T.C. Memo. 2007-85



                UNITED STATES TAX COURT



  RAMESES SCHOOL OF SAN ANTONIO, TEXAS, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 23228-04X.              Filed April 10, 2007.



     P was established as a nonprofit corporation under
the laws of the State of Texas for the purpose of
operating a school providing education to children in
the San Antonio area. P initially received recognition
from R as an organization described in sec. 501(c)(3),
I.R.C., which recognition R now seeks to revoke.

     Held: P furthers private interests and therefore
is not operated exclusively for exempt charitable
and/or educational purposes. Consequently, P is not
entitled to exemption from income taxation under sec.
501(a), I.R.C., as an organization described in sec.
501(c)(3), I.R.C.


Victor L. Smith, for petitioner.

Michael K. Park and Virginia E. Cochran, for respondent.
                                 - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     Respondent determined that Rameses School of

San Antonio, Texas (petitioner), no longer qualified for

exemption from Federal income taxation under section 501(a) as an

organization meeting the requirements of section 501(c)(3).1

Respondent therefore revoked petitioner’s tax-exempt status

effective September 22, 1995.    Petitioner challenged respondent’s

determination by timely invoking the jurisdiction of this Court

for a declaratory judgment pursuant to section 7428.    In

accordance with Rule 217, the administrative record underlying

respondent’s determination was filed with the Court, and a

subsequent trial was conducted.    At this juncture, the issue for

decision is whether petitioner is operated exclusively for exempt

purposes (i.e., educational and/or charitable) within the meaning

of section 501(c)(3).

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.




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

Founding and Operations

     Petitioner was formed as a nonprofit corporation under the

laws of the State of Texas on September 22, 1995.   Pursuant to

its articles of incorporation, petitioner was organized for the

stated exempt purpose of operating a school “to provide a sound

education for all school-age children within the City of San

Antonio and Bexar County, Texas.”   At all relevant times

petitioner has maintained its principal place of business in San

Antonio, Texas.   Patricia L. Fennell (Ms. Fennell), founder of

petitioner, has from its inception served as the school’s

executive director, president, and CEO.   Basil H. Franks

(Mr. Franks), apparently also known as Basil Kamau Atum, was

likewise involved in the founding, incorporation, and early

operations of petitioner.   Mr. Franks resigned from further

participation in May of 1996.   The articles of incorporation and

the bylaws adopted in accordance therewith provided for a board

of directors to oversee governance of petitioner.

     During 1996, petitioner submitted to the Internal Revenue

Service (IRS), a Form 1023, Application for Recognition of

Exemption Under Section 501(c)(3) of the Internal Revenue Code.

By letter dated May 9, 1997, petitioner received recognition from

the IRS as an organization exempt from taxation under section

501(a) by reason of being described in section 501(c)(3).    Exempt

status under section 501(c)(3) rendered petitioner eligible under
                                - 4 -

the Texas Education Code to apply for an open-enrollment charter,

and thereby to be recognized as a State public school entitled to

receive public funding.    See Tex. Educ. Code Ann. sec.

12.101(a)(3) (Vernon 1996).    Petitioner so applied and on May 14,

1998, obtained from the Texas State Board of Education (SBOE) the

requested open-enrollment charter.2     The charter, in accordance

with applicable State law, imposed upon petitioner conditions

related to its operations, including rules to require compliance

with generally accepted accounting principles (GAAP) and

recordkeeping standards, to restrict conflicts of interest and

less than arm’s-length transactions, and to adhere to specific

dictates governing student attendance and special education

programs.

     In 1995, petitioner began operating a school offering pre-

kindergarten through grade 12 instruction to children.     The

school employed what is referred to as a “multi-age level” or

“one-room schoolhouse” setting.    Records suggest that student

enrollment grew from about 10 in early years to approximately 100

by 1999.    Throughout its history, the school has focused on

serving a racially and ethnically diverse, economically


     2
       Although the parties’ stipulation references “March of
1998” in connection with receipt of the open-enrollment charter,
a cursory review of the underlying document reveals that the
contract for charter was entered and executed on May 14, 1998.
See Cal-Maine Foods, Inc. v. Commissioner, 

, 195
(1989) (holding that stipulations are properly disregarded where
clearly contrary to evidence contained in the record).
                                - 5 -

disadvantaged population, with the majority of the student body

drawn from minority groups.

