IRS 200524029: Museum charity loses exemption after only storing founder's collection

Plain-English summary

An organization was formed to open a public museum for its founder's collection of dolls, teddy bears, and other memorabilia. The museum never opened. The examination report says the organization only stored the collection, did not establish its value or transfer, and could not document which receipts and expenses belonged to the charity rather than the founder. The IRS concluded that it was not operating for an exempt purpose and served the founder's private interest. It retroactively revoked the organization's IRC § 501(c)(3) exemption to a redacted date and said contributions were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Did storing the founder's collection without opening the planned museum satisfy the charity's exempt purpose?
• Outcome: Revocation of exempt status, effective on a redacted date.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c)(1), (d)(1)(ii); Better Business Bureau v. U.S., 326 U.S. 279 (1945).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
TE/GE: EO Examination

625 Fulton Street, Room 503
Brooklyn, NY 11201

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
December 22, 2004

Number: 200524029
Release Date: 6/17/05

UIL: 501.03-08

Taxpayer Identification Number:
LEGEND:
T = Taxpayers Name
D = Date of Revocation

Person to Contact:
Identification Number

Contact Telephone Number:

LAST DATE FOR FILING A PLEADING
WITH THE TAX COURT, THE CLAIMS
COURT, OR THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT
OF COLUMBIA: ____

Dear

This is a final determination regarding your exempt status under section 501 (c)(3) of the Internal Revenue Code (IRC). Recognition of your exemption from Federal income tax as an organization described in Internal Revenue Code section 501(c)(3) is retroactively revoked to “D” because it is determined that you are not operated exclusively for an exempt purpose.

IRC 501(c)(3) exempts from taxation organizations which are organized and operated exclusively for charitable or educational purposes, no part of the net earnings of which inure to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation and which do not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office.

We have determined that you are not operating exclusively for charitable or educational purposes. Our examination reveals that your assets, income and expenses have been commingled with those of your founder and principal officer, and you were unable to

produce records to substantiate the exempt nature of your revenue and expenditures. You have not demonstrated that you are not operated for the private benefit of your founder as required by Treas. Reg. 1.501(c)(3)-1(d)(1)(ii).

We are revoking your exemption from Federal income tax as an organization described in section 501(c)(3) of the Internal Revenue Code effective “D”.

Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code.

You are required to file Federal income tax returns on Form 1120. These returns should be filed with the appropriate Service Center for all years beginning “D”.

Processing of income tax returns and assessment of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

If you decide to contest this determination in court, you must file a pleading seeking a declaratory judgment in the United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia before the 91st day after the date this final determination was mailed to you. Please contact the clerk of the appropriate court for rules regarding filing pleadings for declaratory judgments and refer to the enclosed Publication 892. You may write to these courts at the following addresses:

United States Tax Court United States Court of Federal Claims 400 Second Street, NW 717 Madison Place, NW Washington, D.C. 20217 Washington, D.C. 20005

United States District Court for the District of Columbia 333 Constitution Avenue, NW Washington, D.C. 20001

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call too-free 1-877- 777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer advocate at: Internal Revenue Service.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely Yours,

R. C. Johnson
Director, EO Examinations
Enclosure:
Publication 892

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE: EO Examination

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Taxpayer Identification Number:
Form:
990
Tax Year(s) Ended:
Person to Contact/ID Number:
Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear Sir or Madam:

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office consideration within 30 days from the date of this letter to protest our decision. Your protest should include a statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues, explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue a determination letter to you based on technical advice, no further administrative appeal is available to you within the IRS regarding the issue that was the subject of the technical advice.

