Disability trust failed to establish charitable status

Plain-English summary

A purported trust sought section 501(c)(3) status for programs intended to help disabled people move toward self-support. It refused repeated requests for a complete signed trust agreement, declined to identify its sole current beneficiary, and did not clearly explain its pooled-fund, research, litigation, housing, and investment activities. The IRS found that the trust could not satisfy the organizational test without a governing document containing valid purpose and dissolution provisions. It also failed the operational test because its current structure served one private beneficiary and the administrative record did not establish exclusively charitable operations. The IRS denied exemption, and the determination became final after no protest was filed.

Ruling snapshot

• Question: Did the trust establish that it was organized and operated exclusively for charitable purposes under section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), (b), (c), (d); Rev. Proc. 2018-5

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date:
May 8, 2019
Employer ID number:

Contact person/ID number:

Number: 201931011
Release Date: 8/2/2019 Contact telephone number:

Form you must file:

Tax years:

UIL: 501.33-00, 501.35-00, 501.03-30, 501.03-31, 508.04-00

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.

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:

March 6, 2019
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = Document 1 501.33-00

C = Document 2 501.35-00

K = Sole trustee 501.03-30

M = First beneficiary 501.03-31
508.04-00

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons 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 state that your purpose is to help disabled persons “exit” from Social Security and related assistance

thereby reducing the burden on governmental programs. Your goal is to attempt to “unhook the words
‘permanently’ and ‘totally’ from the disabled individuals medically diagnosed Social Security assistance
applied title.”

You claim to be formed as a trust, but you have declined to submit a copy of a trust document. You state that

you have been making confidential trust submissions to the Social Security Administration (SSA), which will
not be submitted to the IRS. We sent three requests for a conformed copy of your organizing document along
with information regarding your planned operations. You have yet to provide a complete, signed copy of your
organizing document.

You assert that the trust is in existence, however, and an individual account for your first beneficiary, whom we
will call M, has been funded. You were established by K, its sole trustee, to hold property and disburse income
to disabled beneficiaries, including M.

Currently, you have only a single beneficiary, M, but intend to have other beneficiaries at some unspecified
time. We concluded that we need to know the identity of M, but you refused to provide that information on the

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ground that M’s identity is confidential under Medicaid rules. You plan to establish a "pooled income fund" for
this purpose, but you have not explained the nature of the activities to be carried out by means of it.

Your quest for exemption is mixed up somehow with K's efforts to obtain the SSA's approval of M's "trust."
You have not explained the nexus. However, you mention the SSA's PASS program in a couple of places,
without explaining its relevance to your programs.

You submitted a document titled B, which is a compilation of multiple statutes, excerpts from various legal
texts, court cases and comments from your founder. A second document entitled C was also submitted. This
document provides that your general purposes are: 1) research, demonstrate and facilitate long term disability
assistance exit strategy; 2) assist with implementation of plans to achieve self-support and similar; 3) consider
evident impeding activities; 4) assist with appropriate legal remedies; 5) selectively take on new cases; 6)
optionally implement allowable associated managed investment fund(s); 7) accomplish the purposes without
materially diminishing existing financial assistance provided by the State and Agencies to the “second
beneficiary”. Every one of these items demanded an explanation. You provided none.

You stated that your founder and sole trustee K devoted a large amount of time to the discovery of causes and
the development of controls, treatments and preventative measures related to medically diagnosed human
physical and mental diseases and impairments. K discovered in the course of his research that modifications to
the living environment were necessary to maintain progress towards self-support, and that a disabled
individual’s specific needs may include custom requirements that he would otherwise neither be able to
facilitate or accommodate. You have furnished no explanation how you will utilize this discovery, other than
the cryptic statement that the trust document is based on Social Security Law which enables certain facilitation,
accommodation and investment activities to be conducted on behalf of the disabled individual.

The sole source of continuing funding identified for the trust will be awards from civil and criminal cases on
behalf of your disabled beneficiaries. We requested information about your litigation on behalf of your disabled
beneficiaries. You stated only that numerous filings have been made over many years with local law
enforcement, federal enforcement and other government agencies including filings with federal court with
respect to an unidentified first disabled beneficiary, and that, in addition, criminal charges are anticipated. No
further explanation was provided.

Your initial funding came about because of a Social Security law that enabled the management of inheritance
received through a will of a deceased parent/guardian. An unidentified disabled beneficiary’s place of residence,
to which many disability modifications had been added was jeopardized somehow by the passing of the
parent/guardian. A specifically tailored trust was needed to ensure that progress towards self-support was not
disrupted. You provided no explanation of the pertinence of the facts described to your activities.

You have also made the following statements for which you have provided no explanations:

• Tax exempt status is not being sought for individual disabled beneficiary accounts but for the “pooled
portion”.

• If a conflict arises between IRS regulations and other agencies such as Social Security you will proceed
in favor of the statutes of Social Security and other involved agencies.

• The trust is being created in connection with a specific Social Security disability plan to achieve self-
support.

• You will likely take on no new second beneficiaries until the Trust is in its final form.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

3

• The pooled trust will be primarily responsible for the construction and management of individual
accounts. Selection of disabled individuals will likely be based on a compatible intent between the disabled
individual and you as well as past successes.

• Substantial intellectual property anticipated to be applicable to your activities is held by the trustee/first
beneficiary. As new intellectual properties are discovered or created ownership will be determined at that time.
• You indicated that you will accept donor advice on the use and distribution of funds.

• You anticipate that both disabled Social Security recipients and military veterans will be future
beneficiaries of the trust, receiving housing assistance tailored to the needs of the disabled individual.

Your responses to our third request for additional information did not provide the specific information we
requested. The 18-page response included of an extensive analysis of multiple individual income tax concepts
and how they impact the disabled individual, and included personal tax documents of K and a customized Form
990 for the trust. You stated that the trust will be able to assist other disabled individuals with their plans to
achieve self-support via the “pooled and special needs portion.” You did not explain how this “portion” would
accomplish this or what it is a portion of. Finally, you did not provide the requested contact phone number,
making it impossible for us to contact K for clarification of your activities and explanation of our needs.

Financial data provided indicates that you have had expenses thus far for law books, two post office boxes, one
safety deposit box and the IRS application fee. To date all expenses were covered by way of contributions
resulting from the death of a parent/guardian of the beneficiary.

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

Limit the purposes of such organization to one or more exempt purposes; and
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. 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. 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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


4

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. 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively
charitable 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 designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interests.

Revenue Procedure 2018-5, 2018-1 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

Revenue Procedure 2018-5 provides that a ruling on exempt status is (Section 3) based solely on facts and
representations in the administrative file and (Section 6) 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. You have not provided
supporting documentation sufficient to establish you meet the requirements of Section 501(c)(3) of the Code.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


5

Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3). You have not established through the administrative record that you have met the particular
requirements of organizational test described in Treas. Reg. 1.501(c)(3)-1(b)(1)(i) and Treas. Reg. 1.501(c)(3)-
1(b)(4). You refused to submit a complete copy of the trust agreement that is your purported organizing
document. The drafts that have been submitted do not contain either a valid purpose or dissolution clause.
Without an organizing document in the administrative record you cannot establish that you meet the
organizational test described in Treas. Reg. Sections 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4).

With regard to the operational test described in Treas. Reg. 1.501(c)(3)-1(c)(1), although you have not provided
a clear explanation of your program as a whole, it is nevertheless clear that you are not operated exclusively for
exempt purposes. Currently you have only a single beneficiary, M, whose relationship to you have not
explained. A trust that has a single particular beneficiary such as you do at present will not qualify for
exemption under section 501(c)(3) because it serves a private interest, that of M, rather than a public interest.
Furthermore, it is more or less clear that when you have established the “pooled income fund” you will maintain
within it individual accounts for specified beneficiaries. You are like the organization described in Rev. Rul. 67-

367. You do not therefore meet the requirement of Treas. Reg. 1.501(c)(3)-1(d)(1)(ii) that you establish you are
not operated for the benefit of private individuals.

Furthermore, as regards your program as a whole, a favorable determination letter or ruling could not be issued
to you because it cannot be established through the administrative record that it meets the particular
requirements of the operational test of Treas. Reg. 1.501(c)(3)-1(c)(1) as required by Revenue Procedure 2018-
5, Section 6. The description you have provided of your activities is persistently incoherent, full of gaps and
omissions, and lacking in necessary explanatory matter, frustrating all attempts to attain an understanding of
them sufficient to support a determination that you are operated exclusively for exempt purposes under Section
501(c)(3). Detailed information regarding your planned activities was requested multiple times, but the
requested information was not submitted. You have not provided detailed descriptions of your plans to assist
disabled beneficiaries of Social Security to exit from assistance programs. Your plans to continue your
founder’s research have not been described in detail. While some of the purposes and/or activities could be
conducted in a charitable manner, without the detailed information regarding your operations it is unclear if
your activities are charitable. Consequently, even if the evidence in the administrative record that you are
operated for the benefit of private individuals could be set aside, you still would not meet the organizational test
because you have failed to clearly show that your operations accomplish exclusively charitable purposes as
required by Treas. Reg. 1.501(c)(3)-1(c)(1), because you have not submitted sufficient information establishing
you are operated exclusively for 501(c)(3) purposes. Like Universal Life Church you have not carried the
burden of establishing your right to a tax-exempt status. Like Pius XII Academy you failed to provide
information describing in adequate detail how the operational test will be met. Like La Verdad your
administrative record does not demonstrate that you would operate exclusively in furtherance of an exempt
purpose. Like New Dynamics, you have numerous gaps in your administrative record which you did not repair
in the course of the administrative process. Like Ohio Disability Association your responses to our requests for
additional information failed to supplement the initial application or clarify purposes and activities. 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 2018-5.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

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 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.

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

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

• A statement of the facts, law, and arguments supporting your position

• A statement indicating whether you are requesting an Appeals Office conference

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

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, 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 they haven’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 gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

Where to send your protest
Send your protest, Form 2848, if applicable, 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
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

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 if 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 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K