part7-33

7.20.4.1
(11-01-2004)
Overview

This IRM section provides information on specific topics that employees
in Exempt Organizations Determinations handle when processing determination
letter requests.
The information in this section describes the following:
- Private schools
- Transfer and control of gaming cases
- Issuance of group exemption letters
- Foreign applications
- Board expansion
- Terrorist issues

7.20.4.2
(11-01-2004)
Private Schools

For purposes of IRC 501(c)(3), private schools include primary or secondary
schools, colleges, and professional or trade schools (day care organizations
may also be included if all requirements are met). By definition, a school
is described in IRC 170(b)(1)(A)(ii).
A school must primarily present formal instruction and normally maintain
a regular faculty and curriculum, and normally have a regularly enrolled body
of pupils or students in attendance at the place where the organization regularly
carries on its educational activities.
All organizations that are private schools must establish a racially
nondiscriminatory policy, except purely religious schools (e.g., a seminary).
The information required for establishing such policy is set forth in Rev.
Proc. 75-50, 1975-2 C.B. 587.

7.20.4.2.1
(11-01-2004)
Processing Private School Cases

An agent must secure the following from a private school:
1. Either a statement in a charter, bylaws or other governing instruments,
  or a copy of a resolution signed and dated by the members of its governing
  board, which provides that the organization has a racially nondiscriminatory
  policy toward students. See Section 4.01, Rev. Proc. 75-50.
2. Copies of any brochures, application forms, advertisements and catalogues
  dealing with its student admissions, programs and scholarships, as well as
  representative copies of all written advertising used as a means of informing
  prospective students of its programs. This literature must contain a statement
  of the organization’s racially nondiscriminatory policy. If present
  literature does not contain a notice of the organizations racially nondiscriminatory
  policy, the organization must submit a statement signed by one of the principal
  officers that future literature will contain the required statement. See Section
  4.02, Rev. Proc. 75-50.
3. Original notice of the organization’s nondiscriminatory policy that
  must be published in a newspaper of general circulation that serves all racial
  segments of the community the organization serves. Such notice must follow
  the example in section 4.03 of Rev. Proc. 75-50 regarding the caption, wording,
  and the size of the type to be used in the advertisement. The notice must
  appear in a section of the newspaper likely to be read by prospective students
  and their families. Therefore, a notice published in the legal notices section
  or classified advertisements is generally not acceptable. The organization
  must furnish the entire page (the “tear sheet”
  ) of the
  newspaper in which the notice appears. A reproduced copy of the notice is
  not acceptable.
4. A numerical schedule showing the racial composition for the current academic
  year, and projected as far as may be feasible for the next academic year,
  of: (i) the student body, (ii) faculty, and (iii) administrative staff. Actual
  numbers are required rather than percentages for each racial/ethnic class.
  If the organization is not yet operational, the organization must estimate
  based on the best information available (such as the racial composition of
  the community served). See Section 5.01-1, Rev. Proc. 75-50.
5. The number and amount of loans and scholarships awarded to students enrolled
  by racial/ethnic categories. See Section 5.01-2, Rev. Proc. 75-50.
6. A list of the incorporators, founders, board members, and donors of land
  or buildings. See Section 5.01-3, Rev. Proc. 75-50.
7. A statement as to whether any of its incorporators, founders, board members,
  and donors of land or buildings have an objective to maintain segregated public
  or private school education. See Section 5.01-4, Rev. Proc. 75-50.
8. A statement that the organization will maintain records according to the
  provisions of Rev. Proc. 75-50, Section 7, in order to support the racially
  nondiscriminatory policy of the private school.
  
  Reminder:
  
  Carefully review responses to ensure that all requirements as set forth by
  Rev. Proc. 75-50 have been met.
Case files for recognition of exemption for private schools must include
a completed Private School Determination Case Checksheet
(see Exhibit 7.20.4-1) and a Private School Worksheet (see Exhibit 7.20.4-2). Should the organization
fail a sufficient number of categories on the Private School Determination
Case Checksheet, EO Technical should be contacted.
Agents closing private school cases are to issue Letter 947 including
paragraph 3201 for the inclusion of Rev. Proc. 75-50 requirements compliance
in order for the organization to maintain exemption.
Agents closing cases involving private schools operated by churches
are to add an addendum to Letter 947 stating that the organization is responsible
for the annual certification attesting to adherence to the provisions of Rev.
Proc. 75-50.
During the closing process, use Form 3198-A to indicate that private
school cases require mandatory review. See IRM 7.20.5 (when published).
For more information on this topic, see Rev. Proc. 75-50 and Rev. Rul.
71-447.

