Tuesday May 11, 2021
Private Letter Ruling
Organization Benefitting Individual Denied Exempt Status
Organization applied for tax-exempt status under Sec. 501(c)(3) and was granted exemption as a private foundation. Organization's Articles of Incorporation state that it is organized for "any lawful purpose." Organization also provided copies of unfiled Articles of Incorporation with more limited language, but the unfiled documents were excluded from consideration as formation documents. Organization failed to file the required tax form, Form 990-PF, for three consecutive years, causing an automatic revocation of exempt status. Organization is requesting reinstatement of exempt status. Organization provides living services to adults with profound disabilities and works in tandem with families and local communities. To fulfill its purpose, Organization contracts with a local social service agency and services one client, G. Since its inception a few years ago, Organization has reviewed other eligible individuals, but only serves G. Organization problem solves with applicant families to find services through local social service agencies to meet their needs. Organization is in the process of establishing services for a family with twin daughters. Organization's board of directors includes G as a member. All members of the board of directors are from the same family.
Organizations seeking tax-exempt status under Sec. 501(c)(3) must show that they are both organized and operated exclusively for a tax-exempt purpose. Under Reg. 1.501(c)(3)-1(a)(1), an exempt organization must meet both the organizational test and operational test. Regulation 1.501(c)(3)-1(b)(1)(i) requires the articles of incorporation of an exempt organization to be limited to one or more exempt purposes, not expressly empowering the organization to engage in activities which are not in furtherance of an exempt purpose. Regulation 1.501(c)(3)-1(c)(2) states that an organization is not operated exclusively for an exempt purpose if its net earnings inure, in part or in whole, to the benefit of private shareholders or individuals. Under Reg. 1.501(c)(3)-1(d)(1)(ii), an organization must establish that it is not organized or operated for the benefit of private interests. In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo 1986-348, the Tax Court denied a foundation's claim of tax exemption because 30% of the organization's net income was expected to benefit a family member of the foundation's founders. Here, the Service found that Organization exists solely to aid a board member, G, and her family, thus Organization does not serve a large enough charitable class. Organization fails both the organizational and operational tests, therefore, the Service denied Organization's application for tax-exempt status under Sec. 501(c)(3).
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.
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.
You were formed as a nonprofit corporation on date E in the state of F. Your filed Articles of Incorporation state you are organized for "any lawful purpose." You also submitted an unfiled document titled "Articles of Incorporation," which contains language limiting your activities to those described in IRC Section 501(c)(3), That document was not filed with the State; therefore, it is not part of your formation document.
You originally applied for and were granted exemption on the Form 1023EZ as a Private Foundation. You failed to file the required Form 990-PF for three consecutive years, causing your tax-exempt status to be automatically revoked. You are now seeking reinstatement of your exemption and have submitted Form 1023.
You were established to deliver living services which support the most challenging adults with profound disabilities in close alignment with families and local communities. To fulfill that purpose, you have contracted with a social services agency. H, to serve one client, G.
You are governed by an * * *-person board of directors including G, who is listed as a member. All of your board members are related within the same family. You were established as a family effort to serve G who was unserved for * * * years before your formation. No agency in the state of F would accept G as a client because of the difficulties and high demands of her care. You were licensed and awarded a contract with H to serve G, H audits your services annually for compliance. You have * * * employees certified by H as direct care professionals for G.
It is your intent to increase the number of the clients you serve, but since your inception several years ago, you have not accepted any new clients. You receive * * * requests for support from local families each month. You engage in problem solving and guide the families on the path to establishing eligibility for services from H in the state of F and help them create visions for care for their family member with a severe disabling condition. Part of your mission is to help develop local, micro agencies to serve clients in their communities.
H informs you quarterly of eligible clients. You review and consider each potential client and assist by coaching family and service teams towards the development of achievable supported living services plans. You have not accepted any of these clients into your-own program that G is currently enrolled in.
