                       T.C. Memo. 2009-261



                     UNITED STATES TAX COURT



  OHIO DISABILITY ASSOCIATION, AN OHIO NON-PROFIT CORPORATION,
                          Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 25436-07X.            Filed November 12, 2009.



    Charles S. Lineback, for petitioner.

    Patricia Pierce Davis, for respondent.




                       MEMORANDUM OPINION


    ARMEN, Special Trial Judge:   Petitioner, Ohio Disability

Association, An Ohio Non-Profit Corporation, brought this action

for declaratory judgment and relief pursuant to section

7428(a)(2) and Rule 211 on the ground that respondent failed to

make a determination regarding whether petitioner qualifies as a
                                 - 2 -

tax-exempt organization under section 501(c)(3).1    The issues for

decision are whether petitioner will operate exclusively for

charitable purposes within the meaning of section 501(c)(3) and

whether no part of its net earnings will inure to the benefit of

a private shareholder or individual.

                              Background

       This case was submitted fully stipulated pursuant to Rule

122.    Pursuant to Rule 217(b), the parties filed with this Court

the administrative record relating to the request for a

determination that petitioner qualifies as an exempt

organization.    The facts in the administrative record are assumed

to be true for purposes of this proceeding.    The record shows

that petitioner has exhausted its administrative remedies.    It is

noted that the administrative record is not a model of clarity

and its imperfection has complicated our fact-finding.

A.   Charles S. Lineback

       Charles S. Lineback (Mr. Lineback) is petitioner’s counsel

in the instant action.     Mr. Lineback formed petitioner as an Ohio

non-profit corporation on March 16, 2004.    Petitioner has not yet

begun to operate.

       Mr. Lineback is a licensed attorney in the State of Ohio as

well as a licensed certified public accountant (C.P.A.) in both


       1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

the State of Ohio and the State of Florida.   During his 28 years

as an attorney Mr. Lineback has managed attorney trust accounts.

Mr. Lineback has also passed the exam for licensure as an

insurance agent; however, he has never sold insurance.

B.   Articles of Incorporation and Bylaws

     Petitioner’s articles of incorporation filed March 16, 2004,

state that petitioner was “formed for the purpose of establishing

and managing a pooled trust authorized by” 42 U.S.C. section

1396p(d)(4)(C) and Ohio Admin. Code 5101:1-39-27.1(C)(3)(c) and

that the corporation is authorized to engage in any act permitted

by section 501(c)(3).   On January 18, 2006, the articles of

incorporation were amended to state the purpose of the

corporation as follows:

      (1) This non-profit corporation is organized
      exclusively for charitable purposes within the meaning
      of section 501(c)(3) * * *, including, for such
      purposes, the making of distributions to organizations
      that qualify as exempt organizations under section
      501(c)(3) * * *.

      (2) Upon the winding up and dissolution of this non-
      profit corporation, after paying or adequately
      providing for the debts and obligations of this non-
      profit corporation, the remaining assets shall be
      distributed for one or more exempt purposes within the
      meaning of section 501(c)(3) * * *.

      (3) No part of the net earnings of this non-profit
      corporation shall inure to the benefit of, or be
      distributable to, any of its members, trustees,
      officers or other private persons, except that this
      non-profit corporation shall be authorized to pay
      reasonable compensation for services rendered and to
      make payments and distributions in furtherance of the
      exempt purposes.
                                - 4 -

      (4) No substantial part of the activities of this non-
      profit corporation shall be the carrying on of
      propaganda, or otherwise attempting to influence
      legislation, and this non-profit corporation shall not
      participate in, or intervene in (including the
      publishing or distribution of statements) any political
      campaign on behalf of or in opposition to any candidate
      for public office.

      (5) Notwithstanding any other provision of these
      articles, this non-profit corporation shall not carry
      on any other activities not permitted to be carried on
      (a) by a corporation exempt from [F]ederal income tax
      under section 501(c)(3) * * *, or (b) by a corporation,
      contributions to which are deductible under section
      170(c)(2) * * *.

