IRS denies exemption to a fundraising organization supporting a foreign charity

Plain-English summary

The IRS finalized its denial of tax-exempt status under IRC § 501(c)(3) after a U.S. fundraising organization did not protest a proposed adverse determination within 30 days. The organization raised funds earmarked for a foreign charity, whose president was also the U.S. organization's president, and sent the money abroad for the foreign organization's use. The IRS found that the organization had not shown that its governing documents met the organizational test, that its activities met the operational test, or that it exercised adequate discretion and control over donated funds. Contributions to the organization were not deductible under IRC § 170.

Ruling snapshot

• Question: Did the fundraising organization qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied, the IRS finalized the adverse determination and stated that contributions were not deductible under IRC § 170.
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), 6110, and 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(a) and 1.501(c)(3)-1(b).

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Release Number: 201345031 Contact Person:
Release Date: 11/8/2013

Date: August 14, 2013 Identification Number:

Contact Number:
Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.03-00; 501.35-00

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.

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.

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

2

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
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

Date: June 24, 2013 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: UIL:
B = Incorporation date 501.03-00
C = State of incorporation 501.35-00
D = President
F = Treasurer
G = Secretary
H = Director
J = Director
K = Foreign city
L = Foreign country
N = Date of automatic revocation
P = Postmark date of reinstatement
X = Foreign charitable organization
Dear

We have considered your application for recognition of exemption from federal income
tax under Internal Revenue Code (“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

1.) Have you failed to demonstrate that you meet the organizational test under
section 501(c)(3)? Yes, for the reasons described below.

2.) Have you failed to demonstrate that you meet the operational test as you do not

Letter 4036(CG) (11-2011)
Catalog Number 47630W

2

operate exclusively for an exempt purpose under Section 501(c)(3) of the Code?
Yes, for the reasons described below.

3.) Does your lack of control and discretion over the funds you send to X, preclude
you from exemption under Section 501(c)(3) of the Code? Yes, for the reasons
described below.

Facts

You were incorporated on date B in the State of C. On date N, you were automatically
revoked due to your non-filing of an annual information return (e.g. Form 990 or Form
990-EZ) or notice (Form 990-N) for three consecutive years. You submitted Form 1023,
Application for Recognition of exemption on date P, which was prior to the date you
were notified about the revocation.

Your Articles show your purpose “ ... is to totally support the charitable activities of X,
which provides quality education to at-risk children and to impoverished adults in
developing countries.” X is a foreign charitable organization located in country L.

X achieves its mission through scholarships and the creation of learning centers. X also
establishes health and environmental programs in impoverished areas of the world.

You are the sole fundraiser of charity funds to X. Currently, your only activity is
fundraising for the benefit of X. According to your Form 1023 application, you accept
donations that are earmarked for X only.

Your governing body consists of D (President), F (Treasurer), G (Secretary), H and J
(directors). F is the mother of D and G. D is located in country L and is the President of
X.

Your Bylaws indicate you have annual meetings. Your first meeting was in August of
2011, at which time you formally adopted the Bylaws. All voting was done via internet
messages and no minutes were taken. During the determination process, you did not
have any other Board meetings and could not provide additional Board meeting
minutes. However, you note that proper minutes will be taken for all future board
meetings.

Your Bylaws describe your Officer positions as follows:

President: The President (D) shall be the on-site chief operating officer in foreign city K,
in the country L, and shall have the general powers and duties generally vested in the
office of President of a voluntary non-profit organization. These include but are not
limited to the day-to-day management of X’s Learning Center in foreign city K;

Letter 4036(CG) (11-2011) 2
Catalog Number 47630W

3

recruitment, selection and supervision of all volunteers; budgeting and disbursement of
funds for day-to-day operations; development, planning and execution all programs that
fall within the purpose of organization. D will also serve as spokesman and chief fund
raiser for organization. The President is a non-paid volunteer.

Treasurer: The Treasurer (F) shall not be on-site unless special trips to country L are
justified and all travel-related expenses are paid from Treasurer’s personal funds.
Treasurer’s functions include but are not limited to the management of incoming and
outgoing U.S.A. funds; various administrative functions including accounting, tax
reporting and coordination; maintain ongoing communications with President and
volunteers as required. The Treasurer is a non-paid volunteer.