     Classes were initially conducted in property leased to the

school at 315 North Hackberry Street in San Antonio, Texas.      By

cash warranty deed dated February 10, 1998, petitioner became the

record owner of property at 309 North Hackberry Street and 527

and 531 North Center Street in San Antonio.    The 309 North

Hackberry Street location has since constituted the school’s

principal place of business.    By a rental agreement dated May 1,

1998, Ms. Fennell purported to lease the 309 North Hackberry and

527 North Center properties to petitioner for $1,500 and $1,000

per month, respectively.

     Personally, Ms. Fennell is the record owner of properties at

902 East Crockett and 442 Westminster Avenue in San Antonio.     The

latter property constitutes Ms. Fennell’s principal residence.

     Petitioner maintained various commercial checking accounts

at Frost National Bank.    Ms. Fennell possessed check writing

authority on these accounts.    Checks from petitioner’s bank

accounts were issued to make purchase price and mortgage payments

on the properties titled to Ms. Fennell in her personal capacity

at 902 East Crockett and 442 Westminster Avenue.    Petitioner’s

funds were likewise used to make payments on leases entered by

Ms. Fennell as an individual on other properties.    Ms. Fennell

also from petitioner’s bank accounts issued checks to herself as
                                - 6 -

payee and made cash withdrawals for which the record reflects no

documented and established business purpose.    Business purpose or

board authorization is similarly lacking for thousands of dollars

of expenditures directed to retail stores, credit card companies,

financial institutions, Ms. Fennell’s dentist, and other

businesses.   Nor does the record suggest any documented system

either (1) of loans to and repayments by Ms. Fennell or (2) of

loans by Ms. Fennell and reimbursements from the school.

State Administrative Proceedings

     Public education in Texas is overseen by the SBOE, a body of

15 members elected by the voters, and by the commissioner of

education, an individual appointed by the governor and confirmed

by the State senate.   Tex. Educ. Code Ann. secs. 7.051, 7.055,

7.101, 7.102 (Vernon 1996).    The SBOE carries out its statutorily

prescribed powers and duties, which consist in large part of

establishing educational policies, programs, and standards, with

the assistance of the commissioner of education.    Tex. Educ. Code

Ann. sec. 7.102.   The commissioner of education, in turn, heads

the administrative agency, the Texas Education Agency (TEA or the

agency), charged with administering and monitoring compliance

with educational programs.    Tex. Educ. Code Ann. secs. 7.002,

7.021 (Vernon 1996).

     In February of 1999, the commissioner of education directed

the TEA to conduct a financial status audit of petitioner.
                               - 7 -

Following issuance by the TEA of findings reflecting a number of

improprieties, the commissioner directed the agency to conduct an

on-site investigation into the fiscal management of the school.

The on-site investigation took place on March 25-29 and 31, 1999,

and the TEA issued its final report of findings on June 23, 1999.

Given that the investigative audit had revealed legal and

material violations of petitioner’s open-enrollment charter, the

report recommended that the TEA institute proceedings for adverse

action, i.e., revocation of the charter, by the SBOE.

     Accordingly, the TEA instituted a proceeding before the

SBOE.   An administrative law judge was assigned to preside over

the resultant hearing and to render a proposal for decision in

the matter.   A 2-day hearing, which included the presentation of

documentary evidence and witness testimony, was conducted on

November 9 and 10, 1999, and petitioner was represented by

attorney Roger Stephens.   On November 18, 1999, the

administrative law judge issued a proposal for decision

containing 48 separate findings of fact, a discussion summarizing

those findings and their import, and specific conclusions of law.

The proposal ultimately recommended that petitioner’s charter be

revoked.

     The following excerpt from the proposal’s discussion

encapsulates the enumerated findings and conclusions:

          It is clear from the evidence that RSSAT was being
     operated without a functioning board of directors. Two
                               - 8 -

     directors were reflected in board minutes as having
     attended meetings; however, the directors did not
     attend meetings as the minutes reflect. In fact, the
     directors were not even aware of the meetings. The
     original budget was never amended as required to
     reflect a decrease in the number of projected students
     in attendance. The school accounts were being used for
     personal purposes by the executive director of the
     school without any oversight by the board of directors.
     Documents submitted by the executive director as
     support for additional payments were altered prior to
     submission to the agency. Student attendance records
     were inflated, resulting in overpayments to the school.
     Special education requirements were ignored until the
     end of November of 1998; entries of temporary
     placements were made well after the fact without the
     knowledge and consent of the original makers of
     documents. Required special education ARD meetings
     were not held, and mandatory forms were not completed.

