IRS denies 501(c)(3) status to a scholarship-and-columbarium conduit that mainly benefits a related for-profit

Plain-English summary

To be tax-exempt under section 501(c)(3), an organization must be operated exclusively for charitable or educational purposes and must serve public rather than private interests; even one substantial non-exempt purpose defeats exemption. Here an organization applied for 501(c)(3) status, saying it would provide scholarships for public educational institutions. In practice it was a conduit: it was formed by a related for-profit company (owned by the organization's own three board members) that sells columbaria (structures of niches holding cremated remains). The scheme paired donations to campus endowed scholarships with the right to buy naming rights and niches in campus columbaria that the for-profit marketed, with a redacted percentage of each donor's payment going to the for-profit. The organization ran no charitable programs of its own, exercised no control over the funds it passed through, and simply routed money as donors directed. The IRS determined the organization failed the operational test because a substantial part of its activity served the private commercial interests of the related for-profit and its owner-directors, not the public. Citing Better Business Bureau, International Postgraduate Medical Foundation, P.L.L. Scholarship Fund, and KJ's Fund Raisers, the IRS issued a final adverse determination denying exemption, which also means donors cannot deduct contributions under section 170. This is a textbook private-benefit denial where a nonprofit is functionally inseparable from the for-profit that created it.

Ruling snapshot

• Question: Does an organization that funnels scholarship-and-columbarium donations for a related for-profit qualify as operated exclusively for exempt purposes under section 501(c)(3)?
• Outcome: denied (final adverse determination; fails the operational test by serving private interests)
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Better Business Bureau v. United States, 326 U.S. 179; International Postgraduate Medical Foundation; P.L.L. Scholarship Fund; KJ's Fund Raisers

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
IRS Cincinnati, OH 45201

Date:
Release Number: 201910022 December 10, 2018
Release Date: 3/8/2019 Employer ID number:

UIL Code: 501.33-00, 501.35-00

Contact person/ID number:
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,

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

RS P.O. Box 2508
I Cincinnati, OH 45201

Date:
September 28, 2018

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

Contact fax number:

Legend: UIL:
B = Formation date 501.33-00
C = State 501.35-00

M = Related for-profit entity

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 were incorporated in the state of C on B. According to your Bylaws you were formed to provide
scholarships for public educational institutions.

You assist educational institutions in attracting funding for endowed scholarships from college and university
alumni, faculty, staff and supporters, by offering them, in return for their gifts, the right to niches (individual
compartments, containing urns, holding cremated human remains) in a columbarium located on the campuses of
such institutions.

You identify a donor or donors who will fund the educational institution’s construction of a columbarium on its
campus. In exchange the donor receives exclusive naming rights to the columbarium. This donor will also
provide funding for the creation of an endowed scholarship (in his or her name) at that institution.

Agreements for the construction of each columbarium will be negotiated between the donor and the educational
institution. Each such agreement will provide for the marketing and promotion of the niches by M. You were
formed by M, a business owned by the three members of your board. M will oversee your day to day
operations. M is in the business of selling columbaria to funeral homes or family members, for interment of
deceased at an approved location designated by the funeral home or family members. However, M will only
promote and market the niches of the columbaria established by educational institutions with its assistance. M


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will not be directly involved in the construction of these columbaria. Donor and educational institution will
agree on location and design, and the institution will award construction contracts through an open bidding
process. M will receive no payments relative to the design or construction of the columbaria.

Apart from bringing together the columbarium donor(s) and educational institutions, for which M is rewarded
with a contract to market and promote the columbarium, you are a non-operating entity. Your sole purpose is to
receive tax-deductible donations for endowed scholarship funds or the construction of columbaria. You describe
yourself as a conduit, or intermediary, through which charitable contributions will be distributed to a college or
university or their affiliated organizations. You will provide no additional services.

You will not oversee or be involved in the awarding of scholarships and/or the distribution of any scholarship
funds. The criteria for applying, selecting and awarding of scholarships will be established, between the donor
and the institution, at the time the endowed scholarship is created and initially funded. Each institution, will
thereafter be responsible for overseeing the scholarship guidelines for their institution.

After the columbarium has been constructed and the endowed fund created, other donors may make
contributions to the endowed scholarship funds or to the columbarium construction fund. The contribution
entitles the donor to a niche in the columbarium. In effect, it is promoted as a quid pro quo contribution.
However, the ultimate beneficiary, the educational institution, does not pay the costs of the premium -- the right
to a niche. Instead M, interposed between the donor and the educational institution, receives payment directly
from the donor. percent of the donor’s total payment goes to M to cover its operating costs.

percent is for the scholarship endowment or the columbarium fund. Donors have the options of contributing it
themselves to a “qualified IRC 501(c) tax-exempt organization” associated with the college or university, or
directing you to pay it to such organization for construction of a columbarium or the scholarship endowment. M
created you to provide this second convenient option to the donors.

Any material restrictions made by a donor, as to their contribution, will be negotiated and agreed to at the time
the donor and institution enter into an agreement setting forth the terms and conditions for both the construction
of the columbarium and the creation of the endowed scholarship fund. M and you will abide by those terms
when making distributions into the endowed scholarship fund at each individual institution. You will prepare
annual reports showing all revenues received, from the sale of niches, and the dates disbursements were made to
each institution having a columbarium.

Law

Section 501(c)(3) of the Code provides for the exemption from federal income tax of organizations organized
and operated exclusively for charitable or educational purposes, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting to influence legislation (except as otherwise provided in
section 501(h)), and which does not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

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

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


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Treas. Reg. 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes only if it
engages primarily in activities that accomplish exempt purposes specified in Section 501(c)(3) of the Code. An
organization must not engage in substantial activities that fail to further an exempt purpose.

