IRS revokes foundation's tax-exempt status under section 501(c)(3)

Plain-English summary

The IRS Appeals Office issued a final adverse determination revoking a foundation's exemption under IRC § 501(c)(3), effective January 1, 2007. The IRS concluded that the foundation's primary activities promoted and oversaw a process serving toy manufacturers, creating private benefit for an industry rather than serving the public exclusively for charitable or educational purposes. The determination states that the foundation may be eligible for exemption under IRC § 501(c)(6), but that issue was outside the scope of the appeal. Contributions to the foundation are not deductible under IRC § 170, and the foundation was instructed to file the required federal income tax returns.

Ruling snapshot

• Question: Did the foundation qualify for continued exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 501(c)(6), 170, 6104(c), and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
1000 South Pine Island Road Person to Contact:
Suite 350
Plantation, FL 33324 Employee ID Number:
Tel:
Fax:
Release Number: 201135036 Refer Reply to:
Release Date: 9/2/2011
Date: June 7, 2011 In Re:
EIN: C
UIL: 501.00-00
A Form Required to be Filed:
B Tax Period Ended:
Certified Mail
Dear

This is a final adverse determination as to your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). It is determined that you do not qualify as exempt
from Federal income tax under IRC Section 501(c)(3) effective January 1, 2007.

When evaluating whether or not an organization meets the operational test of IRC
§501(c)(3) we consider whether the organization engages primarily in activities that
accomplish charitable purposes and whether more than an insubstantial part of its
activities further non-charitable purposes. You have failed to establish you are operated
exclusively for exempt purposes as defined in IRC §501(c)(3), because your activities
serve mainly the private interests of toy manufacturers and as such they are in
furtherance of non-exempt purposes. Although your activities may have an indirect
benefit to the general public, there is substantial private benefit to toy manufacturers.
Therefore, our adverse determination was made because we have determined you are
not operated exclusively for exempt purposes described in section 501(c)(3).

You may qualify for exemption under §501(c)(6), although such determination was
outside the scope of this Appeal. If you wish to pursue such you can file Form 1024,
Application for Recognition of Exemption Under Section 501(a), to apply for such
exemption.

Contributions to your organization are not deductible under Code section 170.

You are required to file Federal income tax returns on the form indicated above. You
should file these returns within 30 days from the date of this letter, unless a request for
an extension of time is granted. File the returns in accordance with their instructions,
and do not send them to this office. Processing of income tax returns and assessment
of any taxes due will not be delayed because you have filed a petition for declaratory
judgment under Code section 7428.

If you decide to contest this determination under the declaratory judgment provisions of
Code section 7428, a petition to the United States Tax Court, the United States Court of
Claims, or the district court of the United States for the District of Columbia must be filed
within 90 days from the date this determination was mailed to you. Contact the clerk of
the appropriate court for rules for filing petitions for declaratory judgment. To secure a
petition form from the United States Tax Court, write to the United States Tax Court,
400 Second Street, N.W., Washington, D.C. 20217.

We will notify the appropriate State officials of this action, as required by Code section
6104(c). 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, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Charles Fisher
Appeals Team Manager

cc:

DEPARTMENT OF THE TREASURY
Internal Revenue Service
10 MetroTech Center; 625 Fulton Street
Brooklyn, NY 11201
TEGE:EO: 7909---5th Floor

TAX EXEMPT ANC
GOVERNMENT ENTITIES

June 10, 2010

Taxpayer Identification Number:

ORG
ADDRESS Form:
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 (04-2002)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
LEGEND
ORG = Organization name XX = Date Country = country
ISSUES

Whether the Internal Revenue Code (IRC) 501(c)(3) tax-exempt status of ORG
(Foundation) should be revoked?

FACTS

The organization is recognized as a section 501(c)(3) tax-exempt organization.
The Foundation’s purposes as stated in its certificate of incorporation include the
following:

(a) Said corporation 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 IRC.

(b) The corporation is formed for charitable purposes within the meaning of
section 501(c)(3) of the IRC with the power and purpose to receive and maintain a
fund or funds of real or personal property, or both, and subject to the restrictions
and limitations hereinafter set forth to use and apply the whole or part of the
income there from and the principal thereof exclusively for international study,
compilation, and distribution of information to members of the public,
publications, and individuals and groups interested in safe and humane
international manufacture and use of children’s products.

The bylaws inspected contained the objectives and purposes of the entity which
included implementing standards for humane and ethical working conditions
including those set forth in ORG Process; safe and humane manufacture of
products, the welfare and betterment of factory workers and elimination of child
labor. The Foundation is overseen by a governance board. The mission of the
ORG Governance Board is to provide leadership, oversight and to support funding
of the ORG Process, ensuring that the operations are effective, credible and
transparent to all stakeholders. The ORG Process was established to promote
ORG’s ethical manufacturing program, as set forth in the ORG Code of Business
Practices (ORG COBP). The process is supported by the ORG

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

een 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX

The PROGRAM Process is the ORG' (ORG) program to promote
manufacturing, in the form of fair labor treatment, as well as employee health and
safety, in the toy industry supply chain, worldwide. Its initial focus is in Country,
where of the world's toy volume is manufactured. Its intent is to provide a
single, fair, thorough and consistent program to monitor toy factories’ compliance
with ORG's Code of Business Practices (the "Code").