7.20.4.3
(11-01-2004)
Transfer and Control of Gaming Cases

Many organizations use gaming as a means to raise funds for their organization.
Charitable gaming includes bingo, raffles, pull-tabs, keno, etc., conducted
by or under the auspices of an IRC 501(c)(3) organization.
Organizations that conduct bingo as their primary activity are designated
as Reserved Inventory. See 7.20.1.2.3. Organizations that conduct bingo as
their primary activity are designated to be kept in Cincinnati, Ohio, for
processing. If an Area Office discovers that an organization’s primary
activity is gaming, the case may be returned to Cincinnati.
When working an application and it is discovered that an organization
will conduct charitable gaming, the agent should:
1. Inquire as to how much time the organization will expend (percentage-wise)
  conducting the activity.
2. Verify that the charitable gaming is legal under State law. If charitable
  gaming is not legal under State law, contact EO Technical.
3. Determine whether volunteers conduct the activity.
4. Determine if the gaming activity will be the primary activity. If so,
  see (2).
5. For case development purposes the agent may use a paragraph in an information
  letter similar to the one shown in Exhibit 7.20.4–3.
6. Consider whether the gaming causes the organization to incur a liability
  for unrelated business income tax. If the organization is liable for unrelated
  business income tax, include Form 990-T filing requirements on Form 8670 when
  closing the case.
7. Consider preparing an exam referral on Form 5666. See IRM 7.20.1.4.
8. Attach a copy of IRS Publication 3079, Gaming Publication for Tax Exempt
  Organizations, to the closing letter as an educational tool for the taxpayer.

7.20.4.4
(11-01-2004)
Issuance of Group Exemption Letters

Applications for group exemption letters are processed under the provisions
of Rev. Proc. 90-27, 1990-1 C.B. 514, and Rev. Proc. 80-27, 1980-1 C.B. 677,
modified by Rev. Proc. 96-40, 1996-2 C.B. 301.
Group rulings are intended as an administrative convenience to relieve
organizations with historically high levels of compliance from the burden
of filing an application for each subordinate. The Service may decline (Declination
letter) to issue a group exemption letter if warranted by the facts and circumstances.
The user fee is refunded in these cases.
See LEM 7.20.4.4(3).
The central organization must obtain recognition of its own exempt status
before or concurrently with the group application.
1. The central organization does not have to be exempt under the same paragraph
  of IRC 501(c) as its subordinates. The subordinates must be exempt under the
  same paragraph of IRC 501(c).
2. A regular exemption letter (Letter 947, Letter 948 or Letter 1045) will
  be issued and will include an addendum referring to the group exemption letter.
A subordinate included in a group exemption letter should not apply
separately for recognition of exempt status unless it no longer wants to be
included in the group exemption. Only subordinate organizations are covered
by group exemption Letter 2419.
A subordinate that is organized and operated in a foreign country may
not be included in a group exemption.
Organizations closely affiliated with governmental entities (instrumentalities)
may obtain a group exemption if the requirements are met.
Continued effectiveness of the group exemption letter is dependent on
the factors listed in section 7 of Rev. Proc. 80-27.

7.20.4.4.1
(11-01-2004)
Definitions

A group exemption letter is issued in response to a group ruling request
to a central organization recognizing, on a group basis, the exemption under
IRC 501(c) of its subordinate organizations on whose behalf the central organization
has applied for recognition of exemption. Rev. Proc. 80-27.
A central organization has one or more subordinates under its general
supervision or control. Therefore, a state, regional, or national organization
is the central organization for the units it controls.
A subordinate is a chapter, local, post, or unit of a central organization.
An intermediate organization is a central organization, which may also
be classified as a subordinate organization.

7.20.4.4.2
(11-01-2004)
Establishing Group Ruling Requests on EDS and Initial Processing

Group ruling requests are established on EDS as “Amendment
”
(A) cases with Form 1026.
A central organization that simultaneously requests an individual exemption
and a group exemption requires the establishment of two cases on EDS:
1. an I case for the parents individual exemption, and
2. an A case with Form 1026 for the group exemption.
Note:

It is the agents responsibility to ensure group ruling
requests are established correctly on EDS.
Group ruling cases are identified by screeners as “Reserved
Inventory”
for processing by a group ruling agent. A group ruling agent
will request group ruling cases according to the agents individual workload
and group ruling inventory level. However, there may be situations when a
group ruling may be assigned to an agent other than a group ruling agent.

Example:

An agent is assigned an initial application and
discovers the organization wishes to request a group ruling. The agent should
discuss the group ruling request with his or her manager to determine if the
case should be reassigned or coordinated with a group ruling agent.
The appropriate user fee must be submitted by the organization. Currently
the user fee for a group exemption is $500. The user fee schedule is provided
in Rev. Proc. 2004-8, 2004-1 I.R.B. 240 (published annually).
If an organization is applying for an individual exemption and group
exemption simultaneously, then the agent needs to verify that a user fee was
paid for both the individual exemption and group exemption.
Group ruling cases are subject to mandatory review. See IRM 7.20.5.4
for more information.