          In short, the evidence establishes that the
     executive director had unfettered discretion to direct
     and manage the operation of RSSAT and its financial
     affairs. As a direct result of this unilateral
     authority, the school failed to meet the requirements
     of the charter contract, failed to comply with GAAP and
     failed to meet applicable laws and rules.

          The open-enrollment charter of RSSAT should be
     revoked.

     On January 14, 2000, after review of the proposal and any

exceptions thereto submitted by the parties, the SBOE issued a

decision that:   (1) “FOUND” that the findings of fact,

discussion, and conclusions of law contained in the November 18,

1999, proposal for decision were proven by a preponderance of the

evidence; (2) “ORDERED” that those findings of fact, discussion,

and conclusions of law were “ADOPTED” by the SBOE for all

purposes; and (3) “ORDERED” that the open-enrollment charter of

the school was “REVOKED” effective January 14, 2000.
                                - 9 -

Subsequently, on March 3, 2000, the SBOE issued a final order

denying the school’s motion for rehearing.

IRS Examination

     Examination by the IRS into petitioner’s tax-exempt status

began in late 2001, precipitated by the forwarding to the IRS of

a newspaper article reporting the revocation of the school’s

charter.   The IRS conducted an investigation into whether

petitioner complied with the standards imposed under section

501(c)(3).    In particular, the IRS sought financial and

governance records in order to verify the information reported by

petitioner on Forms 990, Return of Organization Exempt from

Income Tax, and to evaluate the records for possible instances of

private benefit and personal inurement.    To that end, dozens of

information document requests were issued to petitioner, but only

a very limited portion of the requested materials was ever

provided, and often only after repeated inquiries, missed or

delayed appointments, and a general lack of cooperation on the

part of petitioner.    Consequently, additional information was

sought and obtained from third-party sources, including public

records and the TEA.

     The examination culminated with issuance on September 8,

2004, of the final adverse determination underlying this

litigation.    The conclusion was that petitioner failed to

establish that it was operated exclusively for an exempt purpose,
                               - 10 -

in that it was operated for the benefit of private interests and

a part of net earnings inured to the benefit of its founder

Ms. Fennell.

                               OPINION

I.   General Rules--Exempt Status

      Section 501(a) exempts from Federal income taxation

organizations described in section 501(c).      Among the

organizations so described are those set forth in section

501(c)(3):

           (3) Corporations * * * organized and operated
      exclusively for religious, charitable, scientific,
      testing for public safety, literary, or educational
      purposes, or to foster national or international
      amateur sports competition * * * , or for the
      prevention of cruelty to children or animals, no part
      of the net earnings of which inures to the benefit of
      any private shareholder or individual * * *

      In order to be exempt under section 501(c)(3), an

organization must be both organized exclusively for one or more

of the exempt purposes specified in the section, known as the

organizational test, and operated exclusively for such purposes,

known as the operational test.      See sec. 1.501(c)(3)-1(a)(1),

Income Tax Regs.   Failure to satisfy either test forecloses a

section 501(c)(3) exemption.

the organizational and operational tests,

“exclusively” does not mean “‘solely’” or “‘absolutely without

exception’”.   Nationalist Movement v. Commissioner, 

,

576 (1994) (quoting Church in Boston v. Commissioner, 

11 -

102, 107 (1978)), affd. 

(5th Cir. 1994); see also

Copyright Clearance Ctr., Inc. v. Commissioner, 

, 803-

804 (1982).     Nonetheless, the presence of a single nonexempt

purpose, if substantial in nature, precludes exempt status,

regardless of the number or importance of truly exempt purposes.

Better Bus. Bureau v. United States, 

, 283 (1945);

Redlands Surgical Servs. v. Commissioner, 

, 71-72

(1999), affd. 

(9th Cir. 2001); Nationalist Movement

v. Commissioner, supra at 576; Am. Campaign Acad. v.

Commissioner, 

, 1065 (1989).

