IRS denies exemption to a fundraiser for one individual

Plain-English summary

A nonprofit corporation was formed to raise money for a named individual's medical, personal, and living expenses during treatment and recovery. Its website described that person's diagnosis, solicited support for the person, and linked to a crowdfunding page that allowed direct donations. The organization later said it would consider other applicants using need and other selection criteria, with directors recusing themselves when relatives applied. The IRS found no evidence that the organization had actually changed its original purpose, and all funds raised since formation had gone to the named person. Because the organization substantially served one preselected individual's private interests rather than the public, the IRS denied exemption under IRC § 501(c)(3). Appeals sustained the adverse determination.

Ruling snapshot

• Question: Does the fundraising organization serve a public charitable class rather than the private interests of one named individual?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367; Better Business Bureau of Washington, D.C., Inc. v. United States; Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
Employer Identification Number:
Date: October 16, 2020 Person to Contact:
Employee ID Number:
Number: 202101006 Tel:
Release Date: 1/8/2021 Uniform Issue List (UIL):
501.03-05
Certified Mail

Dear Sir or Madam:

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) of
the Code.

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

You are not organized and operated exclusively for exempt purposes within the meaning of section 501(c
)(3) of the Internal Revenue Code (the “Code”) and therefore you do not qualify for exemption from
federal income tax under section 501(a) of the Code. Rather you are operated more than incidentally for
private benefit and serve the private interests of individuals, rather than the public, in contravention of
Treas. Regs. §1.501(c )(3)-1(c )(1) and § 1.501(c )(3)-1( d)(ii).

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
petition for declaratory judgment under section 7428 of the Code.

Please refer to the enclosed Publication 892, How to Appeals an IRS Determination on Tax -Exempt
Status, for more information about the Appeals process.

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.
Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. You
If you qualify for TAS assistance, which is always free. TAX 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

Enclosure: Publication 892

Department of the Treasury

Internal Revenue Service

Cincinnati, OH 45201
Date: OCT 16 2020
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.00-00
C = Date 501.03-00
D = Individual 501.33-00
Dear Applicant:

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 were incorporated in the state of B on C. Your original Articles of Incorporation state that your purpose is
to act as a fundraiser for D who has [redacted]. You amended your Articles to state that you are organized
exclusively for charitable, religious, educational, and scientific purposes under Section 501(c)(3) of the Code.

To further your stated purposes, you will hold your first annual fundraiser. All proceeds from the event go to
funding the care and personal and medical expenses of [redacted] during their treatment and
recovery. You plan to hold an annual event to raise money and awareness for [redacted].

In your application you stated that following your first fundraiser, all proceeds will be donated to D, a
[redacted]. All future fundraising activities will be directed towards [redacted] as selected by the
Board of Directors. Any member can nominate candidates for consideration by the Board.

Your website describes D’s diagnosis and it states you were established to provide the helping hand and
fighting chance that D needs to overcome [redacted], without further disrupting [redacted] care and responsibilities. Your
website also tells the readers that there are several ways to help D during [redacted] time of need. In addition to the
link to buy tickets to your fundraiser, there is also a crowdfunding site link, which gives the reader the option to
donate to D directly.

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

2

The funds you raise will be used to pay for patient medical expenses associated with the treatment and recovery
from [redacted], including any in-home aid that is necessary. Additionally, these funds will be used to subsidize
normal living expenses while a [redacted].

You said that anyone meeting the eligible purpose in either of [redacted] will be eligible to receive
funds from you. First, a patient or a family member of a patient must submit a request for funds, along with any
supporting documentation, including to medical bills, invoices, etc. Second, a committee selected by your
Board of Directors will review each request for funds and make an eligibility determination and make
recommendations to the Board based on several criteria: need, source of funds, other sources of funds, personal
story and locality. Your Board will make the final decisions on which request for funds will be approved, which
is done by a simple majority vote.

The committee will directly pay expenses based on the approved request for funds. Typically, you will only
have the resources to work with one family at a time but will attempt to approve a request for funds from as
many [redacted] as possible.

A [redacted] whose relative serves on the committee and/or the Board of Directors will still be eligible to receive
approval for a request of funds. However, a Board of Director whose relative submits a request for funds must
recuse him/herself from voting on said request of funds.

