Determination 1040030: IRS revokes exemption from an education and research organization

Plain-English summary

The IRS revoked an organization’s federal income tax exemption under IRC § 501(c)(3), effective January 1, 20XX. The organization was formed for Southeastern Indian education, research, and public outreach, but the IRS found that it performed non-exempt services for companies and a state transportation department. The examination also found that the organization shared a director, employees, projects, and a facility with a related for-profit organization, while its educational and outreach activities were only a minimal part of its overall work. The IRS concluded that the organization was not operated exclusively for exempt purposes and that contributions were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Was the organization operated exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 6001, 6033, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(2), 1.501(c)(3)-1(d)(3), 1.501(c)(3)-1(d)(1)(ii), 1.6001-1(c), 1.6001-1(e), and 1.6033-2(i)(2)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.

TAX EXEMPT AND Dallas, Texas 75242 501.03-00
GOVERNMENT ENTITIES
DIVISION

Date: June 24, 2010

Number: 201040030
Release Date: 10/8/2010

Taxpayer Identification Number:

LEGEND Person to Contact:
ORG = Organization name Employee Identification Number:

XX = Date Address = Address Employee Telephone Number:
(Phone)

ORG (Fax)

ADDRESS

LAST DATE TO FILE A PETITION
IN TAX COURT: September 22, 20XX

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code. Our favorable determination letter to you dated October 29, 20XX is
hereby revoked and you are no longer exempt under section 501(a) of the Code effective January
1, 20XX.

The revocation of your exempt status was made for the following reason(s):

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized
and operated exclusively for exempt purposes. During the examination it was discovered that the
ORG is performing services of a non-exempt nature for various companies and the STATE
Department of Transportation. The activities of ORG, according to the Articles of Incorporation,
are for the furtherance of 501(c)(3) purposes, and are organized exclusively for education, public
outreach, and research under the provision of all applicable laws for a non-profit entity in the State
of STATE.

It is the service’s position that ORG failed to provide proof of an adequate amount of educational
and outreach activities such as workshops, community involvement and awareness, school
boards, etc. as was stated in the mission statement of ORG’S initial 1023 application.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be filed with the
appropriate Service Center for the tax year ending December 31, 20XX, and for all tax years
thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments 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 under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the
district court of the United States for the District of Columbia must be filed before the 91st Day
after the date this determination was mailed to you. Please contact the clerk of the appropriate
court for rules regarding filing petitions for declaratory judgments by referring to the enclosed
Publication 892. You may write to the United States Tax Court at the following address:

You also 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:

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

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892

Internal Revenue Service Department of the Treasury
801 Tom Martin Drive, Room 263

Birmingham, AL 35211

Taxpayer Identification Number:

Date: December 31, 2009
Form:

ORG

ADDRESS Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested
Dear

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 (Rev. 11-2003)
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:

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,

Nanette M. Downing
Acting, Director EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

Form 886-A

Exhibit I
LEGEND
ORG = Organization name XX = Date Address = address City = city
State = state President = president DIR-1 = 1st DIR County =
county Project = project CO-1, CO-2 & CO-3 = 1st, 2nd & 3rd COMPANIES

TAX YEARS ENDING DECEMBER 31, 20XX &
JANUARY 31, 20XX

ISSUES PRESENTED:

1. Whether ORG is operated exclusively for exempt purposes described within
   Internal Revenue Code section 501(c)(3):

a. Whether ORG is engaged primarily in activities that accomplish an exempt
purpose?

b. Whether more than an insubstantial part of ORG’s activities are in
furtherance of a non-exempt purpose?

FACTS

Background

ORG was incorporated on December 20, 20XX for the purpose of carrying on a
lawful business in pursuance of the laws of the State of State relating to non-profit
corporations. In a determination letter dated October 29, 20XX, ORG was determined
to be exempt from federal income tax as an organization described in IRC Section
501(c)(3). ORG is located at Address, City, State.

