                      T.C. Memo. 2002-300



                  UNITED STATES TAX COURT



           CHRISTIE E. CUDDEBACK AND LUCILLE M.
          CUDDEBACK MEMORIAL FUND, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5453-01X.       Filed December 6, 2002.


     David K. Hayes, for petitioner.

     Robin W. Denick, for respondent.



                      MEMORANDUM OPINION


     WHALEN, Judge:   This is an action for declaratory

judgment, pursuant to section 7428(a)(1)(B), involving

respondent's determination with respect to the initial

classification of petitioner as a private foundation, as

defined by section 509(a).   Unless stated otherwise, all

section references are to the Internal Revenue Code as in
                            - 2 -

effect at the time of respondent's determination.    The

issue for decision is whether respondent correctly

determined that petitioner is a private foundation as

defined by section 509(a), rather than a supporting

organization within the meaning of section 509(a)(3).      The

narrow issue presented by this case is whether respondent

correctly determined that petitioner does not meet the

"integral part test" prescribed by section 1.509(a)-

4(i)(3), Income Tax Regs.

     The parties submitted this case for decision without

trial in accordance with Rule 122.    See Rule 217(b)(2).    In

this opinion, all Rule references are to the Tax Court

Rules of Practice and Procedure.    The stipulation of facts

and the accompanying exhibits filed by the parties are

hereby incorporated in this opinion.

     On the basis of the record, we find that petitioner

exhausted the administrative remedies available to it

within the Internal Revenue Service and that the juris-

dictional requirements to maintain this action, enumerated

by Rule 210(c), are satisfied.   At the time the petition

was filed on its behalf, petitioner's address was in

Baltimore, Maryland.
                              - 3 -

                          Background

     Petitioner is a testamentary trust which was created

under the last will and testament of Lucille M. Cuddeback

(referred to herein as the will), as amended by the second

codicil to last will and testament of Lucille M. Cuddeback,

executed on February 28, 1991 (referred to herein as the

second codicil).   In this opinion, we sometimes refer to

Ms. Cuddeback as the testator.

     Item Two G.2 of the testator's will, as amended by the

second codicil, directs that one-half of the residue of the

testator's estate is to be transferred in trust with the

intention that the trust qualify as a charitable remainder

unitrust under section 664.    As amended by the second

codicil, the will directs that 5 percent of the net fair

market value of the principal of the trust is to be paid in

monthly installments to Ms. Cuddeback's niece, Ms. Vivian

B. Nelson, during her life.    Thereafter, the trust's net

income is to be paid to three charities, and the trust is

to be known as the Christie E. Cuddeback and Lucille M.

Cuddeback Memorial Fund (referred to either as petitioner

or the Cuddeback Fund).

     The three recipients of the net income of the trust

following Ms. Nelson's death are Bedford Presbyterian

Church, New York, New York (Bedford), Parklane Baptist
                              - 4 -

Church, Baltimore, Maryland (Parklane), and Keswick Multi-

Care Center, formerly known as the Keswick Home for the

Incurables of Baltimore City, Baltimore, Maryland,

(Keswick).   Each of these recipients is a charitable

organization described in section 501(c)(3) and is

classified as other than a private foundation under

sections 509(a)(1) and 170(b)(1)(A)(i) or (iii).    Such

organizations are sometimes referred to as "publicly

supported [organizations]".    See sec. 1.509(a)-4(a)(5),

Income Tax Regs.   Under the terms of the second codicil,

Bedford and Parklane are each to receive 10 percent of the

Cuddeback Fund's net income, and Keswick is to receive 80

percent of petitioner's net income at annual or more

frequent intervals.

     Keswick's primary program or activity is providing

in-house, full-time nursing home care (domiciliary care).

Keswick also provides daycare to individuals through its

adult day services center or program.    In conjunction with

this daycare program, Keswick offers "grants" to some

participants who could not otherwise afford to pay the full

amount that Keswick charges for its services.

     With respect to Keswick, the second codicil provides

in pertinent part as follows:
                           - 5 -

          The remaining net income shall be paid in
     annual or more frequent installments to the
     Keswick (Home for Incurable's), of Baltimore
     City, to be used by it to cover not more than
     one-half (½) of the cost of such elderly persons
     enrolled in the Day Care Program operated by
     Keswick, who do not have financial means to pay
     all costs thereof. If for any reason Keswick
     should cease to operate its Day Care Program, or
     should there be insufficient individuals enrolled
     therein needing financial assistance to utilize
     all trust income, then it is my wish that the
     remaining income or all income, as the case may
     be, from this fund be used to subsidize a portion
     of the costs of worthy elderly persons who may
     benefit from the Domiciliary Care Program
     operated at Keswick. Again, this subsidy should
     be offered to persons who do not have sufficient
     financial means to pay all of the costs thereof.
     Said home may establish, through a committee
     appointed by the Director, with the approval of
     its Board of Trustees, rules and regulations to
     determine who, and to what extent, deserving
     persons shall receive benefits of the income from
     time to time available. The Trustees shall have
     no responsibility for the application of the
     income and payment of the net income to said Home
     as above provided shall exonerate said Trustees
     from all liability.


