Determination 1338052: IRS denies exemption to an online aid platform that solicited funds for specific individuals

Plain-English summary

The IRS finalized an adverse determination for an organization that used an online platform to connect donors with people seeking financial assistance. The organization focused on Jewish applicants, relied on rabbis to verify need, and allowed donors to direct funds to particular cases. The IRS concluded that this process served the private interests of pre-selected individuals, did not give the organization enough control over donated funds, and lacked adequate records documenting grants and recipients. The organization therefore failed the operational test for section 501(c)(3) exemption, and donors could not deduct contributions under section 170.

Ruling snapshot

• Question: Did the online charitable-assistance organization qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied. The IRS finalized the adverse determination after no protest was filed within 30 days.
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 6104(c), 6110, 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii); Rev. Ruls. 56-304, 67-367, 68-489.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201338052 Contact Person:

Release Date: 9/20/2013
Identification Number:

Date: 6/28/2013 Contact Number:
Employer Identification Number:
Form Required To Be Filed:

Tax Years:

UIL: 501.00-00; 501.03-05; 501.03-00; 503.00-00

Dear

This is our final determination that you do not qualify for exemption from federal income
tax as an organization described in Internal Revenue Code section 501(c)(3). Recently,
we sent you a letter in response to your application that proposed an adverse
determination. The letter explained the facts, law and rationale, and gave you 30 days
to file a protest. Since we did not receive a protest within the requisite 30 days, the
proposed adverse determination is now final.

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

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 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.

Letter 4038(CG) (11-2005)
Catalog Number 47632S

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In accordance with Code section 6104(c), we will notify the appropriate State officials of
our determination by sending them a copy of this final letter and the proposed adverse
letter. You should contact your State officials if you have any questions about how this
determination may affect your State responsibilities and requirements.

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,

Kenneth Corbin
Acting Director, Exempt Organizations

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

Letter 4038(CG) (11-2005)
Catalog Number 47632S

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: April 30, 2013 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
Legend: UIL Numbers:
E = individual 501.00-00
N = state 501.03-05
x = date 501.03-00
y = number 503.00-00
Dear
:

We have considered your application for recognition of exemption from federal income
tax under Internal Revenue Code section 501(a). 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.

Issues
Have you substantiated that you are operating within the meaning of Section 501(c)(3)
of the Code? No, for the reasons described below.

Facts
You were incorporated in State N on date x. Your Articles of Incorporation state you
were formed, in part, to:

Use social networking technology to facilitate scholarships and grants to needy
individuals and families in order to enable them to achieve their educational goals,
provide poverty relief, and to fulfill grantees’ religious obligations. To accomplish
these goals by providing financial assistance, food, clothing and other basic
necessities as appropriate to widows, orphans and other financially disadvantaged
individuals.

Your application for exemption states you will take advantage of the internet to facilitate
charitable giving through social networking. Your grant making steps are as follows:

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1. A needy person registers and completes a comprehensive questionnaire about
   their financial needs, background and references.

2. The Board of Directors independently reviews the application including checking
   with references and discusses it with relevant religious authorities. Currently the
   plan is to set up separate sites for different religious groups — so under the
   current site it would be reviewed by a relevant authority.

3. A redacted description of the need is uploaded to the website including the
   amount needed (and eventually integrated with various social networking
   platforms). The individual/family need is described but no individual/family name
   is given.

4. A donor reviews the needs and decides to make a donation to the relevant need.
   An affirmation that they have no personal, professional or other relationship with
   the grant recipient is made.

5. You facilitate the need and the grant recipient either receives payment directly or
   indirectly.

You hired and contracted with an individual, E, as an employee to build and manage
your website. Your website also lists E as your founder.

You have three board members, responsible for :

• selecting, supporting and evaluating the chief executive and his/ her responsibilities
• ensuring participation in the overall planning process
• assisting in implementing and monitoring your goals by determining which
programs are consistent and effective with your mission
• ensuring adequate financial resources to fulfill your mission, developing the annual
budget and ensuring proper financial controls are in place.

They are also responsible for informing others about your activities and suggesting
nominees to the board who can make significant contributions to your work.

Your website states your mission is to help “any and all Jews in need.” You do this by
providing a forum whereby Jews in need can apply directly to others for help. Through
this forum you connect “thousands of Jews who need help with those willing to give it.”
You are setting people up to support themselves independently, and to have productive
and successful lives. Your “mission is to provide temporary help to Jewish individuals
and organizations in the United States and around the world on a one on one basis as
needed.”

Your website states the following regarding assistance:

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You simply need to be a Jew that needs help. Take the time to fill out an
application for assistance and be sure to express clearly what your problem is and
why you want someone to help. The better you express yourself, the more likely it
is you will receive assistance.

Your website states in order to receive a grant you must:

• Be Jewish, and a permanent resident or citizen of the US
• Over 18 years of age
• In need of assistance

Your “Application and Case History Form” requests the following information: name,
date of birth, Social Security number, address, phone number, employer, work address,
employment reference, amount requested, a description of the financial situation
(including monthly income and expenses) and references.

