                          T.C. Memo. 2000-329



                        UNITED STATES TAX COURT



              AT COST SERVICES, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13604-96X.                     Filed October 25, 2000.



     Matthew Marion Fondel (an officer), for petitioner.

     Joan Ronder Domike, for respondent.



                          MEMORANDUM OPINION


     COHEN, Judge:   Respondent determined that At Cost Services,

Inc., does not qualify as a section 501(c)(3) charitable

organization and, therefore, is not exempt from Federal taxation

under section 501(a).    Pursuant to section 7428 and title XXI of

the Tax Court Rules of Practice and Procedure, petitioner seeks a

declaratory judgment that it is a qualified organization under
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section 501(c)(3).   The issue for decision is whether petitioner

operates exclusively for charitable purposes.   Unless otherwise

indicated, all section references are to the Internal Revenue

Code in effect at the time the petition was filed, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

                            Background

     The administrative record, which includes all of the facts

upon which the Commissioner made the final adverse determination,

was submitted to the Court under Rule 217(b)(1) and is

incorporated herein by this reference.

     Petitioner is a nonprofit Delaware corporation with its

principal office located in New York, New York.   The sole

founder, director, and officer of petitioner is Matthew Marion

Fondel (Fondel), who has a bachelor’s degree in electrical

engineering from Northwestern University.   Before founding

petitioner, Fondel worked temporary service jobs for 4 years

through a number of temporary service agencies.

     On Form 1023, Application for Recognition of Exemption Under

Section 501(c)(3) of the Internal Revenue Code, petitioner stated

that its principal purposes are to:

     (a)   eliminate poverty for inner city minorities
           associated with long-term unemployment and under-
           employment and combat the racial prejudice these
           individuals face in the conventional work place;

     (b)   promote social welfare by providing a means of
           obtaining a lawful income to inner city minorities
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            and by providing them with benefits and
            privileges which they would enjoy if they had
            conventional employment (for example a health care
            plan, credit union, vacation pay, etc.).

     (c)    to reduce the burden on the federal and state
            governments of the current unemployment insurance
            system by emphasizing the placement of persons in
            temporary work, contract work, and self-employment
            as a means of keeping the individuals in the work
            place and as a means of reducing the cost to the
            government of paying unemployment insurance to
            these individuals until they can obtain
            conventional permanent employment.

Petitioner’s bylaws state:

     It is recognized * * * that a large segment of the
     population will never obtain conventional * * *
     employment. This corporation, At Cost Services, Inc.,
     a publicly supported charitable organization, is then
     created and empowered * * * to assist the unemployed in
     marketing whatever skills they may possess, and to
     train the unemployed in skills which are marketable
     * * *.

     Petitioner counsels and trains unemployed or underemployed

individuals to become temporary service workers.    Temporary

service workers, as defined by petitioner, include secretaries,

word processors, desktop publishers, data entry operators,

general clerical workers, receptionists, and light industrial

laborers.    Initially, petitioner plans to teach its clients basic

computer skills in demand by local businesses that historically

use temporary office labor.    Petitioner intends to become a “one-

stop-job-center” where job training and job placement take place

in the same location.
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     Petitioner works in conjunction with At Cost, LLC (LLC), a

Delaware for-profit limited liability company whose members

include Fondel and petitioner.    Petitioner acts as the managing

member of the LLC.   Petitioner or the LLC assists clients in

bidding for and finding temporary and contract work so that a

client may be employed year-round through a series of temporary

service jobs.   Petitioner advises clients to form their own

limited liability companies or become members of the LLC to

create advantages for local businesses.   Petitioner advertises to

local businesses that those advantages include:

     1.    A 10-50% reduction in their costs from temporary
           agencies and conventional consulting firms.

     2.    A relationship between companies and your LLC
           would be business to business (as with temporary
           agencies and conventional consulting firms) rather
           than the employer/employee relationship associated
           with directly hiring consultants.