     Ms. Cuddeback, the testator, died on October 12, 1992,

and Ms. Nelson died on October 27, 1993.   For the year

1993, petitioner filed a Form 1041, U.S. Income Tax Return

for Estates and Trusts, with the Internal Revenue Service

Center, Philadelphia, Pennsylvania.   For each of the years

1994 through 1998, petitioner filed a Form 990-PF, Return

of Private Foundation or Section 4947(a)(1) Nonexempt

Charitable Trust Treated as a Private Foundation, with

the Internal Revenue Service Center in Ogden, Utah.
                            - 6 -

     On or about September 1, 1999, petitioner filed a

Form 1023, Application for Recognition of Exemption Under

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

Internal Revenue Service at Baltimore, Maryland.    In its

Form 1023, petitioner asked that it be recognized as a

section 509(a)(3) supporting organization.    It listed

Keswick, Parklane, and Bedford as the supported

organizations.   The Form 1023 states that Keswick receives

80 percent of petitioner's income, or approximately $26,000

per year, and that Parklane and Bedford each receive 10

percent of petitioner's income, or approximately $3,300 per

year.

     Along with its Form 1023, petitioner submitted a

letter from Keswick's chief financial officer which

describes petitioner's participation in Keswick's

activities for 1996.   According to the letter, there were

"149 participants served in the Adult Day Services Center

in 1996", of whom "29 were recipients of Cuddeback funds."

The letter states that "Keswick offers grants to needing

[sic] participants" in Keswick's "Adult Day Services

Center" that defray 40 or 50 percent of the full charge of

the program for the participant.    The letter further

explains that the first 25 percent of the "grant" is

covered by Keswick and the remaining 15 to 25 percent comes
                                  - 7 -

from funds provided by petitioner.           During 1996, 24

participants received a 40-percent grant and 5 received a

50-percent grant, for a total of 29 participants who

received funds from petitioner totaling $15,967.

     Petitioner later supplemented its Form 1023 upon

respondent's request for certain additional information.

Set out below is the statement of revenue and expenses

that petitioner submitted as part of its Form 1023, as

supplemented:

     Statement of                                               1/1/99–
 revenue and expenses            1996      1997       1998      7/31/99    Total

Gross investment income         $27,455   $26,750    $36,255    $20,347   $110,807
Other income, "partnerships"      -0-       -0-         (241)     -0-         (241)

 Total                          27,455    26,750     36,014     20,347    110,566

Gain or loss from sale
  of capital assets             18,042    (7,954)    150,682    210,635   371,405

 Total revenue                  45,497    18,796     186,696    230,982   481,971

Contributions, gifts, grants,
  & similar amounts paid
  Keswick                       20,291    23,585     25,631     19,114
  Bedford                        2,536     2,948      3,204      2,389
  Parklane                       2,536     2,948      3,204      2,389

Compensation of officers,
  directors, & trustees          3,365     3,720      4,236     10,151

Other expenses
  Accounting                     1,000     1,000      1,000      1,200
  Publications                      85        89        100        104
  Bank charges                      10       114         74        -0-

 Total expenses                 29,823    34,404     37,449     35,347

Excess of revenue
  over expenses                 15,674    (15,608)   149,247    195,635
                                - 8 -

The balance sheet submitted as part of petitioner's Form

1023 is set out below:

                     Balance sheet                  7/31/99
Assets
Cash                                                $197,289
Bonds and notes receivable                           100,500
Corporate stocks                                     611,770
Other investments                                     17,033

 Total assets                                       926,592

Liabilities

 Total liabilities                                    -0-

              Fund balances or net assets

Total fund balances or net assets                   (926,592) (sic)
Total liabilities and fund balances or net assets    926,592


     By letter dated November 16, 1999, respondent

recognized petitioner as an organization described in

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

to petitioner's private foundation classification.          In

pertinent part, the adverse ruling states as follows:


     Information submitted states the support provided
     by the organization revealed that in 1999 the
     organization distributed 8% percent [sic] of it's
     [sic] income to Kerswick [sic] and 1% percent
     [sic] each to Bedford Park Presbyterian Church
     and Parklane Baptist Church.

     You submitted a letter dated March 17, 1997 from
     Keswick in which it states that the grant is of
     a significant benefit to its budget. However,
     the amount of the grant in comparison to the
     overall annual income of each recipient
     organization far exceeds the gross income and
     net investment income of the trust. Thus, we
     find that the support provided by the trust is
     not sufficient to ensure the attentiveness of
     the charities to the operations of the organi-
                            - 9 -

     zation, thereby failing the "integral part test"
     set forth in the regulations. Consequently, your
     organization does not qualify as a supporting
     organization within the meaning of section
     509(a)(3) of the Code.


