itable contribution or a business expense would depend upon the facts and circumstances and would include, among other factors, a consideration of whether the payment was made for business reasons and with the view of deriving some particular business benefit therefrom or whether the gift preceded from charitable intentions. Thus, if the taxpayer makes what is determined to be a charitable gift he is limited by the provisions of section 170. If, however, the gift is not a charitable contribution but is a business expense, the amount may be deducted in full as a business expense. Accordingly, it can be seem that the answer to questions three, four, and five would depend upon the facts and circumstances of each situation. Finally, based upon the information submitted, we are unable to determine whether the value of the day care services received by an employee would be includable in the gross income of the employee for Federal income tax purposes. Generally, where an employer provides a service for an employee the value thereof is includable in the employee's gross income as additional compensation. However, each case must be decided on the facts and circumstances relating to the particular individual taxpayer involved. We hope this general information will be of assistance to you. Enclosure. LESTER W. UTTER, Chief, Individual Income Tax Branch. [Reprinted from Internal Revenue Bulletin 1969-1, Jan. 6, 1969] 26 CFR 601.201: Rulings and determination letters Processing requests for exemption under sections 501 and 521 of the Code; revocation or modification of exempion rulings and determination letters; and rulings involving prohibited transactions described in section 503; Revenue Procedure 67-3 superseded. Rev. Proc. 69-3 SECTION 1. PURPOSE The purpose of this Revenue Procedure is to outline the procedures of the Internal Revenue Service with respect to applications for exemption from Federal income tax under sections 501 and 521 of the Internal Revenue Code of 1954 and with respect to revocation or modification of exemption rulings and determination letters, other than those subject to Revenue Procedure 69-4, page 19, this Bulletin (relating to pension, annuity, profit-sharing, and stock bonus plans); and to outline circumstances under which rulings will be issued involving prohibited transactions described in section 503 of the Code. See Revenue Procedure 68-13, C.B. 1968-1, 764, for procedures under which applications for exemption and under the general supervision or control of a central organization. Also, see may be established on a group basis for subordinate organizations affiliated with Revenue Procedure 68-24, I.R.B. 1968-30, page 24, for information on applications for exemption filed by certain religious and apostolic organizations. SEC. 2. GENERAL For the purpose of this Revenue Procedure the term "determination letter" includes letters issued by a District Director on the basis of advice secured from the National Office pursuant to the procedures prescribed herein. SEC. 3. FILING APPLICATIONS FOR EXEMPTION .01 An organization seeking a ruling or determination letter of exemption under section 501 or section 521 of the Code is required to file an application (in duplicate, if under section 501) with the District Director of Internal Revenue for the district in which is located the principal place of business or principal office of the organization. Any application received by the National Office or by a District Director other than as provided above will be forwarded, without any action thereon, to the appropriate District Director. .02 An exemption ruling or determination letter will be issued to an organization, provided its application and supporting documents establish that it meets the particular requirements of the section under which exemption is claimed. Exempt status will be recognized in advance of operations if proposed operations can be described in sufficient detail to permit a conclusion that the organization clearly will be exempt. A mere restatement of purpose or a statement that proposed activities will be in furtherance of such purposes will not satisfy these requirements. Where the Service considers it warranted, a record of actual operations may be required before a ruling or determination letter will be issued. .03 An exemption ruling or determination letter will not ordinarily be issued involving the organization's exempt status under section 501 or 521 of the Code is pending in litigation or before the Appellate Division. .04 Requests for rulings or determination letters other than in the form of applications for exemption are governed by the procedures outlined in Revenue Procedure 69-1, page 3, this Bulletin. SEC. 4. PROCESSING APPLICATIONS .01 Under the general procedures outlined in Revenue Procedure 69-1, District Directors are authorized to issue determination letters involving applications for exemption under sections 501 and 521 of the Code. .02 A District Director will refer to the National Office those applications which present questions that are not specificially covered by statute, Treasury Decision or regulation, or by a ruling, opinion, or court decision published in the Internal Revenue Bulletin. The National Office will consider each such application, issue a ruling directly to the organization, and send a copy of the ruling to the District Director. In the event of a conclusion unfavorable to the applicant, it will be informed of the basis for the conclusion and of its rights to file a protest and to a conference in the National Office. If a conference is requested, the conference procedures outlined in section 6 of Revenue Procedure 69-2, page 12, this Bulletin, will be followed. After reconsideration of the application in the light of the protest and any information developed in conference, the National Office will affirm, modify, or reverse the original conclusion, issue a ruling to the organization, and send a copy of the ruling to the District Director. 