      Petitioner’s bylaws were adopted on January 18, 2006.    The

bylaws do not include any statements regarding the specific

purposes or objectives of the corporation.   The bylaws make

reference to the incorporators of the corporation as the initial

members.2   The bylaws further describe the process for calling

member meetings and voting procedures for the election of the

board of directors and passing on business matters.

C.   Board of Directors, Officers, and Members

      Petitioner’s articles of incorporation list Mr. Lineback as

the sole incorporator and the bylaws provide that Mr. Lineback is

the sole director.   The record demonstrates that Mr. Lineback is

also the president and sole officer and employee and will serve

without compensation.   According to the bylaws, Mr. Lineback is

also the only member of the corporation.




      2
          The bylaws appear to equate members with shareholders.
                                - 5 -

D.   Petitioner’s Application for Exemption and Followup
     Correspondence

      1.   Application for Recognition of Exemption

      Mr. Lineback signed petitioner’s Form 1023, Application for

Recognition of Exemption Under Section 501(c)(3) of the Internal

Revenue Code (application), and dated it February 3, 2006.     On

the application Mr. Lineback stated:

     This corporation is formed to assist the poor and
     needy, as defined by Medicaid standards, that is, a
     person who has one thousand five hundred dollars or
     less in countable assets. Our activity will not be
     primarily fundraising but rather managing a non-profit
     ‘Pooled Trust’ agreement.

     The application also stated:    “The Ohio Disability

Association will reach out to the poorest of the disabled.     There

will be no minimums and our investments will be limited to

government insured checking and savings accounts.”    The

application further stated that the corporation would “provide

‘Pooled Trust’ services to impoverished individuals who have been

declared disabled by the Social Security Administration” who also

“must be applying for Medicaid benefits”.    The application

explained that services will be limited to individuals who are 65

years of age or older, blind, or disabled.

     2.    Requests for Additional Information

      On August 17, 2006, an exempt organization specialist for

respondent sent petitioner a letter requesting additional

information under penalties of perjury including:     (1) Whether
                               - 6 -

petitioner would modify the board of directors to include

unrelated individuals selected from the community the corporation

will serve; (2) a complete description of all compensation paid

to Mr. Lineback; (3) a description of the organization’s staff,

including their experience and qualifications; (4) a copy of the

pooled trust master agreement; and (5) any informational

materials about the organization and/or the pooled trust that

would be distributed to potential applicants.

     Mr. Lineback replied to respondent’s request for additional

information in the form of two letters.   In the letters Mr.

Lineback replied that:   (1) The board of directors would not be

modified and instead he provided an amended application

designating petitioner as a nonoperating private foundation; (2)

the compensation “to be paid to Charles Lineback = None”; (3)

“the organization’s staff is limited to myself”; (4) the pooled

trust master agreement had not yet been prepared as the “non-

profit status, i.e., [an IRS] determination letter, is a

prerequisite to signing the trust” citing Ohio Admin. Code

5101:1-39-27.1(C)(3)(c) (2006) and providing a sample pooled

trust; and (5) there are no informational materials about the

organization and/or the pooled trust.

     Following this initial exchange of letters, Mr. Lineback and

respondent exchanged numerous additional letters and faxes.

Respondent’s letters repeatedly requested the same or similar
                               - 7 -

information, and at times the inquiries were not coherent.

However, it was clear that respondent desired additional details

about petitioner’s proposed activities.   Although Mr. Lineback

responded to respondent’s requests for additional information,

the answers were often curt and, for the most part, referred

respondent back to prior letters and the initial application.

Mr. Lineback’s letters also included conclusory statements that

petitioner had satisfied the requirements for tax-exempt status

and stated that a favorable determination letter should be

issued.

