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Saturday July 20, 2024

Private Letter Ruling

Fundraising Organization is Denied Tax-Exempt Status

GiftLaw Note:
Organization applied for exempt status under Sec. 501(c)(3). The required Section 501(c)(3) language is missing from the Organization's Articles of Incorporation. While Organization attested an amendment was made to include the required language, none is apparent per the applicable Secretary of State website. Organization states on Form 1023EZ that their sole purpose is to help with medical expenses associated with breast cancer treatment for E. Organization's primary activities consist of hosting a benefit at a local venue and conducting social media fundraisers. The funds raised by Organization's activities will be sent directly to the hospital or doctors who treat E or paid to E for reimbursement of past expenses. Organization's president and secretary/treasurer, who share the same last name as E, oversee the fundraising activities.

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), an organization must be both organized and operated exclusively for an exempt purpose. Under Reg. 1.501(c)(3)-1(b)(1)(i), an organization is organized exclusively for exempt purposes if its articles of organization limit the purpose of the organization to exempt purposes and do not empower the organization to engage, other than insubstantially, in activities that are in themselves not in furtherance of one or more exempt purposes. Regulation 1.501(c)(3)-1(c)(1) states that an organization is operated exclusively for an exempt purpose only if it engages primarily in activities that accomplish an exempt purpose. Under Reg. 1.501(c)(3)-1(d)(1)(ii), an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. To meet this requirement, 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. Here, the Service determined that Organization's articles do not limit its purposes to those described in Sec. 501(c)(3) and its activities are exclusively to serve the private interests of E. As such, the Service denied Organization's application for exempt status under Sec. 501(c)(3).
PLR 202327019 Fundraising Organization is Denied Tax-Exempt Status

7/7/2023 (2/13/2023)

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 submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

You attest that you were incorporated on B, in the state of C. You attest that you have the necessary organizing document, that your organizing document limits your purposes to one or more exempt purposes within the meaning of IRC Section 501(c)(3), that your organizing document does not expressly empower you to engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that your organizing document contains the dissolution provision required under IRC Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you attest you will:
  • Refrain from supporting or opposing candidates in political campaigns in any way
  • Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or individuals
  • Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially
  • Not be organized or operated for the primary purpose of conducting a trade or business that is not related to your exempt purpose(s)
  • Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations outlined in Section 501(h)
  • Not provide commercial-type insurance as a substantial part of your activities
The mission or most significant activity on your Form 1023 EZ states your sole purpose is to help with medical expenses associated with breast cancer treatment for E.

During review of your Form 1023-EZ, detailed information was requested supplemental to the above attestations. The submitted information shows you are raising money in order to pay the medical bills for E's cancer treatments who is the only recipient of these funds. Your fundraising activities will consist of putting on a benefit at a local venue as well as conducting social media fundraisers on various platforms. You will distribute funds directly to the hospital or doctor where each bill comes from. E had been paying the medical bills and if possible, will be reimbursed for the ones that have been paid thus far. Your president and secretary/treasurer conduct the activities. Your secretary/treasurer and E also share the same last name.

Further, you submitted Articles of Incorporation filed on B in C, which state you were formed for the purpose of engaging in any lawful activity for which corporations may be formed under C's nonprofit statutes. You attested that you amended your Articles to include the required Section 501(c)(3) language; however, to date there is no evidence of such an amendment on C's Secretary of State website.

Law


IRC Section 501(c)(3) 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 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 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:

(a) Limit the purposes of such organization to one or more exempt purposes; and

(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its activities, in activities that 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 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) provides that an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than private interest, Thus to meet the requirement of this subdivision, 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.

Rev. Rul. 67-367, 1967-2 C.B. 188 held that an organization formed to award scholarships to pre-selected, specifically named individuals doesn't qualify for exemption under IRC Section 501(c)(3) because it was serving the private interests of its subscribers rather than public or charitable interests.

In Wendy L. Parker Rehabilitation Foundation, Inc. Petitioner 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, wasn't 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 activities which benefited the Parker family by assisting them 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, it was not exempt from federal income tax under Section 501(c)(3).

Application of law


IRC Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg. 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). You fail both the organizational and operational tests.

You fail the organizational test because there is no evidence that you filed an amendment with your state limiting your purposes to those described in IRC Section 501(c)(3) as required by Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i).

You fail the operational test because you are not operated exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You have a substantial nonexempt private purpose. You are serving the private interests of E by raising money to pay for her medical bills. In addition, you do not meet the provisions under Treas. Reg Section 1.501(c)(3)-1(d)(1)(ii) because you are operated for private interests rather than public interests.

You also explained that you are conducting fundraisers on E's behalf and that E is receiving all the funds you are raising. This illustrates that you are like the organization described in Rev. Rul. 67-367 because you serve private rather than public interests.

In Wendy L. Parker Rehabilitation Foundation Inc., the court found that the family coma victim was a substantial beneficiary of the foundation's activities. You are similar to this organization because you are raising funds for one individual who appears to be related to your secretary/treasurer. Therefore, you do not qualify for exemption under IRC Section 501(c)(3).

Conclusion


We have determined that you do not meet the requirements for tax exemption under IRC Section 501(c)(3) because you fail both the organizational and operational tests. There is no evidence on C's Secretary of State's website that you filed an amendment to meet the organizational test for Section 501(c)(3). You are also not operated exclusively for exempt purposes as set forth in Section 501(c)(3). You are operated to further the private interests of E and are operating for a substantial non-exempt purpose.

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 Determination 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
PO Box2508
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 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Published July 14, 2023
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