In its Articles of Incorporation, ORG stated its purpose is "To operate a non-profit
corporation whose primary purpose includes Southeastern Indian Education, Research
and Public Outreach. To borrow money for the purpose of carrying on the business of
this Corporation, to lease, buy, sell, convey, rent and mortgage or pledge, both real and
personal property as the same shall be necessary or incidental to the carrying on of said
business, and generally to do all things that may be necessary or incidental to the
carrying on of said business. Subject to the limitations and restrictions imposed by law,
to make, accept, endorse, execute and issue promissory notes, bills of exchange,
bonds, debentures, or other obligations from time to time for the purchase of property or
for any purpose in or about the business of the company. To establish lines of credit
with banking houses for the purposes herein above enumerated and set forth, and to
incur indebtedness and to raise, borrow and secure the payment of money in any lawful
manner, including the issue and sale of other disposition of warrants, bonds, debentures
or obligations, negotiable and transferable instruments, and evidences of deeds of trust,
or otherwise, for the purpose of adding additional capital or for any other purposes in or
about its business or affairs without limit as to amount, except as provided by statute,
this to be done on such terms and conditions and by such officers as said banking
house or houses may require.

Form 886-A

Exhibit I

To acquire the property, rights, franchises, certificates and good will, including
the whole for any part of the assets, and in connections therewith, assume no
guarantee such liabilities of any person, firm association or other corporation as this
Corporation may lawfully acquire or assume to pay for the same in cash, or bonds of
this Corporation, or otherwise. To engage in any other lawful activity except that of
banking or insurance.

The foregoing clauses shall be construed as powers, as well as objects and
purposes, and the matters expressed in each clause shall, except as otherwise
expressly provided, be in no wise limited by reference to or inference from the terms of
any other clause, which shall be regarded as independent objects, purposes and power;
and the enumeration of specific objects, purposes and powers shall not be construed to
limit or restrict in any manner the meaning of general terms of any other clause, which
shall be regarded as independent objects, purposes and powers, and the enumeration
of specific objects, purposes and powers shall not be construed to limit or restrict in any
manner the meaning of general terms of the powers of the Corporation now or hereafter
conferred by law, nor shall the expression of one thing be deemed to exclude another
not expressed, although it be of like nature.

The Articles were amended on September 4, 20XX to include the following
clause: “To operate a non-profit corporation whose primary purpose includes
Southeastern Indian Education, Research and Public Outreach. Said organization is
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 section 501(c)(3) of the Internal Revenue Code, or
corresponding section of any future federal tax code.

According to the form 1023 application for recognition of exemption, ORG was
formed to facilitate Native American participation in a curriculum of Southeastern Indian
education, outreach, and research. Programs were to be developed to create an
awareness and understanding of Southeastern Indian history and culture through the
use of artifact collections, map collections, primary source historical documents, eye-
witness accounts, land records, oral history, linguistics, genealogy, family papers, and
published materials. The ORG will strive to provide a facility unlike any other presently
functioning in the Southeastern United Sates in that it will bring widely scattered
documents from many locations to one easily accessed location.

Activity Description

The primary activity of ORG (hereinafter ORG) during the tax years ending
December 31, 20XX and January 31, 20XX was completing cultural resource services
for the State Department of Transportation, CO-1, and CO-2. CO-2, Inc. is an
independent environmental research and consulting firm specializing in applied
biological and environmental sciences with offices in City, State, and City, State. The
company, founded in 19XX by President, provides a wide spectrum of environmental
services, including assessments of coastal, marine, and freshwater ecosystems,

Form 886-A

Exhibit I
terrestrial surveys, cultural resource surveys, wetland impact analyses and mitigation,
permit coordination, and NEPA documentation.

During the examination it was discovered that the ORG is working along side
another for-profit organization of a different name, CO-3. Both organizations have the
same director, DIR-1, and perform essentially the same activities except for the minimal
educational and outreach activities performed by ORG. The organization shares
virtually the same employees, projects, and facility; therefore it is difficult to distinguish
between the for-profit organization and the non-for-profit organization.

It was also noted in the minutes of the organization that on three separate
occasions comments were made concerning the legitimacy of the activities as exempt
function activities. This comment was also made by a potential attorney for the
organization who “expressed concerns regarding 501(c)(3) goals.”

Education

The founding members of ORG envisioned it as four different components with
four different heads, outreach, education, research, and Native American participation.
They wanted to involve Native Americans in research along with the scientists and
archaeologists. One of the ways they accomplish their goals is to perform outreach
programs at schools. In these lectures they tell the history of Native Americans and the
importance of the preservation of archaeological artifacts. They teach the importance of
not looting sites because those artifacts cannot be recovered. The County Board of
Education gave the organization a grant for an archaeological program in which 300
kids participated in 20XX and 600 kids in 20XX. The children would visit the dig site,
and the ORG employees would walk them through the whole excavation process:
mapping, documentation, lab work, and data entry. The organization has also worked
to have PROJECT project recognized as a National Trail of Tears site. They received a
grant from ALDOT for mapping and geological research of the PROJECT project. They
have held numerous presentations on the history of the site and a festival to
commemorate it as a Trail of Tears site. ORG was incorporated in 20XX but began
planning activities began in 20XX.

