expert opinion to local
government officials regarding hazardous traffic conditions in the community and
conducting programs to inform the public about traffic safety. The organization was
supported by contributions from the public. Performing certain services for the benefit of
federal, state or local governments has been recognized as a charitable activity and
traffic control and safety are universally recognized as a governmental responsibility.
The relationship between the government and the organization also indicates the
existence of a burden of government in that the organization’s services are requested
by local governments and delivered to the government free of charge. Based on the
facts, the activity is a burden of government. By providing expert opinion to local
government officials, the organization relieved the government of an activity it would
otherwise have to perform. Therefore, the activities of the organization actually lessen
the governmental burden. [Rev. Rul. 76-418, 1976-2 C.B. 145]

Lessening the burdens of government occurs only if the governmental unit formally
recognizes the activities of the organization to be its burden. This objective
manifestation may be evident in the interrelationship between the organization and the
governmental unit. The organization's activities were an integral part of a larger
governmental program and the organization funded governmental expenses. The fact
that a governmental unit expresses approval of an organization's activities does not
establish that the organization is lessening the burdens of government. [Rev. Rul. 85-1
1985-1 C.B. 178].

Two requirements are set forth for an organization to qualify for exemption under IRC §
501(c)(3) by lessening the burdens of government. These requirements are:

1. An organization’s activities must be activities that a governmental unit considers to
be its burdens, and 2. The activities of the organization must actually lessen such
governmental burdens. [Rev. Rul. 85-2, 1985-1 C.B. 178].

The United States Supreme Court held that for an organization to qualify for tax-exempt
status; the organization must be exclusively devoted to an exempt purpose and the
presence of a single nonexempt purpose, if substantial in nature, will destroy the
exemption regardless of the number or importance of truly exempt purposes. [Better
Business Bureau v. United States, 326 U.S. 279 (1945)].

In one case, the United States Court of Claims held that, since the plaintiff was
providing information and services purchased by subscribers, the plaintiff was in direct
competition with other commercial organizations providing similar services. The court
stated that the plaintiff has chosen to compete in this manner and, consequently, the
plaintiff's activities acquire a commercial hue. It was readily apparent that those
operations emphasized by the plaintiff were more analogous to commerce than to

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20

education. By the sale of these services, the plaintiff entered, unwittingly or not, into a
business. The court concluded that the business purpose was primary and not
incidental to any educational purpose that may be present. [American Institute for
Economic Research v. United States, 157 Ct. Cl. 548, 302 F.2d 934].

Taxpayer's Position:

The Center disagrees with the Government that its tax exempt status should be

revoked because it is not operated exclusively for charitable purposes under Section
501(c)(3) of the Internal Revenue Code. The Center states that its school transportation
and technology activities lessen the burdens of government, which is a charitable
purpose.

The Center states that the transportation of schoolchildren is an established core
function of local government because requires school
districts to provide transportation for special needs students and G.L.
Ch.90 imposes regulations for transporting students in vehicles other than school
buses. Also, under the ; ;
local school districts are required to transport children to their original school if they
move out of the district due to homelessness or other economic displacement such as
domestic violence situations.

The Center provides three reasons why their transportation activities lessen the
government's burden. The first reason is that they preserve governmental resources by
saving school districts money because many smaller districts cannot afford to buy and
maintain the specially equipped vehicles. The second reason is that the Center fills the
void left by for-profit transportation companies because they will work with the school
districts and accept unprofitable routes assignments. Third, the Center's transportation
activities have operated at a loss because of accepting these unprofitable assignments.

The Center indicated that its technology services are essential to the communities
because municipalities recognize internet services are crucial and step in to provide
these services, indicating that securing technology access is a government function.
The Center’s technology services were developed specifically for, and often at the
request of and with significant input and direction from the school districts and do not
have widespread commercial applicability.

The Center provides three reasons why its technology services lessen the
government's burden. The first reason is that they work as an extension of the
government's IT departments by providing managed services to towns without sufficient
IT staff. The second reason is that the Center provides essential government services
not provided by for-profit technology companies because they provide storage and

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -8-


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20

maintenance of the electronic records as required by the
. Third, the Center permits flexibility in payment terms for the school
districts that are unable to meet the payment schedules.