Secretary: The Secretary (G) is not required to be on-site in country L. The Secretary’s
function includes but is not limited to assisting the Treasurer in the execution of the
Treasurer’s function as required; serve as a non-paid consultant to the President in
areas of fund raising and communications and to keep the organization’s minutes. The
Secretary is non-paid volunteer.

Although D lives in country L, D’s family live and have owned a retail gift shop in state C
for 20 years. In order to raise funds, the gift shop offers cold bottled water and % of
proceeds go to X. The water is purchased with the family’s personal funds. They have a
sign that tells customers that the funds raised through the sale of bottled water goes to
X. The gift shop also sells designer jewelry and donates to you a large percentage of
each piece sold, which in turn goes directly to X.

D’s family in state C has also contacted a local restaurant (which serves cuisine from
country L) and they contribute $ monthly to you, which in turn is sent to X. X has a
website from their location in foreign city K and gift contributions flow through their e-
commerce account, where deposits are made into your local bank account. D has
access to the US bank account in country L. He withdrawals funds as he deems
necessary to pay the expenses of X. Future fundraising and fund distributions will be
done in the same manner.

You have indicated that all transactions (gift donation transfers) are documented
through electronic transfer of funds. Credit card and other funds received online through
X’s website are processed through the online payment service. The online payment
services sends you monthly statements showing the amounts received. All donations go
to a general operating fund for the sole use of X and are used to pay rent, utilities, buy
school supplies, pay local staff (in country L), scholarships, and general operating
expenses. Actual distribution of donations are made locally in country L by D. All
withdrawals for X’s operational expenses for their projects are made only by D. You
indicated that the funds are transferred only after the governing body in the United
States reviews the request for funds. You indicated that the governing body monitors

Letter 4036(CG) (11-2011) 3
Catalog Number 47630W

4

X’s website on a daily basis and that the Treasurer monitors the online bank account
daily. However, you have not demonstrated how the governing body exercises
discretion and control over any funds that are funneled to X. There is no evidence of
any procedures used to determine the validity of fund requests or monitoring of funding.

You provided past financial data and proposed budgets. All of the financial data shows
your revenue coming from donations. Past expenditures are for rent, utilities, office
expenses, salaries (for the staff of the Learning Center in country L), truck payments
(for the vehicle in country L), the building of a recycling center (in country L) and other
miscellaneous expenses related to the operations of X. The minimal expenses related
to your operations were paid for by the personal funds of the Treasurer.

You indicated that all withdrawals (made in country L by D) are recorded and
documented in foreign city K, by X’s paid staff accountant. However, you have provided
none of this documentation.

Other than D, members of the governing body have visited country L, but there is no
evidence of any visits being made to L since you were incorporated.

Law

Section 501(c)(3) of the Internal Revenue Code recognizes organizations, which are
organized and operated exclusively for religious, charitable, and educational purposes,
as being exempt from federal income tax.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations (“Regulations”) states that in
order to qualify under section 501(c)(3) of the Code, an organization must be both
organized and operated exclusively for one or more exempt purposes. If an organization
fails to meet either the organizational or operational test, it is not exempt.

Section 1.501(c)(3)-1(b)(1)(i) of the Regulations state that an organization is organized
exclusively for one or more exempt purposes only if its articles of organization:

(a) Limit the purposes of such organization to one or more exempt purposes;
and

(b) Does not expressly empower the organization to engage, otherwise than as
an insubstantial part of its activities, in activities which in themselves are not
in furtherance of one or more exempt purposes.

Section 1.501(c)(3)-1(b)(1)(ii) of the Regulations states that in meeting the
organizational test, the organization's purposes, as stated in its articles, may be as
broad as, or more specific than, the purposes stated in section 501(c)(3).

Letter 4036(CG) (11-2011) 4
Catalog Number 47630W

Section 1.501(c)(3)-1(b)(1)(iv) of the Regulations states that in no case shall an
organization be considered to be organized exclusively for one or more exempt
purposes, if, by the terms of its articles, the purposes for which such organization is
created are broader than the purposes specified in section 501(c)(3).

Rev. Rul. 63-252, 1963-2 C.B. 101, states that contributions to certain domestic
charitable organizations are deductible if it can be shown that the gift is, in fact, to or for
the use of the domestic organization, and that the domestic organization is not serving
as an agent for, or channel for, a foreign charitable organization. The ruling decided the
question of whether the amounts paid to the domestic organization are deductible under
section 170(a) of the Code, in the following instances:

(1) In pursuance of a plan to solicit funds in this country, a foreign organization
caused a domestic organization to be formed. At the time of formation, it was
proposed that the domestic organization would conduct a fund-raising campaign,
pay the administrative expenses from the collected fund and remit any balance to
the foreign organization.

