Written determination 1245026: IRS revokes a private foundation's tax exemption

Plain-English summary

The IRS revoked a private foundation's exemption under section 501(c)(3), effective January 1 of the redacted year. The foundation did not operate primarily for charitable or other exempt purposes, and its financial transactions substantially furthered private interests. The IRS found that foundation funds were used for personal expenses of the trustees, including payments connected to a trustee's residence and other personal disbursements. The foundation remained subject to the private-foundation filing and excise-tax rules and was required to file Form 1041 and continue filing Form 990-PF.

Ruling snapshot

• Question: Did the private foundation continue to operate exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 170, 507, 509, 7428, and 6110; Treas. Reg. §§ 1.501(c)(3)-1(c)(1) and 1.501(c)(3)-1(d)(1)(ii)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

TE/GE: EO Examinations 501-03.00
625 Fulton Street, Room 503
Brooklyn, NY 11201

TAX EXEMPT AND
GOVERNMENT ENTITIES

Release Number: 201245026 Taxpayer Identification Number:
Release Date: 11/9/2012 Person to Contact:
[illegible] Identification Number:

ORG - Organization name

[illegible] Address [illegible] Contact Telephone Number:

CERTIFIED MAIL
ORG
ADDRESS

Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated October 18, 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):

You are not operating exclusively for any charitable purpose, educational purpose, or
any other exempt purpose. Our examination reveals that you are not engaged primarily
in activities which accomplish charitable, educational or other exempt purposes as
required by Treas. Reg. 1.501(c)(3)-1(c)(1). Your activities, including your financial
transactions, more than insubstantially furthered non-exempt purposes. Moreover, you
failed to establish that you were not operated for the benefit of private interest of your
trustees, as required for continued recognition of exemption pursuant to Treas. Reg.
1.501(c)(3)-1(d)(1)(ii). Your income inured to the benefit of private shareholders and
individuals.

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 1041. These returns should be
filed with the appropriate Service Center for the tax year ended December 31, 20XX
and for all tax years thereafter in accordance with the instructions of the return.

Pursuant to section 509(b) of the Code, your private foundation status continues unless
your status as such is terminated under section 507 of the Code. Therefore, in
addition to filing Form 1041, you are required to continue filing Form 990-PF and you
are still subject to excise taxes under Chapter 42 of the Code until such time as you
terminate your private foundation status under section 507 of the Code.

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
these courts at the following addresses:

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

Enclosure:
Publication 892

Letter 3607(04-2002)
Catalog Number: 34198J

Internal Revenue Service Department of the Treasury
Internal Revenue Service
TE/GE Exemption Organizations Examination
915 Second Avenue, M/S 540(TAI)
Seattle, WA 98174

ORG
ADDRESS Taxpayer Identification Number:

Form:
Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

We propose to revoke our recognition of your exempt status as an organization described in
section 501(c)(3) of the Internal Revenue Code (the Code). We enclose our report of
examination explaining why we are proposing this action.

If you accept our proposal, please sign and return the enclosed Form 6018, Consent to
Proposed Action - Section 7428, unless you have already provided us a signed Form 6018. We
will issue a final revocation letter determining you are not an organization described in section
501(c)(3). After the issuance of the final revocation letter we will publish an announcement that
you have been deleted from the cumulative list of organizations contributions to which are
deductible under section 170 of the Code.

If you do not respond to this proposal, we will similarly issue a final revocation letter. Failing to
respond to this proposal may adversely impact your legal standing to seek a declaratory
judgment because you may be deemed to have failed to exhaust administrative remedies.

If you do not agree with our proposed revocation and wish to protest our proposed revocation to
the Appeals Office of the Internal Revenue Service, then 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. This written request is called a protest. For your protest to be valid it needs to contain
certain specific information which generally includes a statement of the facts, the applicable law,
and arguments in support of your position. For the specific information needed for a valid
protest, please refer to page 6 of the enclosed Publication 3498, The Examination Process, and
page 1 of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.
If you do submit a valid protest, then 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 and Publication 892 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. Please note that Fast

Track Mediation Services referred to in Publication 3498, generally do not apply after issuance
of this letter. You may also request that we refer this matter for Technical Advice as explained in
Publication 892 and an annual revenue procedure. Please contact the individual identified on
the first page of this letter if you are considering requesting Technical Advice. If we issue a
determination letter to you based on a Technical Advice Memorandum issued by the EO
Rulings and Agreements function, then no further administrative appeal will be available to you
within the IRS on the matter.

If you receive a final revocation letter, you will be required to file Federal income tax returns for
the tax period(s) shown above as well as for subsequent years.

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,

Cathy Tai
Revenue Agent, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 20XX12

LEGEND

ORG - Organization name XX - Date Class - class RA-1 - RA-1 [illegible] FOUNDER CO-1 through CO-29 - [illegible]

Issues:

Whether the section 501(c)(3) exempt status of ORG, a private non-operating foundation, be revoked
effective January 1, 20XX.

Facts:

ORG (ORG) was recognized as a private non-operating foundation, exempt under IRC section 501(c)(3),
on October 18, 20XX.

Per their Form 1023, Application for Recognition of Exemption, which was filed on September 17, 20XX,
the Foundation activities would exclusively consist of making grants to other 501(c)(3) organizations
classified as public charities for religious, charitable, educational, scientific and literary purposes.

