IRS determination 1311028: IRS finalizes denial of exemption for an organization with insufficiently described operations

Plain-English summary

The IRS finalized its adverse determination that an organization did not qualify for exemption under IRC § 501(c)(3). The IRS said the organization had not described its operations in enough detail to establish exclusive exempt purposes or to show that it would not serve private interests. The organization therefore did not qualify for exemption and could not offer donors a deduction under § 170. The letter also required federal income tax returns to be filed.

Ruling snapshot

• Question: What did the IRS determine under the cited Code provisions?
• Outcome: revocation.
• Key authorities: IRC § 501; IRC § 503; IRC § 170; IRC § 7428

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201311028 Contact Person:

Release Date: 3/15/2013
Identification Number:

Date: December 21, 2012
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
Uniform issue List: 501.00-00; 501.33-00; 503.00-00

Dear

This is our final determination that you do not qualify for exemption from Federal income tax
under Internal Revenue Code (“Code”) § 501(a) as an organization described in Code
§ 501(c)(3).

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

You have not described your operations in sufficient detail to permit a conclusion that you
clearly meet the requirements of § 501(c)(3). See Rev. Proc. 2012-9, 2012-2 I.R.B. 261.
Therefore, you have failed to establish that you will operate exclusively for exempt purposes as
required by § 501(c)(3). Furthermore, you have not established that you will not serve private
interests:

Because you do not qualify for exemption as an organization described in Code § 501(c)(3),
donors may not deduct contributions to you under Code § 170. 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.

If you decide to contest this determination under the declaratory judgment provisions of Code
§ 7428, you must initiate a suit in the United States Tax Court, the United States Court of
Federal Claims, or the District Court of the United States for the District of Columbia before the
91st day after the date that we mailed this letter to you. Contact the clerk of the appropriate
court for rules for initiating suits for declaratory judgment. Filing a declaratory judgment suit
under Code § 7428 does not stay the requirement to file returns and pay taxes.

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

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show our proposed deletions. If you disagree with our proposed deletions, you should 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,

Holly O. Paz
Director, Rulings and Agreements

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: March 5, 2012 Contact Person:

Uniform Issue List: Identification Number:
501.00-00
501.33-00 Contact Number:
503.00-00

FAX Number:

Employer Identification Number:

Technology
Equipment
For-Profit
For-profit2

For-profit3
For-Profit4

For-Profit5
For-Profit6
For-Profit7
For-Profit8
For-Profit9
For-profit10
Family

Dear

We have considered your application for recognition of exemption from Federal income tax
under § 501(a) of the Internal Revenue Code (“Code”). Based on the information provided, we
have concluded that you do not qualify for exemption under § 501(c)(3). The basis for our
conclusion is set forth below.

Facts:

You, Taxpayer, are a not-for-profit corporation organized under the laws of State. You filed a
Form 1023 seeking exemption under § 501(c)(3). Your Articles of Incorporation state that you
were formed to “support the development of practical laser Technology.” You will “promote the
replacement of conventional Technology with laser Technology for use in Equipment.”

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According to your narrative description, you were formed “exclusively for charitable and
educational purposes. Specifically, [you] have been formed to (a) educate the public on
subjects useful to the individual and beneficial to the community, and (b) develop advanced
technology for the benefit of the environment.” You state that you have one program in
furtherance of these purposes, which is to promote the development of laser Technology for use
in Equipment. In your Date1 response you state that your purpose is “educating and promoting
low emission fuel efficient technologies for use in Equipment.”

Your initial education efforts consist of review and posting on your website “over 36 technical
papers related to the subject [of laser Technology].” You have also provided that most of your
education would occur online and via word of mouth. Additional examples of your educational
program include “presentations on laser Technology and other fuel efficient technologies to
various groups and individuals.” You also plan to “provide demonstrations of these technologies
to local and national audiences in the future.” For example, you have plans for a mobile exhibit
that will feature a street legal electric golf cart that is outfitted with Equipment from For-Profit.

You submitted a white paper on laser Technology. This paper provides information about For-
Profit1 and For-Profit2. The paper touts the accomplishments of For-Profiti, stating that “For-
Profit1’s . . . technologies provides the following benefits: reduces fuel consumption by greater
than 40% (any fuel), burns virtually any fuel (e.g. gasoline, diesel, kerosene, military fuels),
reduces engine weight. .. , reduces emissions . . . , increases vehicle/aircraft power to weight
ratio, and reduces manufacturing costs.” The paper also states that For-profit2 has “developed
core technology for a new generation of high peak power eye-safe micro-lasers.” Finally, the
paper states that “[w]hen you combine For-Profit1’s engine and For-Profit2’s Technology you
get a light weight, clean burning, super high efficiency multi-fuel” Equipment.

