Determination 1023058: IRS denied exemption to a proposed charitable assistance organization

Plain-English summary

The IRS denied an organization's application for exemption under IRC § 501(c)(3). The organization proposed providing food, clothing, shelter, vehicles, financial assistance, and other services to people identified through a celebrity founder and a church. The IRS found that the application did not adequately describe the organization's activities, beneficiary-selection criteria, governing arrangements, or safeguards against private benefit. Because the organization did not establish that it would operate exclusively for charitable purposes or serve a public rather than private interest, it did not qualify for exemption.

Ruling snapshot

• Question: Did the proposed organization establish that it would be organized and operated exclusively for charitable purposes under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 6104(c), 6110, and 7428; Treas. Reg. §§ 1.501(a)-1(a)(2)-(3), 1.501(c)(3)-1(a), 1.501(c)(3)-1(c)(1), and 1.501(c)(3)-1(d)(1)(ii), (d)(2); Better Business Bureau v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Release Number: 201023058 Contact Person:
Release Date: 6/11/10

Date: March 18, 2010 Identification Number:

VIL Code: 501.03-00
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:

Dear

This is our final determination that you do not qualify for exemption from Federal income tax
under Internal Revenue Code section 501(a) as an organization described in Code section
501(c)(3).

We made this determination for the following reason(s):

You failed to establish that you are organized and operated exclusively for an exempt purpose
described in section 501(c)(3). You failed to establish that your program constitutes an activity
that furthers a charitable purpose by providing relief to persons who are poor and distressed or
underprivileged or accomplishes any other exempt purpose specified in section 1.501(c)(3)-
1(d)(2) of the regulations. Further, you have not established that you are not organized or
operated for the benefit of private interests. Accordingly, you do not qualify for exemption under
section 501(c)(3) and, therefore, cannot be classified as a private foundation or a public charity.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. You must file
Federal income tax returns on the form and for the years listed above within 30 days of this
letter, unless you request an extension of time to file. File the returns in accordance with their
instructions, and do not send them to this office. Failure to file the returns timely may result in a
penalty.

If you decide to contest this determination under the declaratory judgment provisions of Code
section 7428, you must initiate a suit in the United States Tax Court, the United States Court of
Federal Claims, or the District Court of the United States for the District of Columbia before the
91st day after the date that we mailed this letter to you. Contact the clerk of the appropriate
court for rules for initiating suits for declaratory judgment. Filing a declaratory judgment suit
under Code section 7428 does not stay the requirement to file returns and pay taxes.

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We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, you should follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if you have any questions about how this determination may
affect your State responsibilities and requirements.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at
1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Robert Choi
Director, Exempt Organizations
Rulings & Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: May 21, 2009 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

Legend:

B =

M

Date =

State =

Dear

We have considered your application for recognition of exemption from Federal income tax
under section 501(a) of the Internal Revenue Code (“Code”). Based on the information
provided, we have concluded that you do not qualify for exemption under section 501(c)(3) of
the Code. The basis for our conclusion is set forth below.

You were incorporated by B on Date in State and filed an application for recognition of
exemption under section 501(c)(3) of the Internal Revenue Code (Code). Your three directors
are all members of M, a church.

Your application states that you are organized exclusively for charitable acts such as providing
food, clothing and shelter for needy families or persons. To help those in need, you plan to
construct homes, lend used cars, and offer clothes, food and other monetary assistance for
housing, education, healthcare and pro-bono legal representation for immigration proceedings
for selected beneficiaries. You state that you particularly plan to assist:

Single parents who have been domestically abused,

Individuals who are unemployed and have difficulties with their families and children,
The homeless, and

Whoever is in need.

BONA

You provided a couple of examples of your services: You loaned three vehicles with prepaid
auto insurance for six months to disadvantaged families. You state that you also paid all of the
expenses to bring an individual from Honduras to the U.S. for eye surgery.

