Revokes energy-referral charity for private benefit

Plain-English summary

An organization said its mission was to inform consumers about possible savings on electric and gas bills. In practice, it called consumers and sent interested prospects to two related energy businesses, earning referral fees when those businesses retained customers. The same person founded and controlled the charity and the related businesses, and the filed returns said all proceeds for two reported years came from those businesses. The IRS found no documented outreach, training, publications, or other charitable or educational program and concluded that the referral operation primarily served the creator's private business interests. It revoked the section 501(c)(3) exemption for failure of the operational and private-benefit tests. The final letter uses February 23 of a redacted year as the effective date, while the examination report recommends January 1 of a redacted year.

Ruling snapshot

• Question: Did an organization that generated paid customer referrals for its creator's related energy businesses operate exclusively for section 501(c)(3) purposes?
• Outcome: Revocation because the organization's sole activity served private business interests rather than a public charitable purpose.
• Key authorities: IRC §§ 501(a) and 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; American Campaign Academy v. Commissioner

Full text (IRS public release)

[Redaction note: the IRS release blanks the organization's identity, related businesses, individual names, taxpayer identification number, contact information, location, dates, employee counts, amounts, percentages, and other identifying details.]

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: May 11, 2018

Number: 201833019
Release Date: 8/17/2018 Tax Year Ending:

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:

Employee Telephone Number:
(Phone)

UIL Code: 501.03-00 (Fax)

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final determination that you do not qualify for exemption from Federal income tax under Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section 501(c)(3) effective February 23, 20XX. Your determination letter dated November 8, 20XX is revoked.

The revocation of your exempt status was made for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax under section 501(a) must be both organized and operated exclusively for one or more of the purposes identified in section 501(c)(3). In accord with Treasury Regulation § 1.501(c)(3)- 1(d)(1)(ii), this includes establishing that the organization is not operated for the benefit of private interests, including the creator of the organization. Through your principal activity of providing potential customer referrals to your creator’s private business interests, you failed to establish that you operated for public interests and not for the private interests of your creator. As such, you were not operated exclusively for section 501(c)(3) tax-exempt purposes.

Contributions to your organization are no longer deductible under IRC §170 after February 23, 20XX.

Organizations that are not exempt under section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information, please

visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS 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 TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce St, MC: 4920 DAL
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
15 June 2017

Taxpayer identification Number:

Form:

Tax Year(s) Ended:
Person to Contact/ID Number

Contact Numbers:
Telephone:
Fax:

Manager’s Name:

Manager Contact Number:
Telephone:

Response Due Date:

Certified Mail - Return Receipt Requested
Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action - Section 7428, and return it to the contact person at the address listed above (unless you have already provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren’t an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for contributions deductible under section 170 of the Code.

1 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

If we don't hear from you

If you don’t respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone conference with the supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the IRS Appeals office by submitting a written request to the contact person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the applicable law, and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please contact the individual identified on the first page of this letter if you are considering requesting technical advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court. They can, however, see that a tax matter that hasn't 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:

Internal Revenue Service
Office of the Taxpayer Advocate

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

For additional information
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,

Wak
Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

3 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. Explanation of Items

Year/ Period Ended
12/31/20XX, XX, XX

Revocation of IRC §501(c)(3) tax-exemption
Issue:

Whether the IRC §501(c)(3) tax exempt status of should be revoked because it is not operated exclusively for tax exempt purposes.

Facts:

() was incorporated under the laws of the state of
as a non-profit organization on 23 February 20XX

The organization’s status as a non-profit in the state of is active

The mission of the organization is to provide individuals with information in regards to energy savings related to electric and gas bills.

has an agreement with ( ) in which will perform its tax-
exempt purposes in informing consumers regarding available energy savings. In the instance where a consumer exhibits desires to pursue savings, will notify of the consumer and will make subsequent contact with the consumer. If is able to retain the referred consumer, will receive a commission or other fee.

was formed in 20XX and the current registered agent and CEO is
, who is also the registered agent and Director of

has an agreement with ( ) in which will perform its tax-
exempt purposes in informing consumers regarding available energy savings. In the instance where a consumer exhibits desires to pursue savings, will notify of the consumer and will make subsequent contact with the consumer. If is able to retain the referred consumer, will receive a commission or other fee. was formed in 20XX and the current registered agent and CEO is , who is

also the registered agent and Director of
For its tax period ending 31 December 20XX the organization filed a 990-N.

On its 990 for the tax period ending 31 December 20XX __ reported program service revenue of
$0. All proceeds received were from and . Reportable expenses for the period were broken down in the following manner $0 for salaries and other compensation; $0 for payroll taxes $0 for office expenses; and $0 for insurance.

On its 990 for the tax period ending 31 December 20XX reported program service revenue of
$0. All proceeds received were from and . Reportable expenses for the period were broken down in the following manner $0 for salaries and other compensation;

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. Explanation of Items

Year/Period Ended
12/31/20XX, XX, XX

$0 for payroll taxes; $0 for accounting services; $0 for office expenses; and $0 for insurance.