     Petitioner's attorneys filed a letter with

respondent's Office of Appeals appealing the proposed

adverse ruling.   In the letter, they state that

petitioner's support is earmarked by the controlling

document to provide "grants associated with Keswick's

Adult Day Care Program", that petitioner "provides up to

50 percent of the grant money provided to 100 percent of

all grant recipients", that the "Keswick Day Care Program

is a substantial program providing day care for 139 adults

within the Baltimore Metropolitan area", and "without the

funds provided by the Cuddeback Memorial Fund, the grant

program would be severely curtailed, and a significant

number of individuals would be unable to receive financial

assistance in connection with the Adult Day Care Program".

The letter further states that, under section 1.509(a)-

4(i)(3)(iii)(b), Income Tax Regs., in determining the

attentiveness of the beneficiary organization, "the total

support for the day care grant program" is substituted for

"the total support of the beneficiary organization."    On

that basis, petitioner's attorneys state "the attentiveness
                            - 10 -

test is clearly met" and the adverse determination should

be reversed.

     Petitioner's attorneys submitted a second letter from

Keswick dated December 15, 1999.     This letter states that

in 1999 there were 139 participants who were served in

the adult day services center, of whom 31 or 22 percent

received Cuddeback funds because they were persons who

"could not afford to pay the full $60.00 per day charge

for our [i.e., Keswick's] service."     The letter also

states that "grants totaling $27,236 were provided to

Keswick participants from the Cuddeback funds during 1999",

and it furnishes the following information on how the funds

from petitioner were applied:


     Keswick offers grants to eligible participants
     in the amount of 25%, 40%, 50% and 60% of the
     program's full charge. The first 50% of each
     grant is covered by Keswick. The remaining 50%
     comes from Cuddeback funds, thus supplementing
     our existing grant program. During 1999 5
     participants received a 25% grant, 12 received
     40% grants, 7 received 50% and 7 received 60%.


     During an Appeals conference on the matter,

respondent's representatives asked petitioner's attorneys

to submit "the budget for Keswick's Adult Day Care Services

for the past three (3) years and also what effect it would

have on that program if the Cuddeback funds were no longer

available."    In response, petitioner filed a supplement to
                               - 11 -

its appeal that included a third letter from Keswick dated

June 28, 2000.       This letter provides the following "current

financial information" that is labeled "FY 2000 Budget"

and "FY 2000 Actual (Projected)":

                                   FY 2000           FY 2000
                                    budget     actual (projected)

Gross revenue                      $841,517        $640,775
Direct program costs                865,682         763,544
Indirect costs                      525,693         377,024
Excess of cost over revenue        (549,858)       (499,793)

Less: charity care                 (179,478)        (54,347)
Net loss                           (729,336)       (554,140)


The letter does not explain the above financial information

except that it notes that "the Charity Care includes the

funding received from the Cuddeback trust."         The letter

also states that


     Without the Cuddeback Trust fund, many of these
     seniors would be placed in a nursing home
     prematurely or left at home alone during the day
     where they could be at risk of injury, missing
     meals and/or medications, and generally feeling
     confused and lost. In addition, Cuddeback funds
     have been used to assist veterans whose benefits
     for medical day care have been exhausted; they
     have assisted families in obtaining services
     quickly until other funding sources could be
     obtained; and the funds have been used as a
     supplement to other funding sources when those
     funds were not adequate. * * *

          In conclusion, without these funds, there
     would be a significant reduction in the number of
     seniors served at Keswick Adult Day, and this
     reduction would affect the overall quality of
     services that are currently being provided.
                              - 12 -


     In due course, respondent determined in a

final adverse ruling that petitioner failed to qualify

as a nonprivate foundation under section 509(a)(3).

According to the final adverse determination letter, the

determination is based upon the fact that "You have failed

to establish that you meet the requirements for exemption

under section 509(a)(3) of the Internal Revenue Code."          In

response, petitioner timely filed the instant petition for

declaratory judgment with the Court.


                            Discussion

     The issue for decision in this case is whether

petitioner is an organization described by section

509(a)(3), a so-called supporting organization, one type

of section 501(c)(3) organization that is excepted from

treatment as a private foundation.       See sec. 509(a).    In

order to qualify as a supporting organization, an entity

must satisfy the three requirements set forth in section

509(a)(3).    Section 509(a)(3) provides, in pertinent part,

as follows:


     SEC. 509.     PRIVATE FOUNDATION DEFINED

          (a) General Rule.--For purposes of this
     title, the term "private foundation" means a
     domestic or foreign organization described in
     section 501(c)(3) other than-–

     *         *        *       *         *       *         *
                            - 13 -

                 (3) an organization which–-

                      (A) is organized, and at all times
                 thereafter is operated, exclusively for
                 the benefit of, to perform the func-
                 tions 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);
                 * * *


The above provision was "designed to insure that a

supported organization has the ability and motivation

to properly oversee the activities of the supporting

organization."    Cockerline Meml. Fund v. Commissioner,

86 T.C. 53, 65 (1986).

     Respondent's determination is based upon petitioner's

failure, as to each of the three recipients of Cuddeback

funds, to meet subparagraph (B) of section 509(a)(3), which

describes the nature and quality of the relationship that

must exist between the supporting organization and the

supported organization.    See generally Quarrie Charitable

Fund v. Commissioner, 603 F.2d 1274, 1278 (7th Cir. 1979),

affg. 70 T.C. 182 (1978); Cockerline Meml. Fund v.