     To satisfy the exclusivity requirement as it pertains to the

organizational test, the entity’s articles of organization must

limit its purposes to those which are exempt and must not

expressly empower it to engage, except in insubstantial part, in

activities not in furtherance of exempt purposes.     Sec.

1.501(c)(3)-1(b)(1)(i)(a) and (b), Income Tax Regs.     The articles

or applicable law must also ensure that, upon dissolution of the

organization, assets would not be distributed to its members or

shareholders.    Sec. 1.501(c)(3)-1(b)(4), Income Tax Regs.

     With respect to the operational test:

     An organization will be regarded as “operated
     exclusively” for one or more exempt purposes only if it
     engages primarily in activities which accomplish one or
     more of such exempt purposes specified in section
     501(c)(3). An organization will not be so regarded if
     more than an insubstantial part of its activities is
     not in furtherance of an exempt purpose. [Sec.
     1.501(c)(3)-1(c)(1), Income Tax Regs.]
                              - 12 -

The operational test also reinforces the express dictates of

section 501(c)(3) in that an entity is deemed not to operate

exclusively for exempt purposes if net earnings are distributed

or otherwise inure to the benefit of private individuals or if

its activities involve proscribed political involvement.    Sec.

1.501(c)(3)-1(c)(2) and (3), Income Tax Regs.   Additionally,

although an organization may be engaged only in a single activity

directed toward multiple purposes, both exempt and nonexempt,

failure to satisfy the operational test will result if any

nonexempt purpose is substantial.   Redlands Surgical Servs. v.

Commissioner, supra at 71; Copyright Clearance Ctr., Inc. v.

Commissioner, supra at 803-804.

     Exempt purposes, in turn, are those specified in section

501(c)(3), such as religious, charitable, scientific, and

educational.   Sec. 1.501(c)(3)-1(d)(1)(i), Income Tax Regs.

Charitable is further defined as follows:

     The term “charitable” is used in section 501(c)(3) in
     its generally accepted legal sense and is, therefore,
     not to be construed as limited by the separate
     enumeration in section 501(c)(3) of other tax-exempt
     purposes which may fall within the broad outlines of
     “charity” as developed by judicial decisions. Such
     term includes: Relief of the poor and distressed or of
     the underprivileged; advancement of religion;
     advancement of education or science; erection or
     maintenance of public buildings, monuments, or works;
     lessening of the burdens of Government; and promotion
     of social welfare by organizations designed to
     accomplish any of the above purposes, or (i) to lessen
     neighborhood tensions; (ii) to eliminate prejudice and
     discrimination; (iii) to defend human and civil rights
     secured by law; or (iv) to combat community
                              - 13 -

     deterioration and juvenile delinquency. * * * [Sec.
     1.501(c)(3)-1(d)(2), Income Tax Regs.]

Educational is similarly expounded, to wit:   “The term

‘educational’, as used in section 501(c)(3), relates to--(a) The

instruction or training of the individual for the purpose of

improving or developing his capabilities; or (b) The instruction

of the public on subjects useful to the individual and beneficial

to the community.”   Sec. 1.501(c)(3)-1(d)(3)(i), Income Tax Regs.

Regulations also list several examples of educational

organizations, including “An organization, such as a primary or

secondary school, a college, or a professional or trade school,

which has a regularly scheduled curriculum, a regular faculty,

and a regularly enrolled body of students in attendance at a

place where the educational activities are regularly carried on.”

Sec. 1.501(c)(3)-1(d)(3)(ii), Example (1), Income Tax Regs.

     However, regardless of the presence of what might otherwise

be proper exempt purposes, an explicit exception to section

501(c)(3) status exists in that:

     An organization is not organized or operated
     exclusively for one or more of the purposes specified
     in * * * [section 501(c)(3)] unless it serves a public
     rather than a private interest. Thus, * * * it is
     necessary for an organization to establish that it is
     not organized or operated for the benefit of private
     interests such as designated individuals, the creator
     or his family, shareholders of the organization, or
     persons controlled, directly or indirectly, by such
     private interests. [Sec. 1.501(c)(3)-1(d)(1)(ii),
     Income Tax Regs.]
                              - 14 -

In other words, if an organization can be shown to benefit

private interests, a limitation substantially overlapping but

encompassing more than simply the inurement of earnings to

insiders, it will be deemed to further a nonexempt purpose.      Am.

