Family education fund denied charitable status

Plain-English summary

An organization was formed to honor a deceased individual and raise money for his son's education, with future support limited to his descendants. Its articles also allowed purposes beyond those described in IRC § 501(c)(3). The IRS found that the organization failed the organizational test and that directing its activities to one preselected person created a substantial private benefit, so it also failed the operational test. The organization did not protest the proposed adverse determination, making the denial final. Contributions to the organization were not deductible under IRC § 170.

Ruling snapshot

• Question: Did an organization formed to fund one individual's education qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 170 and 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(b)(1)(i), 1.501(c)(3)-1(c)(1), and 1.501(c)(3)-1(d)(1)(ii); Rev. Rul. 67-367

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

IRS P.O. Box 2508 Date: 10/14/14

Cincinnati, OH 45201
Employer ID number:

Contact person/ID number:

Contact telephone number:

Number: 201502017
Release Date: 1/9/2015 Form you must file:

Tax years:

UIL: 501.32-00; 501.32-01; 501.33-00

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) 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, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Director, Exempt Organizations

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)

Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: 8/21/14 Contact Person:

Identification Number:

Contact Number:

FAX Number:

Employer Identification Number:

LEGEND:

B =

C =

O =

Q =

UIL:

501.32-00

501.32-01

501.33-00

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

Do you pass the organizational test under section 501(c)(3) of the Code? No, for the reasons
described below.

Do you pass the operational test under section 501(c)(3) of the Code? No, for the reasons
described below.

Facts

You were formed as a corporation in the State of O on Q. Per your Articles of Incorporation,
you were formed for the purpose of receiving and administering funds for perpetuation of the
memory of B and for educational and charitable purposes, along with any other provision
allowable under the law.

You were established to perpetuate the memory of B, by providing monetary educational
support to his son, C. You planned a golf outing and other fundraising activities to raise money
for C’s education and support, including tuition, books, and other related expenses. Your
support will be limited to any descendants of B and their expenses for education.

Your fundraising program is a golf outing. Email solicitations for participation and sponsorships
were sent. Numerous people have solicited personal fund raising for this outing as well as
phone solicitations. A sample of a solicitation flyer submitted with your application requested
individuals to join the golf outing to celebrate B’s life and legacy with all proceeds supporting his
son’s education fund.

Your financial data showed estimated revenues from contributions, gross receipts from
admissions, and revenue not otherwise listed ranging from $ to $ annually. Your
listed expenses were for fundraising, professional fees, and contributions paid out totaling
$ to $ annually. The attachments to your application states there were no current
disbursements to or for the benefit of members but it is expected that the net amount raised will
be used for C’s education.

In response to a request for additional information, you stated, “... it appears that the purpose
of the organization will not be served by becoming a public charity. The reasons for the
formation of the foundation, that being to provide for the education of B’s son, would not be met
by providing those funds to others.”

Law

Section 501(c)(3) of the Code provides, in relevant part, exemption from federal income tax for
corporations, and any community chest, fund, or foundation, organized and operated exclusively
for religious, charitable, scientific, literary, or educational purposes, no part of the net earnings
inure to the benefit of any private shareholder or individual.

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

Limit the purposes of such organization to one or more exempt purposes; and
do not expressly empower the organization to engage, otherwise than as an
insubstantial part of its activities, in activities that in themselves are not in
furtherance of one or more exempt purposes.

Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations explains that 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
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.

Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations states that an organization is not
organized or operated exclusively for exempt purposes unless it serves a public rather than a
private interest. It is necessary for an organization to establish 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.

Revenue Ruling 67-367, 1967-2 C.B. 188 states that a nonprofit organization whose sole
activity is the operation of a scholarship plan for making payments to pre-selected, specifically
named individuals does not qualify for exemption from Federal income tax under section
501(c)(3) of the Internal Revenue Code of 1954.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the
Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature,
will destroy a claim for exemption regardless of the number or importance of truly exempt
purpose.

In Easter House v. United States, 12 Cl.Ct. 476 (1987), aff'd 846 F.2d 78 (Fed.Cir.1988), the
court stated “It is the taxpayer who must demonstrate that no part of the earnings inured to the
benefit of any individual. Likewise, it is the responsibility of an organization to establish that it
serves a public rather than (a) private interest.”

In Wendy L. Parker Rehabilitation Foundation, Inc., Petitioner v. Commissioner, 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 activities.

Application of Law

Section 501(c)(3) of the Code sets forth two tests for qualification for exempt status. An
organization must be both organized and operated exclusively for purposes described in section
501(c)(3). Your Articles of Incorporation states the purpose for which you organized is for
receiving and administering funds for perpetuation of the memory of B and for educational and
charitable purposes, along with any other provision allowable under the law. The language in
your Articles of Incorporation does not exclusively limit your purposes for those described in
section 501(c)(3). As a result, you have not satisfied the organizational test required by section
1.501(c)(3)-1(b)(1)(i) of the Income Tax Regulations.

Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations states that an organization is not
organized or operated exclusively for exempt purposes if it is organized or operated for private
interests such as designated individuals. You were named after B, the father of C. Your
solicitation for funding states all proceeds are for the support of C’s education fund. This shows
that your formation and operations are primarily for the private benefit of C. This substantial
private benefit to C is a substantial non-exempt purpose which precludes exemption.

You are similar to the organization in Revenue Ruling 67-367 because your sole activity is
making payments to a pre-selected, specifically named individual. You do not qualify for
exemption because you are paying substantial funds to a pre-selected, specifically named
individual provided in your application. This shows you serve the private interests of the friends
of B rather than public interests.

You are like the organization described in Better Business Bureau of Washington, D.C., Inc v.
United States in that you are not “operated exclusively” for exempt purposes. Your purposes
include substantially furthering the private interests of C by providing the funds for the education
and support of C. Like the organization in this court case and Easter House, supra, this single
nonexempt purpose destroys your claim for exemption under section 501(c)(3) of the Code.

Similarly to Wendy L. Parker Rehabilitation Foundation, Inc., Petitioner v. Commissioner of
Internal Revenue, a substantial amount of your funds will be expended for the benefit of C. You
were created by friends of B, the father of C, and your board consists of friends of B. In
addition, C was pre-selected as the sole recipient of funds throughout your formation and
operations, as evidenced by your name, description of your activities, and financial data
provided. Even after discussion of exemption under section 501(c)(3), you wish to only provide
support for education of C. These facts show that your operations result in a substantial private
benefit for C, which precludes exemption under 501(c)(3).

Applicant’s Position

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

Service Response to Applicant’s Position

You do not qualify for exemption under section 501(c)(3) of the Code. You meet neither the
organizational test nor the operational test as required under section 501(c)(3). You limit your
support only to C, who is the son of B. Generally, a charitable program is one that benefits an
indefinite number of people as opposed to specific persons.

Conclusion

Based on the facts presented above, you failed both the organizational test and the operational
test required of 501(c)(3) organizations. Your organizational document shows you were created
for the substantial private benefit of C. Your operations show that you have operated for C’s
private benefit since formation, rather than for public purposes. Your operations result in
substantial private benefit to C. Therefore, you do not qualify for exemption under section
501(c)( 3) 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, How to Appeal an IRS Decision on Tax-Exempt Status.

Types of information that should be included in your appeal can be found on page 1 of
Publication 892, under the heading “Filing a Protest”. The statement of facts (bullet 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 protest 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.

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:

Internal Revenue Service
EO Determinations Quality Assurance
Room 7-008
P.O. Box 2508
Cincinnati, OH 45201

Deliver to:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202

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,

Director, Exempt Organizations

Enclosure: Publication 892