Foreign foundation denied charitable exemption

Plain-English summary

A foreign foundation created under a decedent's will sought recognition as a section 501(c)(3) private foundation. Its stated purposes included education, science, and research, but the will also required lifetime support payments to the decedent's surviving spouse, payment of her domestic and foreign tax liabilities, and a protected position for her on the executive board. The IRS concluded that these provisions prevented the foundation's assets from being dedicated exclusively to exempt purposes and created substantial private benefit and inurement. Foreign-source support under section 4948, an analogy to a charitable remainder trust, and the applicable tax treaty did not independently establish section 501(c)(3) status. The IRS therefore denied exemption, and Appeals issued a final adverse determination.

Ruling snapshot

• Question: Did the foreign foundation satisfy the organizational and operational tests for section 501(c)(3) exemption?
• Outcome: Denied.
• Key authorities: IRC §§ 501(c)(3), 664, and 4948(b); Treas. Reg. § 1.501(c)(3)-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office
300 North Los Angeles Street Employer Identification Number:
MS LA-8000 Room 3054 C
LOS ANGELES, CA 90012

Number: 201947020 Person to Contact:
Release Date: 11/22/2019 *
Employee ID Number:
DATE: AUGUST 29, 2019 Tel:
Fax: *
A
UIL Index:
B 501.00-00
501.03-30
501.33-00

Redaction legend:

A = taxpayer name

B = taxpayer address

C = taxpayer identification number

Certified Mail

Dear

This is a final adverse 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 Section 501(c)(3).

We made the adverse determination for the following reason(s):

You have not demonstrated that you are organized and operated exclusively for charitable, educational,
or other exempt purposes and that no part of your net earnings inure to the benefit of private
shareholders or individuals as required by section 501(c)(3) of the Internal Revenue Code. Treas. Reg. §

1.501(c)(3)-1(a)(1).
Contributions to your organization are not deductible under section 170 of the Code.

You're required to file Federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return,
or 1041, U.S. Income Tax Return for Estates and Trusts. Mail your form to the appropriate Internal
Revenue Service Center per the form’s instructions. You can get forms and instructions by visiting our
website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Code section 6110 after deleting certain identifying information. We have provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents
attached that show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437.

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 either:

• United States Tax Court,
• The United States Court of Federal Claims,

• The United States District Court for the District of Columbia.

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed
this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate
forms for filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

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

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a
petition for declaratory judgment under section 7428 of the Code.

You also have the right to contact the Taxpayer Advocate Service (TAS). 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.
Please contact the Taxpayer Advocate for the IRS office that issued this letter. 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.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process.
TAS cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to
file a petition in a United States Court.

If you have any questions, contact the person at the top of this letter.

Sincerely,

Appeals Team Manager

Department of the Treasury
Internal Revenue Service

IRS P.O. Box 2508
Cincinnati, OH 45201

AUG 2 9 2019

Employer ID number:

Date:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Country 501.00-00
C = Date 501.03-30
D = Individual 501.33-00

E = Individual
F = Corporation

y = Amount
Z = 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 meet the organizational test under Section 501(c)(3) of the Code? No, for the reasons described

below.

• Do you meet the operational test under Section 501(c)(3) of the Code? No, for the reasons described
below.

Facts
You were formed as a “ ” in the country of B on C. Your organizing document states you were formed

for the advancement of education, science and research in the fields of business administration, economics, law,
medicine, chemistry, physics and biology. You provide grants and pay stipends and allowances to qualified
educational institutions and qualified academics and students for reasons listed above. You are seeking
exemption as a private foundation.

D and E were husband and wife at the time of D’s death. D’s Last Will and Testament, under B law, caused
your formation and indicates that you must provide adequate funds for the life support of E, in the amount of y

annually, adjusted for inflation and capped at no more than one-third of your income. You will also
provide E with the means to fulfill domestic and foreign tax liabilities. The Will states that as it relates to you, E
is a member of the Executive Board, without restriction of her term of office until a specifically-named
birthday, unless she remarries.

2

Your main source of support has been the bequest you received from D at the time of his death in the amount of
z . No person other than E may make donations to you, and E does not expect to do so. E is a B national,
residing in B, and is not a citizen or resident of the United States. Eighty-five percent or more of your non-
investment income has been received from sources outside the United States.

Law

Section 501(c)(3) of the Code provides for the exemption from federal income tax of corporations organized
and operated exclusively for charitable, educational, and other purposes, provided that no part of the net
earnings inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order for an organization to be exempt under
Section 501(c)(3) of the Code, it 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 or 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 limit its purposes to one or more exempt purposes and
do not expressly empower it to engage, otherwise than as an insubstantial part of its activities, in activities
which themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) states 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, if upon dissolution, such assets would by reason of a provision in
the organization's articles of organization or by operation of law, be distributed for one or more exempt
purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) states 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. A single nonexempt purpose, if substantial in
nature, will disqualify an organization from qualification under Section 501(c)(3).

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 organized exclusively for any of the
purposes specified in Section 501(c)(3) of the Code unless it serves public, rather than private interests. 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.

In Carrie A. Maxwell Trust, Pasadena Methodist Foundation v. Commissioner, 2 T.C.M. (CCH) 905 (1943), a
trust established for the benefit of an aged clergyman and his wife was a private trust and not an exempt activity
despite the fact that the two individuals served were needy.