Campaign Acad. v. Commissioner, supra at 1066, 1068-1069; Church

of the Transfiguring Spirit, Inc. v. Commissioner, 

, 5 &

n.5 (1981).   Private benefits within the scope of the prohibition

may include an advantage, profit, fruit, privilege, gain, or

interest.   Am. Campaign Acad. v. Commissioner, supra at 1065-

1066.

     A substantial body of caselaw has explored the concept of

private benefit within the framework of the relationship between

an organization claiming tax-exempt status and its founder (or

small group of related insiders).   See, e.g., Founding Church of

Scientology v. United States, 

, 

,

1199-1202 (1969); Church of Eternal Life & Liberty, Inc. v.

Commissioner, 

, 927-928 (1986); Church of the

Transfiguring Spirit, Inc. v. Commissioner, supra at 5-6; Basic

Bible Church v. Commissioner, 

, 856-858 (1980), affd.

sub nom. Granzow v. Commissioner, 

(7th Cir. 1984);

Bubbling Well Church of Universal Love, Inc. v. Commissioner, 

, 534-538 (1980), affd. 

(9th Cir. 1981);

Unitary Mission Church v. Commissioner, 

, 512-515
                             - 15 -

(1980), affd. without published opinion 

(2d Cir.

1981).

     Factors emerging repeatedly as indicative of prohibited

inurement and private benefit include control by the founder over

the entity’s funds, assets, and disbursements; use of entity

moneys for personal expenses; payment of salary or rent to the

founder without any accompanying evidence or analysis of the

reasonableness of the amounts; and purported loans to the founder

showing a ready private source of credit.   See, e.g., Founding

Church of Scientology v. United States, supra at 1200-1202;

Church of Eternal Life & Liberty, Inc. v. Commissioner, supra at

927-928; Church of the Transfiguring Spirit, Inc. v.

Commissioner, supra at 5-6; Basic Bible Church v. Commissioner,

supra at 857-858; Bubbling Well Church of Universal Love, Inc. v.

Commissioner, supra at 534-538; Unitary Mission Church v.

Commissioner, supra at 513-515.   As this Court has noted, such

circumstances provide “an obvious opportunity for abuse of the

claimed tax-exempt status” and make incumbent “open and candid

disclosure of all facts”; otherwise, “the logical inference is

that the facts, if disclosed, would show that petitioner fails to

meet the requirements of section 501(c)(3).”   Bubbling Well

Church of Universal Love, Inc. v. Commissioner, supra at 535; see

also, e.g., Founding Church of Scientology v. United States,

supra at 1201; Basic Bible Church v. Commissioner, supra at 858.
                               - 16 -

      Upon a conclusion that relevant facts reveal private

benefit, the organization will not qualify as operating primarily

for exempt purposes “absent a showing that no more than an

insubstantial part of its activities further the private

interests or any other nonexempt purposes.”    Am. Campaign Acad.

v. Commissioner, 

.

II.   Contentions of the Parties

      Respondent contends that petitioner’s status as an

organization exempt from tax under section 501(c)(3) should be

revoked.    It is respondent’s position that petitioner fails the

operational test imposed pursuant to section 1.501(c)(3)-1(c),

Income Tax Regs., on grounds that the school was operated to

benefit private interests of Ms. Fennell and that part of its net

earnings inured to her benefit.    Respondent relies on the

evidentiary record compiled throughout this proceeding and also

argues, as set forth in an amendment to answer, that the doctrine

of collateral estoppel applies to preclude petitioner from

relitigating questions of fact central to the instant dispute.

      Conversely, petitioner asserts that it satisfies the

operational test, operating for public interest as an educational

facility.   Petitioner further denies the existence of inurement

for personal gain or private interests.    With respect to
                                  - 17 -

collateral estoppel, petitioner challenges application of the

doctrine in this context.3

III.       Burden of Proof and Status of the Record

       As pertains to tax litigation generally, the typical rule

with respect to burden of proof is that determinations by the

Commissioner are presumed correct, and the taxpayer bears the

burden of proving error therein.       Rule 142(a); Welch v.