     Respondent’s letters requested additional information

regarding, inter alia, the implementation of the conflict of

interest policy, the qualifications and experience of Mr.

Lineback, the modifications petitioner would make to the sample

pooled trust, the procedures for managing the pooled trust fund,

the eligibility criteria for the trust beneficiaries, and the

standards by which disbursements from the trust would be

approved.

     In response to respondent’s question regarding how the

conflict of interest policy would be implemented, petitioner

stated:   “The Conflict of Interest Policy was copied directly

from Appendix A of the Form 1023 instructions.”

     Regarding Mr. Lineback’s qualifications and experience,

petitioner stated:   “I have 32 years experience as a CPA.   I
                               - 8 -

suggest that if I am legally qualified to audit such an entity,

then I am also qualified to do the bookkeeping.”

     With respect to the modifications to the sample pooled

trust, petitioner stated:   “The document must be converted to 6th

grade plain English for easy comprehension.   The fundamental

changes are that fees will be limited to $10.00 per year and no

interest will be paid.”

     In response to a question regarding the procedures for

managing the pooled trust, petitioner referred respondent back to

its original application, which stated:

     Our director, Charles Lineback, will be directly responsible
     for conducting the charitable activities which will consist
     of adopting a standard Pooled Trust master agreement and
     managing the same * * *. He will serve without
     compensation. This will involve accepting applicant sub-
     trust joinder agreements, making deposits and
     approving/rejecting requests for disbursements as well as
     reconciling accounts on a monthly basis. The physical bank
     account(s) will operate in a manner similar to attorney
     trust accounts.

     With respect to bookkeeping procedures, petitioner stated,

“there are no sub-accounts and no sub-trusts.”   Petitioner

further explained:   “there is a single (one) trust fund with a

separate account (book entry) maintained for each beneficiary.”

     Regarding the criteria for trust beneficiary applicants,

petitioner indicated that in addition to there being no minimums,

there would be no maximum limitation per account and no maximum

limitation on the level of income or assets owned by the

individual that may be transferred to the trust.   Petitioner
                                - 9 -

further stated that the trust is not prohibited from managing

accounts on behalf of the director’s relatives or clients (or

relatives of clients).

     Regarding disbursements to beneficiaries, petitioner stated:

     Beneficiaries cannot make claims. Beneficiaries can request
     that certain payments be made, such as an upgrade from a
     semi-private room to a private room. The criterion
     generally, is whether the service is covered by an existing
     social program such as Medicaid. Please refer to the
     Medicaid Providers manual for a complete list of Medicaid
     covered services.3

      Despite the extensive correspondence between respondent and

petitioner, respondent failed to issue a determination letter.

On November 5, 2007, petitioner filed a petition for declaratory

judgment with this Court.   The petition was filed more than 1-1/2

years after petitioner filed its initial application for

exemption.   By Order of the Court dated February 20, 2009, it was

determined that this Court has jurisdiction because petitioner

had exhausted the administrative remedies available to it within

the Internal Revenue Service.   See sec. 7428(b); see also Rules

210(c)(4), 211(g)(4).

                             Discussion

A.   Declaratory Judgment

      A declaratory judgment action pursuant to section 7428(a)(2)

is commenced on the ground that the Commissioner failed to make a

determination with respect to a taxpayer’s request for initial

      3
          The administrative record does not include any such
manual.
                              - 10 -

qualification as a tax-exempt organization.   See generally Rules

210-218.   This Court may issue a declaratory judgment once the

organization involved has exhausted all administrative remedies

and 270 days have passed since the date the application was

filed.   Sec. 7428(b)(2); Rule 210(c); Natl. Paralegal Inst. Coal.

v. Commissioner, T.C. Memo. 2005-293.   Disposition of a

declaratory judgment action concerning the initial qualification

of an exempt organization is ordinarily made on the basis of the

administrative record.   Rule 217(b); Church in Boston v.

