Place a hold on our 501(c)(3) research!

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L____’s revelations yesterday have “just” consumed me. And made me realize I want to stop C____ from proceeding with her research . . . at least until I get some other questions answered first.

So I wrote to her:

I put into the mail yesterday a check for $1,000 and the signed Letter of Engagement.

Before we (i.e., you and your associates) go anywhere, however, I sense I should raise a few questions that came up from a conversation I had yesterday with L____, our CPA.

Yesterday, as I spoke with L____, he made clear that he had told J____ that he would refuse to approve J____’s proposal unless and until Sonlight/InquisiCorp got a Private Letter Ruling from the IRS about our proposed 501(c)(3) status: “Get me on the record,” he says he told J____: “I will not sign off on your proposal without a Private Letter Ruling.”

He also told me that J____ told him (i.e., J____ told L____) that the attorney he (J____) is working with, had advised him specifically to avoid seeking such a letter. (I assume that attorney must be you.)

As L____ and I discussed the matter, L____ said he is willing, potentially, to modify his opinion about the need for a PLR if someone who specializes in this area of non-profit/tax-exempt corporations–someone such as yourself–could assure him about certain matters.

If you would be willing to talk with us about these things, L____ said he would be happy to participate in a brief conference call on these questions later this week. Perhaps on Thursday. Otherwise, he said, he would be happy if I were to talk with you on my own. He said he thought I understand the issues well enough for me to get your perspective and communicate it to him. Either way, however, I think we need to talk.

The concerns:

1) “What about UBTI?”

a. As L____ noted: on the responses he has received to 1023 applications, “When the IRS responds, they will say, ‘You are a 501(c)(3),” but they also say, ‘We are not adjudicating on whether there is Unrelated Business Taxable Income.’” And as far as L____ and I are concerned, this is huge.

b. This came up particularly forcefully as we reviewed the InquisiCorp tax return because–for the first time ever–InquisiCorp took a substantial deduction for domestic production, the cost of putting together some $__ million worth of kits [math and science supplies and, I imagine, the other products that Sonlight/InquisiCorp develops on its own] we sold last year. –”How would the production or sale of science kits fit a legitimate tax-exempt purpose?” he asked.

c. And then, of course, there are the $__ million-plus (sales price) worth of books we sold (resale) last year. Virtually every one of them is available for sale at Amazon.com, Barnes & Noble, and hundreds of other booksellers.

d. L____ and I didn’t discuss the following details, C____, but he wanted to make sure that, as you do whatever research you are proposing, you are fully aware of the specifics of our interests . . . so you can ensure that our proposed tax-exempt purposes match the specifics of what we do as a company. So, to fulfill that plea, let me note:

i. Sarita’s and my primary mission/vision in life has to do with _________ efforts.

1. We went into business in order to support [the people who are engaged in these efforts] practically, by means of homeschool curricular materials that meet their unique needs.

2. Now that we have begun generating significant profits, we want to maximize our giving to these same efforts.

We are delighted to generate significant profits in order to make them available for the above-mentioned efforts. We are not interested in any kind of restructuring that would reduce our ability to offer financial or practical support to these endeavors.

ii. Our primary brand serves the educational needs of some 40,000 families around the world each year. We would want to continue to meet these families’ curricular needs.

iii. Of the approximately _____ SKUs Sonlight Curriculum sells, possibly ____ are self-published. About _____ titles are published by Avyx, Inc., another subsidiary of InquisiCorp that primarily reprints books that have been previously published by other companies. Avyx has acquired the reprint rights. Avyx sells not only to Sonlight Curriculum, Ltd., but to and through other resellers, including, for example, Amazon.com. All the other SKUs sold by Sonlight are purchased from other manufacturers or publishers and then resold.

iv. Besides the Sonlight Curriculum company and brand, InquisiCorp is interested in developing additional companies.

1. I have already mentioned Avyx.

2. Another company that we are just now beginning to develop is _______, dedicated to _________. At this time, we would expect to charge fees or prices along the lines of “what the market will bear.”

3. A third initiative is also just getting off the ground, in which we seek to _________.

4. We have discussed the possibility of working with non-profit agencies to help them improve their “business” functions.

We want to make sure we are able to continue to pursue and grow (without outgrowing our corporate form) all of these, plus, potentially, additional, similar efforts.

2) “You have to be really careful, John. Getting a Form 1023 approved does not mean you’re out of the woods. . . . ”

a. It is possible that the IRS could come back and decide that much of what we are doing does not qualify as exempt activity.

b. If the IRS were to decide that most of our income is UBTI, it is possible (”I don’t know the tax rates, but it is possible”) that the owner/operators of InquisiCorp could wind up having to pay more taxes than they are now under the S-form.

c. “As far as I know, once you are declared a 501(c)(3), there is no going back. You can’t undo the declaration . . . even if the IRS were to declare most or all of your income as UBTI.”

Thanks.

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