Transportation LLC is denied charity status for private benefit and commercial operations

Plain-English summary

An LLC sought section 501(c)(3) status to provide scheduled transportation to people with disabilities and other clients affected by local budget cuts. It shared vehicles, drivers, an address, and an owner-member with a related for-profit transportation company, and it planned to use donations and grants to help cover operating costs. Its formation document did not limit its purposes to exempt activities or dedicate assets to an exempt purpose. The IRS found that the LLC failed both the organizational and operational tests, operated much like the related business, and conferred private benefits on that company and its owner. It also found no objective evidence that a government unit regarded the transportation activity as its burden. The IRS therefore denied exemption under section 501(c)(3), and the denial became final after the organization did not protest.

Ruling snapshot

• Question: Does the transportation LLC qualify under section 501(c)(3) despite its organizational defects and close relationship with a for-profit company?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 85-2; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date: November 4, 2016
Release Number: 201704021

Release Date: 1/27/2017 Employer ID number:

UIL Code: 501.00-00
501.33-00 Contact person/ID number:
501.36-00

Contact telephone number:
Form you must file:

Tax years:

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

IRS P.O. Box 2508
Cincinnati, OH 45201

Date: August 12, 2016

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date of formation 501.00-00
C = Organizer/Member 501-33.00
D = Organizer/Member 501.36-00

F = Organizer/Member

G = For-profit entity

H = Local department of aging
L = State agency

M = State

X dollars = Amount

Y 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 qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts

You formed as a Limited Liability Company (hereafter, “LLC”) on B in the state of M. Your
organizers/members include C, D and F. Your formation document is silent regarding your purpose and how
assets will be distributed upon dissolution.

You do not have an operating agreement. You also do not have Bylaws. Your name includes the name of one
of your members, C. According to your application, your Board consists of an office manager and four drivers.

Your purpose is to provide non-ambulatory transportation for individuals that are assigned daily by the local
department of aging, known as H, and L. Clients of L are the general public and L schedules riders who go to
non-ambulatory medical appointments. You provide transportation services for individuals for appointments for
medical, dental and employment related activities. You also provide transportation services for individuals to
social functions.

There is related a LLC named G, which also provides the same services as you. G is owned by C. G has been
providing transportation services as a contracted vendor for H and L, as well as private transportation, for
approximately seven years. G will remain a separate business and will continue working with H and L as they
have in the past.

You provided copies of contracts as a non-ambulatory transportation provider with H and L, but the contracts
were between G and those entities. You said you do not have any contracts.

Budget cuts have caused H to eliminate programs that provided transportation. G is contracted to provide
transportation services for H and has been providing those services for several years. You are formed for the
clientele that were being transported by G under these programs. You said you are offering them a chance to
continue to be transported, just as they have in the past, only your company name will be different.

You said that G has four vehicles and four drivers providing transportation for H and L. These vehicles and
drivers are used approximately 45% of the time by you to provide rides. You also share a physical address with
G.

You said you need to be a public charity in order to obtain donations, grants and monetary gifts. These funds
will help maintain your business so that you can continue to provide safe and reliable transportation to these
individuals in their time of need. You are not a taxi service to whoever calls. The rides will be scheduled and
reoccurring. These rides will replace what they are losing through the county budget cuts.

You will charge a rate of x dollars per ride or y dollars if it is round trip. This will allow the clients to continue
being transported to their employment, appointments and daycare programs. You said you have nothing to do
with the fare being charged to your clients; therefore, you cannot reduce a fare. The money you receive covers
gas, insurance, maintenance for the vehicles and the general cost of running a business.

Your budgets include payroll expenses that account for more than 60% of your annual revenue. The remaining
30% or so of your revenue that you do not anticipate expending you have classified as “net income.”

Your mission is to “lessen the burden of government assistance by providing safe and reliable transportation for
families in need, which no longer have access.”

Law

Section 501(c)(3) of the Code provides, in part, for the exemption from federal income tax organizations
organized and operated exclusively for charitable, religious or educational purposes, no part of the net earnings
of which inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in Section 501(c)(3) of the Code, an 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.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization limit its purposes to one or more exempt purposes and

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

do not expressly empower it to engage, otherwise than as an insubstantial part, in activities which in themselves
are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) provides that an organization is not organized exclusively for one or
more exempt purposes unless its assets are dedicated to an exempt purpose, either by an express provision in its
governing instrument or by operation of law.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides 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 in not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or
more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or
individuals.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an exempt organization must serve a public rather than
a private interest. The organization must demonstrate that it is not organized or operated to benefit 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.” Thus, if an organization is operated to benefit
private interests rather than for public purposes, or is operated so that there is prohibited inurement of earnings
to the benefit of private shareholders or individuals, it may not retain its exempt status.

