IRS proposes revoking exemption from a professional association over private inurement

Plain-English summary

The IRS proposed revoking a professional association's exemption under IRC § 501(c)(6). The examination report said that the organization lacked meaningful membership support and received most of its funds through a professional fundraiser. It also found that organizational funds were used for a for-profit business owned by the president and for payments to officers, which the report treated as private inurement. The report concluded that the organization no longer met the requirements for exemption and proposed revocation effective January 1 of the stated year.

Ruling snapshot

• Question: Did the organization continue to qualify under IRC § 501(c)(6) when its funds benefited a related for-profit business and its officers?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(6) and 6104(c); Treas. Reg. §§ 1.501(c)(6)-1 and 1.501(a)-1(c)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
7850 SW 6th Court, Stop 7954 501.06-00
Plantation, Florida 33324-3202

Number: 201218018
Release Date: 5/4/2012
Taxpayer Identification Number:

Date: November 22, 2011 Form:

Tax Year(s) Ended:
ORG Person to Contact/ID Number:
ADDRESS Contact Numbers:

Telephone:

Fax Number:

Certified Mail — Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of
your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed Publication
3498, The Examination Process, explains 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.

If you request a conference, we will forward your written statement of protest to the Appeals
Office and they will contact you. For your convenience, an envelope is enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals conference, or if
you do not request an Appeals conference, you may file suit in United States Tax Court, the
United States Court of Federal Claims, or United States District Court, after satisfying
procedural and jurisdictional requirements as described in Publication 3498.

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

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter revoking your exempt status. If
we do not hear from you within 30 days from the date of this letter, we will process your case on
the basis of the recommendations shown in the report of examination and this letter will become
final. In that event, you will be required to file Federal income tax returns for the tax period(s)
shown above. File these returns with the Ogden Service Center within 60 days from the date of
this letter, unless a request for an extension of time is granted. File returns for later tax years
with the appropriate service center indicated in the instructions for those returns.

Letter 3610 (Rev 11-2003)
Catalog Number 34801V

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,

Director, EO Examinations
Nanette M. Downing

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

2 Letter 3610 (Rev 11-2003)
Catalog Number 34801V

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number | Year/Period ended

ORG EIN December 31, 20XX
LEGEND
ORG - Organization name XX - Date State - state President - president
Secretary - secretary CO-1, CO-2, CO-3 & CO-4 - 1st, 2nd, 3rd & 4th COMPANIES
Issues:

Whether any part of the net earnings of the ORG inured to the private benefit of any private
shareholder or individual’.

Facts:

ORG was incorporated April 04, 19XX as a State non-profit corporation. The organization filed
Form1024, Application for Recognition of Exemption with the Internal Revenue Service, in
April, 19XX and was granted tax-exempt status February 9, 19XX under section

501(c)(6). The organization was granted exemption from most federal income taxes. However,
donations made to a 501(c)(6) are not tax deductible as charitable contributions.

In the original Application 1024, the organization’s stated purpose is to provide a forum to
address issues affecting emergency medical technicians (EMT’s) and paramedics statewide.
Also, the organization purpose is to promote the professional and educational advancements of
career EMT’s and Paramedics.

The daily operations and control of the organization is the responsible of President, president. The
secretary, Secretary, is also activity in the organization.

A filed audit was conducted week of April 25, 20XX based on a referral and to determine if the
organization was in compliance with its exempt status.

During the audit agent reviewed the books and records available. Limited bank records were
available. Agent later issued two summonses for additional bank statements and cancelled
checks for the organization.

In reviewing the bank statements and cancelled checks for 20XX, it was revealed that
substantially all of the organization’s funds were through fundraising activities. The organization
hired a private, for-profit company, CO-1 to operate and solicit non-deductible contributions on
behalf of the organization. The organizations account at CO-2 reveals deposits of $ in 20XX. CO-
1 the for-profit business received approximately $ in fees in 20XX. EO received limited member
dues. The professional funder’s income is not used to supplement membership support.

The income reported on Form 990 for tax year ending December 31, 20XX.

Revenue Sources Amounts

Contributions and grants

Expenses

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number | Year/Period ended

ORG EIN December 31, 20XX

A review of the bank statements and cancelled checks reveals ORG funds were used to pay the
expense CO-3, a for-profit business owned by the president. An exempt organization funds
received from non-member income is for the benefit of member and cannot use to pay the
expenses of a private for-profit business. This is inurement to the president since he owns the
private entity.