Letter 3618 (04-2002)
Catalog Number 34809F

If we do not hear from you within 30 days from the date of this letter, we will process your case based on the recommendations shown in the report of examination. If you do not protest this proposed determination within 30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code provides, in part: “A declaratory judgment or decree under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for the District of Columbia determines that the organization involved has exhausted its administrative remedies within the Internal Revenue Service.” We will then issue a final revocation letter. We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service

Telephone Number:

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

R. C. Johnson
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

Form 886-A (Rev. January 1994) Explanation of Items
Name of Taxpayer: Year/Period Ended:

Facts:

[redacted] was
incorporated in [redacted] in the state of [redacted]. The organization was granted exempt status under IRC Section 501(c)(3) in our letter dated June [redacted]. The organization’s intended purpose was to establish a museum, open to the public, for the purpose of exhibiting [redacted] collection of dolls, teddy bears and other [redacted] memorabilia, which were acquired by [redacted] during her long career as a film actress.

As a result of our examination, it was determined that the organization’s intended purpose of establishing a museum was never realized. The organization's sole activity since inception has been the storage of [redacted] collection in a leased, warehouse facility in [redacted]. The organization does not reflect the asset value of the collection on the Form 990 and was unable to produce records verifying the transfer of the collection from [redacted]. The organization was unable to produce records to substantiate the exempt nature of their revenue and expenditures, and it was not possible to distinguish the transactions of the exempt organization from those of the founder.

Law:

Section 501(c)(3) of the Code provides, in part, for the exemption from Federal income tax of organizations organized and operated exclusively for charitable, religious, scientific or educational purposes; no part of the net earnings of which inures to the benefit of any private shareholder or individual.

In order to qualify under IRC 501(c)(3), an organization must be both “organized” and “operated” exclusively for one or more purposes specified in that section. If the organization fails to meet either the organizational test or the operational test, it is not exempt. (Regs 1.501(c)(3)-1(a)(1)). The organizational test relates to the rules for governing an organization and the purposes stated in its articles of organization. The operational test relates to the organization’s activities.

Section 1.501(c)(3)-1(c)(1) of the Regulations states that if more than an insubstantial part of an organization’s activities is not in furtherance of exempt purposes, the organization will not be regarded as exempt.

Form 886-A (Rev. 1994) Department of the Treasury - Internal Revenue Service

Form 886-A: Explanation of Items
Name of Taxpayer: Year/Period Ended:

In Better Business Bureau v. U.S., 326 U.S. 279 (1945), the Supreme Court stated that the presence of even a single, non- exempt purpose, if more than insubstantial in nature, will defeat exemption under Section 501(c)(3) of the Code, regardless of the manner or importance of the truly exempt purposes.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides, in part, that an organization is not organized or operated exclusively for one or more of the purposes mentioned in section 501(c)(3) of the Code unless it serves a public rather than a private interest. An organization may not be exempt if it is operated for the benefit of private individuals.

Section 1.501(c)(3)-1(d)(2) of the Regulations provides that the term “charitable” includes relief of the poor and distressed, advancement of education and science and the promotion of social welfare designed to accomplish any of the above purposes.

Internal Revenue Service Position

Based upon our examination, we have determined that the organization does not conduct an exempt purpose activity and, as a result, fails to meet the operational test as defined in Regulations Section 1.501(c)(3)-1(c)(1)). Furthermore, the exempt organization’s sole activity of warehousing the private collection of its founder serves a private rather than a public interest (Regulations Section 1.501(c)(3)-1(d)(1)(ii)). Failing the operational test and serving private rather than a public interest preclude exemption under IRC Section 501(c)(3).

Organization’s Position

The organization’s founder explained that as a result of financial difficulties, the organization has been unable to accomplish its goal of establishing a museum in order to exhibit the founder's collection. [redacted] understands that the organization's sole activity of warehousing her collection precludes continued exemption under IRC section 501(c)(3), and she has executed the Form 6018 agreeing to revocation of exempt status.

Conclusion

The organization does not qualify for exemption under IRC Section 501(c)(3) as it fails the operational test and serves private rather than public interests. We, therefore, propose to revoke exemption under IRC Section 501(c)(3) effective January 1,
[redacted].

Form 886-A (Rev. 1994) Department of the Treasury - Internal Revenue Service