Commissioner, supra at 58; Callahan Scholarship Fund v.
                             - 14 -

Commissioner, 73 T.C. 626, 632 (1980); Roe Found.

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

order to satisfy section 509(a)(3)(B) the organization must

be one which is:   (1) Operated, supervised, or controlled

by; (2) supervised or controlled in connection with; or (3)

operated in connection with, one or more publicly supported

beneficiary organizations.    See sec. 1.509(a)-4(f)(2),

Income Tax Regs.   According to section 1.509(a)-4(f)(3),

Income Tax Regs., any relationship described in section

509(a)(3)(B) must ensure that


     (i) The supporting organization will be respon-
     sive to the needs or demands of one or more
     publicly supported organizations; and

     (ii) The supporting organization will con-
     stitute an integral part of, or maintain a
     significant involvement in, the operations of
     one or more publicly supported organizations.


     Petitioner argues that it satisfies the third rela-

tionship described by section 509(a)(3)(B), the "operated

in connection with" relationship, as to Keswick.    See

generally sec. 1.509(a)-4(i), Income Tax Regs.    Under this

relationship, it is not necessary for one organization to

control the other, or for a third party to control both,

but it is necessary for there to be a sufficient connection

between the two organizations.    Because this is the least

intimate of the three types of relationship, the regulation

imposes a stringent two-part test that must be met in order
                           - 15 -

to qualify.   See Quarrie Charitable Fund v. Commissioner,

supra at 1278 n.5; Roe Found. Charitable Trust v.

Commissioner, supra.   Specifically, section 1.509(a)-4(i),

Income Tax Regs., provides the following guidance on how to

qualify as an "operated in connection with" organization:


     (i) Meaning of "operated in connection with"--
     (1) General rule. (i) Except as provided in
     subdivisions (ii) and (iii) of this subpara-
     graph and subparagraph (4) of this paragraph,
     a supporting organization will be considered as
     being operated in connection with one or more
     publicly supported organizations only if it
     meets the "responsiveness test" which is defined
     in subparagraph (2) of this paragraph and the
     "integral part test" which is defined in
     subparagraph (3) of this paragraph.


Thus, in order to qualify as a supporting organization

under the "operated in connection with" relationship,

petitioner must satisfy both the responsiveness test and

the integral part test prescribed by the regulations.

     The responsiveness test, prescribed by section

1.509(a)-4(i)(2), Income Tax Regs., is designed to ensure

that the publicly supported organization has the ability to

influence the activities of the supporting organization or

has the power to compel an accounting from the supporting

organization.   See Cockerline Meml. Fund v. Commissioner,

supra at 59-60; Roe Found. Charitable Trust v.

Commissioner, supra.   Section 1.509(a)- 4(i)(2), Income Tax

Regs., describes this test, in part, as follows:
                            - 16 -

       (2) Responsiveness test. (i) For purposes of
       this paragraph, a supporting organization will
       be considered to meet the "responsiveness test"
       if the organization is responsive to the needs or
       demands of the publicly supported organizations
       within the meaning of this subparagraph. In
       order to meet this test, either subdivision (ii)
       or subdivision (iii) of this subparagraph must be
       satisfied.

       *       *       *       *       *         *      *

            (iii)(a) The supporting organization is a
       charitable trust under State law;

            (b) Each specified publicly supported
       organization is a named beneficiary under such
       charitable trust's governing instrument; and

            (c) The beneficiary organization has the
       power to enforce the trust and compel an
       accounting under State law.


       In this case, petitioner is a charitable trust under

the law of the State of Maryland.    Keswick, the publicly

supported organization, is a named beneficiary under the

second codicil, and it has the power to enforce the trust

and compel an accounting under the law of the State of

Maryland.    See Md. Code Ann., Est. & Trusts, sec. 14-301

(2001).    Thus, petitioner meets section 1.509(a)-

4(i)(2)(iii), Income Tax Regs., and, accordingly, meets

the responsiveness test as to Keswick.     See generally

Callahan Scholarship Fund v. Commissioner, supra at 634-

637.    Respondent does not contend otherwise.

       The integral part test, prescribed by section

1.509(a)-4(i)(3), Income Tax Regs., is designed to ensure

that the supporting organization maintains a significant
                           - 17 -

involvement in the operations of one or more publicly

supported organizations and that such publicly supported

organizations are in turn dependent upon the supporting

organization for the type of support which it provides.

See sec. 1.509(a)-4(i)(3)(i), Income Tax Regs.   In

effect, the integral part test ensures that the supported

organization will have the motivation to be attentive to

the activities of the supporting organization.   See

Callahan Scholarship Fund v. Commissioner, 73 T.C. at 638.

     There are two alternate ways to satisfy the integral

part test.   Section 1.509(a)-4(i)(3)(ii), Income Tax Regs.,

describes the first method as follows:


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


Thus, under this first method, the supporting organization

must actually engage in activities for or on behalf of the

publicly supported organization.

