                  T.C. Memo. 2002-293



                UNITED STATES TAX COURT



        LAPHAM FOUNDATION, INC., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3881-01X.               Filed November 27, 2002.


     P is a nonprofit corporation described in sec.
501(c)(3), I.R.C., and exempt from taxation under sec.
501(a), I.R.C. P’s articles of incorporation, as filed
in conjunction with its application for exempt status,
provide that it is to operate exclusively for the
benefit of the American Endowment Foundation, a
publicly supported charitable organization. The
Commissioner determined that P was a private foundation
and not a supporting organization as defined in section
509(a)(3), I.R.C.

      Held: P is to be classified as a private
foundation on account of failure to satisfy the
integral part test of sec. 1.509(a)-4(i)(3), Income Tax
Regs.

Nancy Ortmeyer Kuhn, for petitioner.

Helen F. Rogers, for respondent.
                                 - 2 -

                          MEMORANDUM OPINION


     NIMS, Judge:     The Lapham Foundation, Inc. (petitioner), is

an organization described in section 501(c)(3) and exempt from

taxation under section 501(a).    Respondent determined that

petitioner is a private foundation as defined in section 509(a),

and petitioner brought this action, pursuant to section 7428, for

a declaratory judgment that it is a supporting organization

within the meaning of section 509(a)(3) and therefore not a

private foundation.    The case was submitted on the basis of the

pleadings and the facts recited in the administrative record, the

latter of which are assumed to be true for purposes of this

opinion.   See Rules 122(a), 217.   The principal office of

petitioner at the time of filing the petition herein was located

in Northville, Michigan.

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code, as amended, and all Rule

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

                              Background

The Laphams and Estate Storage

     Charles P. Lapham was born on September 22, 1933, and Maxine

V. Lapham was born on October 14, 1934 (hereinafter individually

Mr. Lapham and Mrs. Lapham and collectively the Laphams).      By

1991, the Laphams were involved in an enterprise known as Estate

Storage, Inc., a Michigan corporation.     At that time, Estate
                               - 3 -

Storage was owned 50 percent by the Laphams1 and 50 percent by an

unrelated shareholder.   During 1991, the Laphams lent $806,000 to

Estate Storage.   Monthly payments of principal and interest at

the rate of 10 percent were made until 1993, at which time the

balance was renegotiated with interest at 8 percent.

     In 1994, the Laphams purchased the interest of the unrelated

shareholder and lent an additional $1 million to Estate Storage.

This loan was consolidated with the earlier obligation, and

monthly payments of principal and interest at 8 percent continued

until the balance was again renegotiated on December 30, 1998.

Following such renegotiation, the obligation was memorialized in

a promissory note in the face amount of $1,554,244.    The maker of

the note was Estate Storage, and the Laphams were the named

payees.   The note bore interest at the rate of 7.75 percent per

annum, payable in quarterly interest-only installments of

$30,113.48.   The principal was due in full no later than December

30, 2013, and the note could be prepaid without penalty at the

option of Estate Storage.   The instrument was executed by Mr.

Lapham in his capacity as president of Estate Storage.   Estate

Storage holds a second-to-die life insurance policy sufficient in



     1
       The record in this case indicates that, at least as of
late 1999, the Laphams’ interests in Estate Storage were in fact
held through their respective revocable living trusts. For
convenience, we adopt the convention, employed with some
frequency throughout the administrative record, of simply
referring to the Laphams in their individual capacities.
                               - 4 -

amount to satisfy the obligation under the note in the event of

the untimely deaths of both Mr. and Mrs. Lapham.

The American Endowment Foundation

     The American Endowment Foundation (AEF) is a nonprofit

corporation organized under the laws of the State of Ohio.     AEF

has been recognized by the IRS as an organization described in

section 501(c)(3) and as a publicly supported entity as defined

in section 509(a)(1).   The Amended Articles of Incorporation of

AEF provide generally that the corporation “is organized and

shall be operated as a community foundation.”   The document

further specifies:

          The Corporation shall be operated exclusively for
     public charitable and educational uses and purposes, as
     will, in the absolute and uncontrolled discretion of
     the Board of Trustees, most effectively assist and
     benefit the community consisting of the inhabitants of
     the United States of America, including within such
     purposes:

               1. Investigating, engaging, conducting,
          supporting, promoting and extending financial aid
          through grants, gifts, contributions or other
          assistance to qualified charitable organizations
          or for public charitable or educational purposes;

               2. Accepting or receiving, absolutely or in
          trust, from any individuals, firms, associations,
          corporations, trusts, foundations, or any
          government or governmental subdivision, unit or
          agency, gifts, legacies, bequests, devises,
          remainders, funds and property of any kind,
          tangible or intangible, real or personal;

               3. Holding, managing, selling, investing,
          reinvesting the property so acquired by the
          Corporation and the income thereon and using,
          applying, contributing and disbursing the
                               - 5 -

          principal and the income thereof solely for the
          public charitable and educational purposes of the
          Corporation; * * *

     AEF operates a donor-advised fund program under which donors

are able to make recommendations regarding the charitable use or

beneficiary of their contributions.    Such suggestions are

generally, but not necessarily, followed, as the organization is

not bound by any donor’s advice.   The ultimate decision with

respect to the timing, manner, or recipient of any distribution

lies with AEF.

     During 1998, total contributions in the amount of $7,350,000

were received by AEF.   The organization’s income was $650,000.