Commissioner, 71 T.C. 102, 105 (1978); Houston Lawyer Referral

Serv., Inc. v. Commissioner, 69 T.C. 570, 573 (1978).

B.   Whether Petitioner Is Entitled to Exempt Status

     Tax exemption is a matter of legislative grace, and an

organization seeking an exemption must prove that it “comes

squarely within the terms of the law conferring the benefit

sought.”   Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958); see

also Fla. Hosp. Trust Fund v. Commissioner, 103 T.C. 140, 153

(1994), affd. 71 F.3d 808 (11th Cir. 1996).

      Pursuant to section 501(a), an organization described in

section 501(c)(3) shall be exempt from Federal income tax.    To

qualify as an exempt organization under section 501(c)(3), an

organization must satisfy all of the requirements stated therein,

specifically including the requirements that the corporation must

be both organized and operated exclusively for one or more exempt
                              - 11 -

purposes, and no part of the net earnings may inure to the

benefit of any private shareholder or individual.    A failure to

satisfy any one of the requirements is fatal to qualification.

Columbia Park & Recreation Association v. Commissioner, 88 T.C.

1, 13 (1987), affd. without published opinion 838 F.2d 465 (4th

Cir. 1988); see sec. 1.501(c)(3)-1(a)(1), Income Tax Regs.

     An organization may seek tax-exempt status before it begins

operations, but the administrative record must set forth

sufficient detail about its prospective operations to provide the

basis for the granting of exemption.    Peoples Prize v.

Commissioner, T.C. Memo. 2004-12 (citing La Verdad v.

Commissioner, 82 T.C. 215, 219 (1984), and World Family Corp. v.

Commissioner, 81 T.C. 958, 964 (1983)).   Without adequate

information, the denial of exemption is warranted.   See Church in

Boston v. Commissioner, supra; Gen. Conference of the Free Church

of Am. v. Commissioner, 71 T.C. 920, 929 (1979).

     Petitioner has, for the most part, provided only

generalizations and conclusory statements in response to repeated

requests by respondent for more detail regarding its proposed

activities.   Such generalizations do not demonstrate that

petitioner qualifies for exemption.    Peoples Prize v.

Commissioner, supra; see also La Verdad v. Commissioner, supra at

221; World Family Corp. v. Commissioner, supra at 966.
                               - 12 -

     Respondent has conceded that petitioner is organized for

exempt purposes but contends that petitioner has failed to

demonstrate that it will be operated exclusively for exempt

purposes and that no earnings will inure to the benefit of a

private shareholder or individual.      Petitioner maintains that the

administrative record demonstrates it will operate exclusively

for exempt purposes and no earnings will inure to the benefit of

a private shareholder or individual.     For reasons discussed

below, we agree with respondent.

     1.   Whether Petitioner Is Operated Exclusively for
          Charitable Purposes

     Whether an organization is operated exclusively for

charitable purposes is often referred to as the operational test.

Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs.      An organization will

satisfy the operational test if it engages primarily in

activities which accomplish one or more of the exempt purposes in

section 501(c)(3).   Id.   Petitioner listed charitable purposes as

its section 501(c)(3) exempt purpose.     Charitable means, inter

alia, relief of the poor and distressed or of the

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

Elderly and disabled individuals have been recognized by the

Commissioner as charitable classes.     See Rev. Rul. 79-19, 1979-1

C.B. 195; Rev. Rul. 76-244, 1976-1 C.B. 155.     The individuals for

whom petitioner purports to manage the pooled trust are

considered members of charitable classes.     However, this fact
                               - 13 -

alone does not demonstrate that petitioner will operate

exclusively for exempt purposes.

