University Medical Resident Services, P.C. - Page 9

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          deductions in connection with the resident's employment.  The                 
          Consortium determines the amount of compensation and benefits.                
          At least 5 days prior to the date UMRS or UDRS makes a payment                
          for compensation, the relevant school or hospital remits to UMRS              
          or UDRS funds equal to the amount of the payment.  Petitioners do             
          not engage in fund-raising activities and receive all of their                
          funding from the Schools and hospitals.                                       
               Under the Consolidation Contract, petitioners must provide               
          the Schools and hospitals with quarterly reports describing all               
          receipts and disbursements, and the Consortium has the right to               
          audit petitioners’ books and records.  Because petitioners have               
          no administrative employees, petitioners' administrative                      
          activities (i.e., processing invoices sent to the Schools and                 
          hospitals and salary payments made to residents) are performed by             
          employees of the Schools.  Each petitioner's actual and projected             
          annual profits, as of May of 1992, were less than one-tenth of 1              
          percent of gross revenue.                                                     
               On August 26, 1994, respondent issued final adverse rulings              
          notifying petitioners that they did not qualify for tax                       
          exemption.  The rulings each stated in pertinent part:                        
               You have failed to establish that you will be operated                   
               exclusively for exempt purposes as required by section                   
               501(c)(3) of the Code.  Your primary activity is to                      
               provide administrative services to teaching hospitals                    
               affiliated through the Consortium with the State                         
               University of New York at Buffalo residency training                     
               program by paying salaries and fringe benefits of the                    
               residents working in these hospitals.  This activity                     

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