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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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