You verify the needs of the individuals seeking assistance through a rabbi. Regarding
this verification process you said, “The rabbi generally has to be from applicants
community and know the applicant on a personal level.” You require verification both
over the phone and on the rabbi’s letterhead to confirm legitimacy of the applicant's
situation. You specifically define “needy” by asking various questions regarding family
size, employment, disabilities, government assistance, funds in the bank, etc. You
confirm financial difficulties and ailments through the rabbi and should you find anything
illegitimate or beyond the scope of your help, you deny the applicant. Your website
describes you as a venture where a Jew can reach out in his time of need.

You state you have had y applicants, however, you have only substantiated around a
quarter of that number. You claim to have denied many for such reasons as the amount
requested is too high, no response from rabbi regarding verification, or location outside
of the United States. You did not substantiate any of those that were denied.

Donors give funds which translate to points. Each potential recipient has a requested
point level. You describe the “points” system referenced on your website in greater
detail. You said it’s just another name for dollar system. Each point represents one
dollar. This was done to make a donor feel they are donating more than just money, but
help. You did not describe what occurs if an approved case does not receive the
requested funding level.

You have gift certificates available for purchase on your website. They were designed
to be purchased on your site and given to someone else to redeem. You said, “It is
basically a donation given in someone else’s name, but rather than make the donation
directly, the recipient of the certificate can choose to distribute the funds to a case that
they specifically choose.” It’s both a way to give and to steer people to your website.

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As you are currently a small organization, there is just one working member. Your one
paid employee works 20 hours per week for you. Family members of this “committee”
(one paid employee) are prohibited from applying for help, as to not cause any
misunderstanding amongst donors that the money is being sent towards your members,
rather than applicants. Should a family member apply for help, they will not be provided
assistance.

Your “...main focus is not monetary assistance but a comfort zone, a place of relief. A
place where people can turn in an emergency situation.” You deal specifically with low
or no income applicants who have encountered something which is obstructing them
from continuing their day to day life activities.

You made your website religion-specific because you feel people want to give to those
they relate to. You are hoping to expand and create similar website for other religions
and have acquired domain names relative to those sites.

You raised revenues of approximately $ in year one and expect revenues of
approximately $ and $ in years two and three, respectively.

Your first year expenses were approximately $ for program services, $ for
salaries and $ in “other” expenses. These included payments to both a firm and
an individual for promotion, advertising and marketing. You project expenses of
approximately $ and $ in years two and three, respectively. These
include around $ in bank fees. When asked of these expenses you indicated you

spent approximately $ annually on bank charges — the remainder of the expenses
projected was not explained.

You made approximately $ in actual distributions to needy individuals through
your website. When asked for a comprehensive list of the distributions, you
substantiated only $ of that $ . The remainder was distributed outside of
your website and included almost $ in payments labeled “A little bit of something.”
The purpose, or the recipients, of those distributions was not clear and you provided no
further explanation.

In addition to this listing of recipients you also indicated that E, who had previously been
listed as a fund recipient, had actually not received any distribution. Instead, you
explained that E was previously reported as having received funds to act as a
‘placeholder’ for a project. You did not describe the project or further indicate the actual
recipient of these funds.

You expect ninety percent of the donations you receive will be paid to individuals
seeking assistance. The remainder of expenses are for operating costs.

Law
Section 501(c)(3) of the Code provides, in part, for the exemption from federal income

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tax of organizations organized and operated exclusively for charitable, religious,
scientific or educational purposes, no part of the net earnings of which inures to the
benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(c)(1) of the regulations states that if more than an insubstantial
part of an organization's activities is not in furtherance of exempt purposes, the
organization will not be regarded as exempt.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides, in part, that an organization is
not organized or operated exclusively for one or more of the purposes mentioned in
section 501(c)(3) of the Code unless it serves a public rather than a private interest. An
organization may not be exempt if it is operated for the benefit of private individuals.

Rev. Rul. 56-304, 1956-2 C.B. 306, holds that organizations that otherwise meet the
requirements for exemption may make distributions to individuals, provided they further
the purposes for which they were organized. The organizations should keep records of
names and addresses of recipients, the amounts given, the purpose for which it was
given, the manner in which the recipient was chosen, and relationship between the
recipient and the members, officers, or trustees or substantial contributor to the
organization and a corporation controlled by a grantor or substantial contributor.

Rev. Rul. 67-367, 1967-2 C.B. 188, holds that the operation of a scholarship plan for
making payments to pre-selected, specifically named individuals does not qualify for
exemption under section 501(c)(3) of the Code. The organization entered into so-called
‘scholarship‘ agreements with subscribers. Under the agreement, a subscriber agreed
to deposit a specified sum with a designated bank. At some later date, the subscriber
nominates a named child who will receive a ‘scholarship‘ from the organization if he
matriculates at a college. A subscriber may withdraw his principal, less any enrollment
fee, from his account at any time. Under the circumstances, the organization was held
to be serving private interests rather than public charitable and educational interests.
This ruling was also compared with Rev. Rul. 56-403, supra

Rev. Rul. 68-489, 1968-2 CB 210 An organization will not jeopardize its exemption
under section 501(c)(3) of the Code, even though it distributes funds to nonexempt
organizations, provided it retains control and discretion over use of the funds for section
501(c)(3) purposes.