You also submitted scientific papers that were authored by your Founder. One of these papers
was submitted twice. The first copy submitted lists For-Profit3 following the name of the author.
However the second copy lists your name. In all other regards, the papers are the same. Some
of the other papers you submitted list the names of various for-profit entities. This includes a
“R&D proposal for For-profit1 written by [you].” Another paper states that you “will contract
research and development of Technology traceable to production designs that are practical and
cost effective in terms of Equipment applications.”

You do not conduct laboratory research. You state that you perform R&D consulting and
scientific literature research at no charge to “those organizations involved in advancing the
state-of-the-art of Equipment technology.” You state that you will make distributions to For-
Profit4, For-ProfitS, For-Profit6, For-Profit7, For-Profit8, and For-Profit9. You do not intend to
make claims on any patents, copyrights, formulas or processes that result from any of your R&D
grants.

You also indicated that you will select a research and development laboratory to perform laser
Technology development work. In selecting organizations, you state that you will review the
following: “technical prowess and history of technical achievement,” “R&D management
capabilities and past accomplishments,” “[p]otential high-tech manufacturing capabilities,” and
“(mJarketing and sales potential in terms of expertise and channels of distribution.” You
submitted example contracts for supplies and services that you said is an example R&D
contract. This contract is for the purchase of a specific quantity of laser Technology
manufactured over a period of time and lists you as the hypothetical buyer. According to your
response of Date1, you will not provide direct contracting services. Rather you will “facilitate

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R&D contracting between various government and private organizations that are strategically
positioned to help advance the state of the art in Equipment technology.”

In addition to providing grants to for-profit entities, you have other relationships with some of
these organizations. You state that you “helped put the “President of For-profit1 .. . in touch
with For-profiti10.... .” As a result of this contact, For-Profit10 will produce items utilizing
technology from For-profit1. Your website provides links, which you claim are educational, to
the websites of several for-profit entities. These entities design and manufacture items which in
some way may be related to the technology that you promote. Your website also reiterates the
benefits of For-profit1’s Equipment technologies. Finally, three of your six directors are
employees of For-Profit3, this includes Founder who is also a member of Family. You describe
For-proft3 as a “old Family business that has no business interest in [you] and has restricted its
relation to [you] as a R&D lab resources and as a potential financial donor to [you].”

Law:

Section 501(c)(3) of the Code provides that an organization may be exempted from tax if it is
organized and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or to foster national or international amateur sports
competition, or for the prevention of cruelty to children or animals and “no part of the net
earnings of which inures to the benefit of any private shareholder or individual ....”

Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt under §
501(c)(3), an organization must be both organized and operated exclusively for one or more of
the exempt purposes specified in that section.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest. To meet the requirement of this subsection, the burden of proof is on the
organization to show 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.

Section 1.501(c)(3)-1(d)(2) provides that the term “charitable” is used in its generally accepted
legal sense and includes the relief of the poor and distressed or underprivileged; advancement
of religion; advancement of education or science; erection or maintenance of buildings,
monuments, or works; lessening the burdens of government; and promotion of social welfare by
organizations designed to accomplish any of the above purposes, or to lessen neighborhood
tensions, to eliminate prejudice and discrimination, to defend human and civil rights secured by
law, or to combat community deterioration and juvenile delinquency.

Section 1.501(c)(3)-1(d)(3) provides that the term “educational” relates to the instruction or
training of the individual for the purpose of improving or developing his capabilities, or the
instruction of the public on subject useful to the individual and beneficial to the community. The
regulation also provides four examples of educational organizations. Example 1 states that an
organization, such as a primary or secondary school, a college, or a professional or trade
school, which has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled
body of students in attendance at a place where the educational activities are regularly carried
on is educational if it otherwise meets the requirements of § 501(c). Example 2 provides that an
organization whose activities consist of presenting public discussion groups, forums, panels,

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lectures, or other similar programs is educational if it otherwise meets the requirements of the §
501(c). Such programs may be on radio or television. Example 3 states that an organization
which presents a course of instruction by means of correspondence or through the utilization of
television or radio is educational if it otherwise meets the requirements of § 501(c). Example 4
provides that museums, zoos, planetariums, symphony orchestras, and other similar
organizations are educational if they otherwise meet the requirements of § 501(c).

Section 1.501(c)(3)-1(d)(5) provides that the term “scientific” includes the carrying on of
scientific research in the public interest. Scientific research will be regarded as carried on in the
public interest if the results of such research (including any patents, copyrights, processes, or
formulae resulting from such research) are made available to the public on a nondiscriminatory
basis: or if the research is performed for the United States, or any of its agencies or
instrumentalities, of for a State or political subdivision thereof, or if such research is directed
towards benefiting the public. Examples of research that is regarded as carried on in the public
interest includes scientific research carried on for the purpose of aiding in the scientific
education of college or university students; scientific research carried on for the purpose of
obtaining scientific information which is published; scientific research carried on for the purpose
of discovering a cure for a disease; or scientific research carried on for the purpose of aiding a
community or geographical area by attracting new industry to the community or area or by
encouraging the development of, or retention of, an industry in the community or area.
Scientific research does not include activities of a type ordinarily carried on as incident to
commercial or industrial operations, as, for example, the ordinary testing or inspection of
materials or products or the designing or construction of equipment, buildings, etc.