Government's Position:

The Center's activities have changed substantially since it applied for exempt status.
Attachment I lists the educational activities, programs and partnerships included in their
Form 1023 exemption application. Currently, the Center only generates % of its
revenue from continuing professional education programs. Treas. Reg. § 1.501(c)(3)-
1(d)(2) and Treas. Reg. § 1.501(c)(3)-1(d)(3)(i) require that a charitable organization's
educational activities promote education and the instruction of the public on subjects
useful to the individual and beneficial to the community. The Center does not operate
exclusively for educational purposes as required in Treas. Reg. § 1.501(c)(3)-1(d)(1)(i)
and accordingly, does not qualify for exemption for educational purposes.

Building leases generate approximately % of revenue and the leases are the same in
nature as any commercial real estate lease and consequently, the leasing activity does
not qualify the Center for tax exemption under IRC 501(c)(3).

The transportation services and technology networks comprise % and % of
revenue, respectively. The determination of whether an organization’s activities lessen
the burden of government requires two tests per Rev. Rul. 85-2. First, it is necessary to
determine whether the Center has made the requisite showing of an objective
manifestation by a governmental unit that its activities constitute a burden of
government, by considering the following questions:

a. Does a statute specifically create the organization and clearly define the
organization's structure and purposes?

b. Are the activities an integral part of a larger governmental program, or performed
jointly with a governmental unit?

c. Do governmental units control the activities of the organization, such as appointing all
the board members?

d. Does the organization pay governmental expenses?

e. Are payments to the Center from regular government funding through grants or
general obligation bonds backed with the full faith and credit of the governmental unit
(as opposed to general revenue bond financing)?

f. Is the governmental unit prohibited from performing the particular activity?

A review of the Center's organization and activities indicates the following:
a. A statute did not create the Center; rather it split from the Collaborative because
a statute mandated the separation of an educational collaborative from related

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -9-


Form 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

- Name of Taxpayer. REVISION DATED 7/8/2016 Year/Period Ended
June 30, 20

for-profit and non-profit entities.

b. The city and town school districts use the Center to provide both transportation
and technology networks services. The Center uses the standard contract form
for technology network services, which are regulated by the

and the Federal Communications Commission. The Federal
Schools and Libraries “E-Rate” Program sets the reimbursement rates for
technology services provided to public schools. The Center bids on
transportation agreements in the same manner as other commercial entities. The
Center is not freeing up government fiscal assets because the school districts

| are paying for their services.

c. Since the Center's corporate restructuring and revision of the Articles of
Organization, the local school districts do not have representation on the
Center's board or any control over its activities.

d. The Center does not pay any governmental expenses rather the local school
districts pays the Center for its services.

e. The school districts pay the Center fees for services covered by contractual
agreements. General grants or obligation bonds are not used to fund the Center.

f. The constitution and statutes do not prohibit
the school districts from directly performing the transportation and technology
activities themselves.
Based on the above facts and circumstances, there is not an objective manifestation by
the governmental units that the Center’s activities are burdens of the government...

The second test per Rev. Rul. 85-2 is whether the Center's activities actually lessen the
burden of the government. The Center's activities do not differ from those of taxable
corporations throughout the state that also serve as transportation and technology
providers. The school districts contract with the Center to perform those activities
associated with its burden of transporting students and providing technology access.
The relationship between the Center and the school districts is more in the nature of a
commercial contract for services as opposed to a lessening of a governmental burden.
Because the facts show that the school districts are satisfying their burdens by
contracting on a commercial basis with the Center for transportation and technology
services, then the Center is not lessening their governmental burden.

Conclusion:

The no longer meets the requirements to qualify as
exempt from federal income tax under IRC section 501(a) as described in section
501(c)(3). Therefore, its exempt status under 501(c)(3) of the Internal Revenue Code
will be revoked.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -10-