The Foundation’s Form 1023 also states that the Foundation would develop operating procedures to
ensure that it adheres to the rules of IRC Section 4941, 4942, 4943, 4944, and 4945 as applicable to
private non-operating foundations.

The Form 1023 also states that the Foundation will be funded primarily from donations by its founders,
FOUNDER-1 and FOUNDER-2.

Funding

The Form 990-PF filed by the Foundation provided the contributions received by the Foundation as follows:

Contributions 20XX
Trustee Contributions
CO-1
Other 15 individuals and private foundations
Total

Expenditures

The following figures represent the Foundation’s expenditure activity for year ending December 31, 20XX.

Expenses Amount

Accounting fees’
Other prof fees”

' Accounting fees were paid to CO-2 for doing the Foundation’s bookkeeping. The owner of CO-2 is FOUNDER-1,
the trustee of the Foundation.
? The Other Professional fee was paid to RA-1 who did some work in the residence of the trustees.

Form 886-A (1-1994) Catalog Number 20810W — Page_1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

Schedule number or exhibit

EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 20XX12
Expenses Amount

Travel, conferences, and meetings

Printing and publications

Other expenses

Business Expenses: Business Registration

Business Expenses: Educational Training

Operations Bank Service Charges

Operations Postage Mailing Service

Operations: Supplies
Operations: Telephone, Telecommunication

Operations: Utilities
Other Types of Expenses: Membership

Contributions, gifts, grants paid

CO-3
CO-4
CO-5
CO-6

Total Expenses

During the course of examination, it was found that the CO-6 expense was the mortgage payments for the

trustee’s personal residence.

In addition to the CO-6 expense, a total of $ expenditures were identified as the expenditures made by the
Foundation and used by the trustee for his personal purposes. The $ expenditures that were identified are

as follows:

Date Name Amount
01/17/XX CO-7
01/17/XX CO-8
01/30/XX CO-9
02/14/XX CO-10
02/19/XX CO-8
02/21/XX CO-8
02/26/XX CO-9

3 Payments were made for the Foundation seminar held by CO-12, online course - CLASS, class for FOUNDER-1's
son, etc.

• The Membership fees were paid to CO-13, CO-14, and CO-15. Those businesses are operated as direct selling
  businesses.

Form 886-A (1-1994)

Catalog Number 20810W Page 2 publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 20XX12
Date Name Amount

03/17/XX CO-11
03/31/XX CO-7

03/27/XX CO-16
04/16/XX CO-17
04/18/XX CO-7

04/21/XX CO-18
05/25/XX CO-19
05/30/XX CO-20
05/29/XX CO-21
05/30/XX CO-22
05/30/XX CO-23
05/30/XX CO-24
05/30/XX CO-25
05/31/XX CO-26
06/03/XX CO-27
06/03/XX CO-28
07/31/XX CO-29
08/22/XX CO-9

09/11/XX CO-8

Law:

IRC Section 501(c)(3) provides tax exemption for corporation and foundations that are organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational
purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states 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.

Treasury Regulation Section 1.501(c)(3)-1(c)(1) states that an organization will be regarded as “operated
exclusively” for one or more exempt purposes only if it engages primarily in activities which 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.

Form 886-A (1-1994) Catalog Number 20810W Page_3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN 20XX12

Treasury Regulation Section 1.501(c)(3)-1(c)(2) states that an organization is not operated exclusively for
one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private
shareholders or individuals.

Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated
exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a
public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for
an organization to establish 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.

Government’s Position:

The organization has failed to meet the operational test described in Treasury Regulation Section
1.501(c)(3)-1(c)(1).

The CO-6 of $ and a total of $ expenditures were used for the trustee personal purposes.

The total of Foundation’s funds paid on behalf of the trustees was $ which were % of the total expenditures
for the year 20XX.

A substantial percentage of the Foundation’s total disbursements for the year 20XX were clearly personal
in nature. These personal disbursements included payment of expenses and cash disbursements for the
benefit of the trustees.

As stated in Treasury Regulation Section 1.501(c)(3)-1(c)(1), “an organization will be regarded as operated
exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one
or more of such exempt purposes specified in Section 501(c)(3).” Since a substantial of the Foundation’s
disbursements were for personal purposes, the Foundation is not engaging primarily in activities that
accomplish exempt purposes under IRC Section 501(c)(3).

The Foundation is also being operated for private rather than public interests since a substantial of its total
expenditures were personal in nature. As stated in Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii), an
organization is not operated for exempt purposes it is being operated for private interests.

Based on the information presented, it has been determined that the Foundation’s exemption under IRC
Section 501(c)(3) should be revoked.

Taxpayer’s Position:

The Foundation agreed to the revocation proposed by IRS. The effective date of the revocation is January
1, 20XX.

The trustee, FOUNDER-2, signed the Form 6018 Consent to Proposed Action — Section 7428 on February
2, 20XX.

Conclusion:

Form 886-A (1-1994) Catalog Number 20810W — Page_4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 20XX12

The Foundation did not meet the operational test under IRC Section 501(c)(3) in the year under review.
Therefore, it was concluded that this Foundation was not organized or ever intended to be operated
exclusively for exempt purposes described in IRC Section 501(c)(3).

As a result, the Foundation's exempt status is revoked effective January 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W — Page_5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service