The Lapham Foundation

     Petitioner finds its genesis in the Laphams’ intent to

return to their community of Northville, Michigan, a portion of

what they had received over the years as long-time residents and

community leaders.   Petitioner was incorporated by Mr. Lapham as

a nonprofit corporation under the laws of the State of Michigan

on December 29, 1998.   The articles of incorporation filed with

the State at that time provide:

          The purpose of the Corporation is to operate
     exclusively for the benefit of THE AMERICAN ENDOWMENT
     FOUNDATION, a publicly supported organization, as
     described in Internal Revenue Code Section 509(a)(1) or
     (2), or, in the event THE AMERICAN ENDOWMENT FOUNDATION
     loses its tax exempt status, substantially abandons
     operations, or dissolves, for the benefit of additional
     publicly supported organizations of the same class, by
                              - 6 -

     receiving and administering funds for the benefit of THE
     AMERICAN ENDOWMENT FOUNDATION or other publicly-supported
     [sic] organizations of the same class.

The articles also named the Laphams as petitioner’s initial

officers and set forth the following with respect to the board of

directors:

          (a) The affairs and business of the Corporation
     shall be conducted by a Board of Directors consisting
     of three or more persons. The members of the Board
     shall be elected annually by the existing directors.
     Provided, however, members of the Board who are
     disqualified persons as defined in Section 4946(a) of
     the Internal Revenue Code shall not comprise a majority
     on the Board. Provided further, however, that
     foundation managers and publicly supported
     organizations are not disqualified persons for purposes
     of this requirement.

          (b) The first Board of Directors shall be:

                    CHARLES P. LAPHAM
                    MAXINE V. LAPHAM
                    DARCY CONNOLLY
                    GEORGIANA CHASE[2]
                    JOHN A. GALLINA

          (c) In the event of a vacancy on the Board of
     Directors by reason of death, resignation or removal,
     the replacement directors(s) will be elected in
     accordance with the by-laws. CHARLES P. LAPHAM and
     MAXINE V. LAPHAM shall each be a director of the
     Corporation for the full term of his or her natural
     life, or until his or her resignation, in accordance
     with the by-laws.

     On December 31, 1998, the Laphams contributed to petitioner

the above-described promissory note with face amount of


     2
       The first name of Ms. Chase is variously spelled in the
parties’ filings as both Georgiana and Georgianna, with the
latter seeming predominant in the administrative record (and
generally used herein).
                                - 7 -

$1,554,244.00.    Simultaneously with the foregoing contribution,

petitioner and the Laphams entered into a charitable gift annuity

agreement whereby petitioner agreed to pay the Laphams an annual

annuity of $116,568.32 over the joint lives of the donors,

payable in quarterly installments of $29,142.08.    The obligation

is unsecured.

The Administrative Process

     In a Form 1023, Application for Recognition of Exemption,

received by the Internal Revenue Service (IRS) in July of 1999,

petitioner sought recognition as a section 501(c)(3) tax-exempt

organization and as a section 509(a)(3) supporting organization.

Therein petitioner indicated that it would “support THE AMERICAN

ENDOWMENT FOUNDATION * * * and other qualified charitable

organizations by receiving and administering funds for the

benefit of THE AMERICAN ENDOWMENT FOUNDATION.”    Petitioner

further explained that it would be “operated in connection with”

AEF and would “receive[] donations which would otherwise be the

subject of fundraising activities conducted by the supported

organization.”

     The Form 1023 described petitioner’s sources of financial

support as “Donations from the Lapham family and its friends,

including individuals and businesses” and “Interest on

investments”.    The statement of revenue and expenses included

with the application reflected gifts, grants, and contributions
                                - 8 -

of $1,554,244 in 1998 and anticipated gifts, grants, and

contributions of $5,000 per year for 1999 and 2000.   The

statement further projected for both 1999 and 2000 gross

investment income of $120,454 and an annuity obligation of

$116,568.    The resultant excess of revenue over expenses for 1999

and 2000 was therefore a projected $8,886 ($3,886 + $5,000),

respectively.   The $1,554,244 note receivable was shown on the

attached balance sheet as petitioner’s sole asset.

     During the administrative process, petitioner also

represented that:   (1) Petitioner would receive outright

testamentary gifts of approximately $693,000 at the death of the

Laphams through beneficiary designations of retirement assets;

(2) petitioner would be the beneficiary of a charitable lead

trust under the revocable living trusts of the Laphams which,

based upon certain assumptions, would distribute $355,834

annually to petitioner for a period of 17 years from the Laphams’

deaths; and (3) the Laphams had pledged an additional $207,733 to

petitioner contingent on approval under section 501(c)(3) and

509(a)(3).

     As regards petitioner’s support of AEF, the Form 1023

reflected that petitioner intended to pay at least 85 percent of

its income to the organization and anticipated a contribution

annually of approximately $7,600.   Later, in correspondence

exchanged during administrative consideration, petitioner stated:
                                - 9 -

          Applicant will specifically provide that the
     American Endowment Foundation shall receive one-third
     of the support provided through the donor advised fund
     to expand its representation in Southeastern Michigan.
     The remaining two-thirds will support only qualified
     charities of Northville, Michigan under the independent
     determination of American Endowment Foundation’s board
     of directors, based upon the non-binding
     recommendations of the Applicants [sic] advisory
     committee. * * *

               *    *    *      *       *   *      *

     The purpose to which the funds are put will represent a
     projected $5,682 or 39.11% of the American Endowment
     Foundation’s overall expenditures toward supplies,
     postage, telephone and travel. Furthermore, these
     funds will represent virtually the entire expenditure
     by the American Endowment Foundation within the
     Southeastern Michigan region.

The above suggests that petitioner intended to recommend to AEF

that one-third of its contributions to the donor-advised fund be

used to support activities in southeastern Michigan and two-

thirds be used to support charities in Northville, Michigan.          As

discussed above, AEF is not bound by such recommendations.