7.20.4.4.3
(11-01-2004)
Closing Procedures for Group Rulings

When preparing a case for closing, these instructions apply:
1. Complete the Group Ruling Checksheet. See
  Exhibit 7.20.4-4.
2. Contact Adjustments Unit at 513-263-3447 or 513-263-3454 to obtain a Group
  Exemption Number (GEN).
3. Forward the group ruling request to the Ogden Campus (previously known
  as the Ogden Service Center). Attach the Pilot Voucher (Form 2363-A) and attachment
  to the Pilot Voucher to the Form 1725.
4. Complete Pilot Voucher according to current group exemption specialist
  team example. Information on the bottom half of this form pertains to the
  subordinate(s). If the information (effective date of exemption, foundation
  status, etc.) for the subordinate(s) is different, attach a schedule indicating
  the correct information for each of the subordinates.
5. Prepare Letter 2419.
6. Prepare Form 8670 and complete all applicable fields including the GEN
  number assigned to the group exemption. EDS currently will not accept an affiliation
  code of 6 or 8 for the central organization. An affiliation code of 3 must
  be entered.
7. Prepare Form 3198-A, check mandatory review, and enter group ruling to
  forward case to EO Determinations Quality Assurance.
8. If the case is returned after managerial or technical review and it has
  been determined that a group ruling should not be issued, the agent must contact
  the adjustments clerk to remove record of GEN for the organization.
  
  Note:
  
  If the central organization plans to file a group return, inform the
  parent of the need for a separate EIN for the group return.
If the subordinate or intermediate organizations have outstanding exemption
letters and are to be included in a group exemption, the group exemption letter
will state that the prior exemption letters are superseded. The central organization
will be instructed to notify each subordinate that its individual exemption
letter is superseded.
Where a request for a group exemption is made by an intermediate organization
and the group exemption files indicate that there is an existing group exemption
letter to a central organization covering the intermediate and its subordinates,
the intermediate will be advised that it is not necessary to obtain another
group ruling.

7.20.4.4.4
(11-01-2004)
Group Ruling Additions, Deletions and Changes

Rev. Proc. 80-27 requires that the central organization submit annually
to the Ogden Campus (previously known as Ogden Service Center) information
about additions, deletions and changes in purposes, character, or method of
operation of subordinate organizations that are covered by the group exemption.
The information should be submitted 90 days before the close of its annual
accounting period.
1. If the annual list is submitted to an Area Office or to EO Technical,
  it should be forwarded to the Ogden Campus.
2. Amendments to the central organization should be submitted to TE/GE Customer
  Account Services for processing as described in IRM 7.20.2.4.2.
See IRM 3.13, Campus Document Services, for campus procedures for processing
Supplemental Group Ruling Information (SGRI).

7.20.4.4.5
(11-01-2004)
Discontinuance of Group Exemptions — Terminations

A group exemption should be terminated if the central organization notifies
EO Determinations that it no longer wishes to maintain its status as a parent
organization, but that it wishes to maintain its individual ruling.
A letter similar to Letter 2242 (DO/CG) will be issued in termination
cases. The letter should be modified to include information of the effect
the termination has on the central organization as well as the subordinates.
The termination letter will be mailed to the central organization only.
Add to the letter a statement that it should advise the subordinates of this
action including applying for individual exemption if desired.

7.20.4.4.6
(11-01-2004)
Denial of Application

The agent should discuss the proposed denial with the group manager.
A denial of a group exemption application may be based upon one or more
of the following:
1. Failure of the central organization to qualify for recognition of exemption
2. Other failure to satisfy the Rev. Proc. 80-27 requirements for group exemption
3. Nonqualification of the subordinates under IRC 501(c)
If the denial is based on (1) a) or b), the denial letter will include
a statement that if the individual subordinates wish to establish their own
exempt status, they must file separate exemption applications. The denial
letter should not discuss whether any of the subordinates might qualify under
IRC 501(c).
If the denial is based on paragraph (1) c), the denial letter will also
discuss why the subordinates do not qualify under IRC 501(c).
If one or more subordinates do not qualify for exemption and the central
organization:
1. Submits a new list of subordinates that qualify for the letter sought,
  issue a favorable group exemption letter. Include a statement about receipt
  (including the date) of the revised list of subordinates that replaced the
  previous list of subordinates.
2. Does not submit a new list of affiliates that qualify for the letter sought,
  issue a letter that is partly favorable only to those affiliates named in
  an addendum to the letter that qualify for the letter sought, and partly a
  denial of those affiliates that do not qualify for the letter sought. Include
  protest and conference rights (and IRC 7428 language in IRC 501(c)(3) cases)
  in the letter.
The usual protest and conference privileges should be afforded to the
central organization before the denial becomes final.