Treas. Reg. 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 subsection, it is necessary for an organization to establish that it is not organized or operated for the benefit
of private interests, such as designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interests.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (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 International Postgraduate Medical Foundation v. Commissioner, TCM 1989-36 (1989), the Tax Court
considered the qualification for exemption under section 501(c)(3) of the Code of a nonprofit corporation that
took physicians on tours throughout the world, providing continuing medical education seminars during the
tours. The tours were arranged by a travel agency in which a trustee of the petitioner had an ownership interest.
The petitioner used the agency exclusively for all travel arrangements. There is no evidence that the nonprofit
solicited competitive bids from any other entity. The agency billed travel charges directly to the individuals
participating in the tours. The petitioner prepared and distributed brochures promoting their program, but
emphasizing its sightseeing and recreational component rather than the medical curriculum. The Court found
that a substantial purpose of the petitioner was benefiting the for-profit travel agency. It concluded that when a
for-profit organization benefits substantially from the manner in which the activities of a related organization
are carried on, the latter organization is not operated exclusively for exempt purposes within the meaning of
section 501(c)(3) even if it furthers other exempt purposes.

In P.L.L. Scholarship Fund v. Commissioner, 82 T.C. 196, 1984, the court held that a nonprofit organization,
which operated bingo games on the premises of a for-profit business while it conducted its regular business
activity, the sale of food and beverages, and turned over its profits to various scholarship funds, could not be
regarded as "operated exclusively" for one or more exempt purposes because more than an insubstantial part of
its activities was not in furtherance of an exempt purpose. The bingo games were conducted by the owners of
the business who allowed the bingo players to be solicited by their employees to purchase food and beverages.
From these facts, the court concluded that more than an insubstantial purpose of the petitioner's activities was to
attract persons, by the way of the bingo games, onto the premises in the expectation that they would purchase
food and beverages while participating in the games. Petitioner's activities were thus, in substantial part,
designed to enhance the profitability of the business. Petitioner argued that its operations and the business’s
were separate because the receipts from the bingo games and the receipts from food and beverage sales were
accounted for separately; and that, because no cash payments were made by the petitioner to the business for
either rent or wages, that all of petitioner's activities were for an exempt purpose. The court, however, found
that the activities of petitioner and business were so interrelated as to be functionally inseparable, regardless of
the manner of accounting of receipts and disbursements.

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

In KJ's Fund Raisers, Inc. v. Commissioner, 74 T.C.M. 669 (1997), the court held that a nonprofit organization,
which sold lottery tickets on the premises of a for-profit business had a substantial non-exempt purpose to
enhance the profits of the for-profit business. The owners of the for-profit business formed the nonprofit
organization purportedly to raise funds for distribution to charitable causes. The nonprofit's lottery tickets were
sold during the regular business hours by the owners and employees of the for-profit business. Although the
petitioner contended that the activity did not have the effect of increasing the sales of beverages, the Court held
that KJ's Place benefited from the publicity surrounding donations given by petitioner.

Application of law

You are not described in Section 501(c)(3) of the Code because you are not operated exclusively for charitable
and educational purposes. You do not meet the provisions of Treasury Regulation Section 1.501(c)(3)-1(a)(1)
because you do not meet the operational test, failing the requirement of Treas. Reg. 1.501(c)(3)-1(c)(1) that no
more than an insubstantial part of your activities is devoted to a non-exempt purpose. You are not operated
exclusively for exempt purposes because you serve private interests, rather than public interests as required by
Treas. Reg. 1.501(c)(3)-1(d)(1)(ii). Your activities substantially benefit M and your board members, its
proprietors.

You describe yourself as a conduit or intermediary. You exercise no control over the donations you receive and
pay out. You simply receive funds from donors and direct them to the schools or exempt entities affiliated with
them as the donors direct. You abide by the terms of the agreements your donors make with the schools. You
are simply as a pass-thru entity, engaging in no charitable operations of your own. Your sole purpose is to
provide a convenience for persons who are simultaneously contributing to endowed scholarship funds and
reserving niches through M, and who would otherwise have to make separate arrangements to contribute to the
scholarship endowments or columbarium construction funds. The fact that there is no monetary interchange is
immaterial. A realistic look at the operations of the two entities shows that their activities are so interrelated as
to be functionally inseparable. Separate accountings of receipts and disbursements does not change that fact.

You are similar to the organization described in Better Business Bureau. You were formed for the substantial
purpose of providing custom to a related for-profit organization, M.

You are like International Postgraduate Medical Foundation in that M benefits substantially and non-
incidentally from the activities which you carry on, even though you make no payments directly to M, by
providing a convenience to M’s clients. In a similar way, the petitioner in the case benefited the related agency
by arranging the tours exclusively through the related agency and promoting them through brochures ostensibly
soliciting participation in its programs.

KJ’s Fund Raisers held that the nonprofit’s activities served the commercial purposes of for-profit organizations
that formed them, even where individuals unrelated to the for-profit organizations formally controlled the
nonprofit. Similarly, you have been set up by M, a related for-profit, to provide a way for purchasers of niches
from M to make donations to schools. This activity is a valuable inducement to purchase a niche through M,
resulting in a substantial private benefit to M, and its owners, your board members.

Like P.L.L. Scholarship Fund you cannot be regarded as "operated exclusively" for one or more exempt
purposes because more than an insubstantial part of its activities was not in furtherance of an exempt purpose.

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

5

Your activities are likewise thus, in substantial part, designed to enhance the profitability of the related
business, M, even though there is no monetary exchange and separate accounts are kept.

Conclusion

Based on the above facts and legal analysis, we conclude that you fail to meet the operational test of Section
501(c)(3) of the Code. You are operated to serve the private interest of M, and your board members who own
M.

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

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

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

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

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

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

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

We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

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

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