Helvering, 

, 115 (1933).       As applied in the

particular context of proceedings involving tax-exempt status,




       3
       To the extent that petitioner on brief renews its
objections to respondent’s motion for leave to file amendment to
answer, and thereby to plead collateral estoppel, the Court
affirms the ruling made at trial granting respondent’s motion.
For reasons more fully explained in the transcript of
proceedings, the Court remains convinced that the liberality of
the Court’s rules concerning amended pleadings and the lack of
any real surprise or prejudice to petitioner counsel for
acceptance of the amendment. See Rule 41.

     Petitioner also attempts to renew on brief evidentiary
objections to exhibits subpoenaed from the TEA and introduced by
respondent at trial. The objections are characterized as
“hearsay” and appear to incorporate complaints about the
specificity of the subpoena. The disputed documents constitute
public records and/or records of a regularly conducted business
activity and were accompanied by a written declaration from the
TEA certifying their authenticity. None of petitioner’s
allegations cast doubt on the admissibility of the documents
under Fed. R. Evid. 803(6), 803(8), 902(4), and/or 902(11). It
is also noteworthy that nearly all of the proffered materials
were already a part of the record in this case on account of the
presence of copies in the administrative record. Respondent
resubmitted the documents during trial in order to provide
certified copies. The Court is satisfied that petitioner’s
objections were properly overruled.
                                - 18 -

it likewise is well settled that the organization bears the

burden of overcoming the grounds set forth in the Commissioner’s

final ruling letter.    See, e.g., Am. Campaign Acad. v.

Commissioner, supra at 1063-1064; Basic Bible Church v.

Commissioner, 

.

     Because an exemption is a deviation from the norm of

taxation, courts have reasoned that “a heavy burden” to establish

satisfaction of all requisites for such status falls on the

entity.   Harding Hosp., Inc. v. United States, 

,

1071 (6th Cir. 1974).    In the words of the Court of Appeals for

the Fifth Circuit, to which appeal in the instant case would

normally lie:   “It is the burden of the party claiming the

exemption, of course, to prove entitlement to it.”    Senior

Citizens Stores, Inc. v. United States, 

, 713 (5th

Cir. 1979).

     There exist, however, several exceptions to the general

rule.   Section 7491(a)(1) may shift the burden to the

Commissioner with respect to factual issues where the taxpayer

introduces credible evidence, but the provision operates only

where the taxpayer establishes that he or she has complied under

section 7491(a)(2) with all substantiation requirements, has

maintained all required records, and has cooperated with

reasonable requests for witnesses, information, documents,

meetings, and interviews.   See H. Conf. Rept. 105-599, at 239-240
                              - 19 -

(1998), 1998-3 C.B. 747, 993-994.   Here, petitioner has made no

argument directed toward section 7491 and consequently has not

shown that all necessary prerequisites for a shift of burden have

been met.   Additionally, the record is replete with evidence

suggesting lack of cooperation.   Hence, regardless of the

applicability of section 7491 in the setting of a declaratory

judgment action, an issue we do not reach, it is clear that it

would afford no relief to petitioner in this situation.    See S.

Cmty. Association v. Commissioner, T.C. Memo. 2005-285.

     Nonetheless, an additional exception is relevant to this

proceeding.   The Commissioner bears the burden of proof with

respect to any new matter raised in the answer.   Rule 142(a)(1).

By amendment to answer, respondent here expressly pleaded

collateral estoppel.   To summarize, then, the burden rests on

petitioner to establish that it was operated exclusively for

exempt purposes, specifically overcoming the determination by

respondent of private inurement and benefit.    Respondent, on the

other hand, would have to shoulder the burden of showing

applicability of collateral estoppel to prevent petitioner from

relitigating questions of fact pertaining to such issues of

inurement, benefit, and the operational test.

     However, because the voluminous record in this case is

replete with evidence that would compel the Court, in an

independent weighing of the materials presented and without
                              - 20 -

regard to any binding effect of the SBOE decision, to make

findings essentially identical to those of the SBOE to the extent

relevant to the result we reach here, we conclude that it is

unnecessary to probe the applicability of collateral estoppel.

To further explain, petitioner at trial, in support of its

position, offered only a single documentary exhibit and the

testimony of three witness.   The document was a copy of the

school’s articles of incorporation, identical in every material

respect to multiple copies already contained in the

administrative record.   The witnesses were a teacher who worked

at the school for a year, a part-time teacher’s aide who assisted

at the school for 2 or 3 months, and Ms. Fennell.   Neither of the

former two could recall the specific time period during which

they were associated with petitioner.   Most critically, the

testimony proffered by all three was generalized, conclusory, and

patently insufficient to cast any serious doubt on the details

regarding particular transactions and events evinced by the

administrative record.

