IRS reclassifies a museum from section 509(a)(2) to section 509(a)(1)

Plain-English summary

The IRS changed a museum’s foundation classification from an organization described under § 509(a)(2) to one described under §§ 509(a)(1) and 170(b)(1)(A)(vi), effective January 1 of the redacted year. The museum received support from gifts, grants, and contributions that exceeded one-third of its total support, even though much of its income came from admissions, merchandise sales, and services. The IRS concluded that the museum qualified as a publicly supported organization under the section 509(a)(1) test. Its section 501(c)(3) tax exemption was not affected.

Ruling snapshot

• Question: Should the museum’s foundation classification change from section 509(a)(2) to section 509(a)(1)?
• Outcome: Foundation classification modified to section 509(a)(1); section 501(c)(3) exemption unchanged.
• Key authorities: IRC §§ 501(c)(3), 170(b)(1)(A)(vi), 509(a)(1), 509(a)(2), and 7428; Treas. Reg. §§ 1.170A-9(f)(7)(ii) and 1-509(a)-6.

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES DALLAS, TEXAS 75242

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO EXAMINATIONS
1100 COMMERCE ST. MAIL Stop 4920 DAL 501.09-02

DIVISION

Number: 201330039
Release Date: 7/26/2013

DATE: February 20, 2013
Taxpayer Identification Number:

LEGEND Person to Contact:
ORG - Organization name Employee Identification Number:
XX - Date Address - address Contact Numbers:
(Phone)
(Fax)
ORG
ADDRESS

CERTIFIED MAIL
Dear

This is a final determination regarding your foundation classification. This letter modifies our
letter to you dated July 11, 19XX, in which we determined that you were an organization
described in sections 509(a)(2) of the Internal Revenue Code (Code).

Based on your sources of support, we have determined that you are not a private foundation
within the meaning of section 509(a) of the Code because you are an organization of the type
described in sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code, effective January 1, 20XX.
Your tax exempt status under section 501(c)(3) of the Internal Revenue Code is not affected.

The modification of your foundation status was made for the following reason(s):

You are an organization that normally receives a substantial part of its support from a
governmental unit or from the public. While the majority of your income is from admission
receipts, merchandise sales, and the provision of services, your sources of public support from
gifts, grants, and contributions were in excess of the one third of total support requirement, as
computed under section 170(b)(1)(A)(vi) of the Code.

Grantors and contributors may rely on this determination, unless the Internal Revenue Service
publishes a notice to the contrary. Because this letter could help resolve any questions about
your private foundation status, please keep it with your permanent records.

Processing of 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, you may file an action for declaratory judgment
under the provisions of section 7428 of the Code in one of the following three venues: United
States Tax Court, the United States Court of Federal Claims, or the United States District Court
for the District of Columbia. A petition or complaint in one of these three courts must be filed
before the 91st day after the date this determination was mailed to you if you wish to seek review
of our determination. Please contact the clerk of the respective court for rules and the
appropriate forms regarding filing petitions for declaratory judgment by referring to the enclosed
Publication 892. Please note that the United States Tax Court is the only one of these courts
where a declaratory judgment action can be pursued without the services of a lawyer. You may
write to the 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 yours,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues
Form 6018, Consent to Proposed Action - Section 7428

Return envelope

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division

Exempt Organizations: Examinations

1100 Commerce Street

Dallas, TX 75242

Date: April 25, 2012 Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
Person to Contact/ID Number:

ORG Contact Numbers:
ADDRESS Telephone:
Fax:

Certified Mail — Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we propose modifying
your foundation status under section 509(a) of the Internal Revenue Code (Code).

Your exempt status under section 501(c)(3) of the Code is still in effect.

If you accept our findings, please sign and return one copy of Form 6018. We will issue a final
letter modifying your foundation status.

If you do not agree with our proposed modification of your foundation status, you may provide
additional information that you would like to have considered, or you may submit a written
appeal. The enclosed Publication 3498, The Examination Process, and Publication 892,
Exempt Organization 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.

If you request a conference with Appeals, you must submit a written protest within 30 days from
the date of this letter. 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. 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.