During the three year period ending 31 December 20XX the primary activity of was the calling of individuals within a geographic area and offering information on alternative servicers for the receipt of electrical services.

For the period ending 31 December 20XX, did not have any employees. For the period ended 31 December 20XX had 0 employees. For the period ended 31 December 20XX had 0 employees. The organization did not have any volunteers during the three year period.

Law:

Internal Revenue Code (IRC) § 501(c)(3) provides for tax exemption to organizations operated exclusively for charitable purposes. Treas. Reg. § 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 is not in furtherance of an exempt purpose.

Treasury Regulation § 1.501(c)(3)-1(c)(1), notes: 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 § 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

Treasury Regulation § 1.501(c)(3)-1(c)(2), notes: 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. For the definition of the words private shareholder or individual

Treasury Regulation § 1.501(c)(3)-1(c)(3), notes: An organization is not operated exclusively for one or more exempt purposes if it is an action organization

Treasury Regulation § 1.501(c)(3)-1(d)(1)(i) provides: An organization may be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: (a) Religious, (b) Charitable, (c) Scientific, (d) Testing for public safety, (e) Literary, (f) Educational, or (g) Prevention of cruelty to children or animals.

Treasury Regulation § 1.501(c)(3)-1(d)(1)(ii) provides: that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. Explanation of Items

Year/Period Ended
12/31/20XX, XX, XX

Treasury Regulation § 1.501(c)(3)-1(d)(1)(iv)(2) defines charitable as: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.

Treasury Regulation § 1.501(c)(3)-1(d)(1)(iv)(3) defines educational as: The instruction or training of the individual for the purpose of improving or developing his capabilities; or (b) The instruction of the public on subjects useful to the individual and beneficial to the community.

American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989) notes that the operational test focuses on the actual purposes an organization’s activities advance rather than the organization’s stated purpose or the nature of its activities.

Taxation with Representation v. United States 585 F.2d 1219-1222 (4th Cir 1978) determined that when testing compliance with the operational test, a determination must look past an organization’s organizational documents, to look at the “actual objects motivating the organization and the subsequent conduct of the organization”.

Trinidad v. Sagrada Orden de Predicadores, 1924, 268 U.S. 578, 44 S.Ct. 204, 205, 68 L.Ed. 458 determined that the carrying on of income-producing activities did not offend the limitation of ‘exclusively’ so long as the activities were purely incidental to the principal charitable purposes to which the income was ultimately devoted.

Kentucky Bar Foundation V. Commissioner 78 T.C. 921, 923-924 (1982) determined that the operational test examines the actual purpose for the organization's activities and not the nature of the activities or the organization's statement of purpose.

Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 283, 66 S. Ct. 112 (1945) notes that the "presence of a single [nonexempt] purpose, if substantial in nature, will destroy the exemption, regardless of the number or importance of truly [exempt] purposes."

Rameses School of San Antonio, Texas v. Commissioner of Internal Revenue T.C. Memo 2007-85 noted that upon a conclusion that relevant facts reveal private benefit; the organization will not qualify as operating primarily for exempt purposes “absent a showing that no more than an insubstantial part of its activities further the private interests or any other nonexempt purposes.”

Effective date of revocation

An organization may ordinarily rely on a favorable determination letter received from the Internal Revenue Service. Treas. Reg. §1.501(a)-1(a)(2). An organization may not rely on a

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

Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. Explanation of Items

Year/Period Ended
12/31/20XX, XX, XX

favorable determination letter, however, if the organization omitted or misstated a material fact in its application or in supporting documents. In addition, an organization may not rely on a favorable determination if there is a material change, inconsistent with exemption, in the organization’s character, purposes, or methods of operation after the determination letter is issued. Treas. Reg. § 601.201(n)(3)(ii); Rev. Proc. 2008-9, Section 12

The Commissioner may revoke a favorable determination letter for good cause. Treas. Reg. § 1.501(a)-1(a)(2). Revocation of a determination letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented. Treas. Reg. § 601.201(n)(6)(i), Rev. Proc. 2008-9, Section 12.

Government’s Position:

is a charitable organization the purpose of which is to provide individuals with information in regards to energy savings related to electric and gas bills. activities consist solely of contacting individuals and offering information on the ability to reduce their energy bills by switching to another energy provider. If an individual is interested in switching, then their information is transferred to either or . If either of these companies are able to retain the individual as a customer, than receives a referral fee.

The operational test of Treasury Regulation §1.501(c)(3)-1(c)(1) is designed to insure that an organization's resources and activities are devoted to furthering exempt purposes. The operational test examines the actual purpose for the organization's activities and not the nature of the activities or the organization's statement of purpose.

Treasury Regulations specify three conditions which must be satisfied for an organization to meet the operational test: First, the organization must be primarily engaged in activities which accomplish one or more of the exempt purposes specified in §501(c)(3); §1.501(c)(3)-1(c)(1). Second, the organization's net earnings must not be distributed in whole or in part to the benefit of private shareholders or individuals, §1.501(c)(3)-1(c)(2). Third, the organization must not be an “action” organization, i.e., one which devotes a substantial part of its activities attempting to influence legislation, or participates or intervenes, directly or indirectly, in any political campaign. § 1.501(c)(3)-1(c)(3).

