IRS determination 201133011: Organization denied exemption as a section 501(c)(25) entity

Plain-English summary

The IRS issued a final adverse determination to an organization that described itself as a broker-dealer, accounts manager, clearinghouse, and private-to-private lending institution. The organization did not hold title to real property, did not plan to hold title to real property, and did not have a qualified parent organization. The IRS concluded that issuing loans was not a permissible activity for a section 501(c)(25) organization and that the organization had not shown it was operated to hold real property and remit the related income to qualifying organizations. The organization was denied exemption and was instructed to file federal income tax returns.

Ruling snapshot

• Question: Does an organization that issues loans, without holding title to real property or having a qualified parent, qualify under section 501(c)(25)?
• Outcome: Denied, final adverse determination
• Key authorities: IRC §§ 401(a), 414(d), 501(a), 501(c)(25), 6110, and 856(d)(1).

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201133011
Contact Person:
Release Date: 8/19/2011

Date: May 24, 2011
Identification Number:
UIL: 501.25-00

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)(25).

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

You are in the business of issuing loans which is not a permissible activity within the meaning of section 501(c)(25) of the Code. You do not hold title to real property. You do not have a qualified parent described in section 501(c)(25)(C) of the Code. In this respect, you have failed to show that you are operated for the exclusive purpose of acquiring, holding title to and collecting income from real property; and remitting the entire amount of such income (less expenses) to one or more organizations described in section 501(c)(25)(C).

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.

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, follow the instructions in Notice 437. If you agree with our deletions, you do not need to take any further action.

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,

Director, Exempt Organizations

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: February 17, 2011
Contact Person:
Identification Number:
UIL: 501.25-00
Contact Number:
FAX Number:
Employer Identification Number:

Legend:
Date A=
B=

Dear

We have considered your application for recognition of exemption from federal income tax under Internal Revenue Code section 501(a). Based on the information provided, we have concluded that you do not qualify for exemption under section 501(c)(25) of the Code.

Facts:

You indicate that you are an unincorporated association formed on Date A. However, you have provided no document of formation that could attest to this statement or establish an organizational purpose. You indicate that you are an authorized broker-dealer, accounts manager and clearinghouse for unsecured debt. Your apparent purpose is to act as a private to private lending institution. Specifically, you issue loans to B as separate insurance for tax-free investing.

You have no designated shareholders. You have provided no financial information as requested in Form 1024, Part III, p. 5. As such, there is no record describing your financial activities. You do not currently hold title to nor do you plan to hold title to real property. You also will not be collecting any income from real property, and as such, you will not be remitting any income from such property to one or more organizations described in section 501(c)(25)(C) of the Code.

Law:

Section 501(a) of the Internal Revenue Code provides that an organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.

Section 501(c)(25) of the Code provides for exemption from federal income tax for organizations that meet the following substantive requirements:

(25)(A) Any corporation or trust which--

(i) has no more than 35 shareholders or beneficiaries,

(ii) has only 1 class of stock or beneficial interest, and

(iii) is organized for the exclusive purposes of--

(1) acquiring real property and holding title to, and collecting income from, such property, and

(ii) remitting the entire amount of income from such property (less expenses) to 1 or more organizations described in subparagraph (C) which are shareholders of such corporation or beneficiaries of such trust.

For purposes of clause (iii), the term “real property” shall not include any interest as a tenant in common (or similar interest) and shall not include any indirect interest.

(B) A corporation or trust shall be described in subparagraph (A) without regard to whether the corporation or trust is organized by 1 or more organizations described in subparagraph (C).

(C) An organization is described in this subparagraph if such organization is--

(i) a qualified pension, profit sharing, or stock bonus plan that meets the requirements of section 401(a),

(ii) a governmental plan (within the meaning of section 414(d)),

(iii) the United States, any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing, or

(iv) any organization described in paragraph (3).

(D) A corporation or trust shall in no event be treated as described in subparagraph (A) unless such corporation or trust permits its shareholders or beneficiaries--

(i) to dismiss the corporation's or trust's investment adviser, following reasonable notice, upon a vote of the shareholders or beneficiaries holding a majority of interest in the corporation or trust, and

(ii) to terminate their interest in the corporation or trust by either, or both, of the following alternatives, as determined by the corporation or trust:

(I) by selling or exchanging their stock in the corporation or interest in the trust (subject to any Federal or State securities law) to any organization described in subparagraph (C) so long as the sale or exchange does not increase the number of shareholders or beneficiaries in such corporation or trust above 35, or

(II) by having their stock or interest redeemed by the corporation or trust after the shareholder or beneficiary has provided 90 days notice to such corporation or trust.

(E)(i) For purposes of this title--

(I) a corporation which is a qualified subsidiary shall not be treated as a separate corporation, and

(II) all assets, liabilities, and items of income, deduction, and credit of a qualified subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the corporation or trust described in subparagraph (A).

(ii) For purposes of this subparagraph, the term “qualified subsidiary” means any corporation if, at all times during the period such corporation was in existence, 100 percent of the stock of such corporation is held by the corporation or trust described in subparagraph (A).

(iii) For purposes of this subtitle, if any corporation which was a qualified subsidiary ceases to meet the requirements of clause (ii), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the corporation or trust described in subparagraph (A) in exchange for its stock.

(F) For purposes of subparagraph (A), the term “real property” includes any personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property (determined under the rules of section 856(d)(1)) for the taxable year does not exceed 15 percent of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, such lease.

(G)(i) An organization shall not be treated as failing to be described in this paragraph merely by reason of the receipt of any otherwise disqualifying income which is incidentally derived from the holding of real property.

(ii) Clause (i) shall not apply if the amount of gross income described in such clause exceeds 10 percent of the organization's gross income for the taxable year unless the organization establishes to the satisfaction of the Secretary that the receipt of gross income described in clause (i) in excess of such limitation was inadvertent and reasonable steps are being taken to correct the circumstances giving rise to such income.

Analysis:

You are in the business of issuing loans which is not a permissible activity within the meaning of section 501(c)(25) of the Code. You do not hold title to real property. You do not have a qualified parent described in section 501(c)(25)(C) of the Code. In this respect, you have failed to show that you are operated for the exclusive purpose of acquiring, holding title to and collecting income from real property; and remitting the entire amount of such income (less expenses) to one or more organizations described in section 501(c)(25)(C).

Conclusion:

You fail to meet the requirements of section 501(c)(25) of the Code. Therefore, you do not qualify for exemption under section 501(c)(25) and must file federal income tax returns.

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 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:

Internal Revenue Service
SE:T:EO:RA:T:3, PE-3L7
Attn:

1111 Constitution Ave, N.W.
Washington, DC 20224

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,

Director, Exempt Organizations
Rulings & Agreements