Exemption denied for defective organizing terms and inadequate records

Plain-English summary

An organization applied to regain section 501(c)(3) status after an automatic revocation for failing to file required annual returns. Its articles directed assets on dissolution to a named organization rather than ensuring that the assets would remain dedicated to exempt purposes. The applicant described collecting used clothing and school supplies and making an annual family donation, but it did not provide enough information about its recipients, selection process, distributions, safeguards, or possible insider eligibility. It also did not amend its articles or answer a second information request. The IRS denied exemption because the organization failed both the organizational and operational tests under section 501(c)(3).

Ruling snapshot

• Question: Did the organization establish that it was organized and operated exclusively for section 501(c)(3) purposes?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(b)(4), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(2); Rev. Rul. 57-449; Rev. Proc. 2017-5

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date: JUNE 30, 2017
Employer ID number:

Release Number: 201738012
Contact person/ID number:
Release Date: 9/22/2017

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-00, 501.03-30

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,

Stephen A. Martin
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

Cincinnati, OH 45201

Date:
May 9, 2017

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend:

V = Date 1
W = Date 2
X = Date 3
Y = Organization
z dollars = dollar amount

UIL:

501.03-00
501.03-30

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 submitted Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, on V, as a request for reinstatement of your exempt status. According to your application, you
were automatically revoked for failure to file your required annual returns for three consecutive years.

Along with your Form 1023, you supplied a document dated W that provided some of the information necessary
for a complete application. While it did not supply a specific attachment for Part IV of the application, a
narrative description of your activities, it did indicate that you would operate in various foreign countries. These
activities included: building an orphanage; digging wells for drinking water; ministering the word of God; Bible
studies; computer classes; sports for children; financial fitness classes; family fitness classes; tutoring; and
nutrition and health classes.

We obtained a copy of your organizing document, Articles of Incorporation, from the website of your state of
incorporation and sent it to you along with a letter requesting additional information. We requested a detailed
description of your past, present, and future activities; information about OFAC compliance; and that you
amend your organizing document to meet the organizational test of Section 501(c)(3) of the Code.

2

According to your Articles of Incorporation, you were formed on X as a public benefit corporation. Your
dissolution provision stated that, upon dissolution, assets would be distributed to Y. The document provided you
an opportunity to adopt the IRS recommended language for distribution of assets upon dissolution to qualify for
501(c)(3) status; however, you opted to name a specific organization instead.

In your response to our information request letter, you indicated that your activities consist of collecting used
clothing and school supplies, asking for a bid on the items and accepting the highest bids offered for the items.
You then give a family donation of z dollars per year. You also stated that you would check the OFAC SDN
List for names of individuals and entities with whom you are dealing and described your practices to ensure that
foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities. No
response was provided about amending your organizing document to comply with the organizational test under
Section 501(c)(3) of the Code.

After unsuccessful attempts were made to contact you by telephone, we sent you a second information request
letter, again stating that you need to amend your organizing document, and asking for more information about
the individuals to whom you distribute funds and/or goods.

We attempted to contact you prior to the due date of the second information request letter, and again after no
reply was received by the due date. All attempts were unsuccessful.

Law

Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure 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)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes.

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) of the Code. An organization will not be so regarded if
more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen
neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The
term “charitable” also includes lessening of the burdens of government.

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

3

Revenue Ruling 57-449, 1957-2 C.B. 622 holds that a trust to pay a certain sum to all the individuals enrolled in
a certain school on a particular date was held to be a private trust, not a charitable trust, because the
beneficiaries were a group of identifiable individuals.

Revenue Procedure 2017-5, 2017-1 I.R.B. 2321, Section 6 (and its predecessors) provides that a favorable
determination letter or ruling will be issued to an organization only if its application and supporting documents
establish that it meets the particular requirements of the section under which exemption from federal income tax
is claimed. Section 3 states that a determination letter or ruling on exempt status is issued based solely upon the
facts and representations contained in the administrative record. The applicant is responsible for the accuracy of
any factual representations contained in the application.

In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that “one
seeking a tax exemption has the burden of establishing his right to a tax-exempt status.”

Pius XII Academy v. Commissioner, T.C. Memo. 1982-97 provides that an organization must establish through
the administrative record that it operates as an exempt organization. Denial of exemption may be based solely
upon failure to provide information describing in adequate detail how the operational test will be met.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization’s
request for tax-exempt status was reasonable.

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service’s denial, stated “It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant.” The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

Ohio Disability Association v. Commissioner, T.C. Memo 2009-261 states denial is justified because responses
to requests for additional information failed to supplement the initial application or clarify purposes and
activities, and generalizations did not provide sufficient detail to determine that the organization would be
operated exclusively for exempt purposes.

Application of law

A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of Section 501(c)(3) of the Code.
Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg. Section
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3).

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes.

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

4

Your organizing document provides that, upon dissolution, your assets will be distributed to a specific
organization. As a result, you have not satisfied the organizational test described in Treas. Reg. Section
1.501(c)(3)-1(b)(4).

You did not provide sufficient detail that you meet the operational test under Section 501(c)(3) of the Code and
are operating exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You
stated that you would give a family donation of z dollars per year, but provided no additional information as to
whether or how the recipients comprised a charitable class. A charitable organization must be set up for the
benefit of an indefinite class of individuals, not for specific persons. A corporation operating for the benefit of
specific individuals is not charitable, even if the specific individuals in questions are in need of assistance. See
Rev. Rul. 57-449. As provided in Treas. Reg. Section 1.501(c)(3)-1(d)(2), you have not established that your
operations accomplish exclusively charitable purposes.

You have not submitted sufficient information establishing you are operated exclusively for 501(c)(3) purposes.
(See Universal Life Church, Pius XII Academy, La Verdad, New Dynamics Foundation and Ohio Disability
Association) You failed to provide details about the purpose of the funds you distribute, your recipient selection
process, how you distribute funds, how you ensure the funds will be used for their intended purposes and
whether board members or their relatives or members of the committee who select your recipients would be
eligible to receive funds. Therefore, there is not sufficient documentation to establish that you are exempt from
taxation as required by Section 501(c)(3) of the Code and Revenue Procedure 2017-5. As in Universal, you
have the burden of establishing that you qualify for tax exemption.

In Pius, La Verdad, and New Dynamics, it was established that an organization must establish, through its
administrative record, that it meets the requirements for exemption. Because you failed to provide sufficient
details in your initial application and the additional documentation you provided did not meet the statutory and
regulatory requirements for exemption, you have not established that you meet the requirements for exemption
under Section 501(c)(3) of the Code. As provided in New Dynamics, any gaps in the administrative record will
be resolved against the applicant. Similarly, in Ohio Disability Association, the court found that even when
additional information was provided, but it contained generalizations and failed to clarify purposes, denial is
justified. You did not provide supplemental information; therefore, we are unable to determine that you qualify
for exemption.

Conclusion

Based on the information submitted, you have failed to establish that you are organized and operated
exclusively for exempt purposes within the meaning of Section 501(c)(3) of the Code and the related income
tax regulations. Therefore, based on the administrative record, you fail to qualify for exemption under Section
501(c)(3).

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

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

5
• 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).

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

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

6

U.S. mail:
Internal Revenue Service
Exempt Organizations
P.O. Box 2508
Cincinnati, OH 45201
ATT: Carly Young
Room 4525
Group 7829

Street address for delivery service:
Internal Revenue Service
Exempt Organizations
550 Main St., Federal Bldg
Cincinnati, OH 45202
ATT: Carly Young
Room 4525
Group 7829

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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