7.20.4.4.7
(11-01-2004)
Declining to Rule

See LEM 7.20.4.4.7.

7.20.4.4.8
(11-01-2004)
Potential Revocation

If a central organization or a subordinate submits information that
indicates that it no longer qualifies as tax- exempt based upon a change in
its organization or operations, the agent needs to prepare Form 5666 to refer
the information to EO Examinations for development of the revocation issue.
Revocation of a central organizations tax-exempt status will result in revocation
of the group exemption.
If one or more subordinates included in a group exemption letter are
revoked, the group exemption letter will no longer apply to the affected organization(s)
but will otherwise remain in effect, so long as there remains at least one
qualified subordinate.

7.20.4.5
(11-01-2004)
Foreign Applications

For purposes of EO Determination case processing:
1. Foreign organizations are those which are not domestic; and
2. Domestic means an organization that was created or organized in the United
  States or under the laws of the United States or of any State.
As a general rule, U.S. possessions are not treated as domestic organizations
since they are not contained in the general definition of United States that
is limited to States and the District of Columbia. Foreign organizations,
if meeting the requirements for the section under which they are applying,
may qualify for exemption.
Applications from foreign organizations and domestic conduits for foreign
organizations are identified during screening as Reserved Inventory. See 7.20.1.2.3
For additional procedures, see also, IRM 7.27.27, Application
of Taxes and Denial of Exemption to Certain Foreign Organizations.

7.20.4.5.1
(11-01-2004)
Processing Foreign Applications

Obtain an explanation about where the organization was created or organized
and why it is seeking United States tax exemption.
All documents submitted in support of an application must be in English
or accompanied by an English translation.
Foreign organizations that apply for IRC 501(c)(3) status must have
IRC 501(c)(3) language in their organizing document. If they do not want to
amend to include the language, suggest IRC 501(c)(4) status since contributions
may not be deductible anyway. Contributions may be deductible to a foreign
organization by treaty or if the organization is created or organized in a
possession of the United States.

Note:

Do not suggest IRC 501(c)(4) if the
organization is treated as a private foundation, such as a nonexempt charitable
trust defined in IRC 4947(a)(1).
Foreign schools must comply with Rev. Proc. 75-50.

Exception:

If a foreign school can demonstrate that the information is impossible to
collect because collecting it would be illegal under foreign law or impractical
under the circumstances, and can make a prima facie showing that the allegation
is true, such as a copy of the law or regulation, the Service may waive parts
of Rev. Proc. 75-50.
Foreign private foundations are excepted from IRC 508(a) and 508(e)
requirements if they receive substantially all of their income from sources
outside the U.S. from the date of creation. Unless foreign non-private foundation
applicants fall within the exceptions set forth in Reg. 1.508-1(a)(3), or
if a private foundation applicant receives in excess of 15 percent of its
support from U.S. sources from the date of creation, then the 15-month filing
requirement set forth in IRC 508(a) must be met. Foreign private foundations
receiving more than 15 percent of their support from U.S. sources from the
date of creation are subject to the governing instrument provisions of IRC
508(e).
Contributions to a foreign organization, other than an organization
created or organized in a U.S. possession, are not deductible by the donors
unless it is located in a country that has a tax treaty with the U.S. that
provides for deductibility of contributions (e.g., Canada). The application
must state which treaty governs contributions to it. If the application contains
no such statement, the determination letter will deny deductibility of contributions
without providing protest, conference, or declaratory judgment rights.

Note:

The complete text of all the tax treaties may be found on the following IRS
website: http://www.irs.gov/businesses/corporations/article/0,,id=96739,00.html.
The filing requirements for Form 990 and Form 990–T for foreign
tax-exempt organizations are similar to requirements applicable to domestic
organizations. A foreign organization described in IRC 509(a) (other than
a private foundation) that normally does not have more than $25,000 in annual
gross receipts from sources within the United States and has no significant
activity in the United States is not required to File Form 990. Significant
activity includes lobbying, political activity, and the operation of a trade
or business, but does not include investment activity. See Rev. Proc. 94-17,
1994-1 C.B. 457.

Note:

Since foreign organizations are not described in IRC
170(c)(2), declaratory judgment provisions under IRC 7428 do not apply with
respect to the contributions.