     Petitioner has described its purpose as establishing and

managing a pooled trust to assist the poor and needy as defined

by Medicaid standards and as provided for in Ohio Admin. Code

5101:1-39-27.1(C)(3) (2006) and 42 U.S.C. 1396p(d)(4)(C) (2006

and Supp. 2009).    “Medicaid provides health coverage for low-

income children and adults, medical and long-term care coverage

for people with disabilities, and assistance with health and

long-term care expenses for low-income seniors.”

http://www.familiesusa.org/issues/medicaid/.      Although Medicaid

is jointly funded by the Federal and State governments, each

State administers its own program.      Id.   In general, under

Federal and State law, funds in a trust and payments made

therefrom are considered in determining eligibility for programs

such as Medicaid.    42 U.S.C. 1396p(d)(3) (2006 and Supp. 2009);

Ohio Admin. Code 5101:1-39-27.1(C) (2006).      However, under Ohio

Admin. Code 5101:1-39-27.1(C)(3) (2006) certain trusts, including

pooled trusts, are not considered in determining eligibility.

     In order to qualify as a pooled trust a trust must satisfy

all of the following provisions of Ohio Admin. Code 5101:1-39-

27.1(C)(3)(c) (2006):

          (i) The trust contains the assets of an individual
     of any age who is disabled as defined in rule 5101:1-
     39-03 of the Administrative Code.
                             - 14 -

          (ii) A separate account is maintained for each
     beneficiary of the trust but, for purposes of
     investment and management of funds, the trust pools the
     funds in these accounts.

          (iii) Accounts in the trust are established by the
     individual, the individual’s parent, grandparent, or
     legal guardian, or a court solely for the benefit of
     individuals who are disabled.

          (iv) To the extent that any amounts remaining in
     the beneficiary’s account upon the death of the
     beneficiary are not retained by the trust, the trust
     pays to the state the amount remaining in the account
     equal to the total amount of medical assistance paid on
     behalf of the beneficiary. To meet this requirement,
     the trust must include a provision specifically
     providing for such payment.

          (v) Cash distributions to the individual are
     counted as unearned income. All other distributions
     from the trust are treated under the rules governing
     in-kind income.

          (vi) Transfers of assets to a pooled trust are not
     subject to the improper transfer provisions in rule
     5101:1-39-07 of the Administrative Code. However,
     assets held prior to the transfer to this trust are
     countable assets and/or income.

     Similar to Ohio Admin. Code 5101:1-39-27.1 (2006), 42 U.S.C.

section 1396p(d)(4)(C) (2006 and Supp. 2009) provides that a

trust containing the assets of a disabled individual is not

considered in determining Medicaid eligibility if:

          (i) The trust is established and managed by a
     nonprofit association.

          (ii) A separate account is maintained for each
     beneficiary of the trust, but, for purposes of
     investment and management of funds, the trust pools
     these accounts.

          (iii) Accounts in the trust are established solely
     for the benefit of individuals who are disabled * * *
                              - 15 -

     by the parent, grandparent, or legal guardian of such
     individuals, by such individuals, or by a court.

          (iv) To the extent that amounts remaining in the
     beneficiary’s account upon the death of the beneficiary
     are not retained by the trust, the trust pays to the
     State from such remaining amounts in the account an
     amount equal to the total amount of medical assistance
     paid on behalf of the beneficiary under the State plan
     * * *.

     Although petitioner states that it will establish and manage

a pooled trust under the aforementioned provisions, petitioner

has not sufficiently described its proposed activities to

demonstrate that it will operate exclusively for exempt purposes.

Mr. Lineback’s responses to respondent’s requests for additional

information failed to supplement the initial application or

clarify petitioner’s purpose and proposed activities, but rather

were mere repetitions of the statements in the initial

application.   Petitioner indicated that the pooled trust would be

managed similar to an attorney trust account but did not describe

specific procedures for managing the pooled trust.   Petitioner

stated only that Mr. Lineback’s experience as an attorney and

C.P.A. qualified him to manage the pooled trust by adopting the

master pooled trust agreement, accepting applicant subtrust

joinder agreements, making deposits and approving/rejecting

requests for disbursements as well as reconciling accounts on a

monthly basis.