Rev. Rul. 65-1, 1965-1 C.B. 226, describes the operations of an organization formed to foster
the development and design of agricultural machinery, including the development of new labor
saving methods and ideas. The ruling held that the organization’s primary activity of aiding in
the development of the farm machinery by the disbursement of grants did not constitute
scientific research because the development of machinery was equivalent to the “designing or
construction of equipment’ that is incident to a commercial operation. The ruling further
determined that the development of a new machine, the patents of which may be licensed on a
restrictive basis to selected manufacturers, was directed toward benefiting those particular
manufacturers and any benefit to the public was considered indirect.

In Rev. Rul. 68-14, 1968-1 C.B. 243, an organization that planted trees in public areas and
assisting municipal authorities in their programs to plant trees and keep the city clean was
lessening the burdens of government. The organization’s informational program directed to the
public, architects, and builders was deemed educational. And, the overall effect of the
organization’s activities was to combat community deterioration. Accordingly, the organization
was exempt from tax under § 501(c)(3).

In Rev. Rul. 72-560, 1972-2 C.B. 248, an organization that provided information to the public
concerning environmental problems caused by solid waste materials and the advantages of
recycling such materials, was found to be instructing the public on subjects useful to the
individual and beneficial to the community. The recycling of the waste materials is an essential
element in the organization's efforts to combat environmental deterioration, since it prevents the
pollution of the environment caused by the usual disposition of these materials.

in Rev. Rul. 76-204, 1976-1 C.B. 152, an organization was formed for the purpose of preserving
the natural environment. The organization accomplished this purpose by acquiring and

maintaining ecologically significant and undeveloped land such as swamps, marshes, forests,
wilderness tracts, and other natural areas. The organization worked closely with Federal, state,
and local government agencies, and private organizations that were also concerned with
environmental conservation. The ruling reasoned that by preserving “ecologically significant
undeveloped land, the organization is enhancing the accomplishment of express national policy
of conserving the nation's unique natural resources.” Thus, the ruling concluded that the
“organization is advancing education and science and is benefiting the public in a manner that
the law regards as charitable.”

An organization's net earnings may inure to the benefit of private individuals in ways other than
by the actual distribution of dividends or payment of excessive salaries. Founding Church of
Scientology v. United States, 188 Ct. Cl. 490 (1969), cert. denied, 397 U.S. 1009 (1970).

Analysis:

Organizations described in § 501(c)(3) must be organized and operated exclusively for one or
more exempt purposes such as charitable, educational, or scientific. § 1.501(c)(3)-1(a)(1). You
state that you were formed for charitable and educational purposes. However, your activities
are neither educational nor charitable. Additionally, your activities may provide prohibited
private benefit to for-profit organizations. Therefore you do not meet the requirements for
recognition of exemption under § 501(c)(3).

You first state that you are organized for charitable purposes, namely preservation of the
environment. In the code and regulations, charitable is used in its generally acceptable legal
sense. § 1.501(c)(3)-1(d)(2). Organizations that promote or protect the environment may be
considered charitable and recognized as exempt. See Rev. Rul. 68-14, supra (planting trees to
combat community deterioration); Rev. Rul. 72-560, supra (providing educational information on
solid waste recycling); Rev. Rul. 76-204, supra (acquiring and preserving ecologically significant
land). However, your activities are significantly different from those organizations described in
the revenue rulings.

The organizations described in each of the above revenue rulings provided a direct
environmental benefit to the public as a result of its activities. However, any potential
environmental benefits from your activities are indirect and tangential. Unlike the organization in
Rev. Rul. 76-204, supra, you do not engage in any activities that directly generate
environmental benefits. Rather you provide R&D consulting to organizations engaged in
developing laser Technology, you “facilitate R&D contracting between various government and
private organizations... .”, and you present and demonstrate technology developed by for-
profit organizations. These activities do not, in and of themselves, preserve or protect the
environment in a manner that is sufficient for § 501(c)(3) purposes.

You also state that your activities are educational. Section 1.501(c)(3)-1(d)(3) defines
educational as referring to the instruction or training of an individual for the purposes of
improving or developing the individual's capabilities or as the instruction of the public on
subjects that are useful and beneficial to the community. Examples of educational
organizations under the regulations include colleges and primary schools, public discussion
groups that have panels, correspondence schools, and museums, zoos, and similar
organizations. You do not meet the definitions of an educational organization and are not
comparable to any of the examples contained in the regulations.