Since your inception, all of the funds you have raised have been distributed to D.

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

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states 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 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(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) 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. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not operated exclusively for one or
more exempt purposes unless it serves a public rather than a private interest. It must not be operated for the
benefit of designated individuals or the persons who created it.

Rev. Rul. 67-367, 1967-2 CB 188, states a nonprofit organization whose sole activity is the operation of a
scholarship plan for making payments to pre-selected, specifically named individuals does not qualify for
exemption from federal income tax under Section 501(c)(3) of the Code.

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

3

In Better Business Bureau of Washington, D.C., Inc, v. U.S., 326 U.S. 279 (1945), the court held that the
presence of a single non-exempt purpose, if substantial in nature, will preclude exemption, regardless of the
number or importance of statutorily exempt purposes.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo 1986-348 (1986), the
organization was created by the Parker family to aid an open-ended class of “victims of coma.” However, the
organization stated that it anticipated spending 30 percent of its income for the benefit of Wendy Parker,
significant contributions were made to the organization by the Parker family, and the Parker family controlled
the organization. Wendy Parker's selection as a substantial recipient of funds substantially benefited the Parker
family by assisting with the economic burden of caring for her. The benefit did not flow primarily to the general
public as required under Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Therefore, the Foundation was not exempt
from federal income tax under Section 501(c)(3).

Application of law

You are not described in Section 501(c)(3) of the Code because you fail the operational test as per Treas. Reg.
Section 1.501(c)(3)-1(a)(1). You do not meet the provisions in Treas. Reg. Section 1.501(c)(3)-1(c)(1) because
you were formed for the private purpose of raising funds to pay for the medical expenses of D. Likewise, you
do not meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are operating for private
interests, rather than public interests, in providing financial assistance to a [redacted].

Your website specifically requests funds for D and provides a link to a crowdfunding site, which you say
provides funds directly to D. You are like the organization described in Rev. Rul. 67-367 because you serve
private rather than public interests.

Although you indicate that you may also assist others, you have specifically been raising funds for D since your
inception. You were formed to raise funds for a [redacted], which is not an exempt purpose.
You are like the organization described in Better Business Bureau of Washington D.C., Inc., because a single
non-exempt purpose, if substantial in nature, will preclude exemption, regardless of the number or importance
of the exempt purposes it serves.

Like the organization described in Wendy L. Parker Rehabilitation Foundation, Inc., your benefits do not flow
primarily to the general public. You were formed specifically to benefit D. Therefore, you do not qualify for
exemption under Section 501(c)(3) of the Code.

Your position

When we asked for more information about how your funds will be distributed, you said your original purpose
is for the payment of medical and related expenses for D. All efforts will be made to review and approve other
requests for funds based on your selection process, which will depend on your current cash flow.

You later said that you like to amend that prior description of how you distribute your funds. You said that your
purpose will be for the payment of medical and related expenses for anyone meeting your eligible purposes. All
efforts will be made to review and approve requests for funds based on the recipient selection process, which
will depend on current cash flow. D will be eligible to submit a request of funds. However, like everyone else
who submits requests, D will be evaluated based upon the criteria you have established. You said that based on
this amendment you should qualify for exemption under Section 501(c)(3) of the Code and the regulations. You
also said to see Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner.

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

4

Our response to your position

Although that you now say that your funds will be available to both D and anyone else meeting your criteria,
cash flow permitting, you have provided no evidence that you have really changed your purpose of providing
financial assistance to one specifically-named individual, D. For example, your website tells the public that your
purpose is to provide assistance to D and includes a link to contribute to [redacted] directly through a crowd-funding
site. Although, in theory, you could provide assistance to others, you have not yet done so, and your activities
provide a substantial private benefit to D. Therefore, you are precluded from exemption under Section 501(c)(3)
of the Code.

Conclusion

Based on the information submitted, you are not operated exclusively for exempt purposes. You are operating
for the private interests of one pre-selected individual, which is a substantial non-exempt purpose. Accordingly,
you do not qualify for exemption under Section 501(c)(3) of the Code.

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.

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

5

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).

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.

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

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