If we do not hear from you within 30 days from the date of this letter, we will process your case
based on the recommendations shown in the report of examination. If you do not protest this
proposed determination within 30 days from the date of this letter, the IRS will consider it to be a
failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code
provides, in part: “A declaratory judgment or decree under this section shall not be issued in any
proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted its
administrative remedies within the Internal Revenue Service.” We will then issue a final letter.

Letter 3620 (Rev 11-2003)
Catalog Number 34811R

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,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 3498
Publication 892
Report of Examination
Form 6018 (2)

2 Letter 3620 (Rev 11-2003)
Catalog Number 34811R

Schedule number or exhibit

Form 886-A
(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
ISSUES

Is the ORG (the organization) properly classified with a private foundation status of 509(a)(2) or
should the classification be changed to 509(a)(1)?

FACTS

The organization is a museum, currently classified as a 509(a)(2) organization.

Income is received in the form of grants and contributions, exempt function income, membership
dues and a small amount of investment income. Exempt function income includes admission
fees, guided tours, viewing parties, educational workshops and exhibitions. Membership dues are
considered exempt function income as members receive benefits in the form of general and
special event admissions, program and workshop discounts and guest passes.

Income for the year ending December 31, 20XX included:

• Gifts, Grants and Contributions $
• Exempt Function Income $
• Investment Income $
• Other Income $

Total income for the years 20XX through 20XX included:

• Gifts, Grants and Contributions $
• Exempt Function Income $
• Investment Income $
• Other Income $

LAW
Organizations exempt under IRC Section 501(c)(3) are classified as either public charities or
private foundations. Unless an organization can establish that it qualifies as a public charity
described in Section 509(a)(1), (2) or (3), it is classified as a private foundation.

In order to be classified as a public charity as described in Section 509(a)(1) an organization must
receive a substantial part of its income in the form of contributions from publicly supported
organizations, from a governmental unit or from the general public.

To qualify as "other than a private foundation" under section 509(a)(1) as a "publicly supported"
organization, an organization must be able to show that "normally" it EITHER receives at least
one-third of its "financial support" from a combination of the "general public" and public charities
and government, OR that it receives at least 10% from these sources and meets various other
tests (e.g., has a broadly representative board of directors, and actively looks for money). In
order to be classified as a public charity as described in Sections 509(a)(2), an organization must
receive more than one-third of its support in each taxable year from any combination of gifts,

Form 886-A (1-1994) Catalog Number 20810W Page 1 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 December 31,
20XX

grants, contributions, or membership and gross receipts from admissions, sales of merchandise,
performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or
business.

To qualify as "other than a private foundation" under section 509(a)(2) as a "publicly supported"
organization, an organization must pass the "1/3" and "not more than 1/3" tests. It doesn't get a
10% exception.

A 509(a)(2) organization has a 1/3 public support test similar to that of a 509(a)(1) organization but
with some major differences. It DOES include in its numerator not only gifts and grants, but
receipts from exempt activities. The organization must also pass another test: it is prohibited from
having more than 1/3 of its income come from a combination of investment income and net
unrelated business income.

According to Treasury Regulation 1.170A-9(f)(7)(ii), an organization receiving income from exempt
function activity is not precluded from meeting the public support requirements of 509(a)(1) and
170(b)(1)(A)(vi) unless “almost all” (generally 95% or more) of its support is in the form of exempt
function income.

Treasury Regulation 1-509(a)-6 states that if an organization is described in section 509(a)(1) and
also in another paragraph of section 509(a), it will be treated as described in section 509(a)(1).

DISCUSSION OF LAW

Taxpayer’s Position

The organization has filed Schedule A of Form 990 for the years ending December 31, 20XX,
20XX and 20XX indicating its reason for not being a private foundation is because it is an
organization that normally receives a substantial part of its support from a governmental unit or
from the general public as described in Section 170(b)(1)(A)(vi). It is apparent that the organization
agrees that is should be properly classified as an organization described in 509(a)(1).

Government's Position

The organization passes the public support test for a 509(a)(1) organization as well as both the
public support and gross investment tests for a 509(a)(2) organization. The organization receives
approximately only % — % of its total support in the form of exempt function. Therefore, it is the
government's position that the organization qualifies to be classified under IRC 509(a)(1) and
170(b)(1)(A)(vi).

CONCLUSION
The ORG will be reclassified as an organization described in IRC Section 509(a)(1).

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service