     With its Form 1023, petitioner submitted to the IRS a copy

of the organization’s bylaws.   Pertaining to governance of

petitioner, the bylaws reiterated that there were to be at least

three directors, a majority of which could not consist of

disqualified persons under section 4946.        The bylaws provided

that for purposes of conducting business, a majority of the

entire board would constitute a quorum, with a majority vote

thereof determining board action.   The instrument further
                              - 10 -

specified that any director, except Mr. and Mrs. Lapham, could be

removed with or without cause by a majority vote of the directors

then in office.

     In addition to the Laphams, the individuals named to

petitioner’s initial board of directors were John A. Gallina of

Northville, Michigan; Georgianna Chase of Northville, Michigan;

and Darcy Connolly of Cincinnati, Ohio.   None of these three

directors had a family relationship with the Laphams, had an

employment relationship with the Laphams or any business owned by

the Laphams, or received a fee for services provided to the

Laphams.   Mr. Gallina was appointed to petitioner’s board by AEF;

petitioner represented that Mr. Gallina also served on the boards

of directors of other organizations in southeastern Michigan

supporting AEF.   Georgianna Chase was an elder of the First

Presbyterian Church of Northville, nominated by the congregation

and elected by general vote to the church’s governing body.

     As correspondence passed between the parties during the

administrative process, respondent by letter dated April 19,

2000, recognized petitioner as exempt from taxation pursuant to

section 501(c)(3) and issued a proposed adverse ruling as to

petitioner’s private foundation classification.   By letter dated

July 14, 2000, respondent supplied additional grounds for the

proposed adverse ruling.   The final submission from petitioner

contained in the administrative record is a letter with
                              - 11 -

attachments dated August 21, 2000.     In this communication,

petitioner proposed to amend its articles to include the First

Presbyterian Church of Northville and the Boy Scouts of America

Detroit Area Council, specifically troops of Northville,

Michigan, as supported organizations, with AEF remaining as the

third supported entity.   Petitioner offered the following

information about its intended support of the church:

          Applicant will provide support to First
     Presbyterian Church of Northville of at least $10,000
     annually. The contribution will support two specific
     programs of First Presbyterian Church of Northville,
     namely, the Music Endowment Fund and the Land/Real
     Estate Acquisition Fund. Applicant’s contribution of
     $1,000 to the Music Endowment Fund constitutes 40% of
     an approximately $2500 budget for the year 2000.
     Applicant’s contribution of $9,000 to the Land/Real
     Estate Acquisition Fund constitutes 80% of an
     approximately $15,000 budget for the year 2000.

No details were given with respect to support of the Boy Scouts.

     Petitioner also proposed to amend its bylaws and the Estate

Storage promissory note to address concerns relating to issues of

control.   Enclosed with the letter was a copy of the proposed

amended bylaws reflecting changes which included providing that a

quorum could not consist of a majority of disqualified persons,

that any director could be removed by a majority vote of the

current directors, and that directors were prohibited from

engaging in any excess benefit transactions as defined in section

4958.   Similarly enclosed was a copy of a proposed demand note
                              - 12 -

for use in lieu of the 15-year term instrument and incorporating

reference to mortgage security and protection against other

liens.

     By letter dated December 18, 2000, respondent issued a final

adverse ruling regarding petitioner’s status as a private

foundation.   The letter stated:

           This ruling is made for the following reason(s):

          You fail to meet the “attentiveness test” under
     the integral part test found under section 1.509(a)-
     4(i)(3)(iii) of the Income Tax Regulations.

          You fail to meet the test for control by
     disqualified persons set forth in section 1.509(a)-
     4(j)(1) of the Regulations. Your primary asset is a
     promissory note secured by assets of a corporation
     controlled by disqualified persons and the income of
     which is payable by that same corporation.
     Disqualified persons are in a position to control you
     by means of the power they exercise, through their
     corporation, with respect to your primary asset.

                            Discussion

I.   General Rules

      Section 509(a) defines a private foundation as any

organization described in section 501(c)(3) except those excluded

under section 509(a)(1) through (4).     Paragraphs (1) and (2) of

section 509(a) detail what are referred to as publicly supported

entities, sec. 1.509(a)-4(a)(5), Income Tax Regs., and encompass

religious, educational, medical, and governmental entities and

institutions which receive substantial public support.     Paragraph
                               - 13 -

(3) of section 509(a) describes what are termed supporting

organizations, sec. 1.509(a)-4(a)(5), Income Tax Regs., as

follows:

     an organization which--

          (A) is organized, and at all times thereafter is
     operated, exclusively for the benefit of, to perform
     the functions of, or to carry out the purposes of one
     or more specified organizations described in paragraph
     (1) or (2),

          (B) is operated, supervised, or controlled by or
     in connection with one or more organizations, described
     in paragraph (1) or (2), and

          (C) is not controlled directly or indirectly by
     one or more disqualified persons (as defined in section
     4946) other than foundation managers and other than one
     or more organizations described in paragraph (1) or
     (2); * * *

Paragraph (4) excepts entities involved exclusively in testing

for public safety.

     As a practical matter, organizations classified as private

foundations are subject to an excise tax regime and to

deductibility limits on contributions not applicable to publicly

supported charities and other excepted entities.   Secs. 170,

4940-4948.   The rationale underlying this distinction, and its

relationship to supporting organizations in particular, has been

encapsulated by the Court of Appeals for the Seventh Circuit:

          Public charities were excepted from private
     foundation status on the theory that their exposure to
     public scrutiny and their dependence on public support
     would keep them from the abuses to which private
     foundations were subject. Supporting organizations are
     similarly excepted in so far as they are subject to the
                                 - 14 -

     scrutiny of a public charity. The Treasury Regulations
     therefore provide that the supporting organization must
     be responsive to the needs of the public charity and
     intimately involved in its operations. [Quarrie
     Charitable Fund v. Commissioner, 603 F.2d 1274, 1277-
     1278 (7th Cir. 1979), affg. 70 T.C. 182 (1978); fn.
     refs. omitted.]

     A.   Section 509(a)(3)(A)

     Regulations promulgated under section 509(a)(3) set forth

tests expounding on the requirements recited in subparagraphs (A)

through (C) above.   Section 1.509(a)-4(b) through (e), Income Tax

Regs., specifies organizational and operational tests that relate

to the criteria of section 509(a)(3)(A).    The organizational test

is not at issue in this proceeding, and because respondent raises

no arguments under the operational test distinct from those

addressed more fully by respondent in connection with

subparagraphs (B) and (C), we do not separately discuss the

elements and tests of section 509(a)(3)(A).

     B.   Section 509(a)(3)(B)

     Section 509(a)(3)(B) prescribes the nature of the

relationship that must exist between the supporting organization

and the publicly supported organization.    Regulations elaborate

that the statute requires one of the following three

relationships to be present:     (1) The supporting organization may

be operated, supervised, or controlled by one or more publicly

supported organizations (comparable to a parent-subsidiary

relationship where the supporting organization is under the
                                - 15 -

direction of the supported organization); (2) the supporting

organization may be supervised or controlled in connection with

one or more publicly supported organizations (comparable to a

brother-sister relationship where the entities are under common

control); and (3) the supporting organization may be operated in

connection with one or more publicly supported organizations

(where the supporting organization is otherwise responsive to,

and significantly involved in the operations of, the publicly

supported organization).     Sec. 1.509(a)-4(f) to (i), Income Tax

Regs.     Petitioner here contends that it falls within the third of

the alternatives just described.

     The regulations further impose two specific tests that must

be satisfied in order for an organization to qualify as operated

in connection with a publicly supported entity; namely, the

responsiveness test and the integral part test.     Sec. 1.509(a)-

4(i), Income Tax Regs.     The responsiveness test is designed to

ensure that the supporting organization is responsive to the

needs of the publicly supported organization by requiring that

the supported organization have the ability to influence the

activities of the supporting organization.     Sec. 1.509(a)-

4(i)(2), Income Tax Regs.     As relevant herein, the test mandates

that:

             (a) One or more officers, directors, or trustees
        of the supporting organization are elected or appointed
        by the officers, directors, trustees, or membership of
        the publicly supported organizations;
                               - 16 -

          (b) One or more members of the governing bodies of
     the publicly supported organizations are also officers,
     directors or trustees of, or hold other important
     offices in, the supporting organizations; or

          (c) The officers, directors or trustees of the
     supporting organization maintain a close and continuous
     working relationship with the officers, directors or
     trustees of the publicly supported organizations; and

          (d) By reason of (a), (b), or (c) of this
     subdivision, the officers, directors or trustees of the
     publicly supported organizations have a significant
     voice in the investment policies of the supporting
     organization, the timing of grants, the manner of
     making them, and the selection of recipients of such
     supporting organization, and in otherwise directing the
     use of the income or assets of such supporting
     organization. [Sec. 1.509(a)-4(i)(2)(ii), Income Tax
     Regs.]

     The integral part test seeks to ensure that the supporting

organization “maintains a significant involvement in the

operations of one or more publicly supported organizations and

such publicly supported organizations are in turn dependent upon

the supporting organization for the type of support which it

provides.”   Sec. 1.509(a)-4(i)(3)(i), Income Tax Regs.   Two

alternative sets of criteria exist under the regulations for

satisfying this test.   Id.   The first alternative (sometimes

referred to for convenience by the parties (with different

punctuation) and herein as the “but-for subtest”) is set forth in

section 1.509(a)-4(i)(3)(ii), Income Tax Regs.:

          The activities engaged in for or on behalf of the
     publicly supported organizations are activities to
     perform the functions of, or to carry out the purposes
     of, such organizations, and, but for the involvement of
                             - 17 -

     the supporting organization, would normally be engaged
     in by the publicly supported organizations themselves.

     The second alternative (referred to as the “attentiveness

subtest”) is laid out in section 1.509(a)-4(i)(3)(iii), Income

Tax Regs.:

          (a) The supporting organization makes payments of
     substantially all of its income to or for the use of
     one or more publicly supported organizations, and the
     amount of support received by one or more of such
     publicly supported organizations is sufficient to
     insure the attentiveness of such organizations to the
     operations of the supporting organization. In
     addition, a substantial amount of the total support of
     the supporting organization must go to those publicly
     supported organizations which meet the attentiveness
     requirement of this subdivision with respect to such
     supporting organization. Except as provided in (b) of
     this subdivision, the amount of support received by a
     publicly supported organization must represent a
     sufficient part of the organization’s total support so
     as to insure such attentiveness. In applying the
     preceding sentence, if such supporting organization
     makes payments to, or for the use of, a particular
     department or school of a university, hospital or
     church, the total support of the department or school
     shall be substituted for the total support of the
     beneficiary organization.

