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Thursday June 20, 2019

Private Letter Ruling

Organization Benefitting Individual Denied Exempt Status

GiftLaw Note:
Organization applied for tax exempt status under Sec. 501(c)(3). Organization's Articles of Incorporation state that it is organized exclusively for charitable, religious, educational and scientific purposes. The Articles of Incorporation also state that Organization will pay for the medical expenses of D, an individual who suffered a debilitating accident, and his family. Organization's name is similar to D's name. Organization's funds will be used exclusively for providing for D's long-term care and well-being.

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)-(a)(1), an exempt organization must meet both the organization 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. Per Reg. 1.501(c)(3)-1(c)(1), an organization will be regarded as operated exclusively for exempt purposes only if it primarily engages in activities which accomplish exempt purposes. 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 D, and fails both the organizational and operational tests. Therefore, the Service denied Organization's application for tax-exempt status under Sec. 501(c)(3).
PLR 201911008 Organization Benefitting Individual Denied Exempt Status

3/15/2019 (12/20/2018)

Dear * * *:

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

ISSUES


Do you meet the organizational test under Section 501(c)(3) of the Code? No, for the reasons stated below.

Do you meet the operational test under Section 501(c)(3) of the Code? No, for the reasons stated below.

FACTS


You were formed as a corporation on date B in the state of C. Your Articles of Incorporation state you are organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under the Section 501(c)(3) of the Internal Revenue Code, or corresponding Section of any future federal tax code. In addition, they state as your activity that you will provide funding for the ongoing medical and life expenses for D and his family. Your corporate name and D's name are also very similar.

Your Form 1023 shows that you are raising, and administering funds for the long-term care of D to insure that he receives the supplemental financial help to assist with his extraordinary additional life expenses resulting from a debilitating accident.

You will conduct your own fundraising programs through emails, personal contacts, phone solicitations as well as multimedia campaigns, and running events. In the future, you may develop a website as well as use outside fundraisers to solicit donations.

You are governed by a three-person board of directors including D's wife who is your president and was one of your incorporators. Your board members also administer your activities on a volunteer basis.

Initially, donations from family, friends and the public have provided your funding. In addition, you estimate that * * *% of your gross proceeds will be used for B and your expenses will consist of internet expenses and other miscellaneous fundraising expenses.

Finally, you specifically indicated:

You exist solely to fundraise for D,

Your fundraising program is limited to D,

Funds may not be used for any other purpose than to provide for the well-being of D, and

Your purpose is to raise funds for this one individual only.

LAW


Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are 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 be exempt as an organization described in Section 501(c)(3) of the Code, 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 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 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(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 which accomplish one or more of such exempt purposes specified in Section 501(c)(3) of the Code. 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(c)(2) states that 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) states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest. 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.

Revenue Ruling 67-367, 1967-2 C.B. 188, states a nonprofit organization whose sole activity is the operation of a "scholarship" plan for making payments to pre-selected, specifically named individuals does not qualify for exemption from federal income tax under Section 501(c)(3) of the Code because it is serving private interests rather than public charitable and educational interests.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo 1986-348, the Tax Court upheld the Service's position that a foundation formed to aid coma victims, including a family member of the founders, was not entitled to recognition of exemption. Approximately 30% of the organization's net income was expected to be distributed to aid the family coma victim. The Court found that the family coma victim was a substantial beneficiary of the foundation's funds. It also noted that such distributions relieved the family of the economic burden of providing medical and rehabilitation care for their family member.

APPLICATION OF LAW


You are not described in Section 501(c)(3) of the Code because you fail the organizational and operational tests as per 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 as your activity that you will provide funding for the ongoing medical and life expenses for D and his family. Because your Articles of Incorporation state that you will provide funding for the ongoing medical and life expenses of a specific named individual, you are not organized exclusively for purposes described in the regulations.

You do not meet the provisions in Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you were formed and are solely operated to raise funds to pay for the medical and living expenses of D and his family. This shows you were formed to further private purposes not public.

As described in Treas. Reg. Section 1.501(c)(3)-1(c)(2), you are not operated exclusively for exempt purposes because your net earnings inure to the benefit of private shareholders or individuals. This is evidenced by the fact that you were formed by D's wife, who is also your president to help pay the medical and life expenses of D.

You are not described in Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations. You are operating for private interests of C and his wife rather than public interests. This is evidenced by the following:

You only exist to fundraising to pay the medical and living expenses of D and his family.

D is the only beneficiary of your fundraising programs

Your corporate name and D's name are very similar.

You are like the organization described in Revenue Ruling 67-367. You were formed to benefit a preselected, designated individual, D, who is the only beneficiary of your fundraising. You are also named after D which illustrates you are serving private interests.

You are similar to the organization described in the court case Wendy L. Parker Rehabilitation Foundation, because you were formed to pay the medical and living expenses for a preselected individual. Like this organization, you are serving the private benefit of an individual and his family by paying these expenses and relieving him and his family of their financial obligation.

CONCLUSION


You do not qualify for exemption under Section 501(c)(3) of the Internal Revenue Code, because you do not meet the organizational and operational tests. You are not organized and operated exclusively for an exempt purpose, you are operated for the purpose of benefiting D and his family. You serve a private rather than a public interest and your net earnings are inuring to D and his family.

If you don't agree


You have a right to file a protest if you don't agree with our proposed adverse determination. To do so, you must send a statement to us within 30 days of the date of this letter. The statement must include:

Your name, address, employer identification number (EIN), and a daytime phone number

A copy of this letter highlighting the findings you disagree with

An explanation of why you disagree, including any supporting documents

The law or authority, if any, you are relying on

The signature of an officer, director, trustee, or other official who is authorized to sign for the organization, or your authorized representative

One of the following declarations:

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

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

For authorized representatives:


Under penalties of perjury, I declare that I prepared this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts 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 he or she hasn'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 provided a basis for us to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't provided a basis for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more information about the role of the Appeals Office 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 at a later date because the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest


Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable address:

U.S. mail:

Internal Revenue Service
EO Determinations Quality Assurance
Room 7-008
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202

You can also fax your statement 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 he or she received it.

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.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Published April 26, 2019
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