     Petitioner does not engage in any activities on behalf

of Keswick, other than distributing funds to Keswick, and,

thus, does not claim to satisfy the first method of

complying with the integral part test, as described by

section 1.509(a)-4(i)(3)(ii), Income Tax Regs.
                          - 18 -

     The second method of satisfying the integral part test

is described by section 1.509(a)-4(i)(3)(iii), Income Tax

Regs., as follows:


          (iii)(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 organ-
     izations is sufficient to insure the attentive-
     ness 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 organiza-
     tion will be sufficiently attentive to the
     operations of the supporting organization.
     This may be the case where either the support-
     ing organization or the beneficiary organization
     earmarks the support received from the support-
     ing organization for a particular program or
     activity, even if such program or activity is not
     the beneficiary organization's primary program or
                            - 19 -

     activity so long as such program or activity is a
     substantial one.


     Thus, the supporting organization must satisfy three

criteria or prongs.   First, the supporting organization

must make payments of substantially all its income to or

for the use of one or more publicly supported organiza-

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

We refer to this as the substantially all prong.     Second,

the amount of support received by one or more publicly

supported organizations must be "sufficient to insure the

attentiveness of such organizations to the operations of

the supporting organization".    Id.   We refer to this as

the attentiveness prong.   Third, a substantial amount of

the total support of the supporting organization must go

to those publicly supported organizations which meet the

attentiveness prong with respect to the supporting

organization.   Id.   We refer to this as the substantial

amount prong.

     In applying the attentiveness prong of the integral

part test, the regulations state that the amount of

support received by the publicly supported organization

must represent "a sufficient part" of the total support

received by the publicly supported organization.     Id.     In

making this determination, if the supporting organization

makes payments to a particular department or school of a

university, hospital, or church, the regulations provide
                           - 20 -

that the amount of support received by the publicly

supported organization must represent a sufficient part

of the total support of the department or school, rather

than the total support of the entire organization.     Id.

     Furthermore, the regulations provide that, even if

the amount of support received by the publicly supported

organization does not represent a sufficient part of the

organization's total support, the support received by the

publicly supported organization nevertheless may be

sufficient.   Sec. 1.509(a)-4(i)(3)(iii)(b), Income Tax

Regs.   According to the regulations, this may be true

if it can be demonstrated that the beneficiary organiza-

tion will be attentive to the supporting organization "in

order to avoid the interruption of the carrying on of a

particular function or activity", such as where the

payments are earmarked for a particular program or activity

which may not be the primary program or activity of the

beneficiary organization but is "a substantial one."      Id.

     Finally, the regulations provide that all pertinent

factors will be considered in determining whether the

attentiveness prong is satisfied; that is, whether the

amount of support received by a publicly supported

organization is sufficient to ensure the attentiveness

of that organization to the operations of the supporting

organization.   See sec. 1.509(a)-4(i)(3)(iii)(d), Income

Tax Regs.   The pertinent factors enumerated by the
                           - 21 -

regulations are the length and nature of the relationship

between the beneficiary and supporting organization, the

purpose to which the funds are put, the amount of the

support as a percentage of the total support of the

publicly supported organization, and evidence of actual

attentiveness by the beneficiary organization.   Id.

     Petitioner's position is that it satisfies the

"integral part test" prescribed by section 1.509(a)-

4(i)(3)(iii), Income Tax Regs., and, therefore, should be

considered as being "operated in connection with" Keswick

for purposes of determining whether it is a supporting

organization under section 509(a)(3)(B).   In applying the

integral part test, petitioner argues that its support to

Keswick is earmarked "for a particular program or activity,

that being the application of the Trust funds for the

purpose of making the Day Care Program of the supported

organization available to those qualified individuals

unable to pay the full cost of the day care tuition."

     According to petitioner, Keswick's letters show that

"Fifty Percent of all grants coming from the grant program

came from the funds distributed to Keswick by the Trust

(i.e. petitioner)."   Petitioner argues:


     Fifty percent of all funds utilized by the grant
     program constitutes a sufficient part to insure
     attentiveness. To reduce by one half, the number
     of recipients of grants would severely impair the
     existing grant program and cause a discontinuance
                           - 22 -

     of service to at least one half of needy grant
     recipients, the ultimate beneficiaries served.


     Thus, petitioner bases its argument that Keswick will

be sufficiently attentive to petitioner's operations in

order to prevent an "interruption" in the grant program on

the fact that it contributes 50 percent of the discount

offered by Keswick to certain participants in the

daycare program and on the supposition that 50 percent of

those recipients would be unable to participate in the

program if petitioner's funds were not available.    In this

connection, petitioner argues that the term "interruption",

simply means conducting the program in a different manner

or degree rather than a complete cessation of the program.

     Petitioner also argues that the grant program "is

certainly substantial in relation to the adult day care

program."   In this connection, petitioner points out that,

of the 139 individuals who were served in the adult daycare

program in 1999, "22% received grants".   Petitioner also

points out that the amount contributed in 1999 was $27,236,

"not an unsubstantial sum".