          (b) Even where the amount of support received by a
     publicly supported beneficiary organization does not
     represent a sufficient part of the beneficiary
     organization’s total support, the amount of support
     received from a supporting organization may be
     sufficient to meet the requirements of this subdivision
     if it can be demonstrated that in order to avoid the
     interruption of the carrying on of a particular
     function or activity, the beneficiary organization will
     be sufficiently attentive to the operations of the
     supporting organization. This may be the case where
     either the supporting organization or the beneficiary
     organization earmarks the support received from the
     supporting organization for a particular program or
     activity, even if such program or activity is not the
                                   - 18 -

     beneficiary organization’s primary program or activity
     so long as such program or activity is a substantial
     one.

     All pertinent factors are to be considered under the

foregoing subtest in order to determine whether the amount of

support received by the beneficiary organization is sufficient to

ensure attentiveness.    Sec. 1.509(a)-4(i)(3)(iii)(d), Income Tax

Regs.     Factors highlighted by the regulations include the number

of beneficiaries, the length and nature of the relationship

between the organizations, the purpose to which the funds are

put, and the imposition of a requirement that the supporting

organization furnish reports to the supported organization.      Id.

As a general premise, the regulations provide that the greater

the amount involved as a percentage of the beneficiary

organization’s total support, the greater the likelihood that the

required degree of attentiveness will be present.     Id.   There is,

however, the caveat that “evidence of actual attentiveness by the

beneficiary organization is of almost equal importance.”      Id.

     C.     Section 509(a)(3)(C)

     Section 509(a)(3)(C) specifies the third basic requirement

for all charitable entities wishing to be classified as

supporting organizations.     A supporting organization may not be

controlled directly or indirectly by disqualified persons,

including substantial contributors; their family members; and

corporations, partnerships, or trusts in which interests of more
                             - 19 -

than 35 percent are owned by disqualified persons.   Secs.

509(a)(3)(C), 4946(a); sec. 1.509(a)-4(j)(1), Income Tax Regs.

Regulations offer the following guidance with respect to this

control test:

     An organization will be considered “controlled”, for
     purposes of section 509(a)(3)(C), if the disqualified
     persons, by aggregating their votes or positions or
     authority, may require such organization to perform any
     act which significantly affects its operations or may
     prevent such organization from performing such act.
     This includes, but is not limited to, the right of any
     substantial contributor or his spouse to designate
     annually the recipients, from among the publicly
     supported organizations of the income attributable to
     his contribution to the supporting organization. * * *
     [Generally] a supporting organization will be
     considered to be controlled directly or indirectly by
     one or more disqualified persons if the voting power of
     such persons is 50 percent or more of the total voting
     power of the organization’s governing body or if one or
     more of such persons have the right to exercise veto
     power over the actions of the organization. Thus, if
     the governing body of a foundation is composed of five
     trustees, none of whom has a veto power over the
     actions of the foundation, and no more than two
     trustees are at any time disqualified persons, such
     foundation will not be considered to be controlled
     directly or indirectly by one or more disqualified
     persons by reason of this fact alone. However, all
     pertinent facts and circumstances including the nature,
     diversity, and income yield of an organization’s
     holdings, the length of time particular stocks,
     securities, or other assets are retained, and its
     manner of exercising its voting right with respect to
     stocks in which members of its governing body also have
     some interest, will be taken into consideration in
     determining whether a disqualified person does in fact
     indirectly control an organization. [Sec. 1.509(a)-
     4(j)(1), Income Tax Regs.]
                              - 20 -

II.   Preliminary Considerations

      As a threshold matter, we first address a dispute between

the parties regarding whether the tests set out above are to be

applied with or without taking into consideration certain alleged

changes to petitioner’s intended operations and governing

documents.   Petitioner, as previously discussed, proposed in a

letter dated August 21, 2000, to amend its articles of

incorporation to include the First Presbyterian Church of

Northville and the Boy Scouts as additional supported

organizations, to amend its bylaws to impose greater restrictions

on the authority of disqualified persons, and to restructure the

Estate Storage note as a demand instrument.   No further materials

are contained in the administrative record to indicate whether

the proposed changes were in fact implemented.

      On brief, however, petitioner claims to be operated pursuant

to “Amended and Restated By-Laws” and requests findings of fact

consistent with the proposed changes to board procedures and the

addition of the First Presbyterian Church of Northville as a

supported organization.   For example, petitioner suggests the

following be found as fact:

           Petitioner is to be operated as a supporting
      organization to the American Endowment Foundation. As
      part of the administrative process with Respondent,
      Petitioner established a supporting relationship with
      the First Presbyterian Church of Northville.
      Additionally, Petitioner proposed establishing a
      supporting relationship with the Boy Scouts of America
                             - 21 -

     Detroit Area Council, specifically the troops in
     Northville, Michigan. [Exhibit references omitted.]

Petitioner also alleges to have provided $10,000 to the First

Presbyterian Church of Northville in 2000.   Petitioner elsewhere

states that neither the proposal concerning the Boy Scouts nor

the offer to convert the promissory note to demand note was acted

upon.

     Respondent objects to factual assertions purportedly derived

from the amended articles and bylaws.   In this connection,

respondent emphasizes that the record does not establish that the

proposed changes were formally implemented, nor does it show the

financial wherewithal of petitioner to support additional

beneficiaries at the level alleged.

     Rule 217 governs procedural matters relevant to disposition

of actions for declaratory judgment.    Paragraph (a) of Rule 217

provides:

          Disposition of an action for declaratory judgment,
     which does not involve either a revocation or the
     status of a governmental obligation, will ordinarily be
     made on the basis of the administrative record, as
     defined in Rule 210(b)(10). Only with the permission
     of the Court, upon good cause shown, will any party be
     permitted to introduce before the Court any evidence
     other than that presented before the Internal Revenue
     Service and contained in the administrative record as
     so defined. * * *

The referenced Rule 210(b)(10), as germane herein, defines the

administrative record to include the request for determination;

all documents, protests, and related papers submitted to the IRS;
                              - 22 -

all written correspondence between the IRS and the applicant; all

pertinent returns filed with the IRS; the articles of

incorporation of the organization and any similar or related

documents and any modifications thereof; and the notice of

determination by the Commissioner.