Note:

If the claim to be covered by
a treaty is questionable, this issue should be pursued by information letter
and/or a discussion with the organization prior to issuance of a determination
letter.
Other filing requirements for organizations created or organized in
possessions of the United States and which have employees are as follows:

Form Country Code

941 Puerto Rico 07

941 Virgin Islands, Guam, American Samoa 06

940 Puerto Rico 07

Note:

Input 941 filing requirements for true foreign
organizations only if there is proof of employees in the domestic U.S.
Approval of U.S. possessions. Organizations created
or organized in U.S. possessions (Puerto Rico, Virgin Islands, Guam, Marshall
Islands, America Samoa, Northern Mariana Islands, Federated States of Micronesia)
qualify for deductibility of contributions. Issue EDS Letter 1045, 947, etc.
Approval of “true”
foreign organizations
. “True”
foreign organizations do not receive deductibility
of contributions, unless it is pursuant to a treaty. Issue composed closing
letter.
To close a case involving a U.S. possession based on ”
Failure to Establish”
(FTE), the agent will complete the following actions:
1. Close case status 11.
2. Issue EDS Letter 1314/1315.
3. Input Form 1120/1041 filing requirements.
4. EDS Form 8670 will not accept the “other filing requirement
  ”
  — consider using 01/1 in this situation.
To FTE a “true foreign organization,”
the agent
will complete the following actions:
1. Close case status 12.
2. Issue composed FTE letter.
3. Generally, the organization should not be given Form 1120/1041 filing
  requirements; however, consider this requirement if the organization receives
  a significant amount of income from sources within the U.S.
The agent must place mail for foreign organizations in the designated
location for the group. There is no additional postage required for the following
territories: American Samoa, Federated States of Micronesia, Guam, Marshall
Islands, Northern Mariana Islands, Puerto Rico, and the Virgin Islands.
Telephone calls and facsimiles to foreign organizations require use
of international telephone lines. Accurate logs must be maintained to substantiate
the use of international telephone and fax lines.

7.20.4.5.2
(11-01-2004)
Canadian Treaty Organizations (Notice 99-47)

Pursuant to the U.S.-Canadian Tax Treaty and Notice 99-47, which governs
the treatment of Canadian charities seeking exempt status in the U.S., a Canadian
charity registered by the Canada Customs and Revenue Agency (CCRA) is automatically
recognized as exempt. However, a Canadian charity may request a ruling on
foundation status and be listed in Publication 78, Cumulative List of Organizations.
A Canadian charity requesting a ruling on its foundation status requires
no user fee and should be established on EDS as an A case. The case may be
closed as usual, except the agent will use a 4 as the deductibility code.
A Notice 99-47 charity requesting classification of its foundation status
will provide a copy of the charitys registration letter (Notification of
Registration) from the CCRA, along with the following items from Form 1023:
1. A completed and signed page 1 (Part I in its entirety),
2. A completed page 6 (Part III, items 7-9),
3. A completed page 7 (Part III, items 10–14),
4. Completed pages 8 and 9 (Part IV in its entirety),
5. Any required supporting schedule, and
6. Form 8833, Treaty-Based Return Position Disclosure Under Section 6114
  or 7701(b), or a separate statement indicating that the charity is claiming
  exemption pursuant to Article XXI of the Treaty.
Agents will:
1. Check the EDS listing for possible changes in the charity’s exempt
  status and, if the charity is not on the list and refuses to provide the Notice
  of Registration, contact the appropriate EO Technical contact.
2. Process the foundation classification issue in the normal manner, except
  that all rulings are definitive.
3. Issue a composed letter (either favorable or adverse) on the foundation
  issue.
4. Close the case on EDS.
The filing requirements are the same as for other foreign organizations.
See IRM 7.20.4.5.1.
If the charity does not submit financial data to establish its foundation
classification, it is treated as a private foundation.
A religious, scientific, literary, educational, or charitable organization
formed in Canada that has received a Form T2051, Notification of Registration,
from Revenue Canada and whose registration has not been revoked, may apply
for recognition as a social welfare organization under IRC 501(c)(4) without
completing all parts of Form 1024. Such an organization must complete only
Part I and the signature portion of Form 1024. For more information, refer
to Instructions for Form 1024, page 2, “Special Rule for Certain
Canadian Organizations.”
Termination of a foreign private foundation under IRC 507 requires consulting
with EO Technical for guidance to determine if IRC 507 is applicable.
Consulting with EO Technical is also required for non-routine issues
that arise during the course of a determination. The following types of cases
must be transferred to EO Technical:
1. An interpretation of a treaty or an international agreement that covers
  the determination
2. Any determination involving unprecedented or novel issues
If the case is closed favorably:
1. The effective date of the exempt status and foundation classification
  is the later of the effective date of registration (shown in the Notice of
  Registration issued by the CCRA) or October 13, 1995 (the effective date of
  the Competent Authority Agreement),
2. The Deductibility Code is 4 (Contributions to the Organization are Deductible
  under Treaty Provisions),
3. The Determination Code is 01, and
4. The Subsection Code is 03.