These tests focus on the purposes the organization promotes by means of its activities. As such was evaluated on its ability to meet each of the guidelines.

1.) The organization must be primarily engaged in activities which accomplish one or more of the exempt purposes specified in §501(c)(3).

Article II of articles provide that the purpose of the organization: “[to provide] information in regards to energy savings related to electric and gas bills’. However, sole activity is contacting individuals and offering to help them save money on their energy bills by switching to another provider.

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. Explanation of Items

Year/Period Ended
12/31/20XX, XX, XX

Treasury regulation §1.501(c)(3)-1(d)(1) defines exempt purposes as: Religious, Charitable, Scientific, Testing for Public Safety, literacy, Educational, or Prevention of cruelty to children or Animals.

Though advises that its activity is charitable; it did not provide any documentation showing that the act of calling individuals and offering them the opportunity to change their utility service provider served a charitable, scientific, literary, or educational purpose. It did not provide documentation showing that it provided any type of outreach, training, seminar, or programs that promote a charitable, educational or scientific endeavor. In fact 0% ($0) of its 20XX expenses went to salaries, wages, and payroll taxes.

did not receive any gifts, grants, or contributions from the general public or from other non- profit organizations. Additionally, did not produce any books, pamphlets, flyers, or media that promoted a charitable activity or project that it accomplished.

As noted in Kentucky Bar Foundation V. Commissioner, the actual purpose of an organizations activity must be examined and evaluated not the nature of these activities or statement of purpose. Upon reviewing the actual activities undertaken by it was determined that main goal is to ultimately create a referral to or

so can receive a referral fee.

As in American Campaign Academy v. Commissioner, failed to establish that it is operated primarily for an exempt purpose. Additionally, Better Business Bureau of Washington, D.C. v. United States notes, the presence of a single nonexempt purpose, if substantial in nature, will destroy an organizations exemption. As noted, _ ’s sole activity is to create a referral to or which is not charitable, educational, scientific, etc. in nature, and as this is sole activity of _, it is not operated in a manner consistent to Internal Revenue Code §501(c)(3); and Treasury Regulation §1.501(c)(3)-1(c)(1)

2.) The organization's net earnings must not be distributed in whole or in part to the benefit of private shareholders or individuals

The operational test also reinforces the express dictates of §501(c)(3) in that an entity is deemed not to operate exclusively for exempt purposes if net earnings are distributed or otherwise inure to the benefit of private individuals Treasury Reg. §§1.501(c)(3)-1(c)(2) and (3). Additionally, although an organization may be engaged only in a single activity directed toward multiple purposes, both exempt and nonexempt, failure to satisfy the operational test will result if any nonexempt purpose is substantial.

has contracts with and in which if
one of these companies is able to secure as a customer a contacted individual, than will receive a commission for the referral. When an individual contacted by is ready to switch their energy provider their information is transferred to either or which completes the transfer. ,

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. Explanation of Items

Year/Period Ended
12/31/20XX, XX, XX

As noted has interest and control in all three of these entities, having founded them all.

The daily activity of is designed to benefit and . The
sole goal of the activity conducted by is to get an individual to switch energy providers and to send a referral to or . This is reinforced by the fact that 0%

of the income received by during the three year period ending 31 December 20XX came from and

As noted in American Campaign Academy, and restated in Rameses School of San Antonio: “when an organization operates 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, the organization by definition does not operate exclusively for exempt purposes”. Additionally, Private benefit within the scope of the prohibition may include an advantage, profit, fruit, privilege, gain, or interest.

and both received a tangible benefit in being the sole
receipts of clients from . Additionally, as the founder and operator of all three organization benefited directly as the daily activities of boosted the income of and

from which he profited.

As such is not operated in a manner consistent with Internal Revenue Code §501(c)(3); and Treasury Regulation §1.501(c)(3)-1(d)(1)(ii) in that it is operated for a private as opposed to a public benefit.

3.) The organization must not be an “action” organization.

As _ has not met the standards under the first two prongs of the operational test, an analysis of its political or legislative activities is not warranted. It is noted that did not participate in any activities that would classify it as an action organization.

Taxpayer’s Position:
The organization has no stated position.
Conclusion:

It’s the government’s position that does not meet the operational test because it is not operated exclusively for exempt purposes and has been used to serve the private interests of its officers rather than public interest.

The organization is not operated for a purpose that is exempt as defined under Internal Revenue Code §501(c)(3) and Treasury Regulation 1.501(c)(3)-1(c). Additionally, the purpose of the organization benefits controlled entities, and charitable activities of | are incidental to providing for the benefit of transferring customers to the controlled entities.

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

Page: -6-

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No.

Year/Period Ended
12/31/20XX, XX, XX

has acted as a vehicle to serve the private interests of its partners rather than public interest as prescribed under Treasury Regulation §1.510(c)(3)-1(d)(1)(ii).

It is recommended that that exempt status of this organization be Revoked as of January 1, 20XX

Form 886-A (Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -7-