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You state that since B is a well-known celebrity, B receives requests for assistance by phone,
email, letters and church contacts. You added that M provides you with information and tells
you who is in need. M's pastor provided a letter confirming B’s close relationship with the
church. In the letter, the pastor explained that he becomes aware of people in need and refers
those persons to you. Once a referral is made, one of your officers will conduct a site check in
order to verify that the potential recipient is in fact in need of some assistance. You state that
the site check will also provide you with the ability to gauge how much and/or what type of
assistance you will provide. You do not have any particular criteria or screening process that
you use to identify and select qualified beneficiaries. But will instead base your decisions on a
case-by-case basis with the goal of assisting individuals who are unemployed, victims of abuse,
homeless or underprivileged. The pastor explained further that B is free to make his own
determination as to who is eligible to receive assistance. You state that any beneficiaries will
not be related to B or B's family.

You did not provide any financial information with your application, stating that there have been
no transactions to date. You state that you expect donations from three sources, B, B’s
personal contacts, and your website. You explained that the large loan from officers reported in
your financial statements was actually a donation from B that you used to pay your expenses.
You state that you are waiting until you are recognized as an exempt organization to solicit
donations from sources other than B.

Two of your directors are related and all of your directors have a business relationship other
than through their position as your director. You did not provide additional information about
those business relationships or a copy of your bylaws.

Law:

Section 501(c)(3) of the Internal Revenue Code provides for the exemption from federal income
tax of organizations organized and operated exclusively for charitable, educational and other
purposes, provided that no part of the net earnings inure to the benefit of any private
shareholder or individual.

Section 1.501(a)-1(a)(2) of the Income Tax Regulations (“regulations”) states that an
organization is not exempt from tax merely because it is not organized and operated for profit.
In order to establish its exemption, it is necessary that every such organization claiming
exemption file an application form with the Internal Revenue Service.

Section 1.501(a)-1(a)(3) of the regulations states that an organization claiming exemption under
section 501(a) and described in any paragraph of section 501(c) (other than section 501(c)(1))
shall file the form of application prescribed by the Commissioner and shall include thereon such
information as required by such form and the instructions issued thereto.

Section 1.501(c)(3)-1(a) of the regulations provides that, in order to be exempt as an
organization described 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 organizational test or the operational test, it is not exempt.

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Section 1.501(c)(3)-1(c)(1) of the regulations 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 section 501(c)(3).

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations assigns the burden of proof to an applicant
organization to show that it serves a public rather than a private interest and specifically 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.

Section 1.501(c)(3)-1(d)(2) of the regulations defines the word “charitable” as including relief of
the poor and distressed or of the underprivileged.

In New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), the organization failed to
establish an administrative record that showed it was operated for exclusively exempt purposes.
The court found instead that it was part of a tax avoidance scheme and primarily provided
private benefits.

In Church in Boston v. Commissioner, 71 T.C. 102, 1978 U.S, an organization made grants to
various individuals, including officers of the church. The grants carried no legal obligation to
repay any interest or principal. Although the church contended that the grants were made to
assist the poor who were in need of food, clothing, shelter, and medical attention, the church
failed to provide any documented criteria demonstrating the selection process of recipients and
the reasons for the specific amounts given. The court affirmed the determination that the church
failed to establish that its grant program constituted an activity in furtherance of an exempt
purpose.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), an organization was organized to provide
education and charity, but failed to provide sufficient details regarding its proposed operations.
The court held that it failed to prove that it would operate exclusively for exempt purposes under
section 501(c)(3) of the Code.

Section 3.08 of Rev. Proc. 2009-9, 2009-2 C. B. 259 provides that an organization seeking
recognition of exemption under section 501(c)(3) must submit a completed Form 1023. A
substantially completed application, including a letter application, is one that includes a detailed
narrative statement of proposed activities and a narrative description of contemplated
expenditures.

Section 4.03 of Rev. Proc. 2009-9, 2009-2 C. B. 260 provides that exempt status may be
recognized in advance of an organization's operations if the proposed activities are described in
sufficient detail to permit a conclusion that the organization will clearly meet the particular

requirements for exemption pursuant to the section of the Internal Revenue Code under which
exemption is claimed. An organization must fully describe all of the activities in which it expects
to engage, including the standards, criteria, procedures or other means adopted or planned for
carrying out the activities, the anticipated sources of receipts, and the nature of contemplated
expenditures. A mere restatement of exempt purposes or a statement that proposed activities
will be in furtherance of such purposes will not satisfy this requirement.