7.20.4.5.3
(11-01-2004)
Processing Procedures for Applicants from the United States Virgin
Islands (USVI)

A Memorandum of Understanding (MOU) was entered between the Virgin Islands
Bureau of Internal Revenue (BIR) and the Internal Revenue Service (IRS). The
purpose of the MOU is to implement processing procedures regarding applications
for exemption and the filing of returns. An MOU was necessary because there
had been confusion about whether an exempt organization chartered in USVI
was required to file a Form 990 with both the BIR and IRS. Prior to the MOU,
the BIR routinely sent exemption applications for the IRS to consider, as
a favor to the BIR, whether the particular organization wanted U.S. exemption
or not. The IRS considered the application and made a determination as to
its tax exemption. Unfortunately, the application and determination established
a filing requirement with the IRS.
There are three different situations in which the procedures below will
apply. It is important to make these distinctions and follow the appropriate
procedures.
1. The applicant files for exemption directly with the IRS and has no BIR
  involvement. The applicant files the appropriate Form 1023/1024 along with
  Form 8718 and pays the appropriate fee. The agent only corresponds with the
  applicant to determine exemption. U.S. exemption, if requirements are met,
  is granted. The exemption letter is issued to both the applicant and the BIR.
  The applicant will have Form 990 filing requirements, if warranted. IDRS will
  be updated to reflect the exemption, and the applicant will be entered into
  Publication 78. Form 3198-A will be attached to the approved application which
  states “Send copy of the letter to the BIR.”
2. The applicant has the BIR file for exemption with the IRS. The applicant
  files the appropriate Form 1023/1024 along with Form 8718 and pays the appropriate
  fee. The applicant completes Form 8821 authorizing the BIR to receive tax
  return information related to the exemption application. EDS should have been
  updated to reflect this authorization. The agent corresponds with both the
  applicant and the BIR to determine exemption. U.S. exemption, if requirements
  are met, is granted. The exemption letter is issued to both the applicant
  and the BIR. The applicant will have Form 990 filing requirements, if warranted.
  IDRS will be updated to reflect the exemption, and the applicant will be entered
  into Publication 78.
3. The BIR requests an information letter. The appropriate Form 1023/1024
  is submitted and marked as an information letter request. No Form 8718 is
  filed, and no fee is required. The agent corresponds with the BIR only to
  determine exemption. U.S. exemption is not issued. An information letter is
  issued to the BIR. There will be no Form 990 filing requirements. IDRS will
  not be updated to reflect exemption. Publication 78 will not be updated. EDS
  case will be closed status 12. The agent will attach Form 3198-A to the case
  and indicate “Microfiche for informational purposes only, not
  open for public inspection.”
  Also, prepare a buckslip which will be
  included in the case file on the left side, top, which states ”
  This application was processed for informational purposes only pursuant to
  the Memorandum of Understanding between the Virgin Islands Bureau of Internal
  Revenue and IRS. No U.S. exemption has been granted. This file is not open
  for public inspection. It has been microfiched for informational purposes
  only.”

7.20.4.6
(11-01-2004)
Board Expansion

Generally, expansion of an organizations board is a possible method
to lessen the degree of concern where the strong possibility for inurement
or private benefit is suggested by an organization’s application for
exemption. For additional information on this topic, see Rev. Rul. 69-383.

Example:

1. Where board members include persons who appear
to be related and such persons will be compensated, the addition of unrelated
outside parties to the board will dilute such majority. For example, A. Willow,
B. Willow, and G. Maple serve on a 3-person board. A. Willow will be paid.
The Willows are married to each other. The only unpaid, unrelated board member
is G. Maple. Maples vote on issues would not constitute a majority.

Example:

2. The addition of unrelated leaders from the community
at large who share the same interests of the organization tends to lessen
the possibility that benefits to insiders, including unreasonable compensation,
will occur.

Example:

3. In addition to diluting control
over a governing board, another method that can be used by an organization
in order to preclude the likelihood of inurement or private benefit is to
adopt a conflict of interest policy whereby the officers, directors, trustees
and highly compensated employees are prohibited from having decision making
authority over any activities where they have a conflict with the charitable
pursuits of the organization. For example, a director would not be eligible
to vote on a contract between the applicant organization and a company that
the director owns.
This applies to organizations other than private foundations seeking
exemption under IRC 501(c)(3).
We cannot require that an organization expand its board or adopt a conflict
of interest policy as a condition of exemption. If an organization refuses
to expand its board and inurement cannot be proven to have occurred but is
likely, then a detailed explanation justifying exemption should be incorporated
into Form 6038 (See Exhibit 7.20.2-1) when closing a case. Where there is
strong potential for inurement, a referral should be made for a future year
examination using Form 5666.