     For example, the testimony elicited on direct examination

from the teacher regarding issues such as private benefit

consisted of the following:

          Q    Okay. Are you aware whether, or did you see
     as a teacher her [Ms. Fennell] participating in any
     board meetings or anything while you were there?

          A    Yes. There were board meetings. We had,
     like, I think there were two or three board meetings.
                                  - 21 -

          Q    Okay. Now, as far as the expenses, to your
     knowledge, with Rameses School, things that you have
     eye witnessed or you have seen, have you seen Ms.
     Fennell take school resources and use them for her own
     personal benefit or gain?

           A     No, I haven’t.

When probed on cross-examination as to the basis for his

statements, the teacher noted that he saw money being used for

“equipment”, “computers and stuff”, and “books” but, with respect

to Ms. Fennell’s “personal deal” did not see “any new car”, “any

new house”, “diamonds, gold, all this type of stuff”.

Similarly, the only question of the teacher’s aide directed

toward the issues at hand was:      “Have you ever seen anything

illegal or improper at Rameses School?”, and the response:        “No,

sir.”

     Even Ms. Fennell’s testimony was similarly nebulous and

indefinite.    Rather than specifically addressing any of the

particular, allegedly self-dealing, transactions reflected in

petitioner’s bank records, counsel for petitioner inquired:

“Okay.   Let me ask you concerning, as far as, did you make any

dispositions or any checks under Rameses School for your own

personal gain or benefit?”    Ms. Fennell answered:    “No, none for

my own personal gain or benefit.”      Testimony regarding real

estate was nearly as opaque.      Instead of probing particular

rental or loan agreements or payments, counsel asked questions

such as “What I’m asking is--did you buy any real estate for
                               - 22 -

personal gain or benefit?”, to which Ms. Fennell replied:   “No, I

have not purchased any real estate for personal gain.   All the

real estate involved in the questions surrounding Rameses School

was purchased for the intent of the school.   It was purchased for

the intent of classrooms, playgrounds, gyms, things like this,

for Rameses School.”

      Thus, given the lack of probative value in the evidence

offered by petitioner at trial, whether or not petitioner is

permitted to relitigate factual issues addressed by the SBOE is

of little practical moment.   The documentary record and the SBOE

decision speak with a consistent voice, and petitioner has put

forward nothing convincing to the contrary.

IV.   Analysis--Revocation of Exempt Status

      Petitioner’s exempt status was revoked on account of failure

to satisfy the operational test, which failure in turn was based

on private benefit and inurement.   Accordingly, the critical

inquiry in this case is whether the facts support a determination

of private benefit.    As set forth in 

, much caselaw

has revolved around questions of private benefit as between an

entity and its founder.   Factors highlighted as indicative of a

prohibited relationship have included control by the founder over

the entity’s funds, assets, and disbursements; use of entity

moneys for personal expenses; payment of salary or rent to the

founder without any accompanying evidence or analysis of the
                                - 23 -

reasonableness of the amounts; and purported loans to the founder

showing a ready private source of credit.    Nearly all of these

factors are present here.

     Express findings of fact from the SBOE proceeding provide a

vivid encapsulation of the evidence contained in the record on

these topics and are worth quoting at some length:

     Creation, Implementation and Review of the School’s
     Budget by the Board of Directors; General Oversight of
     the School

               *    *       *   *    *   *     *

          8.   By failing to adopt as a current and legally
     adequate budget, RSSAT’s governing board failed in its
     duty to provide oversight, direction, supervision, and
     control over the administration of the school as
     required by the charter. Further, as a result of this
     failure, Ms. Fennell has exercised budget authority for
     the school without the oversight and direction of the
     board of directors as required by the charter.

