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Friday July 30, 2021

Private Letter Ruling

Exempt Status Denied

GiftLaw Note:
Organization was formed in State W. Organization's Articles of Incorporation state Organization is operated for educational and charitable purposes as required under Sec. 501(c)(3). Specifically, Organization will raise funds for Y and Y's family and will raise national awareness for Z. Organization's members will travel to raise money for those born with Z and for Y. Once Y is financially supported, Organization will shift its focus to support others in the general population born with Z.

To be exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for charitable, religious or educational purposes and no part of the earnings may inure to the benefit of any private shareholder or individual. Under Reg. 1.501(c)(3)-1(a)(1), if an organization fails to meet either the organizational test or operational test, it is not exempt. Regulation 1.501(c)(3)-1(c)(1) states that an organization is organized exclusively for one or more exempt purposes only if it is engaged primarily in activities that accomplish one or more of its exempt purposes. Under Reg. 1.501(c)(3)-1(d)(1)(ii), an organization must not be operated for the benefit of designated individuals or the persons who created it. In Rev. Rul. 67-367, 1967-2 C.B. 188, a nonprofit whose sole activity was a scholarship plan to benefit pre-selected named individuals did not qualify for exemption from federal income tax under Sec. 501(c)(3). In Wendy Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C Memo 1986-348(1986), a Foundation was created to aid "victims of coma." However, the Foundation anticipated spending 30% of donations on an individual whose family controlled the Foundation. The Foundation was found to be non-exempt because it did not serve a broad charitable class as required in Reg. 1.501(c)(3)-1(d)(1)(ii). Here, the Service determined that Organization failed the organizational and operational tests described in Reg. 1.501(c)(3)-1(a)(1). Organization operates for private rather than public interests as described in Reg. 1.501(c)(3)-1(d)(1)(ii) because Organization will raise funds for Y and Y's family. Therefore, Organization is not exempt from federal income taxes under Sec. 501(c)(3).
PLR 202117014 Exempt Status Denied

4/30/2021 (2/2/2021)

Dear * * *:

We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records.

Issues


Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts


You were incorporated in the State of W on X. Your Articles of Incorporation state you shall be operated exclusively for educational and charitable purposes within the meaning of IRC Section 501(c)(3), specifically for the purpose of raising funds to ease the quality of life of Y * * * and family as well as raise national awareness for Z.

You will travel across the country raising money and awareness for children born with a * * * called Z. Specifically, you will raise money for Y. You will spend a year on the road reaching out to different populations and communities to spread awareness and with the generosity of the community you will be able to radically increase Y's quality of life. Once you are successfully able to support Y, you will turn your eyes to support a greater population and others across the country.

You were formed and are governed by a * * *-member board. The funds you raise will support Y and * * * family in the amount of b dollars. Salaries will be paid to your board members in the amount of c dollars. Any remaining funds will go back to the communities that have supported you.

Law


IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations organized and operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that in order to qualify under IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational or operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of such organization to one or more exempt purposes; and do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iii) provides an organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in IRC Section 501(c)(3).

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated exclusively” for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in IRC 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest. It must not be operated for the benefit of designated individuals or the persons who created it.

Revenue Ruling 67-367, 1967-2 C.B. 188, describes a nonprofit organization whose sole activity was the operation of a “scholarship plan” for making payments to pre-selected, specifically named individuals. The organization did not qualify for exemption from federal income tax under IRC Section 501(c)(3) because it was serving private rather than public or charitable interests.

In Better Business Bureau of Washington, D.C., Inc. v. U.S., 326 U.S. 279 (1945), the court held that the presence of a single non-exempt purpose, if substantial in nature, will preclude exemption, regardless of the number or importance of statutorily exempt purposes.

In Wendy Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo 1986-348 (1986), the organization was created by the Parker family to aid an open-ended class of “victims of coma.” However, the organization stated that it anticipated spending 30 percent of its income for the benefit of Wendy Parker, significant contributions were made to the organization by the Parker family, and the Parker family controlled the organization. Wendy Parker's selection as a substantial recipient of funds substantially benefited the Parker family by assisting with the economic burden of caring for her. The benefit did not flow primarily to the general public as required under Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Therefore, the Foundation was not exempt from federal income tax under IRC Section 501(c)(3).

Application of law


You are not described in IRC Section 501(c)(3) because you fail the organizational and operational tests as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1).

Your organizing document states that your purpose is to raise funds to ease the quality of life of Y and family. As explained in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) and Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iii), you are not organized exclusively for one or more exempt purposes because your articles expressly empower you to engage in activities which are not in furtherance of one or more exempt purposes. Despite the fact that your organizing document states that you are formed exclusively for educational and charitable purposes as described in IRC Section 501(c)(3), your organizing document further states that you will provide funds to pre-selected individuals, which is not an exempt purpose.

You will raise funds for Y and * * * family. Operating for the benefit of designated individuals does not further an exempt purpose under IRC Section 501(c)(3). Thus, per Treas. Reg. Section 1.501(c)(3)-1(c)(1), you are not operated exclusively for one or more exempt purposes. Providing funds to a pre-selected family serves a private rather than a public interest as described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You are like the organization described in Rev. Rul. 67-367 because you were formed to benefit one pre-selected, designated individual and are, thus, serving a private rather than a public interest.

You are also like the organization in Better Business Bureau because you are not operated exclusively for exempt purposes. Your main purpose is to further the private interests of Y and * * * family.

Finally, you are similar to the organization described in Wendy Parker because the benefits you provide flow primarily to Y and his family, rather than the general public.

Conclusion


Based on the information submitted, you are neither organized nor operated exclusively for exempt purposes. You are operating for the private interests of Y and * * * family. Thus, you do not qualify for exemption under IRC Section 501(c)(3).

If you agree


If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements.

If you don't agree


You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include:
  • Your name, address, employer identification number (EIN), and a daytime phone number
  • A statement of the facts, law, and arguments supporting your position
  • A statement indicating whether you are requesting an Appeals Office conference
  • The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative
  • The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:


Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).

Where to send your protest


Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail:

Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter.

Contacting the Taxpayer Advocate Service


The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Published May 7, 2021

Previous Articles

Set-Aside Program Approved

Extension for Portability Election Granted

Foundation's Scholarships Not Taxable

Organization's Exempt Status Denied

Estate Granted Extension for Portability Election

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