IRS revokes a family association's exemption for serving private interests

Plain-English summary

The IRS revoked a family association's recognition as a § 501(c)(3) organization. The association planned to manage and protect family land, sell timber, hold family reunions, and provide scholarships and other benefits to family members and their children. The IRS concluded that these activities served private interests and did not operate exclusively for public charitable or educational purposes, and that contributions were not deductible under § 170. The final letter required the organization to file Form 1120 returns, and it stated that the organization had waived its right to contest the determination under § 7428.

Ruling snapshot

• Question: Did the family association satisfy the organizational and operational tests for exemption under IRC § 501(c)(3)?
• Outcome: Revocation, the organization was found ineligible for exemption.
• Key authorities: IRC §§ 501(c)(3), 170, 7428, and 6110(k)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), 1.501(c)(3)-1(c), and 1.501(c)(3)-1(d); Rev. Rul. 67-367, Rev. Rul. 69-175, and Rev. Rul. 80-302.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office _
1000 Liberty Avenue

Reoms81é6

Pittsburgh, PA15222

Release Number: 201331007 Taxpayer Identification
Release Date: 8/2/2013 Number:

Date: May 10, 2013
Person to Contact:
dee coe ERK
wee Tel:
“eee . Fax:

kkeKK

kakk

KkKK

Tax Period(s) Ended:

Certified Mail UIL Numbers: 0501.03-30,
. 501.33-00

Dear KKKK.

We considered your appeal of the adverse action proposed by the Director, Exempt |
Organizations, Rulings and Agreements. This is our final determination that you do. not
qualify for exemption from Federal income tax under Internal Revenue Code (the |
“Code”) section 501(a) as an organization described in section 501(c)(3) of the Code. f

Our adverse determination was made for the following reasons:.

In order to be exempt as an organization described in section 501(c)(3) of
the Code, an organization must be operated exclusively for one or more of
the purposes specified in such section. You have not established that you
are operated exclusively for exempt purposes described in section
501(c)(3) of the Code. .

Your organization’s activities are not conducted in a charitable manner and serve the ©
private interests of your members. Your members are the substantial beneficiaries of
your funds because your activities relieve them from the economic burden of ****

and KkKK

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

You are required to file Federal income tax returns on Forms 1120 for the tax period
stated in the heading of this letter and for all tax years thereafter. File your return with
the appropriate Internal Revenue Service Center per the instructions of the return. For
further instructions, forms, and information please visit www.irs.gov.

You have waived your right to contest this determination under the declaratory judgment
provisions of Section 7428 of the Code.

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 get prompt and proper handling. If you
want Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS
office that issued this letter. You may call toll-free, 1-877-777-4778, for the Taxpayer
Advocate or visit www.irs.gov/advocate for more information.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely Yours,

/s/
Appeals Team Manager

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: December 21, 2011 Contact Person:

identification Number:

ORG
ADDRESS Contact Number:
CITY, STATE
FAX Number:
Employer Identification Number:
UIL #:
501.03-30
501.03.31
501.33.00
LEGEND :
ORG - Organization name XX - Date Address - address City -
_ city State - state
Dear

We have considered your application for recognition of exemption from federal income tax
under Internal Revenue Code section 501(c)(3). Based on the information provided, we have
concluded that you do not qualify for exemption under Code section 501(c)(3). The basis for

our conclusion is set forth below.

issue

Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons stated
below,

Facts

You were incorporated in State on March 1, 20XX. Your Articles of Incorporation state that you
are “organized for charitable, religious, educational, and scientific purposes under §501(c)(3) of

the Internal Revenue Code (Code)...”

Article li, Section 1 of your bylaws states that you are organized for the following purposes:

e To promote common familial interests of those individuals who are related by blood,
marriage or other significant relationship to a common ancestors bearing the primary

surname of your Family.
e To maintain, preserve and protect “family land”, located primarily in City State that was

first purchased by your ancestors over one hundred years ago. You will use any

2

proceeds from crops, timber or other resources extracted from the “family land” to
encourage, facilitate and support the educational aspirations of family members,

e To support activities which enhance familial relationships and communications.

e To compile historical information regarding the common ancestry of the individuals who
are members of the Association.

e To cooperate with other organizations and agencies in furtherance of genealogy and

other family related activities.
The activities narrative submitted in your Form 1023 application states,

“Our primary activities will include the use of organization receipts to assist the
educational endeavors of our members’ children. We intend to create a
scholarship fund to supplement other resources that the students will already be
receiving. Conditions for eligibility will include enrollment in an accredited institution
of higher learning, proof of a minimum grade point average and proof that the
funds are used for qualified educational expenses.”