In S.E. Thomason v. Commissioner, 2 T.C. 441 (1943), the taxpayer paid an
educational institution the tuition and maintenance of a particular individual, who was
the ward of a public charity, and claimed a charitable deduction. The court held that the
taxpayer was not entitled to the deduction because the contributions were for the benefit
of a particular individual.

In Tripp v. Commissioner, 337 F.2d 432 (7th Cir. 1964), the court held that payments
made to an educational institution and earmarked for the educational expenses of a

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particular individual were not deductible because they were neither made to the college
for use as it saw fit nor made for the benefit of an indefinite number of persons, as, for
example, a scholarship fund.

In Church in Boston v. Commissioner, 71 T.C. 102 (1978), the court upheld the denial of
exemption on an organization that made grants to individuals. The organization
asserted that its grants were made in furtherance of a charitable purpose: to assist the
poor. The organization was unable to furnish any documented criteria which would
demonstrate the selection process of a deserving recipient, the reason for specific
amounts given, or the purpose of the grant. The only documentation contained in the
administrative record was a list of grants made during one of the three years in question
which included the name of the recipient, the amount of the grant, and the “reason” for
the grant. The court held that this information was insufficient in determining whether
the grants were made in furtherance of an exempt purpose.

Application of Law
You are not as described in section 501(c)(3) because you have failed to establish that
you are operated exclusively for charitable, religious, scientific or educational purposes.

By providing funds to pre-selected individuals for items of their request you are not
furthering exclusively exempt purposes as described in section 1.501(c)(3)-1(c)(1) of the
regulations, therefore you are not exempt.

Your method of soliciting funds for specific individuals, although not named, serves the
private interests of individuals. When a charitable program works for the private benefit
of an individual, the organization may not qualify for recognition of exemption. See
section 1.501(c)(3)-1(d)(1)(ii) of the regulations.

Like Rev. Rul. 67-367, you solicit donations for specific pre-selected individuals and
therefore you fail to qualify for exemption under section 501(c)(3) of the Code. Also, the
payments you seek for particular individuals are like the ones described in S.E.
Thomason v. Commissioner, supra, where the court held that the taxpayer was not
entitled to a deduction for paying for expenses of an individual because the
contributions were for the benefit of a particular individual.

You are unlike the organization is Rev. Rul. 68-489 in that you have made distributions
to entities but have not documented the source of those funds nor the reason for those
distributions. You took no steps to secure any information about potential recipients.
You do not control the funds to be given, rather, donors distribute their funds to causes
as they see fit. Here, the rabbi did not appear to collect or provide any information
regarding the income of the recipients. The fact that the family has debt does not
necessarily make them needy. Need was not verified through paper documentation and
there was no mention of their income. Your method of operations allows for funds to be
directed to pre-selected individuals. Because you did not substantiate the review,

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selection, method of distribution and documentation of the use of those funds you have
not demonstrated sufficient control and discretion over those funds.

You seek contributions earmarked for expenses of specifically designated individuals.
In Tripp v. Commissioner, supra, the court held that payments earmarked for the
educational expenses of a particular individual were not deductible because they were
not made for the benefit of an indefinite number of persons, as, for example, a
scholarship fund.

Although you have rabbis vouch for the needs of the individuals you assist, you do not
directly collect any information from the individuals to confirm their income, or lack
thereof, as described in Rev. Rul. 56-304. You have placed the control of determining
qualified candidates for assistance in the hands of individuals outside of your board.
Further, you have failed to establish numerous expenditures as qualified charitable
distributions. The organization described In Church in Boston v. Commissioner was
unable to furnish any documented criteria which would demonstrate the selection
process of a deserving recipient, the reason for specific amounts given, or the purpose
of the grant. The only documentation contained in the administrative record was a list of
some of your grants made during one of the three years in question which included the
name of the recipient, the amount of the grant, and the “reason” for the grant. Much like
this case, the information you solicit from the individuals seeking assistance is
insufficient in determining whether the grants are made in furtherance of exempt
purposes. Also, you did not provide documentation for many of your grants such as
those labeled as ‘a little bit of something’.

Conclusion

Based on the above facts and law, we conclude that you do not qualify for exemption
under section 501(c)(3) of the Code. Your method of soliciting funds online for specific
individuals constitutes a substantial private benefit to individuals. You lack
documentation, records and evidence that distributions were or will be made and used
for exclusively 501(c)(3) purposes. You fail the operational test, and are disqualified
from exemption under Section 501(c)(3).

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. 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.

An attorney, certified public accountant, or an individual enrolled to practice before the
Internal Revenue Service may represent you during the appeal process. If you want
representation during the appeal process, you must file a proper power of attorney,

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Form 2848, Power of Attorney and Declaration of Representative, if you have not
already done so. You can find more information about representation in 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 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 appeal 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 the
applicable address:

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

You may 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 O. Paz
Director, Exempt Organizations

Enclosure: Publication 892