     Finally, petitioner argues that the factors for

determining attentiveness which are enumerated in section

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

in its favor.   Petitioner points out that it has made

distributions to Keswick for 7 years and that such

distributions provide 50 percent of all grants.     According
                           - 23 -

to petitioner, this "shows a great likelihood that the

degree of attentiveness * * * required by the regulation

will be present."   Petitioner also argues that Keswick's

correspondence shows its "attentiveness to and reliance

upon the supporting organization".   Lastly, petitioner

points out that under section 6104(d) Keswick is entitled

to obtain a copy of petitioner's annual return, which shows

a detailed listing of all of petitioner's investments and

its investment return.

     Respondent's position is that petitioner is not a

supporting organization because it has not shown that it

has a relationship with Keswick or any other publicly

supported organization described by section 509(a)(3)(B).

Specifically, respondent contends that petitioner is not

"operated in connection with" Keswick or any other publicly

supported organization because petitioner does not meet

the "integral part test" described by section 1.509(a)-

4(i)(3)(iii), Income Tax Regs.

     Respondent agrees that petitioner's support is

earmarked for a particular program or activity of Keswick,

raising a question whether the exception for earmarked

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

is applicable.   Contrary to petitioner's contention,

respondent argues that petitioner has not made the showing,

required under section 1.509(a)-4(i)(3)(iii)(b), Income Tax

Regs., that Keswick would be sufficiently attentive to the
                             - 24 -

operations of petitioner in order to avoid the interruption

of the carrying on of a particular program or activity.

Respondent's argument is premised on the assertion that

there is "no evidence, other than petitioner's self-serving

statements, that there exists a separate adult daycare

grant program."   According to respondent, petitioner's

funds are earmarked for Keswick's adult daycare program,

not for any grant program.

     Respondent also argues that the adult daycare program

is not a substantial activity for Keswick, but, even if it

were, there is no evidence that the loss of petitioner's

funds would cause Keswick to interrupt or discontinue the

adult daycare program.   To the contrary, respondent states

that for fiscal year 2000 petitioner's support represented

only 4.25 percent of Keswick's budget for the adult daycare

center.   Respondent also points out that during 1999, when

the amount of Cuddeback funds used to provide grants

increased by $11,269, an increase of more than 70 percent

over the amount used during 1996, the adult daycare program

served 10 fewer participants (i.e., 149 in 1996 and 139

in 1999) and only 2 additional individuals received

"grants".   Respondent further argues that petitioner's

support can be used, and was used in 1996, for purposes

other than the adult daycare program.   Respondent concludes

from these facts that the adult daycare program does not

depend on petitioner's support and, without such support,
                           - 25 -

the program would not be interrupted or discontinued.

     Respondent also argues, on the basis of the examples

set forth in section 1.509(a)-4(i)(3)(iii)(c), Income Tax

Regs., that the term "interruption" in section 1.509(a)-

4(i)(3)(iii)(b), Income Tax Regs., should be interpreted

to mean discontinuance.   In effect, respondent argues that

a publicly supported organization will not be attentive to

the operations of the supporting organization unless the

loss of support from that organization will cause the

discontinuance of a particular program or activity, rather

than causing the program to be conducted in a different

manner or degree.

     The dispute between the parties in this case involves

the question whether it is demonstrated in the administra-

tive record "that in order to avoid the interruption of

the carrying on of a particular function or activity,

the beneficiary organization [i.e. Keswick] will be

sufficiently attentive to the operations of the support-

ing organization [i.e. petitioner]."   See sec. 1.509(a)-

4(i)(3)(iii)(b), Income Tax Regs.   It also involves whether

the particular program or activity for which the support is

earmarked is a "substantial" program or activity.   See id.

     While the parties agree that petitioner's support to

Keswick is earmarked, they disagree about whether the

support is earmarked for the adult daycare program or for a

program to provide grants to needy participants in that
                           - 26 -

program.   They also disagree about the meaning of the term

"interruption" as used in the regulation.    Finally, they

disagree about whether the adult daycare program or the

grant program is a "substantial" program or activity of

Keswick, as required by section 1.509(a)-4(i)(3)(iii)(b),

Income Tax Regs.

     On the basis of our review of the administrative

record, we do not believe that it has been demonstrated

that Keswick will be sufficiently attentive to petitioner's

operations in order to avoid an "interruption" of either

the adult daycare program or a program to provide grants to

needy participants in that program.     Furthermore, while the

daycare program with "Actual (Projected)" revenues of

$640,775 and direct and indirect costs of $1,140,568 in

fiscal year 2000 appears to be a substantial program, there

is not sufficient information in the administrative record

to make the same finding about the grant program.

     The information about Keswick in the administrative

record of this case is sketchy.     We know that Keswick

conducts a domiciliary nursing care program which is its

primary program or activity, and we know that it conducts

a daycare program through its adult day services center.