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

3

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court held that an organization is not
operated exclusively for charitable purposes, and thus will not qualify for exemption under Section 501(c)(3), if
it has a single non-charitable purpose that is substantial in nature. This is true regardless of the number or
importance of the organization's charitable purposes.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo 1986-348 (1986), thirty
percent of the petitioner’s income is expected to be expended for the benefit of Wendy L. Parker, the daughter
of an officer and organizer of the corporation. An adverse determination was made because a child of the
founder and chief operating officer of the Foundation is a substantial beneficiary of the services contemplated
by the organization. This constitutes inurement which is prohibited under Section 501(c)(3) and the
Regulations. To qualify under Section 501(c)(3), an organization, inter alia, must operate exclusively for
exempt purposes, and no part of its net earnings can inure to the benefit of any private individual.

Application of law

You are not described under Section 501(c)(3) of the Code or Treas. Reg. Section 1.501(c)(3)-1(a)(1) because
you do not meet the organizational or operational tests. If an organization fails either the organizational or
operational test, it cannot qualify as an exempt organization under Section 501(c)(3).

Organizational test

Your organizing document does not limit your purposes to one or more exempt purposes as required by Treas.
Reg. Section 1.501(c)(3)-1l(b)(1)(i). Also, the provision of the annuity for E violates the requirements of Treas.
Reg. Section 1.501(c)(3)-1(b)(4) that assets of an organization exempt under Section 501(c)(3) be dedicated
exclusively to charitable purposes. Accordingly, you fail the organizational test and do not qualify for
exemption under Section 501(c)(3).

Operational test
You don't meet the operational test described in Treas. Reg. Section 1.501(c)(3)-1(c)(1). You provide an
annuity to E, your founder’s wife, for her lifetime. This is a substantial non-exempt purpose which precludes

you from exemption.

You are not operated exclusively for one or more exempt purposes because the payments you make to E inure
to her benefit, as described in Treas. Reg. Section 1.501(c)(3)-1(c)(2). These payments serve a private, rather
than a public, interest as prohibited in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

An exempt organization must not be operated for the benefit of a specific or designated few, as described in
Carrie A. Maxwell Trust. Your activities are like those in Wendy L. Parker Rehabilitation Foundation, Inc.
because a portion of your funds are given annually to E and you pay any of E’s domestic and foreign tax
liabilities.

Like the organization described in Better Business Bureau, your non-charitable purpose of providing an annuity
to E and paying domestic and foreign taxes due is substantial in nature, regardless of other activities you may
conduct which may be charitable or educational in nature. This substantial non-exempt purpose precludes you
from exemption.

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

Your position

You indicate that you qualify as a foreign charity described in Section 4948(b) of the Code. To qualify under
Section 4948(b), a foreign charity must have at least 85 percent foreign support since its creation. Gifts, grants,
contributions, and unrelated business income count as support, along with debt financed income appears to
count as support. Investment income that is not unrelated business income or debt financed income does not
count. Your main source of support has been the bequest you received from D at the time of his death, which is
B support in the amount of z ;

A couple of years ago you formed F, a corporation located in the United States that you assert is exempt under
Section 501(c)(2) as title holding company. You stated that most of F’s income is not unrelated business income
and therefore does not count as U.S. support, except some debt-financed income that is nominal in relation to
your foreign support. You are seeking a determination for tax exempt status because you have U.S. source
income from F.

D’s Will was prepared under B’s laws and not U.S. laws. D named you as his residual beneficiary. You believe
that this provision is analogous to a charitable remainder trust, with you serving as its own trustee, and with the
power to invade corpus of its own benefit (Treas. Reg. Section 1.664-2(a)(4)), except that if D had owned any
property at his death that was subject to U.S. estate tax (which was not the case), no estate tax deduction would
have been available under IRC Section 2055 because the payments to E do not meet the requirements of Section
664(d)(1)(A).

You indicated that B law does not allow you to alter the purposes laid down by D, so you are unable to comply
with our request to add language that references Section 501(c)(3) of the Code to the organizing document. You
said there’s no meaningful difference in the Section 501(c)(3) language and the language contained in the
Stiftung, other than the Stiftung does not specifically refer to Section 501(c)(3).

You said a Treaty between the United States and B provides that you are tax-exempt in the U.S. even if you
cease to be described in Section 4948(b).

Our response to your position
While you would satisfy the test under Section 4948(b) because substantially all of your support comes from
sources outside the U.S. it does not provide an independent basis to be recognized as an organization described

in Section 501(c)(3) of the Code.

To be recognized as an organization described in Section 501(c)(3), you must satisfy all requirements, whether
or not some of the provisions in your formation document are analogous to requirements under U.S. law. As
discussed above, we have determined that the Will that caused you to form includes provisions that prevent
your assets from being exclusively used for and dedicated to charitable or educational purposes.

You argue that you are analogous to a charitable remainder trust. A charitable remainder trust may be tax
exempt under Section 664 of Subchapter J, not under Section 501(a) of the Code. You are applying for tax
exemption under Section 501(c)(3); therefore, Section 664 and the applicable regulations are not relevant.
Further, you acknowledge that that you do not meet all the requirements to be an organization described in

Section 664(d)(1)(A).

The tax treaty between the U.S. and B does not provide automatic recognition of exempt status to organizations
which are exempt under the laws of B. Rather, it requires that an organization satisfy the relevant laws of both

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

5

[emphasis added] countries in order to receive recognition in the U.S. Because you do not meet the
requirements of Section 501(c)(3), you are not exempt.

Conclusion

You are not organized or operated exclusively for exempt purposes under Section 501(c)(3) of the Code. You
do not meet the organizational test because your organizing document does not properly limit your purposes to
those described in Section 501(c)(3) and your assets are not dedicated to one or more exempt purposes. You
also fail the operational test because your funds inure to the private benefit of E. Providing funds to E is a
substantial non-exempt purpose and precludes you from exemption. Accordingly, 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.

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

Letter 4036 (Rev. 7-2014)
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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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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