Charity reclassified after support shifted from fees to public contributions

Plain-English summary

A charity had originally been classified under section 509(a)(2) because fees were its primary source of support. Its support later shifted to gifts, grants, and contributions, and its reported public-support percentage was about 80 percent. The organization asked to change its classification and agreed to the proposed action. The IRS reclassified it as a publicly supported organization under sections 509(a)(1) and 170(b)(1)(A)(vi), effective from the specified year. Its section 501(c)(3) exemption remained in effect.

Ruling snapshot

• Question: Should the charity's foundation classification change from section 509(a)(2) to publicly supported status?
• Outcome: classification modified to sections 509(a)(1) and 170(b)(1)(A)(vi), with exemption retained
• Key authorities: IRC §§ 170(b)(1)(A)(vi), 509(a)(1), 509(a)(2); Treas. Reg. § 1.170A-9(e)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce St., MS 4920 DAL
Dallas, Texas 75242-1100

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: March 13, 2019

Number: 201933018                            Employer Identification Number:
Release Date: 8/16/2019
                                            Person to Contact/ID Number:
                                            /
UIL: 501.03-00                              Contact Numbers:
                                            Voice:
                                            Fax:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

CERTIFIED MAIL – RETURN RECEIPT REQUESTED

Dear                  :

This is a final determination regarding your foundation classification. This modifies our
letter dated January 19XX, in which we determined that you were an organization
described in section 509(a)(2) of the Internal Revenue Code (Code). We have modified
your foundation status to that of a public charity described in sections 509(a)(1) as
described under section 170(b)(1)(A)(vi) of the Code, effective for tax years beginning
January 1, 20XX.

Your tax-exempt status under section 501(c)(3) of the Internal Revenue Code is not
affected. Grantors and contributors may rely on this determination, unless the Internal
Revenue Service publishes a notice to the contrary. Because this letter could help
resolve any questions about your private foundation status, please keep it with your
permanent records.

We previously provided you a report of examination explaining the proposed
modification of your tax-exempt status. At that time, we informed you of your right to
contact the Taxpayer Advocate, as well as your appeal rights. On December 19, 20XX,
you signed Form 6018, Consent to Proposed Action – Section 7428, in which you agreed
to the modification of your foundation classification to 509(a)(1) organization. This is a
final determination letter with regard to your Federal tax-exempt status under section
501(a) of the Code.

You are required to file Form 990, Return of Organization Exempt from Income Tax. Form
990 must be filed by the 15th day of the fifth month after the end of your annual accounting
periods. A penalty of $20 a day is charged when a return is filed late, unless there is a
reasonable cause for the delay; however, the maximum penalty charged cannot exceed
$10,000 or 5 percent of your gross receipts for the year whichever is less. In addition,
organizations with gross receipts exceeding $1,000,000 for any year will be charged a
penalty of $100 a day when a return is filed late; however, the maximum penalty charged
cannot exceed $50,000. These penalties may also be charged if a return is not complete,
so be sure your return is complete before you file it.

If you are subject to the tax on unrelated business income under section 511 of the Code,
you must also file an income tax return on Form 990-T, Exempt Organization Business
Income Tax Return.

If you decide to contest this determination in court, you must initiate a suit for a declaratory
judgment in the United States Tax Court, the United States Claims Court, or the District
Court of the United States for the District of Columbia before the 91st day after the date this
final determination letter was mailed to you. Contact the clerk of the appropriate court for
rules for initiating suits for declaratory judgment. You may write to the Tax Court at the
following address:

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

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS
that can help protect your rights. We 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 our assistance, which is always free, we will do everything possible to
help you. Visit [email protected] or call 1-877-777-4778.

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter.

Thank you for your cooperation.

Sincerely,

Maria Hooke
Director, Exempt Organizations Examinations

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date: November 27, 2018

Taxpayer Identification Number:

Form:
Return Tax Year(s) Ended:

Person to Contact:

Employee ID:
Telephone:
Fax:
Address:

Manager's Contact Information:

Employee ID:
Telephone:
Response Due Date:

CERTIFIED MAIL – Return Receipt Requested

Dear                  :

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to modify your organization’s foundation status under Internal Revenue Code (IRC)
Section 509(a).

Your exempt status under IRC Section 501(c)(3) is still in effect.

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final letter modifying
your foundation status.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
send additional information as stated in 1 and 2, above, you'll still be able to file a protest
with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
Government Entities) if you feel the issue hasn't been addressed in published precedent
or has been treated inconsistently by the IRS.

If you're considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

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 letter modifying your foundation status.

Contacting the Taxpayer Advocate Office is a taxpayer right

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 877-777-4778.

Additional information
You can get any of 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 shown at the top of this letter.

Sincerely,

Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

Form 886-A
EXPLANATION OF ITEMS

Name of Taxpayer
Tax Year
20XX

Issue:
Whether [redacted] should be reclassified from
section 509(a)(2) to sections 509(a)(1) & 170(b)(1)(A)(vi) of the Internal Revenue Code.

Facts:

Initially, when [redacted] was formed they were
supported primarily by fees and they were granted exemption under classification 509(a)(2).
Over the years the organization’s support has changed from fees to gifts, grants and
contributions. The financial information reported on your Form 990, Schedule A indicates that
you are primarily supported by gifts, grants, and contributions. It was determined that the public
support percentage under 509(a)(1) & 170(b)(1)(A)(vi) was approximately 80 percent.

The financial information indicates that [redacted]
qualifies under either 509(a)(2) or 509(a)(1) & 170(b)(1)(A)(vi).
[redacted] requested that their foundation status be changed from 509(a)(2) to 509(a)(1) & 170(b)(1)(A)(vi).

Law:
Section 509(a)(2) of the Code describes an organization that receives no more than one-third of
its support from gross investment income and more than one-third of its support in each tax year
from a combination of the following:

i) gifts, grants, contributions, or membership fees from other than a disqualified
person, and

ii) gross receipts from admissions, sales of merchandise, performance of services
or furnishing of facilities in an activity that is not an unrelated business (to the
extent that gross receipts from any one individual does not exceed the greater of
$5,000 or one percent of the organization's total support on that tax year.

Section 170(b)(1)(A)(vi) of the Code describes an organization “which normally receives a
substantial part of its support from a governmental unit...or from direct or indirect contributions
from the general public.”

Income Tax Regulations section 1.170A-9(e)(2) states that an organization is publicly supported
if at least 33 1/3 percent of its support is received from grants from governmental units, and
direct or indirect support from the general public.

Income Tax Regulations section 1.170A-9(e)(6) states, in part, that in order to meet the 1/3
support test, contributions from individuals, corporations, or trust are includible in the public
support only to the extent that they do not exceed 2 percent of the organization’s total support.

Taxpayer’s Position:

The taxpayer agrees with the foundation status change from 509(a)(2) to 509(a)(1) &
170(b)(1)(A)(vi).

Government’s Position:

Based on your financial information, we have determined that you are not a private foundation
within the meaning of section 501(c)(3) of the Internal Revenue Code, because you are an
organization of the type described in sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code.
Therefore, we propose to modify your foundation status from an organization described in
section 509(a)(2) of the Code to that of an organization described in section 509(a)(1) and
170(b)(1)(A)(vi) of the Code effective January 1, 20XX.

Conclusion:

[redacted] foundation status should be
changed from 509(a)(2) to sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code since they are
primarily supported by gifts, grants, and contributions.

Your exemption under section 501(c)(3) of the Internal Revenue Code remains in effect.