     Here the parties jointly filed the administrative record now

before us with a stipulation “that the exhibits attached

constitute the entire administrative record” and “that said

exhibits are genuine”.   Neither party has requested leave to

supplement the administrative record with further evidence or

offered any additional documentary materials.    The administrative

record closes with petitioner’s having proposed several changes

to its operations and governing instruments.    On brief,

petitioner represents that certain changes were made but

repudiates other changes with the result that the Court is

uncertain exactly what petitioner is asking us to take into

account.   Moreover, petitioner’s statements on brief regarding

which changes were effectuated fall outside the parameters of

Rule 217 and are hardly a substitute for proof of formal

amendment and the actual resultant contents of governing

documents.   In these circumstances, we are constrained to reach

our disposition on the basis of the administrative record as

constituted without taking any such changes into account.
                               - 23 -

       Accordingly, we base our ruling herein solely on the

materials exchanged by the parties during the administrative

process.    Since those materials do not establish implementation

of proposed changes, our conclusions as to petitioner’s status

will turn on application of the tests under section 509(a)(3) to

petitioner’s original articles of incorporation and bylaws.

       As a second preliminary matter, we make several observations

regarding burden of proof.    Pursuant to Rule 217(c), the burden

of proof rests upon petitioner as to grounds set forth in the

notice of determination and upon respondent as to any ground not

stated in the notice.    Respondent raised the responsiveness test

as a new issue by means of an affirmative pleading in the answer.

The parties here agree that respondent bears the burden as to the

responsiveness test and that petitioner bears the burden as to

the attentiveness subtest and the control test.    They disagree as

to who bears the burden with respect to the but-for subtest.

However, because our disposition on this point does not depend on

application of the burden of proof, we need not further address

the dispute.

III.    Responsiveness Test

       As previously mentioned, petitioner claims to be an

organization “operated in connection with” a supported

organization, AEF, for purposes of the relationship requirement

prescribed in section 509(a)(3)(B).     See sec. 1.509(a)-4(f)(2),
                                - 24 -

Income Tax Regs.    To qualify as such, petitioner must satisfy

both the responsiveness test of section 1.509(a)-4(i)(2), Income

Tax Regs., and the integral part test of section 1.509(a)-

4(i)(3), Income Tax Regs.     We consider each of these tests

seriatim.

     The responsiveness test is structured to ensure that the

supported organization will have the ability to influence the

supporting organization, thereby ensuring that the supporting

organization will be responsive to the needs of the supported

organization.     Cockerline Meml. Fund v. Commissioner, 86 T.C. 53,

59 (1986); Nellie Callahan Scholarship Fund v. Commissioner, 73

T.C. 626, 633 (1980); Roe Found. Charitable Trust v.

Commissioner, T.C. Memo. 1989-566; sec. 1.509(a)-4(i)(2), Income

Tax Regs.

     Under the circumstances of this case, the pertinent

requirements are found in subdivisions (a) and (d) of section

1.509(a)-4(i)(2)(ii), Income Tax Regs.     Subdivision (a) specifies

that at least one officer, director, or trustee of the supporting

organization must be appointed or elected by the supported

organization.     Here the administrative correspondence indicates

that Mr. Gallina was appointed to petitioner’s board of directors

by AEF.     Petitioner also offers a proposed finding of fact to

that effect, to which respondent has “No objection.”     In

addition, petitioner’s bylaws mandate that “one or more members
                              - 25 -

of the Board of Directors shall be appointed by the Board of

Directors of the publicly supported organization(s) for whose

benefit the Corporation exists.”   We are satisfied that

petitioner is in conformity with section 1.509(a)-4(i)(2)(ii)(a),

Income Tax Regs.

     Subdivision (d) of 1.509(a)-4(i)(2)(ii), Income Tax Regs.,

then requires that, by reason of the above relationship, the

supported organization have a “significant voice” in the

investment policies of the supporting organization; in the

timing, manner, and recipients of grants made by the supporting

organization; and in otherwise directing the use of the income or

assets of the supporting organization.   The term “significant” in

this context has been interpreted to mean “‘likely to have

influence,’ not control.”   Cockerline Meml. Fund v. Commissioner,

supra at 60 (quoting Webster’s Third New International Dictionary

2116 (1981)); see also Roe Found. Charitable Trust v.

Commissioner, supra.

     Respondent by answer raised the issue of failure to satisfy

the responsiveness test, alleging therein that the director

appointed by AEF lacked a significant voice in the activities

specified in section 1.509(a)-4(i)(2)(ii)(d), Income Tax Regs.

On brief respondent argues that no facts have been given to show

Mr. Gallina will have a significant voice in determining

petitioner’s investment policies or when and where petitioner’s
                              - 26 -

funds will be paid.   Respondent similarly states that there is no

evidence that nondisqualified directors will have any control

over the income or assets of petitioner.    In particular,

respondent focuses on the fact that the only asset held by

petitioner is the Estate Storage note and observes that the

charitable gift annuity obligation will require payments equal to

the majority of the note’s annual income.    Hence, it is

respondent’s view that there are, as a practical matter, no

meaningful assets or investments for the board to manage.