     3.    Companies can enjoy the benefits of using
           consultants and avoid the nightmare of having
           consultants they use being reclassified by the
           state or the IRS as employees.

     The services provided by petitioner also assist local

businesses by providing a source of skilled labor at reduced

costs.    Petitioner forgoes the normal fee charged by a temporary

service agency, and the local businesses pay petitioner only the

hourly rate of the client who acts as an independent contractor.

Most businesses that are aided by petitioner are located in

economically depressed areas.
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     Fondel, who does not draw a salary, performs all of the job

training and job placement activities of petitioner and the LLC.

At the time of the filing of the application for tax-exempt

treatment, petitioner had referred about 30 people to temporary

personnel agencies where they were able to obtain temporary

employment.   Fondel also uses petitioner and the LLC to market

his own services as a temporary service worker.

     Petitioner plans to create another limited liability company

to publish a newsletter listing temporary employment agencies in

the area and their current needs for workers.   The purpose of

this activity will be for referring clients when petitioner is

unable to find work for them.

     The primary means of support for petitioner will be from

payments from clients who become members of the LLC or who create

their own limited liability companies.   If there is a net profit

after the expenses of petitioner and the LLC are paid, it will be

distributed to Fondel.   A payment of 10 percent of a member’s

gross income earned from jobs obtained through petitioner is

suggested.    Petitioner will also solicit donations from nonprofit

or private foundations and local businesses that have benefited

from the services of petitioner.   In 1995, petitioner received

$1,000 from the Regis Retirement Plan, Inc., a company that

petitioner helped to find a permanent employee.   Petitioner will
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also receive 10 percent of the gross profit from the sale of the

newsletter.

     Financial information included in petitioner’s application

for exempt status shows that it had occupancy expenses in 1994 of

$6,240 and itemized expenses of $2,230.   The occupancy expenses

were for an apartment that served as the office of petitioner,

the office of the LLC, and the personal living quarters of

Fondel.   Petitioner intends to obtain a building, either by lease

or gift, where it can perform job training and job placement

services in one location.

     On April 4, 1995, petitioner submitted its Form 1023,

Application for Recognition of Exemption Under Section 501(c)(3)

of the Internal Revenue Code.   Respondent issued an initial

adverse determination on October 23, 1995.   Petitioner appealed

to the Internal Revenue Service Office of Appeals, which gave a

final adverse determination on April 17, 1996, denying tax-exempt

status to petitioner under section 501(c)(3).    The Commissioner’s

reasons for denial stemmed from the determination that operations

of petitioner serve the private interests of Fondel, petitioner

is operated for private benefit rather than exclusively for

public purposes, and petitioner has failed to establish that it

is operated exclusively for exempt purposes.    Petitioner

challenges that determination in this action for declaratory

judgment.
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                             Discussion

     Petitioner bears the burden of proving that it is a section

501(c)(3) organization.    See Rule 217(c)(2)(A).   In order for

petitioner to meet this burden, the administrative record, upon

which this case is to be decided, must contain enough evidence to

support a finding contrary to the grounds set forth in the notice

of determination.   See Nationalist Movement v. Commissioner, 102

T.C. 558, 572 (1994), affd. 37 F.3d 216 (5th Cir. 1994); Church

in Boston v. Commissioner, 71 T.C. 102, 105 (1978).     A statute

creating an exemption must be strictly construed.     See American

Auto. Association v. Commissioner, 19 T.C. 1146, 1158 (1953);

Associated Indus. v. Commissioner, 7 T.C. 1449, 1464 (1946).

     Section 501(a) provides tax-exempt status for organizations

described in section 501(c).    Section 501(c)(3) includes the

following organizations:

          (3) Corporations, and any community chest, fund,
     or foundation, organized and operated exclusively for
     religious, charitable, scientific, testing for public
     safety, literary, or educational purposes, * * * no
     part of the net earnings of which inures to the benefit
     of any private shareholder or individual, no
     substantial part of the activities of which is carrying
     on propaganda, or otherwise attempting, to influence
     legislation, * * * and which does not participate in,
     or intervene in * * * any political campaign on behalf
     of (or in opposition to) any candidate for public
     office.