03 An exemption appplication that does not contain the required information will be classified as an "incomplete application case." The applicant will be advised in writing why a determination will not be made. SEC. 5. EFFECT OF EXEMPTION RULINGS OR DETERMINATION LETTERS .01 An exemption ruling or determination letter is usually effective as of the date of formation of an organization if its purposes and activities during the period prior to the date of the ruling or determination letter were consistent with the requirements for exemption. If the organization is required to alter its activities or to make substantive amendments to its enabling instrument in order to qualify for exemption, the exemption ruling or determination letter will be effective as of the date specified therein. .02 An exemption ruling or determination letter may not be relied upon if there is a material change inconsistent with exemption in the character, the purpose, or the method of operation of the organization. SEC. 6. NATIONAL OFFICE REVIEW OF DETERMINATION LETTERS The National Office will review determination letters to assure uniformity in application of the statutes, Treasury Decisions or regulations, or rulings, opinions, or court decisions published in the Internal Revenue Bulletin. Where the National Office takes exception to a determination letter, the District Director will be advised. If the organization protests the exception taken, the file and protest will be returned to the National Office. The referral will be treated as a request for technical advice and the procedures of Revenue Procedure 69-2 will be followed. SEC. 7. PROTEST OF ADVERSE DETERMINATION LETTERS .01 Upon the issuance of a determination letter adverse to the applicant the District Director will advise the organization of its right to protest the determination by submitting a statement of the facts, law, and arguments in support of its application for exemption, and of its right to a district office conference. However, the organization will not be afforded protest and conference rights if the determination letter is based on technical advice. .02 If, after considering the organization's protest and any information developed in conference, the District Director maintains his position and the organization does not agree, the file will be referred to the National Office. The referral will be considered a request for technical advice and the procedures of Revenue Procedure 69-2 will be followed. .03 The adverse determination letter will serve to inform the organization of the pertinent facts and the question or questions proposed for submission to the National Office, and will be deemed to satisfy the requirements of section 4.02 of Revenue Procedure 69-2. .04 The organization may waive its right to a district office conference and request referral of the matter directly to the National Office. The District Director will advise the organization in writing that the matter will be refered to the National Office in accordance with its request only after a statement is filed setting forth the facts, law, and arguments in support of its application for exemption. In addition, the organization will be requested to specify whether it desires a conference in the National Office in the event an adverse decision is indicated. SEC. 8. REVOCATION OR MODIFICATION OF EXEMPTION RULINGS OR DETERMINATION LETTERS .01 An exemption ruling or determination letter may be revoked or modified by a ruling or determination letter addressed to the organization, or by a Revenue Ruling or other statement published in the Internal Revenue Bulletin. The revocation or modification may be retroactive if the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented, or engaged in a prohibited transaction of the type described in section 8.07. .02 If a District Director concludes, as a result of examining an information return or considering information from any other source, that a ruling or determination letter should be revoked or modified, the organization will be advised in writing of the proposed action and the reasons therefor. The District Director will also advise the organization of its right to protest the proposed action by submitting a statement of the facts, law, and arguments in support of its continued exemption, and of its right to a district office conference. .03 If the organization agrees with the proposed action, either before or after a district office conference, or if no protest is filed, the District Director will issue a determination letter revoking or modifying the organization's exemption. .04 If, after considering the organization's protest and any information developed in conference, the District Director maintains his position and the organization does not agree, the file and protest will be referred to the National Office. The referral will be considered a request for technical advice and the procedures of Revenue Procedure 69-2 will be followed. .05 The letter advising the organization of the proposed revocation or modification action will serve to inform the organization of the pertinent facts and the question or questions proposed for submission to the National Office, and will be deemed to satisfy the requirements of section 4.02 of Revenue Procedure 69-2. .06 The organization may waive its right to a district office conference and request referral of the matter directly to the National Office. The District Director will advise the organization in writing that the matter will be referred to the National Office in accordance with its request only after it files a statement setting forth the facts, law, and arguments in support of continued exemption. In addition, the organization will be requested to specify whether it desires a conference in the National Office in the event an adverse decision is indicated. .07 If it is concluded that an organization entered into a prohibited transaction for the purpose of diverting corpus or income from its exempt purpose and if the transaction involved a substantial part of the corpus or income of the organization, its exemption is revoked effective as of the the beginning of the taxable year during which the prohibited transaction was commenced. .08 In all other prohibited transaction cases, the exemption is revoked effective as of the beginning of the first taxable year after the date of the revocation letter. In these cases the organization will be notified of the revocation of exemption by registered or certified mail, sent to its last known address. .09 Although the organization, in a prohibited transaction case, will usually be permitted to submit its brief and to be heard in conference before the revocation notice is issued, the Service may, at its discretion, issue the revocation notice by registered or certified mail prior to the receipt of the brief or prior to granting a conference. If it is later determined that the revocation was in error, it will be rescinded as of the date it was issued. .10 The provisions of this section relating to protest and conference rights before a revocation notice is issued are not applicable to matters where delay would be prejudicial to the interests of the Internal Revenue Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limitations, or where immediate action is necessary to protect the interests of the Government). SEC. 9. PROHIBITED TRANSACTIONS .01 Section 503 of the Code denies exemption to certain organizations that engage in transactions of the type described therein. The National Office may issue a ruling as to whether an organization has entered into, or proposes to enter into, a prohibited transaction. However, except as provided in section 9.02 below, a ruling will not be