     At the outset, we reiterate that respondent bears the burden

of proof on this issue, which creates a situation quite different

from that in Roe Found. Charitable Trust v. Commissioner, supra,

cited favorably by respondent.   In Roe Found. Charitable Trust v.

Commissioner, supra, we relied in significant part on the

taxpayer’s failure to indicate how the relevant trustee would

have a significant voice.   Here respondent must demonstrate that

AEF will not have the requisite significant voice, and we

conclude respondent has not done so.

     Mr. Gallina is one of five directors, and petitioner has

represented that the AEF director will have a voice equal to any

of the remaining four.   Respondent has not established otherwise.

Petitioner’s articles of incorporation empower the corporation

through its board of directors to carry out the purposes of the

entity by, among other things, owning, acquiring, transferring,
                               - 27 -

and disposing of property; receiving and administering property

by gift, devise, or bequest; and entering into contracts.

Furthermore, although petitioner currently has few assets

requiring active management, respondent has not shown that

principal payments on the note or additional annual

contributions, etc., estimated by petitioner will not occur to

render the management role increasingly material.    Certain of

respondent’s statements also seem to conflate influence with

control to a degree unsupported by the regulations and caselaw.

     Moreover, as pertains to the timing, manner, and recipients

of grants, petitioner indicated during the administrative process

that the AEF director would serve on the advisory committee of

the donor-advised fund and would thereby have a significant voice

in recommending grants.    Again, respondent has introduced nothing

proving to the contrary.    We further are mindful that AEF

exercises final authority over distributions from the donor-

advised fund.   Hence, we cannot find that AEF lacks the necessary

ability to influence petitioner’s activities in these matters.

Accordingly, we conclude that petitioner’s governance and affairs

are structured to satisfy the responsiveness test of section

1.509(a)-4(i)(2)(ii), Income Tax Regs.
                              - 28 -

IV.   Integral Part Test

      The complementary and interrelated roles of the

responsiveness and integral part tests have been expressed by

this Court as follows:

      While the responsiveness test guarantees that the
      supported organization will have the ability to
      influence the supporting organization’s activities, the
      integral part test insures that the supported
      organization will have the motivation to do so. The
      general thrust of this regulation is that the
      supporting organization must maintain a significant
      involvement in the operations of the supported
      organization so that the latter will be attentive to
      the supporting organization’s operations. [Nellie
      Callahan Scholarship Fund v. Commissioner, 73 T.C. at
      637-638.]

      As previously discussed, the regulations in section

1.509(a)-4(i)(3), Income Tax Regs., offer two alternative sets of

criteria for satisfying the integral part test, which we for

convenience refer to as the “but-for subtest” of subdivision (ii)

and the “attentiveness subtest” of subdivision (iii).

      A.   But-For Subtest

      The but-for subtest will be met where:   (1) The activities

engaged in for or on behalf of the supported organization are

activities to perform the functions of or to carry out the

purposes of the supported organization, and (2) but for the

involvement of the supporting entity, such activities would

normally be engaged in by the supported organization itself.

Sec. 1.509(a)-4(i)(3)(ii), Income Tax Regs.
                               - 29 -

     With respect to the first prong set forth above, we have

stated that “This rule generally applies only to situations where

the supporting organization actually engages in activities that

benefit the supported organization, such as performing a specific

function for one or more publicly supported organizations.”        Roe

Found. Charitable Trust v. Commissioner, T.C. Memo. 1989-566.       In

a similar vein, respondent maintains that the but-for subtest

applies only in cases where the involvement of the supporting

organization extends beyond merely making grants or monetary

donations.   Petitioner, on the other hand, contends that

“activities” in section 1.509(a)-4(i)(3)(ii), Income Tax Regs.,

should be construed in a manner consistent to its use elsewhere

in the regulations under section 509(a), with the result that the

term should encompass grant making.     Petitioner cites section

1.509(a)-4(e)(1), Income Tax Regs., which uses the word and then

explains:    “Such activities may include making payments to or for

the use of, or providing services or facilities for, individual

members of the charitable class benefited by the specified

publicly supported organization.”

     We, however, need not resolve this dispute.     Even if we were

to assume arguendo that grant making is properly characterized as

an activity for purposes of section 1.509(a)-4(i)(3)(ii), Income

Tax Regs., a matter which is by no means clear, the

administrative record establishes that petitioner cannot satisfy
                             - 30 -

the second prong set out above.3   Before setting forth the

reasons for our conclusion, it is necessary to describe

petitioner’s argument in more detail.

     Petitioner summarizes its position on the but-for subtest as

follows:

          Petitioner is providing the only support the
     American Endowment Foundation receives for the support
     of activities in Northville, Michigan. “But for”
     Petitioner’s support, those activities would not exist,
     and would not be funded unless the American Endowment
     Foundation found funding elsewhere. * * *

Petitioner also states that AEF “is dependent upon Petitioner for

its grants to perform the functions of the public charities in

the Northville, Michigan area.”    Thus, petitioner views the

pertinent activities narrowly, i.e., in terms of support of the

Northville, Michigan, region, and not broadly, i.e., in terms of

AEF’s mission to assist the community of U.S. inhabitants.

     We reject petitioner’s argument on the ground that it is

based upon a faulty factual premise; namely, that petitioner’s

support to AEF is dedicated to activities in Northville,

Michigan, or southeastern Michigan.    This premise is based upon

the fact that petitioner intends to recommend to AEF that

petitioner’s contributions to the donor-advised fund be used to


     3
       As previously indicated, our conclusions with respect to
the but-for subtest do not turn on who bears the burden of proof.
In contrast to our analysis of the responsiveness test, we here
do not rely on a failure of proof by either party but rather
apply the regulatory standard to the facts as evidenced by the
administrative record.
                                - 31 -

support charities in Northville, Michigan, or southeastern

Michigan.    However, as found above, AEF is not bound by such

recommendations and can use the support received from petitioner

to fund charitable activities anywhere in the United States.