Contributions to organizations described in section 501(c)(3) are

generally deductible to donors.    See sec. 170(a)(1), (c)(2).
                               - 8 -


      To come within the terms of section 501(c)(3), an

organization must be both “organized” and “operated” exclusively

for tax-exempt purposes.   Sec. 1.501(c)(3)-1(a)(1), Income Tax

Regs.   The presence of a single substantial nonexempt purpose

precludes exempt status for the organization, regardless of the

number or importance of exempt purposes.   See Better Bus. Bureau

v. United States, 326 U.S. 279, 283 (1945).   The actual purposes

of the organization, not necessarily limited to those purposes

stated in the organizing documents, are the appropriate focus.

See American Campaign Academy v. Commissioner, 92 T.C. 1053, 1064

(1989).

      As stated in the regulations, the “operational test” is as

follows:

      An organization will be regarded as “operated
      exclusively” for one or more exempt purposes only if it
      engages primarily in activities which accomplish one or
      more of such exempt purposes specified in section
      501(c)(3). An organization will not be so regarded if
      more than an insubstantial part of its activities is
      not in furtherance of an exempt purpose. [Sec.
      1.501(c)(3)-1(c)(1), Income Tax Regs.]

Of the exempt purposes listed in section 501(c)(3), petitioner

maintains that it operates for charitable purposes.

      The term “charitable” is used in section 501(c)(3) in its

generally accepted legal sense and includes, but is not limited

to:

      Relief of the poor and distressed or of the
      underprivileged; advancement of religion; advancement
                              - 9 -


     of education or science; erection or maintenance of
     public buildings, monuments, or works; lessening of the
     burdens of Government; and promotion of social welfare
     by organizations designed to accomplish any of the
     above purposes, or (i) to lessen neighborhood tensions;
     (ii) to eliminate prejudice and discrimination;
     (iii) to defend human and civil rights secured by law;
     or (iv) to combat community deterioration and juvenile
     delinquency. * * * [Sec. 1.501(c)(3)-1(d)(2), Income
     Tax Regs.]

     Petitioner argues that its activities, which include job

training and job placement for persons who otherwise would remain

unemployed or underemployed, lessen the burdens of the

unemployment and welfare systems.   Petitioner maintains that its

goal of creating a “one-stop-job-center” was envisioned by the

Reemployment Act of 1994, S. 1951, 103d Cong., 2d Sess. (1994),

and, therefore, its application for tax exemption should be

treated differently than other applications for tax exemptions.

Respondent claims that petitioner has not established that it

operates exclusively for charitable purposes as defined in

section 1.501(c)(3)-1(d)(2), Income Tax Regs.

     Petitioner cites the comments of the Secretary of Labor

before the Senate Finance Committee for the proposition that the

Government has called on citizens to take action to help reduce

the burdens of the current unemployment system.   The Secretary

stated:

     The mismatch between the current [unemployment]
     system’s structure and the needs it is pressed to serve
     burdens federal and state taxpayers, and especially
     businesses, with enormous costs. State unemployment
                             - 10 -


     compensation payments have exceeded $13 billion in each
     of the last seven years, and in 1993--even as recovery
     set in--states paid out nearly $22 billion in regular
     unemployment benefits. Federal spending on
     administrative costs for regular unemployment insurance
     totalled $2.5 billion last year. But unemployment
     insurance is not designed to help speed workers into
     reemployment. So despite these huge outlays, the
     predicament of the long-term unemployed led to the
     repeated provisions of federal Emergency Unemployment
     Compensation payments, costing $24 billion over the
     past two years. [Reemployment Initiative: Hearings on
     S. 1951 (Reemployment Act of 1994) Before the Senate
     Comm. on Finance, 103d Cong., 2d Sess. (May 26, 1994)
     (statement of Robert B. Reich, Secretary of Labor);
     emphasis added.]