issued where the determination is primarily one of fact, e.g., market value of property, reasonableness of compensation, etc. Also, no rulings will be issued with respect to such transactions as sales and leasebacks, gifts and leasebacks, and other rental transactions of real or personal property directly or indirectly with the creator of a related or controlled interest. .02 Where the adequacy of the security of a loan is involved, a ruling may be issued, but only if there is a clear indication of value that can be established by reference to recognized sources without requiring physical valuation or appraisal. The following are examples of transactions where the adequacy of security can be established by reference to recognized sources: 1 A surety bond issued by a recognized surety company doing a surety bond business under applicable state law; 2 An assignment of an insurance contract having a cash surrender value sufficient to cover the loan, interest, and possible costs of collection; 3 A first mortgage on real property in an amount not in excess of 50 percent of its assessed value for local tax purposes; or, 4 Collateral represented by securities listed on a recognized exchange of an aggregate value equal to twice the amount of the loan. .03 An organization whose exemption is revoked by reason of section 503 of the Code may file a new application in any taxable year following the taxable year in which the notice of revocation was issued. But the exempt status of the organization may not be renewed before the beginning of the first taxable year following the year in which its new application is filed. Thus, if a revocation notice was issued in 1968, the organization may not file a new application for exemption until 1969, and the new exemption may not be granted for a taxable year prior to 1970. If the organization does not file a new application until 1970, the new exemption may not be recognized for a year prior to 1971. SEC. 10. EFFECT ON OTHER DOCUMENTS Revenue Procedure 67–3, C.B. 1967-1, 560, is superseded. SEC. 11. EFFECTIVE DATE This Revenue Procedure is effective January 6, 1969, the date of its publication in the Internal Revenue Bulletin. AUGUST 19, 1969. Mr. JOHN W. LITTLETON Director, Income Tax Division, Internal Revenue Service, DEAR MR. LITTLETON: In the course of the Senate Committee on Labor and Public Welfare hearings on S. 2060 last Tuesday, August 5, Senator Jacob Javits requested from the Department of Health, Education, and Welfare a statement analyzing possible tax incentives to businessmen who establish day care centers for children of their employees. He specifically asked whether such action by a businessman would be deductible as a business expense and to what extent the day care services would be taxable to the beneficiary. These questions have been of particular concern to us because we have been investigating ways of encouraging businessmen to provide day care facilities so that women with young children, particularly those who might otherwise be on welfare, can be employed and their children provided with adequate care in the mother's absence. Benefit would accrue not only to those employed but also to the employer through improved ability to hire and retain employees with high morale and less absence ratio. In an effort to obtain guidelines to assist businessmen in these ventures, we wrote to your office on January 30, 1969,* (a copy of our letter is enclosed), asking for answers to a series of questions relating to the tax deductibility of contributions to day care and to the taxability of day care services to the recipient. 11K On May 13, 1969, I received the enclosed reply from Mr. Lester Utter of the Internal Revenue Service, which while setting forth some general information, states: We are unable to provide definite answers to the questions indicated above since we would need a complete statement of all the facts of each situation in order to do so. Since we are not concerned with an individual case but rather with general guidelines, the presentation of a completely detailed hypothetical case is of value for our purposes only to the extent that your decision regarding it could be considered as having general applicability. If you feel that we could arrive at such guidelines through the analysis of hypothetical individual cases, or by any other means, we would be glad to work with you in this endeavor. In the absence of this, we have no alternative but to include in our report to Senator Javits a copy of Mr. Utter's letter which, in effect, preclude the possibility of general advice of a position nature. In view of the necessity of meeting a rather short deadline, I would appreciate any action you would take to expedite a decision by the Internal Revenue Service on this matter. Sincerely, JULE M. SUGERMAN, Acting Director, Office of Child Development, Department of Health, Mr. JULE M. SUGARMAN, INTERNAL REVENUE SERVICE, Washington, D.C., August 28, 1969. Office of Child Development, Department of Health, Education, and Welfare, Washington, D.C. DEAR MR. SUGARMAN: In answer to your request, I am writing this letter to you to confirm our telephone conversation of August 22, 1969, in which I explained that because we were not in possession of the necessary facts, we would be unable to expand on the general guidelines we furnished you in our prior letter of May 13, 1969. In that letter we provided you with general information as to the Federal income tax consequences resulting from contributions made by business firms to early childhood programs established or promoted by your agency. However, as previously emphasized, we would issue a ruling on this matter to an interested taxpayer if we received an actual case and were in possession of the necessary facts. Furthermore, I will be happy to explore this problem with you further if you feel that it is necessary and we would certainly be pleased to respond directly to Senator Javits if he had any further questions that he felt needed to be resolved in this area. Sincerely yours, DENNIS A. MCGRAW, Acting Chief, Individual Income Tax Branch. Senator JAVITS. At the top of page 5 of Mr. Farmer's statement, dealing with title IV-A of the Social Security Act, it states that "The amount of Federal funds available is limited only by the amount that a State or local government is able to provide as a non-Federal share.” Does that sentence mean that Federal appropriations are automatic, Mr. Sugarman? Mr. SUGARMAN. That is correct, Senator. This is financed under an appropriation for the public welfare system, which covers services as well as financial payments. The law now requires that the Federal Government provide matching monies to the extent that they are necessary to match what the States provide. The States' share is 25 percent. Senator JAVITS. Is it an automatic appropriation? |