7.20.4.7
(11-01-2004)
Possible Terrorist Connections — Overview

An organization that conducts activities that are illegal or contrary
to clearly defined public policy does not qualify for exemption from federal
income tax under IRC 501(a). To minimize the chance that an organization that
commits acts of terrorism or supports such acts will receive recognition of
exemption, a procedure to identify applications where the organization may
be involved in or support terrorism is implemented. A Comprehensive List of
Terrorists and Groups is available as an EXCEL spreadsheet. EO Determinations
is responsible for updating this list periodically to add or remove names.
The Comprehensive List of Terrorists and Groups includes individuals, entities
and organizations listed in Executive Order 13224 and as a Foreign Terrorist
Organization, obtained from the Department of Treasury Office of Foreign Assets
Control (OFAC). The OFAC list can be obtained at http://www.treas.gov/offices/enforcement/ofac/sdn/index.html.
Only the names of individuals, entities and organizations listed as an SDT
(specially designated terrorist) or as an SDGT (specially designated global
terrorist) are added to the Comprehensive List of Terrorists and Groups.

7.20.4.7.1
(11-01-2004)
Processing Procedures

The following cases are to be transferred to EO Technical for processing:
1. Cases in which the applicant organization represents in its application
  that it will engage in terrorist activity, or in any activity that consists
  of providing support to terrorists or terrorist organizations, including sending
  funds, materials, or other resources for such activity.
2. Cases in which the Service has credible information that the applicant
  organization has engaged in or plans to engage in terrorist activity, or in
  any activity that consists of providing support to terrorists or terrorist
  organizations, including sending funds, materials, or other resources for
  such activity.
3. Cases where the applicant organization, listed principal officers, directors,
  trustees, or named potential grantees are included in the Comprehensive List
  of Terrorists and Groups.
4. Cases where the applicant organization, listed principal officers, directors,
  trustees, or named potential grantees are included in the list of foreign
  terrorist organizations (FTOs) designated by the U.S. Department of State
  under the Antiterrorism and Effective Death Penalty Act of 1996. The list
  is obtained from http://www.state.gov/s/ct/. See Exhibit 7.20.4-5.
  
  Note:
  
  All determination agents, including agents involved in the screening process
  as well as agents working regular inventory cases, must search the EXCEL spreadsheet
  containing the Comprehensive List of Terrorists and Groups for cases described
  in items c) and d) above. Any questions regarding a name on the list can be
  directed to the EO Technical contact.
Cases where the applicant organization is located in or plans to conduct
activities in, or send funds or materials to individuals or entities located
in or conducting activities in, or has officers or directors that are located
in a country designated as a state sponsor of terrorism under the Export Administration
Act and regulated by OFAC must be coordinated with EO Technical prior to any
final processing. These countries currently include:
1. Cuba
2. Iran
3. Iraq
4. Libya
5. North Korea
6. Sudan
7. Syria
Cases in which the facts and circumstances indicate a strong likelihood
of a terrorist connection by the applicant will be coordinated with the EO
Technical contact during case processing.
If paragraphs (1) through (3) are applicable, complete the Potential
Terrorist Connection Checklist. The checklist is shown in Exhibit 7.20.4-5.

7.20.4.8
(11-01-2004)
Exempt Organizations Technical E-Mail Box and Telephone Inquiries

Determination specialists may seek assistance on technical matters from
EO Technical though an E-Mail Box or by contacting a designated subject matter
expert by telephone.
- Determination specialists should advise their immediate manager of their
  intention to request informal assistance from EO Technical, whether by e-mail
  or telephone.
- E-Mail inquiries should be sent to *TE/GE-EO (the asterisk is required),
  and secure messaging must be used if the inquiry includes taxpayer information.
- The agents immediate manager must be copied on any e-mail inquiry. (If
  the manager is not copied, the inquiry will be returned without a response.)
  Similar
  procedures should apply to advising an immediate manager about informal assistance
  requested from EO Determinations Quality Assurance.
EO Technical will assign incoming e-mail requests to senior tax law
specialists based on their areas of expertise. EO Technical will provide a
response within 5 work days of assignment to the tax law specialist. If more
time is required to respond, EO Technical will send an interim reply providing
an estimated time frame for the response.