You are in the process of establishing services for a family with twin daughters who have support needs similar to G. The family has established a living setting and has experienced staff who wish to continue working with these clients. You will accept the contract with H to provide supported living services when housing and staffing are ensured. You indicate that finding the right persons as caregivers for the clients is difficult and is further exacerbated by the low rate of funding provided by H for staff salaries.
You also conduct community outreach. You serve disenfranchised developmentally disabled persons and their families by sharing knowledge and experience as well as providing guidance for those attempting to establish a micro-agency like yours.
You receive all your funding from H for your contracted services assisting G. You indicated that j percent of these resources are dedicated to G's care/staff salaries while the remaining percentage is allocated to business operations. Volunteer hours are used to support your mission of advocacy within the community. Your expenses include compensation of directors, other salaries and wages, professional fees, payroll taxes, insurance, travel, printing, filing fees, and a settlement to H.
IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations organized and operated exclusively for charitable, education and other purposes, including the prevention of cruelty to children or animals provided that no part of the net earnings inure to the benefit of any private shareholder or individual.
Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization describes in 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 organization test or the 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 its purposes to one or more exempt purposes and do not expressly empower it to engage, otherwise than as an insubstantial part, in activities which in themselves are not in furtherance of one or more exempt purposes.
Treas. Reg. Section 1.501(c)(3)-1(c)(2) provides an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.
Treas. Reg, Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for an exempt purpose unless it serves a public rather than a private interest. The organization must demonstrate that it is not organized or operated for the benefit or 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.
Rev. Rul. 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 US, 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 L. Parker Rehabilitation Foundation, Inc v. Commissioner, 52 T.C.M. (CCH) 51 (1986), the organization was created by the Parker family to aid an open-ended class of "victims of coma." However, the organization states 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 file organization. Wendy'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)(l)(ii). Therefore, the Foundation was not exempt from federal income tax under Section 501(c)(3).
Application of law
You are not described in IRC Section 501(c)(3) because you fail both the organizational and operational tests under Treas. Reg. Section 1.501(c)(3)-1(a)(1).
You do not meet the requirements in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). Your Articles of Incorporation state that you were formed for any lawful purpose. Because your purposes are not limited to those which are exempt you do not meet the organizational test under Section 501(c)(3).
Treas. Reg. Section 1.501(c)(3)-1(c)(2) provides an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Caring for G, one of your eight board members and currently your only client, accounts for j percent of your time and resources. Your net earnings inure in part or in whole to the benefit of G and her family. You do not, therefore, meet the operational test under IRC Section 501(c)(3).
Likewise, you do not meet the requirement of Treas. Reg. 1.501(c)(3)-1(d)(1)(ii) because you are operating for the private interests of your board member, G, and her family rather than public interests. The majority of your services and payments are used for the benefit of G and her family. All of your income is derived from a contract with H to provide services to G.
You are like the organization described in Rev. Rul. 67-367 because you serve a private rather than the public interest, having been formed to benefit G, a preselected individual. In fact, you receive quarterly referrals from, H but have not accepted any new clients.
Although you do conduct educational activities and you have plans to assist other individuals with conditions similar to G, you have been operating primarily for the non-exempt purpose of assisting G since your inception. According to the court in Better Business Bureau of Washington D.C., Inc., such a single non-exempt purpose, if substantial in nature, will preclude exemption, regardless of the number or importance of the exempt purposes it serves.
You closely resemble the organization described in Wendy L. Parker Rehabilitation Foundation, Inc, because you were formed by G and her family primarily to pay her supported living expenses, relieving them of their economic burden. Although you may, at some point, provide services to others, since your inception you have not accepted any other clients. Your activities primarily benefit a single family and not the general public, which precludes you from exemption under IRC Section 501(c)(3).
Based on the facts presented above, you fail the organizational and operational tests under IRC Section 501(c)(3), Your formation document doesn't limit your purposes to those which are exempt, which causes you to fail the organizational test. You fail the operational test because your funds inure to G and her family. You are operating for private rather than public interests. Therefore, you do not qualify for exemption under 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.
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 ease 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:
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 tire 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 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 taxpayeradvocate.irs.gov or call 877-777-4778.
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements