An animal sanctuary run out of the founders' home is denied 501(c)(3) status for inurement

Plain-English summary

A husband and wife formed a nonprofit to run a permanent sanctuary for previously ill, abused, or neglected animals, which lived in the couple's own home. The IRS denied the organization recognition as a tax-exempt charity under § 501(c)(3) on two independent grounds. First, it flunked the organizational test: its Articles of Incorporation authorized any lawful activity and lacked both a purpose clause limited to exempt purposes and a dissolution clause. Second, and more seriously, it flunked the operational test because its earnings inured to the benefit of its founders. The organization leased the founders' residence for rent equal to their mortgage, made the monthly payments on a vehicle the founders owned and used personally, and covered their utilities, all while the couple continued to live in the house. Running an animal sanctuary can be an exempt purpose, but here the private benefit to the insiders was substantial, and under cases like Better Business Bureau and Basic Bible Church a single substantial non-exempt purpose (or inurement to insiders) defeats exemption even alongside genuine charitable activity. Because the organization did not protest within 30 days, the denial became final: donors cannot deduct contributions under § 170 and the organization must file income tax returns. The takeaway for founders: a charity cannot pay the personal housing, vehicle, and utility bills of the people who control it.

Ruling snapshot

• Question: Does an animal sanctuary operated out of, and paying the personal expenses of, its founders qualify for exemption under § 501(c)(3)?
• Outcome: Denied (final adverse determination; fails both the organizational and operational tests, with earnings inuring to insiders).
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (b)(1)(i), (b)(4), (c)(1), (c)(2), (d)(1)(ii); Rev. Rul. 67-292; Better Business Bureau v. United States; Old Dominion Box Co. v. United States; Basic Bible Church v. Commissioner; Schoger Foundation v. Commissioner.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
IRS Cincinnati, OH 45201
Date:
May 9, 2018

Employer ID number:

Number: 201831013

Release Date: 8/3/2018 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-00, 501.03-18, 501.32-00, 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.


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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


Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date:
March 6, 2018

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

Contact fax number:

Legend: UIL:

P = State 501.03-00
Q = Date of formation 501.03-18
R = Individual 501.32-00
S = Individual 501.33-00

T = Individual
u dollars = Amount
w 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 described below.

Facts
You incorporated in the state of P on date Q. The filed copy of your Articles of Incorporation indicates that your

purpose is to engage in any lawful activity for which corporations may be incorporated in the state. Your
Articles do not contain a dissolution clause.

You provide a permanent home and sanctuary to previously ill, abused, and/or neglected animals. The animals
come from other animal sanctuaries, rescues, and/or from individuals in the community. You feed, house, and
provide veterinary care to the animals with the assistance of volunteers and paid independent contractors. You
plan to provide education to the public on the proper feeding, housing, and nurturing of animals.

You were founded by R and S, husband and wife. R is the President, Treasurer and primary caretaker of the
animals. The animals live in the home of R and S. R will be compensated u dollars per year for his duties,
adjusted annually. S is the secretary. T is listed as your chief veterinarian. There are no other members of your
governing body.


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You stated that R is the legal guardian of the animals. You obtain the animals from various organizations, such
as the local animal shelter and rescue organizations. You pay any related adoption fees for the animals. You
favor animals that require the most care, whether they have physical or psychological needs or are of difficult
species, and which would be too much for the average individual to care for adequately.

You provided a copy of your conflict of interest policy, which states in part that, after disclosure of any
financial interest in a contemplated business transaction and all material facts, all interested persons shall leave
the governing board or committee meeting while the determination of a conflict of interest is discussed and
voted upon. An interested person shall leave the meeting during the discussion of, and the vote on, the
transaction or arrangement involving the possible conflict of interest.

The facility you lease is a residential home owned by R and S. The monthly rent is equal to the home’s monthly
mortgage payment. R and S will continue to reside at the facility. The lease agreement states that you will lease
a three bedroom, one bathroom house on a month-to-month tenancy. R signed the agreement as both the
landlord and the tenant. You listed a mortgage payable of w dollars on your Balance Sheet.

Your occupancy expenses also include the monthly payment on a vehicle owned by R and S, as well as various
utilities. You provided details about the other expenses you intend to pay, which include: supplies, food, and
other associated costs; veterinary care; adoption fees; and the purchase of new enclosures.