In order to create and maintain your scholarship fund, you intend to use receipts obtained from
harvesting timber from land that was purchased by your members’ ancestors. You have and
continue to document your ownership of the land. It is also your intent to protect your ownership
of the land by paying property taxes when due. And, you will continue to expend funds for
litigation to protect your ownership rights and prevent “poaching” of timber from family land.

You expect that:
e % to % of your activities will be directed to documentation of land ownership, protection

of ownership of land and timber, coordination of the harvest and sale of timber and land .
management,

e % of your time will be spent planning and attending bi-annual family reunions,

e % of you time will be required to administer the scholarship programs, and

e % to % of your activities will be used to perform general administrative activities.

Your current board is related to each other through family relationships, and they are all
cousins. You are a family association. Furthermore, all individuals who receive funds through
your programs will have a family relationship. Your activities are only available to your family

members and their children.

Your sources of revenue during your first three years of operation include contributions,
membership fees and revenue from the sale of timber. Your expenses consist of fundraising,
disbursements for the benefit of member, depreciation and depletion, professional fees, and
other expenses. You expect to incur expense for your family reunion as well as for scholarships.

Law

Section 501(c)(3) of the Code provides that corporations may be exempted from tax if they are
organized and operated exclusively for charitable or educational purposes and no part of their
net earnings inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations (“regulations”) provides that, in order

3

to be exempt as an organization described in section 501(c)(3) of the Code, 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.

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 specified in section 501(c)(3) of the

Code. An organization will not be so regarded if more than an insubstantial part of its activities

is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(c)(2) of the regulations provides 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. Section 1.501(a)-1(c) of the regulations defines
the words “private shareholder or individual” in section 501 of the Code to refer to persons
having a personal and private interest in the activities of the organization.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations assigns the burden of proof to an applicant
organization to show that it serves a public rather than a private interest and, specifically, 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) of the regulations defines the term “charitable” as used in section
501(c)(3) of the Code as including the relief of the poor and distressed or of the underprivileged.
The term “charitable” also includes the advancement of education.

In Revenue Ruling 67-367, 1967-2 C.B. 188, an organization established a plan under which it
enters into so-called “scholarship” agreements with subscribers. Under the agreement, a
subscriber agrees to deposit, either in periodic payments or in a lump sum, a specified sum with
a designated bank. At the same time, the subscriber nominates a named child not over a
specified age at the time the agreement is entered into who will receive a “scholarship” from the
organization if he matriculates at a college. The Service ruled that the organization’s
“scholarship” plan for making payments to pre-selected, specifically named individuals does not

qualify for exemption under section 501(c)(3) of the Code.

Revenue Ruling 69-175, 1969-1 C.B. 149 describes an organization formed by the parents of
pupils attending a private school exempt under section 501(c)(3) of the Code. The organization
provides bus transportation to and from the school for those children whose parents belong to
the organization. The ruling states that when a group of individuals associate to provide a
cooperative service for themselves, they are serving a private interest. By providing bus
transportation for school children to school, the organization enables the participating parents to
fulfill their individual responsibility of transporting their children to school.

Revenue Ruling 80-302, 1980-2 CB 182 describes an organization that (1) limits its membership
to descendants of a particular family, (2) compiles family genealogical research data for use by
its members for reasons other than to conform to the religious precepts of the family’s
denomination, (3) presents the data to designated libraries, (4) publishes volumes of family
history, and (5) promotes social activities among family members. The organization did not