While the organization has performed numerous exempt function activities, the
non-exempt activities represent a substantial portion of the total activities of the
organization.

LAW

Section 501(a) of the Internal Revenue Code provides that an organization
described in section 501(c) (3) is exempt from income tax. Section 501(c)(3) of the
Code exempts from federal income tax corporations 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. The term charitable
includes relief of the poor and distressed. Section 1.501(c) (3)-1(d) (2), Income Tax
Regulations.

Form 886-A

Exhibit I

The term educational includes (a) instruction or training of the individual for the
purpose of improving or developing his capabilities and (b) instruction of the public on
subjects useful to the individual and beneficial to the community. Treas. Reg. §
1.501(c)(3)-1(d)(3). In other words, the two components of education are public
education and individual training.

Section 1.501(c)(3)-1(a)(1) 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.

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). An organization will not be so regarded if more than an insubstantial
part of its activities is not in furtherance of an exempt purpose. The existence of a
substantial nonexempt purpose, regardless of the number or importance of exempt
purposes, will cause failure of the operational test. Better Business Bureau of
Washington, D.C. v. U.S., 326 U.S. 279 (1945).

Educational purposes include instruction or training of the individual for the
purpose of improving or developing his capabilities and instruction of the public on
useful and beneficial subjects. Treas. Reg. § 1.501(c)(3)-1(d)(3). In Better Business
Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme
Court held that the presence of a single non-exempt purposes, if substantial in nature,
will destroy the exemption regardless of the number or importance of truly exempt
purposes. The Court found that the trade association had an “underlying commercial
motive” that distinguished its educational program from that carried out by a university.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct.
Cl. 1962), the Court considered the status of an organization that provided analyses of
securities and industries and of the economic climate in general. The organization sold
subscriptions to various periodicals and services providing advice for purchases of
individual securities. Although the court noted that education is a broad concept, and
assumed for the sake of argument that the organization had an educational purpose, it
held that the organization had a significant non-exempt commercial purpose that was
not incidental to the educational purpose and was not entitled to be regarded as
exempt.

An organization must establish that it serves a public rather than a private
interest and “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.” Treas. Reg. §
1.501(c)(3)-1(d)(1)(ii). Prohibited private interests include those of unrelated third

Form 886-A

Exhibit I
parties as well as insiders. Christian Stewardship Assistance, Inc. v. Commissioner, 70
T.C. 1037 (1978); American Campaign Academy v. Commissioner, 92 T.C. 1053
(1989). Private benefits include an “advantage; profit; fruit; privilege; gain; [or] interest.”
Retired Teachers Legal Fund v. Commissioner, 78 T.C. 280, 286 (1982).

EXEMPT ORGANIZATION’S POSITION
The exempt organization will have a chance to respond when the report is sent to them.
GOVERNMENT POSITION

During the examination it was discovered that the ORG is performing services of
a non-exempt nature for various companies and the State Department of
Transportation. The activities of ORG, according to the Articles of Incorporation are for
the furtherance of 501(c)(3) purposes, and are organized exclusively for educational,
public outreach, and research under the provision of all applicable laws for a non-profit
entity in the State of State.

It is the service’s position that ORG failed to provide proof of an adequate amount of
educational and outreach activities such as workshops, community involvement and
awareness, school boards, etc. as was stated in the mission statement of ORG’s initial
1023 application. A ruling or determination letter recognizing exemption may not be
relied upon if there is a material change inconsistent with exemption in the character,
the purpose, or the method of operation of the organization.

The term educational includes (a) instruction or training of the individual for the
purpose of improving or developing his capabilities and (b) instruction of the public on
subjects useful to the individual and beneficial to the community. Treas. Reg. §
1.501(c)(3)-1(d)(3). In other words, the two components of education are public
education and individual training.

CONCLUSION

In conclusion, ORG has not been operated exclusively for exempt purposes.
Substantially all of ORG’s activities were not in furtherance of the exempt purpose of the
organization. Accordingly, it is determined that ORG is not an organization described in
section 501(c)(3), and is not exempt from income tax under section 501, effective
January 1, 20XX.