You plan to subsidize your mission through donations, grants, and the sale of merchandise. You will advertise
through your website, presentations to local groups, mail, brochures, newspaper articles and other charities. All
income generated or granted to you will go specifically toward paying for the care of your animals, the upkeep
of the facility, and to pay your independent consultants working at the facility.

In the future, you wish to expand your facilities to include a much larger space for the animals, larger and better
crafted enclosures, and to provide care for a larger variety of animals, including often neglected farm animals.

You provided copies of your meeting minutes. Your first meeting consisted of an announcement of filing
Articles of Incorporation, a discussion of the duties and responsibilities as a board, future volunteers and
volunteer opportunities, and your future goals. At your second meeting, you discussed new additions of
animals, progress of current animals, review of and suggestions for improving your website. The minutes did
not include any discussion of entering a lease with interested persons, making the car payments of your officers
privately owned vehicles, or the payment of utilities at the residence. There was also no mention of any
discussion of, or voting on, the compensation of your President or how you followed your conflict of interest
policy with respect to any of these contemplated transactions.

Your website features pictures of some of your animals and information about your Board of Directors. You
provide a means by which interested persons can contact you to request a visit. Visits to the sanctuary are
allowed by appointment only. You request that individuals not contact you about re-homing; you are purely a
sanctuary, and not a rescue. You will not accept animals without prior arrangements, nor do you re-home the
animals currently living with you. None of the animals are available for adoption; the sanctuary is their forever
home. You do not pick up or care for stray or injured animals; you recommend contacting the local animal
control or humane society. Donations are not accepted at this time because non-profit status is pending. You
will gladly take volunteers.

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

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) provides 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:
(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization 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.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that that an organization's assets must be 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) 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(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) states that an organization is not operated exclusively for one or
more exempt purpose unless it serves a public rather than a private interest. It must not be operated for the
benefit of designated individuals or the persons who created it.

Revenue Ruling 67-292, 1967-2 C.B. 184, provides that an organization formed for the purpose of developing a
sanctuary for wild birds and animals for the education of the public may be exempt as an educational
organization. The organization was formed to purchase and maintain a large tract of forest land to be reserved
as a sanctuary for wild birds and animals and to be open to the public for educational purposes. A sanctuary for
wild birds and animals to be used for public educational purposes is an organization similar to a museum or Zoo.
Therefore, the activities of this organization are educational in that they instruct the public on subjects useful to
the individual and beneficial to the community.

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 Old Dominion Box Co. v. United States, 477 F2d. 344 (4th Cir. 1973) cert. denied, 413 U.S. 910 (1973), the
court held that operating for the benefit of private parties constitutes a substantial non-exempt purpose.

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


In Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), the organization's founder and his wife executed
vows of poverty and transferred all their possessions and income to the organization on the condition that it
qualified under Section 501(c)(3) of the Code. Financial control by the founder created an opportunity for
abuse. The court found that a substantial purpose of the organization was to serve the private interests of the
founder and his wife. Accordingly, the court held that the organization did not qualify under Section 501(c)(3).

In Schoger Foundation v. Commissioner, 76 T.C. 380 (1981), it was held that if an activity serves a substantial
non-exempt purpose, the organization does not qualify for exemption even if the activity also furthers an
exempt purpose.

Application of law

As explained in Treas. Reg. Section 1.501(c)(3)-1(a)(1), to be exempt as an organization described in Section
501(c)(3) of the Code, you must be both organized and operated exclusively for one or more of the purposes
specified in such section. Because you are neither organized nor operated exclusively for exempt purposes, you
are not exempt.

Organizational Test

Your Articles of Incorporation do not include a clause limiting your purposes to one or more exempt purposes.
Additionally, your Articles do not include a dissolution clause. As stated in Treas. Reg. Section 1.501(c)(3)-
1(b)(1)(i) and 1.501(c)(3)-1(b)(4), to demonstrate that it is organized exclusively for exempt purposes, thus
satisfying the organizational test, an organization must have a valid purpose and dissolution clause. You do not
have a proper purpose or dissolution clause; therefore, you are not organized for exempt purposes as described
in Section 501(c)(3) of the Code.