     AEF endeavors through its grant making to benefit

communities throughout the United States.   Yet such grant-making

activities cannot properly be characterized as something in which

AEF would be engaged but for petitioner’s support.    Rather,

distributing grant moneys is something in which AEF is and will

continue to be engaged regardless of support from petitioner.

Hence, the record reveals no but-for relationship between

petitioner’s operations and those of AEF and, accordingly, cannot

establish the type of dependency sought by the integral part

test.

     B.     Attentiveness Subtest

     Under the attentiveness subtest, (1) the supporting

organization must make payments of substantially all of its

income to or for the use of the supported organization, and (2)

either (a) the amount of support must be sufficient to ensure the

attentiveness of the supported entity or (b) the funds must be

earmarked for a substantial program or activity of the supported

entity, such that the supported organization will be attentive to

avoid interruption thereof.    Sec. 1.509(a)-4(i)(3)(iii)(a) and

(b), Income Tax Regs.
                               - 32 -

     In addition, a substantial amount of the total support of

the supporting organization must go to those publicly supported

organizations which meet the attentiveness requirement.    Sec.

1.509(a)-4(i)(3)(iii)(a), Income Tax Regs.

     The phrase “substantially all of its income”, as used in the

integral part test, has been interpreted to mean 85 percent or

more of net income.    Rev. Rul. 76-208, 1976-1 C.B. 161 (stating

that the terminology should be given the same meaning as in sec.

53.4942(b)-1(c), Foundation Excise Tax Regs.).   Since petitioner

has indicated that it will distribute at least 85 percent of its

net annual income, we focus on the further criteria intended to

cultivate attentiveness.

     With respect to the first method for ensuring attentiveness,

support significant in amount relative to the beneficiary’s total

support is generally the defining characteristic.   Sec. 1.509(a)-

4(i)(3)(iii)(d), Income Tax Regs.    By this standard, we conclude

that petitioner’s proposed contributions to AEF do not rise to

the requisite level.   Anticipated annual contributions of

approximately $7,600 from petitioner, when measured against the

total annual contributions received by AEF of more than $7

million, are not sufficient to guarantee attentiveness.4



     4
       Although it is unclear how petitioner’s proposed “pledge”
of $207,733 would factor into the support calculation, we are
satisfied that its impact would not be material for purposes of
our conclusion on this issue.
                              - 33 -

     Additionally, while evidence of actual attentiveness can be

equally important, id., the record on this score is less than

persuasive.   Petitioner has mentioned that it will furnish

financial reports to AEF and cites AEF’s appointment of a

Northville resident to petitioner’s board as evidence of actual

attentiveness.   On these facts, however, we remain unconvinced

that the two features highlighted portend the type of ongoing

monitoring and attentiveness envisaged in the regulation.     Given

the vast difference in the size and scope of the two entities’

programs, establishing actual attentiveness would require more

than pointing to a few administrative formalities.

     We now turn to the earmarking facet of the attentiveness

subtest, noting that petitioner appears on brief to emphasize

this argument over the support-based considerations just

addressed, as follows:

     Petitioner’s support to the American Endowment
     Foundation has been earmarked for use in Northville,
     Michigan. This is the only support that the American
     Endowment Foundation received to support activities in
     Northville, Michigan. Without Petitioner’s support,
     the Northville activities will be interrupted.
     Therefore, even though the percentage of support
     provided by Petitioner to American Endowment
     Foundation’s overall budget is small, it is 100% of the
     support that American Endowment Foundation provides to
     Northville residents. * * *

     On the present facts, there exist at least two barriers to

petitioner’s ability to satisfy the integral part test through

the alleged earmarking.   The first is the requirement that either
                               - 34 -

petitioner or AEF earmark the funds for a particular program or

activity.    Because the contributions are made to a donor-advised

fund, petitioner cannot definitively earmark the moneys for any

specific project.    Rather, petitioner is limited to making

recommendations which AEF is not bound to, and will not

necessarily, implement.    Moreover, petitioner has not established

that AEF has in fact earmarked petitioner’s contributions for a

particular venture.

       Second, the regulations mandate that the payments be

earmarked for a substantial program or activity of the supported

organization.    Again, the administrative record belies that

supporting Northville, Michigan, is a substantial activity of

AEF.    Even benefiting Michigan as a whole has not been shown to

be a substantial focus of AEF, and there is no evidence that the

rather minimal expenditures made in that State by AEF ($5,500 in

1998) would be interrupted absent petitioner’s support.

Petitioner therefore has failed to prove that its operations will

ensure AEF’s attentiveness.

V.   Control Test

       In view of our holding above that the integral part test is

not met on the record presented, we need not reach the control

test.    Petitioner’s failure to satisfy section 509(a)(3)(B)

obviates any need to consider section 509(a)(3)(C) or to give

further attention to section 509(a)(3)(A).    Even if petitioner
                              - 35 -

were to satisfy the tests of the latter two provisions, as to

which we express no opinion, its failure to meet the requirements

of section 509(a)(3)(B) is fatal to its position that it is a

supporting organization and not a private foundation as defined

in section 509.   In summary then, we hold that petitioner is to

be classified as a private foundation on account of failure to

satisfy the integral part test of section 1.509(a)-4(i)(3),

Income Tax Regs., as delineated above.

     To reflect the foregoing,



                                         Decision will be entered

                                    for respondent.