4

qualify for exemption under section 501(c)(3) of the Code because the activities are primarily
limited to one particular family. Therefore, these activities do not advance education to benefit

the public interest.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. C.I.R., T.C. Memo. 1986-348, the Tax
Court upheld the Service’s position that a foundation formed to aid coma victims, including a
family member of the founders, was not entitled to recognition of exemption. Approximately
30% of the organization’s net income was expected to be distributed to aid the family coma
victim. The Court found that the family coma victim was a substantial beneficiary of the
foundation’s funds. It also noted that such distributions relieved the family from the economic
burden of providing medical and rehabilitation care for their family member and, therefore,
constituted inurement to the benefit of private individuals.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the Supreme Court stated that
the presence of a single nonexempt purpose, if substantial in nature, will preclude exemption
under section 501(c)(3) of the Code, regardless of the number or importance of statutorily
exempt purposes. Thus, the operational test standard prohibiting a substantial nonexempt
purpose is broad enough to include inurement, private benefit, and operations that further
nonprofit goals outside the scope of section 501(c)(3).

Application of Law

Section 501(c)(3) of the Code and section 1.501(c)(3) -1(a)(1) of the regulations sets forth two
main tests for qualification for exempt status. An organization must be organized and operated
exclusively for purposes described in section 501(c)(3) of the Code. Because your Articles of
Incorporation state purposes described in section 501(c)(3) of the Code and upon dissolution all
assets will go to organizations that are exempt under section 501(c)(3) of the Code, you pass

the organizational test.

You must, however, satisfy the operational test. This means that you must prove that you are
an organization that operates exclusively for one or more purposes described in section
501(c)(3) of the Code and no part of your net earnings inure to the benefit of any private
shareholder or individual. The fact is, however, that your operations are clearly directed to

providing services to your family members.

1. When you conduct activities which manage and protect your land, harvest and sell your
   timber, and conduct family reunions, you are serving the private interests of your
   members in a manner similar to the organization described in Revenue Ruling 69-175.

2. Like the organization which was denied exemption in Revenue Ruling 67-367, you have
   established a plan to award scholarships to members of a preselected group of -

individuals: your family.

3. You expect to compile historical information regarding the common ancestry of your
   family members in furtherance of genealogy and family related activities. But, according
   to Revenue Ruling 80-302, genealogic activities do not advance education to benefit
   public interest when membership is limited to descendants of a particular family.

4. Finally, we point out that, in the same manner as the Wendy L. Parker Rehabilitation

5

Foundation, Inc, your family members are the substantial beneficiaries of your funds
because your activities relieve your members from the economic burden of providing
services to protect your land and provide educational assistance to members and their

children.

The Supreme Court in Better Business Bureau v. United States, 326 U.S. 279 (1945), held that
the presence of a single non-educational purpose, if substantial in nature, will destroy
exemption regardless of the number of truly educational purposes. In this case, every aspect of
your enterprise is carried on to provide substantial benefit to your family, not the public.

Conclusion

Based on the facts provided, we hold that you do not meet the operational test for exemption
under section 501(c)(3) of the Code because you serve the private interest of members of your
family, rather than a public interest. Furthermore, a substantial part of your activities are not in
furtherance of any exempt purpose under section 501(c)(3) of the Code.

Accordingly, we have found that you do not qualify for exemption as an organization described
in section 501(c)(3) of the Code.

Appeal Rights

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 that information affects our determination. If your
Statement does not provide a basis to reconsider our determination, we will forward your case to
our Appeals Office. You can find more information about the role of the Appeals Office in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal.” These items include:

The organization’s name, address, and employer identification number;

A statement that the organization wants to appeal the determination;

The date and symbols on the determination letter;

A statement of facts supporting the organization’s position in any contested factual
issue;

A statement outlining the law or other authority the organization is relying on; and
A statement as to whether a hearing is desired.

AWN a

On

The statement of facts (item 4) must be declared true under penalties of perjury. This may be
done by adding to the appeal the following signed declaration:

“Under penalties of perjury, | declare that | have examined the statement of facts presented in
this appeal and in any accompanying schedules and statements and, to the best of my
knowledge and belief, they are true, correct, and complete.”

6

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be included
Stating that the representative prepared the appeal and accompanying documents; and whether
the representative knows personally that the statements of facts contained in the appeal and

accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the Internal
Revenue Service may represent you during the appeal process. To be represented during the
appeal process, 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 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 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 to you.
That letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to the
applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance

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,

Lois Lerner
Director, Exempt Organizations

Enclosure: Publication 892