Foundation serving one individual loses charitable exemption

Plain-English summary

A foundation operated as a microboard providing care and support for one person with disabilities. The IRS examination found that all of the foundation’s activities, expenses, and earnings benefited that single person rather than a charitable class. It concluded that the arrangement produced prohibited inurement and that the foundation had not demonstrated operation for an exempt charitable purpose under IRC § 501(c)(3). The final adverse determination revoked the organization’s exempt status, made contributions nondeductible, and required corporate income tax returns.

Ruling snapshot

• Question: Does a foundation serving one preselected individual continue to qualify under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), 1.501(c)(3)-1(c)(1); Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street M/C 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES Date: SEP 15 2015
DIVISION

Number: 201552034 Person to Contact:

Release Date: 12/24/2015 Identification Number:

Telephone Number:
In Reply Refer to:

LAST DATE FOR FILING A PETITION

WITH THE TAX COURT:
UIL: 501.03-00

CERTIFIED MAIL- Return Receipt Requested
Dear

This is a Final Adverse Determination Letter that your organization was not exempt from
taxation under section 501(a) as described under section 501(c)(3) of the Internal Revenue
Code (IRC). The denial of your tax exempt status is effective July 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are operated exclusively for an exempt
purpose or that you have been engaged primarily in activities that accomplish

one or more exempt purposes.

You have not established that no part of your net earnings inure to the benefit
of any private shareholder or individual.

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

You are required to file Federal income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the year ending June 30, 20XX and for all years

thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should
a petition for declaratory judgment be filed under section 7428 of the Internal Revenue

Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District
Court of the United States for the District of Columbia before the 91st day after the date this

determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect your taxpayer rights. We can offer you help if your tax problem is causing a
hardship, or you've tried but haven’t been able to resolve your problem with the IRS. If you
qualify for our assistance, which is always free, we will do everything possible to help you.
Visit taxpayeradvocate.irs.gov or call 877-777-4778.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

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

Sincerely yours,
John A. Koskinen
Commissioner
By

Margaret Von Lienen
Director
EO Examinations

Enclosures:
Publication 892

Internal Revenue Service
Department of the Treasury

2525 Capitol Street #217
Fresno, CA 93721-2227

Taxpayer identification Number:

Date: April 30, 2015
Form:

Tax Year(s) Ended:

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, take no further action. We will issue a final 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 IRC
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,

Margaret Von Lienen
Director, Exempt Organizations Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (11-2003)
Catalog Number 34809ZF

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer: Year/Period Ended
06/30/XX
Issues
Issue 1 — Should the (Foundation) tax exempt status under Internal

Revenue Code (Code) section 501(c)(3) be revoked on the grounds that inurement exists?

Issue 2 — Should the Foundation’s tax exempt status under Code section 501(c)(3) be
revoked on the grounds that it did not demonstrate it is operated for a charitable purpose?

Facts

The Foundation submitted Form 1023, Application for Recognition of Exemption Under
Section 501(c)(3) of the Internal Revenue Code, (attachment 1) to the Internal Revenue
Service (Service) on February 20, 20XX. An attachment to Part II, Activities and
Operational Information, states in part:

The Foundation serves as both the fiscal and supportive intermediary service
organization which better serves that individual, the family and the county with a higher
level of autonomy and control. The foundation is centered around

plan of care which provides vocational, and daily living supports. The Foundation allows

to grow in relationships, contribute to his community, take responsibility for his decisions and
actions, be treated with dignity and respect and have control over and manage his budget...

A copy of the Foundation’s Articles of Incorporation or Bylaws was not found in the
Determination File.

The Foundation provided additional information to the Service in subsequent
correspondence to secure tax exempt recognition and provided a Mission Statement
(attachment 2, item 1a):

It is the aim of the Foundation to provide for the highest quality supports to enrich
the lives of persons with disabilities... We have a strong desire to provide a safe and
compatible environment in which any individual can progress to their full potential... We aim
to develop an individual plan of care to help promote skill development and assist any
individual... We hope to promote a stress free environment and help individuals live as
independently as possible... Our role as a support system is to assist any individual... It is
our aim as an agency to continue to promote choices and independence for people...

In other correspondence (attachment 3, item 1d) the Foundation stated it was seeking non-
profit status as a health service agency dedicated to the promotion or lifestyle of choice and
independence for persons with disabilities.

In other correspondence (attachment 4, item 4a) the Foundation stated it was an
Independent Support Coordination unit and was to receive referrals from County and State
agencies.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer: Year/Period Ended
06/30/XX

In other correspondence (attachment 5, item 11a) the Foundation stated it would provide
another option for persons with disabilities... all disabled individuals receive the
individualized care... all disabled persons wishing to use the Foundation...

In letter dated May 21, 20XX (attachment 6) the Foundation stated it was microboard
organization set up to service persons with disabilities. Currently, the organization is
providing services for the care of . The organization receives funding to
provide 24 hour care for

The Commonwealth of Department of Public Welfare provided a
Developmental Programs Bulletin, dated July 1, 20XX, (attachment 7) states a microboard is
a small, non-profit corporation which is created with the specific intent of supporting an
individual with developmental disability, and is committed to the individual’s needs and
desires for self-determination. A microboard works to address an individual’s planning and
support needs now and into the future. Such boards are created based upon the person-
centered planning philosophy and are designated specifically to support one individual.

The Microboard Association website (attachment 8) states that a
microboard is a legal nonprofit organization but not a 501(c)(3).

Law

Code section 501(c)(3) provides for exemption from income 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 (but only if no part of its activities
involve the provision of athletic facilities or equipment), 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.

Federal Tax Regulations

Section 1.501(c)(3)-1(a) states in part that in order to be exempt as an organization
described in Code section 501(c)(3), the 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. The term
“exempt purpose or purposes”, as used in this section, means any purpose or purposes
specified in section 501(c)(3).

Section 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded as operated
exclusively for exempt purposes if more than an insubstantial part of its activities is not in
furtherance of exempt purposes.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
‘ Explanation of Items Exhibit
Name of Taxpayer: Year/Period Ended
06/30/XX

In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, the US Tax Court held
that a substantial amount of the organization’s funds were be expended for the benefit of
Wendy Parker. Wendy Parker was pre-selected as the sole recipient of funds throughout
your formation. The result of the operations is a substantial private benefit Wendy Parker,
which precludes exemption under 501(c)(3).

Government’s Position

Issue 1 — The Foundation’s tax exempt status under Code section 501(c)(3) should be
revoked on the grounds that inurement exists.

The Foundation’s sole purpose is to provide services to one person, . All
of the Foundation’s earnings inure to benefit because all the Foundation’s activities
and incurred expenses relate to care. All funds received are used and future funds
will be used to provide services for benefit. The Foundation’s selection of

as a substantial beneficiary of its disbursements the detrimental factor resulting in
inurement. Because is the only beneficiary of the Foundation’s activities the
inurement amount is 100% of the Foundation’s earnings.

Issue 2 — The Foundation’s tax exempt status under Code section 501(c)(3) should be
revoked on the grounds that it did not demonstrate it is operated for a charitable purpose.
The Foundation’s proposed activities were to provide services to individuals, presumably a
charitable class, but no documentation has been provided to substantiate the proposed
activities. Providing services to one or a few individuals results in inurement and precludes
the Foundation from being regarded as operating for a charitable purpose.

Taxpayer’s Position
The taxpayer has not provided a definitive position; once a position is provided it will be

incorporated into this report.

Conclusion

A conclusion will be made once the taxpayer provides a response.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -3-