7.20.4.9
(11-01-2004)
Processing Guides

Processing guides are intended to provide aid in handling special determination
issues. Generally, a guide will provide standards that should be reviewed
to help determine whether an organization is qualified for the determination
letter requested.
1. Organizations that apply for exemption representing that they intend to
  be involved in providing charitable housing through a low income
  housing partnership that offers tax credits should be reviewed based
  on the standards set forth in the Low Income Housing Tax Credit Limited Partnership
  memorandum (see Exhibit 7.20.4-6).
2. Form 1024 applications filed by voluntary employee beneficiary
  associations (VEBA) seeking recognition of exemption under IRC 501(c)(9)
  should be reviewed based on the standards set forth in the VEBA Reference
  Guide Sheet and the accompanying VEBA Reference Guide (see Exhibit 7.20.4-7).
3. Requests for approval of set-asides under IRC 4942(g)(2)
  should be reviewed based on the standards set forth in the Reference Guide
  Sheet for Processing Set-Aside Requests, the accompanying ”
  Law at a Glance,”
  and sample private rulings (see Exhibit 7.20.4-8).
4. Applications for recognition of exemption under IRC 501(c)(3) filed by health care providers, such as hospitals, clinics, and health
  maintenance organizations, should be reviewed based on the standards set forth
  in the Guide Sheet and Reference Guide for Hospitals, Clinics and Similar
  Health Care Providers (see Exhibit 7.20.4-9). This guideline was previously
  issued in the FY 2004 Exempt Organizations Continuing Professional Education
  (CPE) text.
5. Applications for recognition of exemption under IRC 501(c)(3) filed by
  organizations, which are closely affiliated with state institutions
  or Indian tribal governments, should be reviewed
  based on the standards set forth in the Guide Sheet and Reference Guide for
  IRC 501(c)3) Organizations Closely Affiliated with State or Indian Tribal
  Governments (see Exhibit 7.20.4-10). This guideline was previously issued
  in the FY 2004 Exempt Organizations Continuing Professional Education (CPE)
  text.
6. Requests for advance approval of individual grant procedures
  filed by private foundations under IRC 4945(d)(3) and IRC 4945(g)
  should be reviewed based on the criteria set forth in the Guide Sheet and
  Instructions for Advance Approval of Individual Grant Procedures (see Exhibit
  7.20.4-11).
7. Applications for recognition of exemption under IRC 501(c)(3) filed by limited liability companies, and by organizations associated
  with limited liability companies, should be reviewed based on the Limited
  Liability Company Reference Guide Sheet and accompanying Instructions (see
  Exhibit 7.20.4-12).
8. Applications for recognition of exemption under IRC 501(c)(3) filed by charter schools should be reviewed based on the criteria set
  forth in the Charter School Guide Sheet and the accompanying Reference Guide
  (see Exhibit 7.20.4-13).

Exhibit 7.20.4-1
(11-01-2004)
Private School Determination Case Checksheet

Private School Determination Case Checksheet
Name
of Organization:

This checksheet is to be used to classify
applications for recognition of exemption from federal income tax under IRC
501(c)(3) filed by private elementary or secondary schools and organizations
that support such schools.
If at least one question in Category A and
one question in Category B are answered affirmatively, call the EO Technical
private school contact.
If the application for exemption does not provide
enough information to answer a particular question, the specialist should
request the information from the organization, or other appropriate source,
as discussed with the EO Technical contact. Specialists should not hesitate
to call the designated EO Technical contact for informal assistance in developing
and analyzing private school cases.

Category A

(YES/NO)
1. Is the applicant organization
a private elementary or secondary school?
2. Does the applicant organization
support the activities of private elementary or secondary schools?

Category B

(YES/NO)

1.
Is the applicant organization located in Mississippi or Louisiana?
2. Has
the applicant organization ever been denied exemption?
3. Has the applicant
organization ever had previous IRC 501(c)(3) status revoked?
4. Has the
applicant organization ever been described or adjudicated as racially discriminatory
by a court or governmental administrative body?
5. Was the applicant organization
formed at the time of public school desegregation in its area?
6. Are there
any indications of actual racial discrimination present (third party complaints,
etc.)?
7. Did the applicant operate as a taxable organization before filing
its application for exemption and, if so, is there any evidence of prior discriminatory
operations?
8. Is the applicant organization a successor organization to
an organization described in questions 2 through 7?
9. Is the applicant
organization supporting one or more organizations described in questions 1
through 8?

The completed checksheet should be inserted
in the administrative file on the left side of the folder and will become
part of the permanent record in the case for purposes of post review and records
retention.

Exhibit 7.20.4-2
(11-01-2004)
Private School Worksheet

School Worksheet

Rev. Proc. 75–50

a. Section 4.01 – Racially nondiscriminatory policy
statement must be in one of the following:

Articles of Incorporation
or Amendments thereto

Bylaws or other governing instrument

Resolution, signed and dated by the members of the
governing body