               *    *       *   *    *   *     *

     Compensation of Ms. Fennell; Other Questionable
     Financial Transactions

          11. While RSSAT’s board approved a salary of
     $5,000.00 per month for Ms. Fennell as the school
     administrator, the school’s payroll journal showed
     salary amounts in excess of $5,000.00 per month. In
     November 1998, December 1998 and January 1999,
     Ms. Fennell was paid $8,000.00, $11,857.00 and
     $10,000.00 respectively. Although Ms. Fennell asserted
     that the excess amounts were awarded as reimbursement
     for money that she had loaned the school, the
     documentation that she personally presented to TEA in
     support of her claim had clearly been altered. For
     example, dates on checks had been changed to correspond
     to the appropriate time period and invoices were
     altered to reflect higher amounts. Further, there is
     no documentation that the board of directors authorized
     the payment of additional amounts of salary.
                        - 24 -

     12. No documentation exists to support
expenditures of $7,252.00 in fourteen counter checks by
Ms. Fennell. Some checks drawn on the school’s account
by Ms. Fennell paid for personal services such as
dental work. Ms. Fennell paid Bandera Dental $224.00
for a dental cleaning using Rameses School check #409
on October 2, 1998. No documentation exists to
demonstrate that checks such as these were payment for
school-related services. The payments were not
approved by the board of directors pursuant to an
amended budget.

     13. In addition to the counter checks described
in Finding of Fact No. 12, Ms. Fennell made unexplained
cash withdrawals on the school’s account. No
documentation exists establishing that the withdrawals
are directly connected to school-related expenditures,
although Ms. Fennell informed agency staff that the
withdrawals reimbursed her for the expenditure of her
personal funds for school purposes. The payments were
not approved by the board of directors.

Real Estate Transactions and Lease Payments

     14. Ms. Fennell, as “president and CEO of Rameses
School, Inc. [sic], Founder, Owner” received a cash
warranty deed from Vera Williams-Young, grantor, for
property located at 309 North Hackberry Street, 527
North Center Street and 531 North Center Street.
Ms. Fennell leased the properties located at 309 North
Hackberry Street and 527 North Center Street to the
Rameses School. The school occupied these properties.
The rental agreement provided that the monthly rents
for the Hackberry property and the North Center
property were $1,500.00 a month and $1,000.00 a month,
respectively. The agreement was unique and did not
resemble traditional lease agreements. It contained
only one signature, that of Ms. Fennell, and did not
contain a specific term of years. No board minutes
exist demonstrating notice, acceptance or ratification
of the lease. No lease payments were documented by the
school. Further, if in fact the school owned the
property, the school was leasing the property from
itself under the owner rental agreement.

     15. There is evidence of other lease payments in
the latter part of 1998: $720 to Chase Manhattan Bank
for a “mortgage lease payment”; $6,500 to Alfredo
                              - 25 -

     Guzman (902 E. Crockett); $1,000 to Sara Guzman; $500
     to Jean Parker; $3,300 to J. Guy Sowells (517 Center);
     and $3,300 to James Goodman (525 Center Street). No
     lease agreements were produced by the school, and no
     real estate transactions supporting these transactions
     were found during a deed records search.

          16. Ms. Fennell bought the property at 902 E.
     Crockett from Alfred Guzman as an individual and not as
     a representative of RSSAT. Ms. Fennell issued Rameses
     School check Number 0454, dated October 9, 1998, to
     Mr. Guzman as a payment for the property. [Citations
     omitted.]

     The foregoing factual circumstances, independently borne out

by the documentary record, are more than sufficient to establish

prohibited private benefit.   Furthermore, even if petitioner were

permitted to challenge the SBOE findings, its response on brief

consists solely of short, unsupported, and conclusory statements

of denial.   For example, the school’s entire argument on opening

brief on the inurement and private benefit issue reads:

     Plaintiff presented witnesses to testify that board
     meetings were regularly conducted and that Plaintiff
     did not personally benefit or receive personal gains.
     Plaintiff explains reimbursement of single RAMESES
     check at a dentist office. Plaintiff was without
     available checks at the time and duly reimbursed
     RAMESES SCHOOL.

Similar blanket statements on reply brief are equally

unpersuasive in the face of the detailed evidence.

     Hence, the Court is constrained to hold on the entire record

in this case that, on account of proscribed private benefit,

petitioner was not operated exclusively for exempt purposes
                              - 26 -

within the meaning of section 501(c)(3).    Petitioner’s tax-exempt

status is properly revoked.

     The Court has considered all other arguments made by the

parties and, to the extent not specifically addressed herein, has

concluded that they are without merit or are moot.    To reflect

the foregoing,


                                           Decision will be entered

                                   for respondent.