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Thursday April 15, 2021

Private Letter Ruling

Organization's Exempt Status Denied

GiftLaw Note:
Organization filed Form 1023 for exemption from federal income tax under Sec. 501(c)(3). The Articles of Incorporation state Organization is organized exclusively for charitable, educational, religious or scientific purposes within the meaning of Sec. 501(c)(3), including fundraising for medical expenses for cancer treatment. The only activity stated on Organization's Form 1023 is raising funds to offset medical expenses for D. D is an individual who is on Organization's board of directors that oversees donations and medical expenses. Organization's funding comes from dinners that benefit D, donations from community members and a crowd funding website.

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 of which inures 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). Here, the Service determined that Organization failed the operational test in Reg. 1.501(c)(3)-1(a)(1) and operates for a private rather than a public interests as described in Reg. 1.501(c)(3)-1(d)(1)(ii) because Organization's sole purpose is to benefit D. Therefore, Organization is not exempt from federal income taxes under Sec. 501(c)(3).
PLR 202113009 Organization's Exempt Status Denied

4/2/2021 (1/5/2021)

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 B on C. Your Articles of Incorporation state you are organized exclusively for charitable, educational, religious, or scientific purposes within the meaning of IRC Section 501(c)(3). In addition, they state you will fundraise for medical expenses associated with cancer treatment.

Your Form 1023 shows that your only activity is to raise funds to offset medical expenses for D. Funding comes from dinners held to benefit D, donations from community members, and a crowd funding website.

Your financial information shows receipts from donations and fundraising activities and disbursements for the benefit of members and fundraising expenses.

You are governed by a * * *-person board of directors including D, * * * will oversee donations and medical expenses.

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(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(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 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 operational test as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1). As described in Treas. Reg. Section 1.501(c)(3)-1(c)(1), you are not operating exclusively for exempt purposes because your funds inure to D and his family. When funds inure to the benefit of private individuals, an organization is not operating exclusively for an exempt purpose. Treas. Reg. Section 1.501(c)(3)-1(c)(2).

Likewise, you are not described in Treas. Reg. Section 1.501(c)(3)-1(d)(l)(ii) because you operate for private rather than public interests. You were formed and operate for the sole benefit of a designated individual and his family.

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

You are also similar to the organization described in Better Business Bureau because you are not operated exclusively for exempt purposes. Your sole purpose is to further the private interests of D and his family by raising and paying funds to offset D's medical expenses.

Finally, you are very similar to the organization described in Wendy Parker because you were formed by D's family to pay his medical expenses, thus relieving them of their economic burden. Like this organization, your payments inure to D and his family.

Conclusion


Based on the information submitted, you are not operated exclusively for exempt purposes. You are operating for the private interests of D and his family. Thus, you do not qualify for exemption under IRC Section 501(c)(3).

Published April 9, 2021
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