(2) Certain persons in this country, desirous of furthering a foreign organization's
work, formed a charitable organization within the United States. The charter of
the domestic organization provides that it will receive contributions and send
them, at convenient intervals, to the foreign organization.

(3) A foreign organization entered into an agreement with a domestic
organization which provides that the domestic organization will conduct a fund-
raising campaign on behalf of the foreign organization. The domestic
organization has previously received a ruling that contributions to it are
deductible under section 170 of the Code. In conducting the campaign, the
domestic organization represents to prospective contributors that the raised
funds will go to the foreign organization.

(4) A domestic organization conducts a variety of charitable activities in a foreign
country. Where its purposes can be furthered by granting funds to charitable
groups organized in the foreign country, the domestic organization makes such
grants for purposes which it has reviewed and approved. The grants are paid
from its general funds and although the organization solicits from the public, no
special fund is raised by a solicitation on behalf of particular foreign
organizations.

(5) A domestic organization, which does charitable work in a foreign country,
formed a subsidiary in that country to facilitate its operations there. The foreign
organization was formed for purposes of administrative convenience and the

Letter 4036(CG) (11-2011) 5
Catalog Number 47630W

6

domestic organization controls every facet of its operations. In the past the
domestic organization solicited contributions for the specific purpose of carrying
out its charitable activities in the foreign country and it will continue to do so in
the future. However, following the formation of the foreign subsidiary, the
domestic organization will transmit funds it receives for its foreign charitable
activities directly to that organization.

The revenue ruling states that it seems clear that the requirements of section
170(c)(2)(A) of the Code would be nullified if contributions inevitably committed to go to
a foreign organization were held to be deductible solely because, in the course of
transmittal to the foreign organization, they came to rest momentarily in a qualifying
domestic organization. In such cases, the domestic organization is only nominally the
donee; the real donee is the ultimate foreign recipient. Accordingly, the Service holds
that contributions to the domestic organizations described in the first and second
examples set forth above are not deductible. Similarly, those contributions to the
domestic organization described in the third example which are given for the specific
purpose of being turned over to the foreign organization are held to be nondeductible.

Rev. Rul. 66-79, 1966-1 C.B. 48, amplifies Rev. Rul. 63-252 to provide that
contributions to a domestic charity that are solicited for a specific project of a foreign
charitable organization are deductible under section 170 of the Code if the domestic
charity has reviewed and approved the project as being in furtherance of its own exempt
purposes and has control and discretion as to the use of the contributions. This
conclusion is reached because the contributions received by the domestic charity are
regarded as for the use of the domestic organization and not the foreign organization
receiving the grant from the domestic organization.

Rev. Rul. 68-489, 1968-2 C.B. 210 held that 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 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.

Letter 4036(CG) (11-2011) 6
Catalog Number 47630W

7

In Western Catholic Church v. Commissioner, 73 T.C. 196 (1979) aff'd 631 F. 2d 736
(7th Cir 1980) cert. den. 450 U.S. 981 (1981), the Tax Court held that although separate
requirements, the "private inurement" test and the "operated exclusively for exempt
purposes" test often overlap substantially. The petitioner's only activities were some
individual counseling and distribution of a few grants to needy individuals. The
petitioner's failure to keep adequate records and its manner of operation made it
impossible to trace the money completely, but the court found it clear that money
passed back and forth between petitioner and its director and his for-profit businesses.
The Court held that petitioner had not shown it was operated exclusively for exempt
purposes or that no part of its earnings inured to the benefit of its officer.

In Peoples Prize v. Commissioner, T.C. Memo 2004-12 (2004), the court upheld the
Service's determination that an organization failed to establish exemption when the
organization failed to provide requested information. The court stated "[Applicant] has,
for the most part, provided only generalizations in response to repeated requests by [the
Service] for more detail on prospective activities .... Such generalizations do not satisfy
us that [applicant] qualifies for the exemption."

