Legal-defense fundraiser denied charitable exemption

Plain-English summary

A nonprofit sought section 501(c)(3) status for programs supporting people it considered wrongly convicted and families affected by incarceration. Its primary activity was raising legal-defense funds for a preselected individual who was the treasurer's brother, shared a similar name with the organization, and was the focus of its website. Although the organization also planned youth workshops, prison visits, and family support, it expected more than 75 percent of its program and fee expenses to support the legal-fund program. The IRS denied exemption because the organization primarily served the private interests of the individual and his family rather than public charitable interests.

Ruling snapshot

• Question: Did an organization raising legal-defense funds for a preselected individual qualify for section 501(c)(3) exemption?
• Outcome: Denied because its substantial private-benefit purpose failed the operational test.
• Key authorities: IRC §§ 170, 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: July 7, 2016

Employer ID number:

Number: 201640019
Release Date: 9/30/2016

Contact person/ID number:

Contact telephone number:

Form you must file:

Tax years:

UIL: 501.03-07, 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.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

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

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date:
May 12, 2016

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:                         UIL:

B = Date                        501.03-07
C = State                       501.32-01
D = Date                        501.33-00
E = Program
F = Program
H = Individual

p dollars = Amount
q dollars = Amount

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues

Do you fail to qualify for exemption under section 501(c)(3) of the Code? Yes, for the reasons described
below.

Facts

You were formed as a corporation on date B in the state of C. Your Articles of Incorporation indicated you
were a nonprofit corporation whose purpose is helping wrongfully convicted people.

You amended your Articles of Incorporation on D. The amended purposes indicate you shall be operated
exclusively for educational and charitable purposes within the meaning of Section 501(c)(3) of the Internal
Revenue Code of 1986, or the corresponding section of any future federal tax code. The Articles also state your
purpose is to address social issues, educate, and help create bridging opportunities for inmates and their
families. In addition, they indicate you will assist children and family of incarcerated individuals to cope with
the absence of their loved ones, while encouraging them to become productive members of society and social
agents of change that they desire to see within their communities. Furthermore, the Articles state you will help
raise legal funds and advocate for wrongly convicted inmates.

2

You were formed to raise funds to pay the legal fees of H, who is the brother of your treasurer. You have to
date raised p dollars for H’s appeal. In addition, you have an informational website which primarily focuses on
H’s case and the circumstances leading to his conviction. Your corporate name and H’s name are also very
similar.

You explained that you were formed out of a desire to help those wrongly convicted inmates such as H because
it was discovered there are several others like him who were wrongly convicted but do not have the resources to
pay legal fees. Your program of E subsequently evolved, whose goal is to raise funds that will go towards legal
fees for those wrongly convicted. As part of E you want to:

• Ensure every person has the opportunity to pursue justice.
• Gather community support around those wrongly convicted inmates.
• Financially contribute to the legal needs of those wrongly convicted.
• Act as an advocate for the voiceless.

In addition to H’s sister, you have three other board members and each has either a friend or family member
who was wrongly convicted. You explained that your selection process for choosing recipients consists of an
attorney or paralegal, who will be members of your board, conducting research to determine if the individual
has been wrongly convicted. The findings will be presented to your board, which will approve one recipient for
services. Then you will create a campaign around the particular individual case. The campaign will include
making the community aware of the individual case and fundraising for the inmate’s legal defense. You will
only conduct fundraising events for one selected individual at a time. You later said that you will not contribute
any more than q dollars for legal fees per approved inmate.

Your second program is F whose goal is to encourage and assist children under the age of 21. This involves
assisting inmates and their families in building healthy relationships by organizing group visits to state and
federal prisons, facilitating and encouraging group discussions among families of incarcerated individuals.