Rev. Rul. 85-2, 1985-1 C.B. 178, sets forth the criteria for determining whether an organization's activities are
lessening the burdens of government: whether the governmental unit considers the organization's activities to be
its burden; and whether these activities actually lessen the burden of the governmental unit. An activity is a
burden of the government if there is an objective manifestation by the governmental unit that it considers the
activities of the organization to be its burden. The interrelationship between the governmental unit and the
organization may provide evidence that the governmental unit considers the activity to be its burden. Whether
the organization is actually lessening the burdens of government is determined by considering all of the relevant
facts and circumstances.

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 the 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 International Postgraduate Medical Foundation v. Commissioner, TCM 1989-36 (1989), the Tax Court
concluded that when a for-profit organization benefits substantially from the manner in which the activities of a
related non-profit organization were carried on, the latter organization was not operated exclusively for exempt
purposes within the meaning of Section 501(c)(3), even if it furthers other exempt purposes.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Application of law
You are not as described in Section 501(c)(3) of the Code because you are not organized and operated
exclusively for charitable purposes.

You are not as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1) because you fail both the organizational and
operational tests.

You do not meet the requirements in Treas. Reg. Sections 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4). Your
organizing document is silent regarding your purpose and dissolution. Therefore, you do not meet the
requirements in Section 501(c)(3) of the Code and you fail the organizational test.

You do not meet the provisions of Treas. Reg. Section 1.501(c)(3)-1(c)(1) because more than an insubstantial
part of your activities are not in furtherance of an exempt purpose. You are formed to conduct the same
activities as the for-profit, G, but you said you want to cover more of your expenses by obtaining gifts, grants
and contributions. You said the only difference between you and G is the company name. These facts show you
are operating for substantial non-exempt private purposes.

You are not described in Treas. Reg. Section 1.501(c)(3)-1(c)(2) because your earnings inure to the benefit of
private shareholders. You are not set up as a non-profit organization; rather, you are set up as a for-profit LLC.
Your members (shareholders) are individuals. The way you are formed, in and of itself, precludes you from
qualifying from exemption.

You said the money you receive will cover gas, insurance, maintenance for the vehicles and the cost of running
a business. You use the cars owned by G. From the general public’s perspective, it is not clear how you are
distinguishable from G, as you have very similar names and share an address. You are not defined in Treas.
Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are operating to confer the advantages of tax-exempt status to
G, as you can receive donations to help cover expenses of cars they own. You further the personal interests of
C, as she is the owner of G.

You indicated you “lessen the burden of government assistance by providing safe and reliable transportation for
families in need, which no longer have access.” As stated in Rev. Rul. 85-2, an activity is a burden of the
government if there is an objective manifestation by the governmental unit that it considers the activities of the
organization to be its burden. You have not shown that a governmental unit considers your activity to be its
burden, or that you actually lessen that burden.

You are like the organization in Better Business Bureau. Although you may serve some charitable purposes,
the presence of non-exempt private purposes precludes exemption under Section 501(c)(3) of the Code.

Similar to the organization in Harding Hospital, 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 the benefit of C and her
for-profit organization, G. Therefore, you do not qualify for exemption under Section 501(c)(3) of the Code.

You are similar to the organization described in International Postgraduate Medical Foundation (IPMF). Your
founder owns a for-profit company which benefits substantially from the manner in which your activities are
conducted. Like IPMF, you are not operated exclusively for exempt purposes within the meaning of Section
501(c)(3), even if you further other exempt purposes.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Your position

You said you are not operating in a commercial manner because you do not have commercially licensed drivers.
You said the business does not contract with anyone, does not take general public rides and does not operate as
a taxi service. The individuals you provide transportation for are handicapped and special needs individuals
that have preset times to ride to work, appointments or adult daycare.

You said you should not be confused with G. G “does do contracts but it is a totally separate entity.” You said
“no person owns shares of the business.” You seek donations to cover the cost of gas and maintenance. Your
Board of Directors is not compensated, but you give reasonable compensation to employees.

Our response to your position

Although you stated that you should not be confused with G, you are operating in a manner indistinguishable
from G. You are not operating exclusively for exempt purposes, as described in Section 501(c)(3) of the Code,
as describe above.

Conclusion

Based on the facts presented, you do not meet the organizational and operational tests in Treas. Reg. Section
1.501(c)(3)-1(a)(1). Your activities do not exclusively further an exempt purpose and your income inures to the
benefit of C. Accordingly, you do not qualify for exemption as an organization described in Section 501(c)(3)
of the Code.

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.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

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).

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.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

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

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W