The record provides little or no specific information about

the domiciliary program, such as how many individuals are

served by the program, what services are provided to

participants in the program, what revenues are realized
                           - 27 -

by the program, what its expenses are, or any other

information.

     The information about Keswick in the administrative

record is focused on the adult day services program and

the "grants" provided to needy participants.   However, even

here, the information in the administrative record is

sketchy.   For 1996, the administrative record shows that

petitioner contributed $20,291 to Keswick, and that $15,967

was given to grant recipients from funds that petitioner

had contributed.   For 1999, the record shows that

petitioner contributed $19,114 to Keswick through July 31,

1999, and that $27,236 was given to grant recipients during

the year from funds that petitioner had contributed.    We

are told the number of participants in the adult day

services program, 149 participants in 1996 and 139

participants in 1999, and the number of such participants

who received "grants", 29 in 1996 and 31 in 1999.

Significantly, we are not given any revenue or cost

information for those years.   For 1999, we are told that

Keswick charged $60 per day for the services it provided to

participants in the adult day services program, but we are

not told the amount of the charge for any other year.

     For the years 1997 and 1998, the administrative record

shows that petitioner contributed $23,585 and $25,631 to

Keswick, respectively.   However, the administrative record
                           - 28 -

provides no other information concerning Keswick's daycare

program or grant program during either of those 2 years.

     For fiscal year 2000, the administrative record

contains certain financial information regarding the adult

day services program and the cost of certain "charity care"

that "includes the funding received from the Cuddeback

trust".   Significantly, we are not given the number of

participants in the program or the number of grant

recipients during that year.    We are not told the amount

that petitioner contributed to Keswick or the amount of

grants provided by petitioner's funds.    We are not even

told the end of Keswick's fiscal year.

     Furthermore, the financial information for fiscal year

2000 regarding the daycare program shows that Keswick

received gross revenue of $640,775 and incurred direct and

indirect costs of $1,140,568, and that Keswick's costs

exceeded revenue by $499,793.    Thus, it appears that

Keswick's charges for the services that it provided to

participants in the program were not sufficient to offset

the costs incurred.   The financial information also

suggests that if "charity care" of $54,347 were removed,

then the excess of cost over revenue would increase to

$554,140.
                                            - 29 -

     The administrative record shows that Keswick discounts

the cost of its daycare program for certain needy

individuals.               Keswick refers to these discounts as

"grants", and it refers to this grant program as "charity

care".       For example, in 1999, Keswick offered discounts of

25, 40, 50, and 60 percent of the full charge of the

program, $60 per day.                Thus, in 1999, the value of the

"grant" or discount of Keswick's charge to each recipient

ranged from $15 to $36 per day.                      During that year, 5

participants received a 25-percent grant, 12 received a 40-

percent grant, 7 received a 50-percent grant, and 7

received a 60-percent grant, for a total of 31 grant

recipients.

     On an annual basis, the value of the "grant" extended

to one recipient in each "grant" category would be $38,325,

and the value of the "grant" for all 31 recipients would be

$301,125, as shown below:


    1999
    Type of
    "grant"        No. of       Daily "grant" per    Annual "grant"   Annual "grants"
    percent        recipients   recipient (at $60)   per recipient    for all recipients


      25               5              $15               $5,475             $27,375
      40              12               24                8,760             105,120
      50               7               30               10,950              76,650
      60               7               36               13,140              91,980


           Total      31                                38,325             301,125
                           - 30 -

The portion of the grants from petitioner's funds,

$27,236, is small in relation to the value of the grants on

an annual basis, computed above.    The record does not

provide the number of days each of the 31 grant recipients

participated in the program during 1999, but, clearly, it

was much less than a full year, at least on an overall

basis.

     With respect to the daycare program, we are not told

what "services" Keswick provides to participants in the

program or what costs Keswick incurs in providing such

services.   We are not given any information concerning the

relationship between the domiciliary program and the

daycare program, such as whether the two programs use the

same buildings or other facilities, whether they share the

same staff, etc.   We know the number of participants in

the daycare program in 1996 and 1999 (viz, 149 and 139,

respectively), but we do not know the number of days that

they participated in the program.    The administrative

record does not provide sufficient information to evaluate

the financial impact of the daycare program on Keswick.

     With respect to the grant program, the record does

not explain how participants are made aware of the grant

program, and whether participants must apply to receive a

grant.   The record does not explain how participants are

selected to receive a grant, other than the fact that each

recipient must be a person who "could not afford to pay the
                             - 31 -

full $60.00 per day charge for our service".    Similarly,

the record does not explain how recipients are selected

for a particular grant category; that is, why one recipient

receives a 25-percent grant and another receives a 60-

percent grant.   The record does not state whether

participants are ever turned down for a grant, or whether

individuals may be denied "grants" in one category but

awarded a smaller "grant".    Finally, the record does not

state Keswick's out-of-pocket cost of providing such

"grants" or discounts.   In short, on the basis of the

information provided in the administrative record, we are

unable to fully evaluate the financial impact on Keswick of

providing the grants to participants in the daycare

program, and we are unable to evaluate the impact on that

program of the loss of the funds contributed by petitioner.