     Most notably, when requested to provide the pooled trust

master agreement, petitioner provided a sample pooled trust and
                              - 16 -

indicated that respondent’s favorable determination letter was

necessary prior to signing the trust agreement.   However,

petitioner was not precluded from submitting the pooled trust

agreement that Mr. Lineback intended to sign after receipt of the

favorable determination letter.   The sample pooled trust is just

that, a sample.

     Petitioner indicated that the sample pooled trust would be

modified to be written in “6th grade plain English” and include

provisions to limit fees to $10 per year and state that no

interest will be paid.   But because the pooled trust in the

record is a sample, this Court cannot rely on it as indicative of

the actual pooled trust provisions.

     Petitioner also did not clearly state the criteria for

accepting applicants and making disbursements.    Petitioner merely

stated that Mr. Lineback would have the authority to accept

applicants with no monetary minimums or maximums, and he would

make disbursements for services not covered by Medicaid referring

to a “Medicaid Providers manual”.

     In sum, the generalizations made by petitioner do not

provide sufficient detail to determine that petitioner will be

operated exclusively for charitable purposes.    See, e.g., La

Verdad v. Commissioner, 82 T.C. at 219-220.
                                - 17 -

     2.   Whether Any Part of the Net Earnings Inures to the
          Benefit of a Private Shareholder or Individual

     An organization is not operated exclusively for one or more

of the exempt purposes in section 501(c)(3) unless it serves a

public rather than private interest.      Sec. 1.501(c)(3)-1(d)(1),

Income Tax Regs.   To satisfy this requirement, the organization

must not be organized and operated for the benefit of private

interests, such as those of its creator or the creator’s family.

Am. Campaign Acad. v. Commissioner, 92 T.C. 1053, 1065-1067

(1989).

     The Commissioner has ruled that an organization will not be

denied tax-exempt status merely because the organization is

controlled by one individual.    Rev. Rul. 66-219, 1966-2 C.B. 208.

However, such a situation provides an obvious opportunity for

abuse and calls for an open and candid disclosure of the

taxpayer’s organization and operations.      Bubbling Well Church of

Universal Love, Inc. v. Commissioner, 74 T.C. 531, 535 (1980),

affd. 670 F.2d 104 (9th Cir. 1981).      If such disclosure is not

made, the logical inference is that the facts, if disclosed,

would show that the taxpayer fails to meet the requirements of

section 501(c)(3).   Id. (citing Founding Church of Scientology v.

United States, 188 Ct. Cl. 490, 412 F.2d 1197, 1201 (1969)).

     The record demonstrates Mr. Lineback is the sole director,

officer, employee, and member.    Thus he is vested with all of the

decisionmaking power within petitioner’s organization.     Although
                                - 18 -

petitioner has a stated conflict of interest policy and the

articles of incorporation state that there will be no private

inurement, there are no procedures or personnel in place to

ensure that either the stated policy will be followed or private

inurement will not occur.    Although the bylaws establish

procedures for member meetings and voting, Mr. Lineback is the

only member.    Further, petitioner states that Mr. Lineback will

serve without compensation; however, the articles of

incorporation state that “this non-profit corporation shall be

authorized to pay reasonable compensation for services rendered”.

In sum, the record does not demonstrate that there is oversight

to prevent the organization from being operated to benefit Mr.

Lineback or his legal and accounting practices.

C.   Conclusion

      The administrative record does not permit us to conclude

that petitioner will operate exclusively for exempt purposes and

that no part of the net earnings will inure to the benefit of a

private shareholder or individual.       Our holding, however, does

not preclude petitioner from filing a new application for

exemption.     See Houston Lawyer Referral Serv., Inc. v.

Commissioner, 69 T.C. at 577-578.

      To reflect the foregoing,


                                       Decision will be entered for

                                  respondent.