Analysis:

The information you submitted is insufficient for us to conclude that you are organized and
operated exclusively for charitable purposes as specified in section 501(c)(3) of the Code.

To be exempt, an organization must provide a substantially complete application. In addition,
an exempt organization must show that it is both organized and operated exclusively for one of
the purposes described in section 501(c)(3) of the Code. Section 1.501(c)(3)-1(a) of
the regulations.

Exemption from federal income tax is not a right; it is a strictly interpreted matter of legislative
grace and the burden rests with the applicant to prove that it is entitled to exempt status. New
Dynamics Foundation, supra. Your application did not include information required by the form
and its instructions such as copies of your bylaws nor did you provide information about your
directors, your activities, and the criteria you use to select beneficiaries. Your application does
not satisfy the requirements of sections 1.501(a)-1(a)(2) and (3) of the regulations and Rev.
Proc. 2009-9, 2009-2 C. B. 259 and 260.

An organization must also satisfy the organizational and operational test described in the
regulations to qualify for recognition as an organization exempt from federal taxation. An
applicant must establish an administrative record showing that it operates primarily to
accomplish an exempt purpose(s) described in section 501(c)(3) of the Code. While your
Articles of Incorporation provide that you are organized for charitable purposes, you have not
provided enough information to demonstrate that you operate exclusively for charitable
purposes.

You stated that you are not presently operational and do not intend to commence operations
until you are recognized as an exempt organization. The Service may recognize exempt status
in advance of operations if an applicant describes its proposed operations in sufficient detail to
permit a conclusion that it will clearly meet the requirements for exemption in accordance with
section 501(c)(3) of the Code. However, a mere restatement of exempt purposes or a
statement that proposed activities will be in furtherance of such purposes will not satisfy this
requirement. La Verdad v. Commissioner, supra.

Based on the information you provided, you have failed to establish that your operations will be
charitable through relief of the poor and distressed. The regulations define the word “charitable”
as including relief of the poor and distressed or of the underprivileged. Section 1.501(c)(3)-
1(d)(2) of the regulations. Similar to the church described in Church in Boston v. Commissioner,
supra you state that you help families in need, but you did not provide information about any
criteria that you would use to select qualifying recipients. You provided a couple of examples of
your grants and services, but failed to provide information providing qualification criteria or
selection process. Instead, you state that you rely on referrals from the pastor of M who uses
personal knowledge in deciding whether someone qualifies for assistance. You have not
demonstrated that your grants were made in an objective and nondiscriminatory manner and
that the distribution of such grants was made in furtherance of an exempt purpose.

An applicant for exemption must also prove 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. Section

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1.501 (c)(3)-1(d)(1)(ii) of the regulations. Two of your three directors are related and all three of
your directors are members of the church and have a business relationship other than through
their position as your director. Even though you do not presently pay compensation to your
directors, you have not stated that they will not receive compensation in the future. Even if your
directors do not receive compensation, the family members exercise control over you and can
use your assets to benefit the family. Since you have not provided a copy of your bylaws or any
other governing documents prohibiting such private benefit, we find that you do not meet the
requirement in section 1.501(c)(3)-1(d)(1)(ii) of the regulations providing that you do not operate
to benefit private interests.

Conclusion:

An organization that fails to provide a substantially completed application and meet the
organizational and operational tests described in the regulations is not exempt. You have not
provided sufficient evidence to demonstrate that you are organized and operated for exempt
purposes within the meaning of section 501(c)(3) of the Code. You have failed to establish that
your program constitutes an activity that furthers a charitable purpose by actually providing relief
to persons who are poor and distressed or underprivileged. You have not established that you
will operate for charitable purposes or that no part of your net earnings will inure to the benefit of
private individuals. Accordingly, you do not qualify for exemption under section 501(c)(3).

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

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

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done
so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to this address:

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax. If you have any questions, please contact the person whose
name and telephone number are shown in the heading of this letter.

Sincerely,

Robert Choi
Director, Exempt Organizations
Rulings & Agreements