     Our difficulty in evaluating the impact of

petitioner's funds is further complicated by the fact that

the administrative record suggests that there are other

funding sources for the grant program.    In describing how

petitioner's funds are used to defray 50 percent of each of

the 31 grants for 1999, Keswick's letter states that the

Cuddeback funds are "thus supplementing our existing grant

program."   Keswick's letter regarding the use of Cuddeback

funds in 1996 makes the same statement.    Thus, it appears

that the grant program is not funded entirely by

petitioner.   This is confirmed by Keswick's letter of
                             - 32 -

June 28, 2000, which states that "Cuddeback funds have been

used to assist veterans whose benefits for medical daycare

have been exhausted"; they have been used as a ready source

of funds to assist families "until other funding sources

could be obtained"; and they have been used "as a

supplement to other funding sources when those funds were

not adequate."    Furthermore, the financial information for

FY 2000 shows a budget for "charity care" of ($179,478) and

"Actual (Projected)" charity care of ($54,347).    According

to Keswick's letter, those amounts include "the funding

received from the Cuddeback trust", but the letter does not

further explain what those figures are.    The existence of

other funding sources suggests that Keswick's grant program

may not depend on petitioner's contributions, and it casts

doubt on petitioner's assertion that "50% of the total

grants were supplied by Petitioner's distribution".

     As mentioned above, petitioner's argument that Keswick

will be attentive to its operations is premised on the

assertion that it provides 50 percent of the funds for

all "grants".    We do not believe that that assertion is

established by the administrative record.    First, there is

no showing in the administrative record that 50 percent of

Keswick's grants were made with funds from petitioner for

1996, 1997, 1998, or 2000.    Second, even for 1999, we do

not agree that the administrative record shows that 50

percent of all grants given by Keswick were made with
                            - 33 -

petitioner's funds.    Petitioner bases that assertion on

Keswick's letter which states that of the 31 grants made in

1999, the first 50 percent of each grant is covered by

Keswick and "the remaining 50 percent comes from Cuddeback

funds".    However, none of Keswick's letters states that

petitioner provided 50 percent of all grants given by

Keswick during the year or that petitioner provided 50

percent of Keswick's charity care for the year.      To the

contrary, as mentioned above, Keswick's letters state that

it had "other funding sources."      We do not know what other

funding sources Keswick had, and we do not know the full

extent of Keswick's charity care.      Therefore, we cannot

evaluate the relative importance of the funds provided by

petitioner or whether the loss of petitioner's funds would

cause an "interruption" of any kind in Keswick's grant

program.

     Moreover, even if we were to accept petitioner's

assertion that "50% of the total grants were supplied by

Petitioner's distribution", we question whether that would

assure Keswick's "attentiveness".      Keswick's financial

information for fiscal year 2000 shows that it sustained a

loss from the daycare program of $499,793 (gross revenue of

$640,775 less direct and indirect costs of $1,140,568).

Thus, it appears that the $60 per day charge was well below

the cost of the program and is an artificial measure of the

importance of petitioner's support.      On the other hand, if
                           - 34 -

the amount of grants provided from petitioner's funds

during 1999, $27,236, is compared to the loss, it appears

that petitioner's funds amount to only 5.44% of the loss, a

level that does not assure "attentiveness".

     In addition, we disagree with petitioner's argument

that the grant program, as funded by petitioner, is

substantial because 22 percent of the 139 daycare

participants received Cuddeback funds during 1999.

Petitioner computed this percentage by dividing the number

of grant recipients for 1999, 31, by the number of daycare

participants for the year, 139.     This percentage does not

show the relative importance of such grants to the daycare

program.   It fails to take into account the number of days

each "grant" recipient participated in the daycare program

and it treats all "grant" recipients equally, whether

they receive a 25-, 40-, 50-, or 60-percent "grant".

     Finally, we reject petitioner's contention that the

factors contained in section 1.509(a)-4(i)(3)(iii)(d),

Income Tax Regs., weigh heavily in its favor.     First,

as explained above, due to the sketchiness of the

information regarding other sources of funds for Keswick's

grant program, we cannot conclude that the percentage of

support from petitioner is sufficient to ensure Keswick's

attentiveness to avoid interruption of the grant program.

Second, we disagree with petitioner's suggestion that

Keswick's letters demonstrate its attentiveness to
                           - 35 -

petitioner.   Finally, we disagree with petitioner's

suggestion that attentiveness is demonstrated by the fact

that petitioner is required by section 6104(d) to make

available for inspection by any individual its annual tax

return and certain other information, such as investment

return and a listing of all investments.    In this case,

there is no evidence that Keswick exercised actual

attentiveness to petitioner's operations.

     For the reasons discussed above, we affirm

respondent's determination that petitioner fails to

satisfy the attentiveness prong of the integral part test

of section 1.509(a)-4(i)(3), Income Tax Regs., and that

petitioner does not qualify to be excepted from private

foundation status under section 509(a)(3).


                               Decision will be entered

                          for respondent.
