IRS denies exemption for funding founder's education

Plain-English summary

An organization planned eventually to provide free health and wellness education and counseling, but its initial and primary activity was funding its founder's full-time professional education. It paid the founder's tuition, travel, apartment, furnishings, supplies, seminars, and salary using an interest-free loan from the founder and the founder's spouse. The founder also planned to license literature to the organization while retaining control of the copyrights, and the organization had not established that its claimed amendment adding required Section 501(c)(3) language had been filed. The IRS concluded that the organization primarily served the founder's private interests and allowed net earnings to inure to the founder. The organization did not protest the proposed adverse determination, so the IRS issued a final denial.

Ruling snapshot

• Question: Did the organization qualify for Section 501(c)(3) exemption while primarily paying its founder's education and living costs?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner

Full text (IRS public release)

Department of the Treasury

Internal Revenue Service

Tax Exempt and Government Entities
PO Box 2508

Cincinnati, OH 45201

Number: 202117023
Release Date: 4/30/2021

UIL: 501.00-00, 501.03-00, 501.33-00

Dear

Date: February 2, 2021
Employer ID number:
Form you must file:

Tax years:

Person to contact:

This letter is our final determination that you don’t qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section
501(c)(3). 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 IRC Section 501(c)(3), donors
generally can’t deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c),
by sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We’ll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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.

If you have questions about this letter, you can call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service

Letter 4038 (Rev. 5-2020)
Catalog Number 47632S

number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 5-2020)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
IRS P.O. Box 2508
Cincinnati, OH 45201
Date: December 2, 2020
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:
B = State
C = Date
D = Name
E = Name
F = Organization
G = Profession

UIL:
501.00-00
501.03-30

x dollars = Amount

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 IRC Section 501(c)(3)? No, for the reasons stated below.

Facts
You were formed in the state of B on C. You later attested that you amended your Articles to include required Section 501(c)(3) language; however, to date there is no evidence of such an amendment on B’s Secretary of
State website.

Your application indicates that you were established to provide education related to health, balanced, effective
living, and happiness in the form of one-on-one counseling, public lectures and seminars for established groups
including churches, yoga centers, fitness centers, health food stores, and bookstores. You also plan to publish
educational information in the form of articles, books, and blogs.

During the [redacted] years of your operations, you will primarily fund the continuing education of your
founder/president/director, D, who is conducting full-time studies at F in order to become a certified G.

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

2

Your initial funding is provided by an interest free loan of x dollars from D and E (D’s spouse) and is intended
to pay for D’s transportation and airfare, apartment and furnishings, tuition, school supplies, and training
seminars while studying at F. D will also be paid a salary while studying at F.

Upon completion of [redacted] studies, D will establish an office in B to begin educating and advising clients on best
practices for health and well- being on a pro bono basis. You hope to also provide an alternative to individuals
who cannot afford the costs of health care, insurance, and medical practitioners by teaching them how to live a
healthy and balanced life. Further, D will write and offer programs offered for free to the public while
continuing personal study and development. D plans to grant you a license to publish [redacted] literature but will
maintain control over copyrights to [redacted] intellectual properties.

After D completes [redacted] education, you plan to receive funding through grants from D and E’s family trust and
donations from the general public.

During this time, you will also begin designing and implementing a website, as well as creating brochures, and
promotional materials while soliciting funding.

Law

IRC Section 501(c)(3) 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 IRC Section 501(c)(3), 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. 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 IRC Section 501(c)(3). 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(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 as defined in Section 1.501(a)-1(c).

Treas. Reg. Section 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. To meet the
requirement of this subsection, the burden of proof is on the organization to show 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 Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir. 1974), the court held that an
organization has the burden of proving that it satisfies the requirements of the particular exemption statute. The
court noted that whether an organization has satisfied the operational test is a question of fact.

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

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In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo. 1986-348, the tax court
upheld the Service's position that a foundation formed to aid coma victims, including a family member of the
founders, was not entitled to recognition of exemption. Approximately 30% of the organization's net income
was expected to be distributed to aid the family coma victim. The distribution of funds from the foundation
were for the medical and rehabilitative care of Wendy Parker, and this was to relieve the Parker family of the
economic burden of providing such care.

Application of law
You are not described in IRC Section 501(c)(3) because you fail the operational test set forth in Treas. Reg.

Section 1.501(c)(3)-1(a)(1).

You are not described in Treas. Reg. Section 1.501(c)(3)-1(c)(1) because more than an insubstantial part of your
activities is in furtherance of non-exempt private purposes. You are primarily funding D’s educational and
living expenses as well as a salary while [redacted] studies to become a practitioner by using the proceeds of a loan
from D and E. This precludes exemption under IRC Section 501(c)(3).

You are not operating as required by Treas. Reg. Section 1.501(c)(3)-1(c)(2) and Treas. Reg. Section
1.501(c)(3)-1(d)(1)(ii). For example, you are funding the living expenses and transportation expenses of your
founder, so she can go to school which you are also funding. Further, D plans to grant you a license to publish [redacted] literature but will maintain control over copyrights to [redacted] intellectual properties. These facts show your net
earnings are inuring to D and that you are operating for private interests. Therefore, you do not qualify for
exemption under IRC Section 501(c)(3).

Moreover, analogous to the organization described in Wendy L. Parker Rehabilitation Foundation v.
Commissioner, a disproportionate amount of your benefits is provided to a family member of the directors, who
maintained complete control over the operations of the organization, rather than to the public as a whole.

Your position

You stated that you were created to support the services that D wants to offer to your community and that your
goal is to have a functioning clinic where [redacted] can offer health and wellness counseling free of charge to

clients. You also stated that you will conduct your activities in a rural county of North B which has a high
percentage of individuals living at and below poverty levels who could benefit from a free alternative to
traditional medical treatment. You reiterated that these activities will begin upon the completion of D’s full-time

studies at F.

Our response to your position
You failed to provide any additional information from which it can be concluded that your activities exclusively

further or advance a purpose described in IRC Section 501(c)(3) as previously explained. Similar to the
organization in Harding Hospital, Inc. v. United States, 505 F2d 1068 (1974), you have failed to provide
sufficient information to prove to us that you are operating exclusively for purposes described in Section

501(c)(3).

Conclusion
Based on the information submitted, you are not operated exclusively for one or more purposes described in

Section 501(c)(3), you are primarily operated for the private benefit of D.

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

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)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

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

5

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