Application of Law

Your certificate of formation and the amendments to it do not specifically limit your
purposes to those exempt under section 501(c)(3) of the Code. For this reason, as
noted in Income Tax Regulation sections 1.501(c)(3)-1(b)(1)(i), 1.501(c)(3)-1(b)(1)(ii),
1.501(c)(3)-1(b)(1)(iv), you do not meet the organizational test.

We cannot determine and you are unable to substantiate that your fund distribution
program is furthering exclusively 501(c)(3) purposes. Therefore, you do not meet the
operational test.

As noted in Income Tax Regulation section 1.501(c)(3)-1(a)(1), failure to meet the
organizational or operational test precludes exemption under section 501(c)(3) of the
Code. You do not meet either the organizational or operational tests.

You indicate that the only activity you partake in is fundraising for X. However, you have
not demonstrated any discretion and control over the funds that you send to X. As
described in Rev. Rul. 63-252, you act as a channel for a foreign organization. You are
only nominally the donee; the real donee is the ultimate foreign recipient. Therefore,
contributions to you would not be deductible.

Unlike the organization described in Rev. Rul. 66-79, the contributions you receive are
not for your use; rather, they are for the use of X. You were formed specifically to raise
funds in the United States and send them to X.

Letter 4036(CG) (11-2011) 7
Catalog Number 47630W

8

The funds you raise are used exclusively by D for X to use as he sees fit. Although he is
a member of your governing body, the rest of the governing body has no input or control
over how the funds are spent. As noted in Rev. Rul. 68-489, the lack of control and
discretion preclude exemption when there is no evidence that the funds are spent
exclusively for exempt purposes.

Like Church in Boston, supra, your method of distributing grants shows no manner of
objective selection. You provided no criterion for why grants were awarded and no
reasoning behind the amounts given. The grants were never discussed openly with the
governing body. You demonstrated no formal process that took place prior to the
distribution of funds. Instead, the distributions relied solely on D’s opinion. Since he is
the only governing body member on the site of X, you have not sufficiently monitored
the funds or how they were spent. For this reason, we cannot determine that the funds
were used exclusively for exempt purposes.

As seen in Western Catholic Church, supra, a lack of sufficient records made it
impossible to trace the entity’s use money completely and that organization was
denied exemption. Similarly, you allowed D to make all funding decisions and provided
no evidence of any follow up activity to ensure that the funds were awarded exclusively
for exempt purposes. Since your sole activity is the distribution of funds to X, and those
funds cannot be confirmed as being used for charitable purposes, you are not operated
exclusively for exempt purposes under section 501(c)(3) of the Code.

As noted in Peoples Prize, supra, generalizations that X is operated exclusively for
exempt purposes and your assurance that D is acting charitably are not sufficient
evidence to support your contention of exemption under section 501(c)(3) of the
Code. Your indication of moderating X’s website and monitoring the online bank
account do not demonstrate control over the funds or their use. Since you cannot
provide evidence of any control over the funds and cannot substantiate that they are
used for exclusively exempt purposes, we cannot find you to be exempt under section
501(c)(3) of the Code.

Applicant's Position

You have provided no rebuttal to our assertion that you are not exempt under section
501(c)(3) of the Code.

Conclusion

Based on the facts, we conclude that you do not qualify for exemption under section

501(c)(3) of the Code as you are not operated exclusively for 501(c)(3) purposes. Your
organizational document does not limit your purpose to those that qualify exclusively as
exempt purposes under section 501(c)(3) of the Code. Thus, you fail the organizational

Letter 4036(CG) (11-2011) 8
Catalog Number 47630W

9

test. You also fail the operational test. You lack documentation, records and evidence
that distributions were made and used exclusively for 501(c)(3) purposes. You have not
held any meetings resulting in no recordation. One person has complete control over all
funds and has not consulted the governing body in any manner on how to spend the
funds. Thus, you do not exercise adequate discretion and control over funds you have
distributed and therefore, you do not qualify for exemption under section 501(c)(3) of the
Code. Contributions to your organization are not deductible under section 170 of the
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. 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”. The statement of facts
(item 4) must be accompanied by the following declaration:

“Under penalties of perjury, I declare that I 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.”

The declaration must be signed by an officer or trustee of the organization who has
personal knowledge of the facts.

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. If you want
representation 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. 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.

Letter 4036(CG) (11-2011) 9
Catalog Number 47630W

10

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
Rulings and Agreements

Enclosure: Publication 892

Letter 4036(CG) (11-2011) 10
Catalog Number 47630W