You stated that most of your education would occur online and via word of mouth. You further
State that some of your education consists of posting “over 36 technical papers related to the
subject [of laser Technology]” on your website.” As examples of these technical papers, you
submitted a white paper on laser Technology which promotes two for-profit organizations. You
also submitted scientific papers that were authored by your Founder. One of these papers was
submitted twice with the first copy listing For-Profit3 and the second copy listing your name.
Some of the other papers you submitted list the names of various for-profit entities. This
includes a “R&D proposal for For-profit1 written by [you].” Another paper states that you “will
contract research and development of Technology traceable to production designs that are
practical and cost effective in terms of Equipment applications.”

Additional examples of your educational program include “presentations on laser Technology
and other fuel efficient technologies to various groups and individuals” and the potential for a
mobile exhibit that is outfitted with Equipment from For-Profit1. None of the materials submitted
by you is sufficient to constitute an educational purpose within the meaning of the Code and
regulations. At the most, these materials serve to benefit the informational needs of a very
narrow group of individuals and for-profit businesses, whose long-term financial interests may
be enhanced by supporting the development of Technology.

It should also be noted that while you state you are performing research and development work,
you also do not qualify for exemption as a scientific organization. According to § 1.501(c)(3)-
1(d)(5), the term “scientific” includes the carrying on of scientific research in the public interest.
Examples of research that is regarded as carried on in the public interest includes scientific
research carried on for the purpose of aiding in the scientific education of college or university
students; scientific research carried on for the purpose of obtaining scientific information which
is published; scientific research carried on for the purpose of discovering a cure for a disease; or
scientific research carried on for the purpose of aiding a community or geographical area by
attracting new industry to the community or area or by encouraging the development of, or
retention of, an industry in the community or area. Id. Scientific research does not include
activities of a type ordinarily carried on as incident to commercial or industrial operations, as, for
example, the ordinary testing or inspection of materials or products or the designing or
construction of equipment, buildings, etc. Id.

You do not conduct scientific research in the public interest. Rather your activities are
coordinating and promoting the development of laser Technology by for-profit organizations.
You do not conduct laboratory research. You state that you perform R&D consulting and
scientific literature research at no charge to “those organizations involved in advancing the
state-of-the-art of Equipment technology.” You indicated that you will select a research and
development laboratory to perform laser Technology development work and you submitted
sample R&D contracts.

In Rev. Rul. 65-1, 1965-1 C.B. 226, an organization that was formed to foster the development
and design of agricultural machinery, including the development of new labor saving methods
and ideas was determined to be not exempt. The ruling held that the organization's primary
activity of aiding in the development of the farm machinery by the disbursement of grants did not
constitute scientific research because the development of machinery was equivalent to the
“designing or construction of equipment” that is incident to a commercial operation. Similarly,
your activity of aiding in the development of laser Technology and its application to Equipment is
the equivalent of “’designing or construction of equipment’ that is incident to a commercial
operation.”

Finally, an organization will also not be organized and operated exclusively for exempt purposes
if it is 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. § 1.501(c)(3)-1(d)(1)(ii). Inurement of net earnings may occur through a wide
range of means, and is not limited to the actual distribution of dividends or payment of excessive
salaries. Founding Church of Scientology v. United States, 188 Ct. Cl. 490 (Ct. Cl. 1969). You
are operated primarily to benefit private parties. Based on the facts you provided, you operate
primarily to benefit private interests in various ways, contrary to the requirement set forth in §
1.501(c)(3)-1(d)(1)(ii).

Various for-profit enterprises benefit substantially or stand to benefit substantially from your
operations. Your website specifically praises the work of For-Profit1 and promotes its
technological developments. You have facilitated relationships between various for-profits that
have led to commercial contracts between those organizations. Three of your directors are
employees of For-Profit3. And your Founder is a member of Family, which created For-Profit3.
These relationships all present questions of potential private benefit. The burden is on you to
demonstrate that you are not organized or operated for the benefit of private interests. §
1.501(c)(3)-1(d)(1)(ii). You have not met this burden. Therefore you do not qualify for
recognition as an organization exempt under § 501(c)(3).

Conclusion:

Based on the information provided in your Form 1023 and supporting documentation, we
conclude that you are not operated exclusively for purposes described in § 501(c)(3) of the
Internal Revenue Code.

Accordingly, you do not qualify for exemption as an organization described in § 501(c)(3) of the
Internal Revenue Code and you must file federal income tax returns.

Contributions to you are not deductible under section 170 of the Internal Revenue Code.

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, | declare that | 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

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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 file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

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:

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,

Holly Paz
Director, Exempt Organizations
Rulings & Agreements