Also, funds were paid to the president and secretary on regular basis as compensation for
services. The organization did not report the compensation and no employment taxes were filed
or paid.

President, president is the sole person authorized with access to the organizations bank
accounts. The table below shows checks written to cover expenses for CO-3, payments to
withdrawals, rent payments (CO-3 benefited from rent paid by ORG) the years at issue: See
Exhibit 1.

Payee Amount

Secretary

President

CO-3 (CO-3)

CO-4

Law:

Section 501(c)(6): “The regulation provides that in order for an organization to qualify for an
exemption, its activities must be ‘directed to the improvement of business conditions of one or more
lines of business as distinguished from the performance of particular services for individual persons,’
and it must not 'engage in a regular business of a kind ordinarily carried on for profit.’

IRC 501(c) (6) further allows exemption for professional organizations which is not organized for
profit and where no part of the net earnings inures to the benefit of any shareholder or individual.

A 501(c)(6) organization has a common business interest, which the organization promotes. The
organization is supported by membership.

EO members of the emergency medical technician (EMT’s) paramedics organized to improve
emergency medical care and high standards.

To meet the requirements of IRC 501(c) (6) and Reg. 1.501(c) (6)-1, an organization must meet the
following characteristics:

1. An association of persons having a common interest and its purpose to promote the common
   interest.
2. Must be a membership organization and have membership support.
3. Must not be organized for profit.
4. No part of its net earnings may inure to the benefit of any shareholder or individual.

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number | Year/Period ended

ORG EIN December 31, 20XX

5. The activities must be directed to the improvement of business conditions or one or more
   lines of business.

6. The primary activity is not to perform particular services for individual persons.

7. Its purpose is not to engage in a regular business activity ordinarily carried on
   by a for profit.

FAPAP fails to meet the characteristics described above. FAPAP is operated with any membership
support and no exempt activities are regularly carried on. The organization is not supported by
membership dues. FAPAP is primary supported from non-member income received from outside
professional fundraiser.

The income is exclusively used by the president and secretary. This constitutes inurement.
Inurement alone can disqualify an organization from exemption.

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. An organization will not be so regarded if
more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(a)-1(c) of the Income tax Regulations provides “Private shareholder"
or individual(s) in section 501 refer to persons having a personal and private interest in the
activities of the organization.”

Taxpayer’s Position
The taxpayer has 30 days to respond to the examination determination if the organization does not

agree with it.

Government's Position:

An organization exempt under Section 501(c) (6) of the Internal Revenue Code does not qualify
for exempt when inurement is shown to exist . The organization cannot use members and non-
member income for the purposes of paying the operating expenses

of a for-profit business owned and operated by the president. The expenditure of organization's
funds to individuals above the benefits received by general membership constitutes inurement
which is prohibited under IRC 501(c) (6).

The audit conducted week of April 25, 20XX, it did not appear that the any membership activities
were conducted. The facility is used to operate the president’s for profit business. Students
attended classes in CPR, first aid and other occupational safety courses put on by the CO-3 (CO-
3).

The organization does not hold monthly meetings with members on issues affecting the concerns
of emergency medical technicians and paramedics’. The officers conduct lectures and technical
training courses to general public interest in careers as EMT and paramedics. These classes are
not put on by the organization. The organization does not sponsor any educational training. Nor
does it conduct any social or recreational activities such as membership dinners, tournaments,
annual party and dance for the members.

Finally the organization receives a substantial portion of its income from non-member sources,
namely professional fundraiser. The income received from professional funders has no direct

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev, January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number | Year/Period ended

ORG EIN December 31, 20XX

relationship to the organization's activities. The income was primarily used for CO-3 expenses,
salaries and other expenses for officers.

If this proposed revocation becomes final, appropriate State officials will be advised of the action
in accordance with Internal Revenue Code Section 6104(c) and applicable regulations.

Conclusion:

It is the government's position that the organization failed to meet the requirements for an
organization exempt under section 501(c)(6).It was determined that inurement exist because the
organization’s income is used to pay the expenses for- profit entity owned and operated by the
president. Also, the expenditure of funds for personal expenses of the officers constitutes
inurnment.

As a result, we have determined that ORG no longer qualify for exemption under section 501(c)(6)
as a professional organization.

Therefore, we propose to revoke the organization’s exempt status under section 501(c)(6) of the
internal Revenue Code effective January 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service