     The activities of petitioner fall outside of the definition

of “charitable” under section 501(c)(3).   Petitioner trains

individuals to fill temporary positions as secretaries, word

processors, desktop publishers, data entry operators, general

clerical workers, receptionists, and light industrial laborers.

Petitioner also assists clients in finding a chain of temporary

jobs so that a client will have employment year-round.

Petitioner encourages clients to create an independent contractor

relationship with temporary employers by using a limited

liability company to market the services of the client.    The act

of creating a limited liability company might also prevent a

client from being labeled as an employee of petitioner.    These

activities are indistinguishable from the activities of a for-

profit temporary service agency.
                                - 11 -


     The only real difference between petitioner and a for-profit

temporary service agency is that petitioner does not charge local

businesses the standard markup that such agencies routinely

collect for services.    However, this Court has held in analogous

circumstances that furnishing services to local businesses at

cost does not establish that an activity is charitable.    See

B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 360 (1978).

     In B.S.W. Group, a taxpayer’s sole activity was offering

consulting services at cost to nonprofit, limited resource

organizations engaged in various rural-related activities.    Some,

but not all, of the clients of the taxpayer were other exempt

organizations.   Services of the taxpayer consisted of obtaining

individuals to perform research projects for the clients.    The

individuals that were engaged received fees for their services.

This Court held that the taxpayer did not operate exclusively for

charitable purposes as required by section 501(c)(3) because its

primary purpose was commercial rather than educational,

charitable, or scientific.    See B.S.W. Group, Inc. v.

Commissioner, supra.

     The activities of petitioner similarly constitute the

conduct of a temporary service agency, which is essentially a

commercial venture.     Petitioner’s own services or the services of

its clients are in direct competition with for-profit businesses
                              - 12 -


in the temporary service field.   Petitioner is indistinguishable

from the corporation in B.S.W. Group.

     Furthermore, petitioner does not qualify as a section

501(c)(3) exempt organization because it benefits the private

interests of its founder, Fondel, and of the LLC more than

incidentally.   Petitioner submitted documents in the

administrative record that state:   First, in 1994, petitioner

paid $6,240 for an apartment that serves as the office of

petitioner and of the LLC and as the personal residence of

Fondel; second, any income of petitioner remaining after the

expenses of petitioner and of the LLC are paid passes to Fondel;

and, third, Fondel uses petitioner to market his own services as

a temporary service worker.   These nonexempt practices prevent

petitioner from qualifying as a section 501(c)(3) exempt

organization.   See Better Bus. Bureau v. United States, 326 U.S.

279 (1945).   Petitioner attempted to retract these statements

after the Commissioner determined that these items would preclude

petitioner from qualifying as a section 501(c)(3) organization.

However, we review the administrative record in its entirety.

     Citing the 13th and 14th Amendments to the Constitution,

petitioner argues that respondent, in violation of petitioner’s

equal protection rights, denied its application for tax-exempt

status because the sole founder, director, and officer of

petitioner is a black male.
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     Besides petitioner’s uncorroborated and inflammatory

accusations, the record is void of any suggestion that

petitioner’s application for tax-exempt status was denied because

petitioner’s sole founder, director, and officer is a black male.

Instead, based on our above analysis, we hold that the

Commissioner’s denial was correct and based on a determination

that petitioner is not operated exclusively for exempt purposes

under section 501(c)(3).

     For the reasons stated, we conclude that petitioner is not

operated as a section 501(c)(3) organization.    We have considered

the remaining arguments of petitioner, and they either are

irrelevant or otherwise lack merit.

                                           Decision will be entered

                                      upholding respondent’s

                                      determination.