To this end, you will organize group visits to state and federal prisons, conduct group discussions to encourage
the youth to see different options and opportunities they have available besides crime, violence and juvenile
recidivism, and family events. You will:

Meet once per month for two hours to participate in workshops or take trips to state or federal prisons

• Develop personal, individualized relationships with young people who are children of
  incarcerated parents
• Hold monthly group discussions so that youth can learn they have a support system of
  educators, community members and other youth who understand the issues that arise by
  having an incarcerated parent
• Have writing workshops to encourage literacy and regular communications with inmates
• Develop relationships with the community, community leaders as well as any other
  organization that is also looking to bring peace to the city

3

• Provide transportation to state and federal prisons every six weeks so that families can visit
  with each other, and
• Create opportunities for youth who have overcome life obstacles to become role models for
  higher risk peers.

You state that F represents 50% of your time and effort.

Grants, dues and proceeds from fundraising events will be your sources of financial support. You estimate over
75% of your program and fee expenses will be for the program E.

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 of which inures to the benefit of any
private shareholder or individual.

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

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 a nonprofit organization whose sole activity is the operation of a
"scholarship fund" plan for making payments to pre-selected, specifically named individuals designated by
subscribers does not qualify for exemption because it is serving private interests rather than public charitable and
educational interests under Section 501(c)(3) of the Code.

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 purposes.

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974), the court held that an organization
seeking a ruling as to recognition of its tax-exempt status has the burden of proving that it satisfies the
requirements of the particular exemption statute.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. C.I.R., 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,

4

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 funds. It also noted that such distributions relieved the family of the
economic burden of providing medical and rehabilitation care for their family member.

Application of Law

You are not described in section 501(c)(3) of the Code because you fail the operational test as per Section
1.501(c)(3)-1(a)(1) of the Regulations.

You do not meet the provisions in Section 1.501(c)(3)-1(c)(1) of the Regulations because you were formed and
are operated to raise funds to pay for H’s legal expenses. Although you plan to help other people in the future,
your primary purpose is to raise funds to pay for the legal expenses of H. This is evidenced by the fact you were
created by H’s sister and named after H. These facts show you were formed to further private purposes not
public.

You are not described in Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations. You are operating for private
interests of H and his family rather than public interests. For example:

• Your website is focused on the circumstances that led to H’s conviction.
• Your corporate name and H’s name are very similar.
• H is the first and only beneficiary of your fundraising program.

You are like the organization described in Revenue Ruling 67-367. To date, H is the only beneficiary of your
fundraising campaign. The details concerning H’s case and his conviction are the primary focus of your
website. You are also named after H. These facts illustrate you were formed to benefit a preselected, designated
individual which shows you are serving private interests precluding exemption under Section 501(c)(3).

You are like the organization in Better Business Bureau v. Commissioner. Although you may have some charitable
and educational purposes, the presence of non-exempt private purposes of paying a pre-selected individual’s legal
expenses and fundraising on his behalf precludes exemption under section 501(c)(3).

Similar to the organization in Harding Hospital, Inc. v. United States, you have the burden of proving that you
satisfy the requirements for tax exemption. You have failed to prove that you are not operating for substantial
non-exempt purposes.

You are similar to the organization described in the court case Wendy L. Parker Rehabilitation Foundation,
because you were formed to pay the legal expenses for a preselected individual. Like this organization, you are
serving the private benefit of an individual and family by paying these expenses and relieving him and his
family of their financial obligation.

Conclusion

You do not qualify for tax-exemption under IRC section 501(c)(3) because you are operating to raise funds for
the benefit of a designated individual. You therefore are serving substantial private rather than public or
charitable interests.

5

If you don’t agree

You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
  number

• A copy of this letter highlighting the findings you disagree with

• An explanation of why you disagree, including any supporting documents

• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
  organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:
Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. 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.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

6

Where to send your protest

Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail:                              Street address for delivery service:

Internal Revenue Service               Internal Revenue Service
EO Determinations Quality Assurance    EO Determinations Quality Assurance
Room 7-008                              550 Main Street, Room 7-008
P.O. Box 2508                           Cincinnati, OH 45202
Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892