The ORG was established to ensure that the Process is conducted in an open and
correct manner. The heart of the ORG process consists of monitoring how well
the factories abide by a set of rules governing working conditions. In addition to
the monitoring the Foundation will focus on training and education programs
aimed at factory managers, workers and auditors. Its governance board sets
policy, raises funds, approves budgets, evaluates and decides on Technical
Advisory Board recommendations, provides guidance and reports publicly. The
board includes both industry and non-industry representatives. The Technical
Advisory Boards provide advice and recommendations on all matters requiring
technical expertise, including adjudication of disputes related to application of the
Process.

The following material was gathered from the Foundation’s website which
describes the activities of the Foundation regarding the PROGRAM monitoring

process:

Audit Companies

Factories

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX

The process also involves the issuance of the following:

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -3-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX

LAW

Section 501(c)(3) of the Code provides for the exemption from Federal income
tax of organizations organized and operated exclusively for charitable purposes.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization is
not organized or operated exclusively for charitable purposes unless it serves a
public rather than a private interest.

Section 1.501(c)(3)-1(d)(3) of the regulations defines the term “educational,” as
used in section 501(c)(3) of the Code as relating to the instruction of the public on
subjects useful to the individual and beneficial to the community.

Revenue Ruling 71-504, 1971-2 CB 231 holds that a city medical society, exempt
under section 501(c)(6) of the Code, that primarily directs its activities to the
promotion of the common business purposes of its members may not be
reclassified as an educational or charitable organization under section 501(c)(3).

Since the society in the above ruling has substantial noncharitable and
noneducational purposes and activities, it is not a charitable organization.
Accordingly, it was held that this association could not be reclassified as an
organization exempt from Federal income tax under section 501(c)(3) of the Code.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX

Revenue Ruling 73-567, 1973-2 CB 178 holds that a medical specialty board that
devises and administers written examinations to physicians in a particular medical
specialty and issues certificates to successful candidates is exempt from tax as a
business league under section 501(c)(6) of the Code, but is not exempt under
section 501(c)(3).

The ruling states, “By examining and certifying physicians under the
circumstances described, the board promotes high professional standards.
Although some public benefit may be derived from promoting high professional
standards in a particular medical specialty, the activities of the board are directed
primarily to serving the interest of the medical profession. Under these
circumstances, the board is not organized and operated exclusively for charitable
purposes. On the other hand, since the activities of the board consist of certifying
physicians who are thereafter authorized to hold themselves out to the public as
specialists, its purpose is to promote the common business interest of the
physicians.

Revenue Ruling 74-553, 1974-2 CB 168 holds that a nonprofit organization
formed by members of a State medical association to operate peer review boards
for the primary purpose of establishing and maintaining standards for quality,
quantity and reasonableness of costs of medical services qualifies for exemption
from tax under section 501(c)(6) of the Code but not under section 501(c)(3).

The ruling states, “The organization’s principal activity is directed to establishing
and maintaining standards for the quality and costs of medical services. Although
this activity may result in a measurable public benefit, its primary objective is to
maintain the professional standards, prestige, and independence of the organized
medical profession and thereby furthers the common business interest of the
organization’s members.”

TAXPAYER’S POSITION

Taxpayer believes that the activities of the entity meet the requirements of those
described under 501(c)(3) for educational and charitable purposes.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX

GOVERNMENT’S POSITION

Based upon the audit findings, the primary activity of the Foundation is to promote
and oversee the operation of the “Process” along with the related foreign entity.
The Foundation establishes and maintains standards which may result in an
indirect public benefit. However, there is private benefit of those in the toy
industry being served from such activities. As such, the Foundation is not
described as an entity exempt under IRC section 501(c)(3). Accordingly, the
information collected during the examination, suggest that the activities target toy
manufacturers and not the general public. The Foundation does not actually
disseminate information to the general public. A 501(c)(3) organization must be
operated for exclusively charitable and educational purposes which serve the
public interest rather than the private interest of an industry.

However, your organization may be eligible for exemption under Internal Revenue
Code 501(c)(6). Section 501(c)(6) of the Code provides for the exemption from
federal income tax of business leagues not organized for profit and no part of the
net earnings of which inures to the benefit of any private shareholder or
individual. In order to determine your qualifications under section 501(c)(6) of
the Code, an application Form 1024, Exemption Application, must be filed with
the Internal Revenue Service.

CONCLUSION

The Foundation is not operated exclusively for charitable, educational or other
purposes that are within the meaning of IRC 501(c)(3). The Foundation is
operated to further the common business interest of the organization’s members.
The Foundation’s exempt status should be revoked effective January 1, 20XX.
Form 1120 returns should be filed for the tax periods ending on or after December
31, 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -6-