Operational Test

You do not meet the operational test of Section 501(c)(3) of the Code because you are not operating exclusively
for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). 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. You are paying the personal bills of your founders, including their house,
utilities and car payments while they continue to live in their house with their animals. Your earnings inure to
the benefit of your founders more than incidentally, as described in Treas. Reg. Section 501(c)(3)-1(c)(2),
which precludes you from exemption under Section 501(c)(3).

You do not meet the provisions of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are not operating
exclusively for public purposes; rather, you are operated for the substantial private benefit of your founders.
You pay rent monthly to R and S equal to their monthly mortgage payment while they continue to reside at the
house they are leasing to you. Although some educational activities may occur at the premises, R and S benefit
more than incidentally from the payment of their bills. Although your proportional usage of the officers’
personal vehicles was not established, you will be making their monthly car payment while they have full use of
these vehicles for their personal needs. As with the house, these vehicles could be sold, and the proceeds would
revert to the officers. Your rent and related utility payments, as well as the car payments, constitute inurement
to your officers, which precludes exemption under Section 501(c)(3) of the Code.

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

You plan to develop a sanctuary for birds and other animals but, unlike Rev. Rul. 67-292, you are not operating
exclusively for educational purposes. The facilities out of which you operate are not accessible to the general
public similar to a museum or a zoo.

You are like the organizations described in Better Business Bureau and Old Dominion Box Co. Although
operating an animal sanctuary may be exempt purpose under Section 501(c)(3) of the Code, you primarily
benefit your founders. Your operations result in benefit to private parties more than incidentally and constitute a
substantial non-exempt purpose.

You have no operational or financial controls in place. Furthermore, you have a small, related board and your
founders have control over your daily operations and finances. Like the organization in Basic Bible Church,
your small related board has provided an opportunity for abuse and your earnings inure to the benefit of your
founders, precluding you from exemption.

As explained in Schoger Foundation, if an activity serves a substantial non-exempt purpose, the organization
does not qualify for exemption even if the activity also furthers an exempt purpose. You are not open to the
public, you do not take in stray or unwanted animals nor do you attempt to find homes for stray or unwanted
animals. You serve a substantial non-exempt, private purpose of benefitting your founders while only
incidentally benefitting stray or unwanted animals.

Your position
You provided additional information to demonstrate how you benefit the public. These include:

• One of your volunteers is studying veterinary science and her time is spent learning about the animals
through direct interaction, sharing of personal experiences, and joining you on your trips to the vet.
Additionally, the veterinarian who is part of your Board has offered to allow her to spend time at the
veterinary hospital to assist in her studies and future career.

• Your social media site and website contain encouraging photos and videos of the animals as they
rehabilitate, as a way of demonstrating what it possible to achieve through proper care and
responsibility. The sites include care tips, healthy recipes and other information to help guardians of
animals make the best choices for their animals.

• Possible educational demonstrations with the local public library, with the aim of improving the
knowledge of the community. You will also partner with additional businesses for similar activities.

• Allowing visitors at your facility during pre-established hours and with appointments, along with
unexpected visits when people see you outside with the animals. Through these interactions, you educate
people about the care and responsibilities that go into being a guardian to an animal. Visitors interact
with the animals and learn about their needs first-hand.

• Over time, grow to become a comprehensive knowledge resource for the raising and rehabilitating of a
wide variety of animals. All information will be publicly available with the hopes of raising awareness
and education.

• Partner with the local high school veterinary science classes to allow students to interact with a variety
of different animals. This would allow them to gain experiences they wouldn’t otherwise have and
provide them with a better future.

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


Our response to your position

Even if an organization has many activities that further exempt purposes, exemption may be precluded if it
serves a substantial private interest. You are neither organized nor operated exclusively for exempt purposes.
You serve the substantial private interests of your founders, which results in inurement, and only incidentally
serve public interests.

Conclusion

Based on the information submitted, you are not organized or operated exclusively for exempt purposes within
the meaning of Section 501(c)(3) of the Code. You are not operating exclusively for exempt purposes and your
earnings inure to the benefit of insiders. Accordingly, we conclude you do not 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
• 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.

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


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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.

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