IRS revokes a private foundation's exemption for private benefit to its founder

Plain-English summary

The IRS revoked a private foundation's section 501(c)(3) exemption effective November 1, 2008. The IRS found that a substantial amount of the organization's assets benefited its founder, including improvements to the founder's home, a luxury automobile available for personal use, and a piano in the home. The organization also paid for airfare that it admitted was not for an exempt purpose and did not provide evidence of a charitable program. The IRS concluded that the private benefit was a substantial non-exempt purpose and that the organization no longer qualified for exemption.

Ruling snapshot

• Question: Did the foundation operate exclusively for exempt purposes when its assets and funds provided substantial private benefits to its founder?
• Outcome: Revocation of the foundation's section 501(c)(3) exemption, effective November 1, 2008.
• Key authorities: IRC §§ 501, 170, 507, 6104, 7428, and 6110; Treas. Reg. § 1.501(c)(3)-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
_ Appeals Office

" 2525 Capitol Street, Suite 201
Fresno, CA 93721 ,
Date: June 4, 2013 Person to Contact:

Taxpayer Identification Number:

A
B

Tax Period(s) Ended:
Release Number: 201335023
Release Date: 8/30/2013

UIL: 501.03-02

Certified Mail

Dear |

This is a final adverse determination regarding your exempt status under section 501 (c)(3) of the Internal
Revenue Code (the “Code”). It is determined that you do not qualify as exempt from Federal income tax
under section 501(c)(3) of the Code effective November 1, 2008.

The revocation of your exempt status was made for the following reason(s):

A substantial amount of your organization’s assets inured to the private benefit of your founder. Because
a substantial amount of your charitable assets were used for private purposes, the organization is not
operated exclusively for exempt purposes described in section 501(c)(3) of the Code.

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 periods 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.

If you were a private foundation as of the effective date of revocation, you are considered to be taxable
private foundation until you terminate your private foundation status under section 507 of the Code. in
addition to your income tax return, you must also continue to file Form 990-PF by the 15th Day of the fifth

month after the end of your annual accounting period.

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

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 matters
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,

Appeals Team Manager

Enclosure: Publication 892

Internal Revenue Service Department of the Treasury

Taxpayer Identification Number:

Date: APR 24, 2012 Form:
ORG Tax Y Ended:
ADDRESS ax Year(s) :

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt
status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed Adverse Action.
We will send you a final modification or revocation letter.

If you do not agree with our proposed revocation, 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. Your protest should include a
statement of the facts, the applicable law, and arguments in support of your position.

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, The
Examination Process, and Publication 892, Exempt Organizations 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.

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.

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

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 revocation letter.
We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) 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 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 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

886-A Schedule number or exhibit
Form -

(Rev. January 1994) EXPLANATION OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN October 31, 20XX
LEGEND

ORG - Organization name XX- Date Address- address City-city State- state Country-country EIN-ein CO-1- Ist
COMPANY

Issue:

Is the ORG an organization exempt from tax under section 501(c)(3) of the Internal Revenue Code?

Facts:

ORG received a letter of determination dated May 7, 20XX, from the Internal Revenue Service recognizing it as a private foundation
exempt from tax under section 501(c)(3) of the Internal Revenue Code.

The organization filed a Form 990-PF for the period ending October 31, 20XX, which was received by the Internal Revenue Service on
April 12, 20XX. .

The return showed the book value of land, building and equipment of $ as of October 31, 20XX and the cost basis of $. The total
assets of the organization were listed as $ as of October 31, 20XX

The return also showed travel expenses of $

Total income of the organization was a $ contribution. Expenses were, $$ in depreciation, the $ travel expense, $ in bank service
charges, a $ filing fee and a $ donation to the CO-1, STATE.

Upon inquiry by the Internal Revenue Service, the organization stated that the cost of the assets was, $ for a piano, which it stated

was used weekly for choir practice,
$ for a computer, $ for an automobile used to visit other non-profit organizations and $ for leasehold improvements used as a facility

for programs and youth. The leasehold improvements were made at ADDRESS, CITY, STATE, which is the address of the
organization and also the residence of the President of the organization.

The travel expense was airfare between CITY and COUNTRY.

Upon further inquiry by the Internal Revenue Service, the organization stated that the piano and the automobile and the leasehold
improvements were available for personal use by family of the president. The leasehold improvement was for a 460 square foot study
room at the rear of ADDRESS. The airfare was for personal use and the organization stated it was “filled by mistake” but did not
state if the organization had been reimbursed.

The Internal Revenue Service had also requested a list of events held by the organization, including a description, membership,
attendance and supporting documentation. The organization stated that its activities included, but were not limited to bible study,
choir and fellowship. It did not provide any documentation.

It also stated that the automobile was used for visiting other non-profit organizations, church meetings, prayer meetings and to
transport elderly to church and other church related works. The organization had no record of use of the automobile for either
business or personal use. The automobile was a Mercedes-Benz and the registered owner was the president of the organization.

Law:

Section 501(c)(3) of the Internal Revenue Code provides for exemption from tax for “Corporations, and any community chest, fund,
or foundation, 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,
no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities
of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)),
and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on
behalf of (or in opposition to) any candidate for public office.”

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

886-A Schedule number or exhibit
Form -

(Rev. January 1994) EXPLANATION OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended

ORG EIN . October 31, 20XX

Section 1.501(c)(3)-1(c) of the income tax regulations provides that (1) Primary activities. —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 Link 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. (2) Distribution of earnings. —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.”

In Better Business Bureau v. United States, 326 U.S. 279, 283, the court stated that the presence of a single substantial nonexempt
purpose precludes exempt status for an organization, regardless of the number or importance of the exempt purposes.

Government’s Position:
In this instance the organization has provided no evidence other than its own statements, that it has any charitable program
whatsoever. Even if it had a charitable program, almost all of the assets consists of an addition to the president’s home, a luxury

automobile available for the president’s personal use, and a piano in the president’s home. The organization paid for airfare for the
president’s trip to COUNTRY, which it admitted was not for exempt purposes.

The presence of any substantial non-exempt purpose precludes exempt status. In this case, the organization has a substantial

non-exempt purpose, which is to provide benefits to its president. Therefore it is not exempt under section 501(c)(3) of the Internal
Revenue Code. -

Taxpayer’s Position:
The taxpayer has not submitted its position.

Conclusion:

Exemption under section 501(c)(3) of the Internal Revenue Code is revoked for ORG effective November 1, 20XX.

Department of the Treasury-internal Revenue Service

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov