IRS denies 501(c)(3) exemption to a trust formed to fund a film based on its founder's copyrighted screenplay

Plain-English summary

An individual set up a trust, named himself its sole trustee and donor, and on the same day licensed the trust the rights to a film screenplay he had written and copyrighted. The trust's plan was to raise charitable grants from wealthy donors to produce, promote, and exhibit the movie, with net proceeds eventually going to soldier and youth charities. It applied for 501(c)(3) status, and the IRS denied it. To be exempt an organization must operate "exclusively" for exempt purposes, serve public rather than private interests, and not let its earnings benefit insiders. The IRS found the trust failed on all counts: producing and distributing a film through ordinary commercial filmmaking is a substantial nonexempt commercial purpose, and the arrangement mainly served the founder, who kept the merchandising and soundtrack rights, would get the license back if funding fell through, and controlled the one-person board. The IRS leaned on cases treating commercial publishing and film-style operations as nonexempt (Rev. Rul. 60-351, Rev. Rul. 77-4, Fides Publishers, Airlie Foundation) and on the rule that a single substantial nonexempt purpose defeats exemption (Better Business Bureau). Because the founder did not overcome these problems, the denial became final, and donors cannot deduct contributions under section 170. The release includes both the final adverse letter and the attached proposed determination laying out the full analysis.

Ruling snapshot

• Question: Does a trust formed to raise funds and produce a film based on its founder's copyrighted screenplay qualify for exemption under section 501(c)(3)?
• Outcome: Denied (final adverse determination; substantial nonexempt commercial purpose and private benefit/inurement to the founder)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (c)(2), (d)(1)(ii); Rev. Rul. 60-351; Rev. Rul. 77-4; Better Business Bureau v. United States, 326 U.S. 279; Fides Publishers Assn. v. United States, 263 F. Supp. 924; Harding Hospital v. United States, 505 F.2d 1068; Airlie Foundation v. IRS, 283 F. Supp. 2d 58

Full text (IRS public release)

Department of the Treasu
oa ihleenal Revenue Service sd Date: AUG 10 2021
. Independent Office of Appeals Praca to coriiecl.

T RS Name:

Employee ID number:

Number: 202144028 {elophone:
Release Date: 11/5/2021 kare

Employer ID number:

Unifotn Issue fist (UIL);
60 !. 30-02

501. 35-00
502. 36-03

Cei tifled
Mail :

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 reasons:

You have not demonstrated that you will be operated exclusively for charitable, educational or other exempt
purposes as required by section 501(c)(3) of the Internal Revenue Code. Furthermore, you are organized and
operated for the primary purpose of carrying on an unrelated trade or business. Additionally, your operations
more than incidentally benefit the private interests of your founder and officer rather than public interests.

Contributions to your organization are not deductible under Section 170 of the Code.

You're required to file federal income tax returns on Forms L120, US Corporation Income Tax Return 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
Section 6110 of the Code after deloting certain identifying information We provided to you, in a separate
nailing, Notice 437, Notice of Intention lo Disclose: Please review the Notice 437 and the dacuments 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 can file an action for declaratory judgment under the provisions
of Section 7428 of the Cade in either:

« The United States Tax Court,

• The United States Court of Federal Claims, or

« The United States District Court for the District of Columbia

Letter 1371 (Rev. 7-2020)
Catalog Number 40683R

You must file a petition or complaint i one of these three courts within 90 days from the date we mailed this
determination letter to you Coulact the clerk of the approptiate coutt Cor tules aud the approptiale foros for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:
United States Tax Court US Court of Federal Claims US District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Avenue, NW
Washington, DC 20217 Washington, DC 20005 Washington, DC 20001

Note: We will not delay processing icone lax velutus aud assessing any laxes due even if you file @ petition for
declaratory judgment under Section 7428 of the Code.

You also lave the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent organization
within the US that can help protect your taxpayer rights. [AS can offer you help if yout tux 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 8// /// 4//8.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. ‘['AS
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 questions, contact the person at the lop of this letter.

Sincerely,
Charles Rettig
Commissioner
By
Appeals Tear Manager
Enclosures:
cc:

Letter 1371 (Rev. 7-2020)
Catalog Number 40683R

Department of the Troasury
Internal Revenue Service

URS P.O. Box 2508
Cincinnati, OH 45201
Date: September 15, 2020
Employer ID number:
Contact person/iLD number:

Gonlact telephone number:

Contact fax number:

Legend: UL:

X — State 01 30-02,

Y = Date 501 35-00

7. = Individual 501.365-03

B = Title

C = Date

D = Date

F = Date

p dollars = Amount
q 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 IKC 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 by a trust agreement in the state of X and funded on Y. Z, is both your trustee and the donor.

The same day you were formed. Z granted you a Certain Exclusive Limited License for the film

screenplay B which he wrote and copyrighted in his name. Specifically, you will hold certain license rights to
B in order lo raise funds lo produce, promote and exhibit B. The initial tenn of the license cuds on D; however
this may be extended if you meet the following two key requirements:

You must secure conditional charitable grants of q dollars to fund the production of B; and
e You must enter into an agreement with a Qualifled Production Company. A Qualified Production

Company is defined as a production company that has been the primary producer of at least two
qualified films is defined as:

Letter 4034 (Rev. 11-2018)
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a) A full length feature film of material historical accuracy;

b) Taving a budget of not less than US Dollars ($: ), aud

c) Exhibited at more than one hundred theaters for a period of more than ten (10) consecutive
weeks, measured from the date of wide release.

You plan to secure conditional grants to meet the requirements of the license by soliciting only very high net-
worth individuals and large organizations, both for-profit and not-for-profit, to finance a highly professional
production of B. In the eveut B is completed within the time period specified in the license, you will own the
perpetual exclusive right to exhibit B. If these requirements are not met before the initial or any extended term,

the license expires The license doos not apply to merchandising and soundtrack rights, which are reserved to be
held by Z.

If B is made into a movie, the two key avenues of promoting it will be traditional broadcast and print media
vullets. Your plat is to exhibit the movie lo a mass audience on a broad and extended basis using multiple
forms of distribution (theater. home video, otc.).

Any net proceeds from the inovie will be used lo provide financial support to soldier aud/or youll: chaities. The
support you will provide to charities is limited to the terms of an Exclusive Benefit Period which is defined in
the trust agreement. This period begins at the commencement of the trust and ends on C. During the last year,
you are required to donate a majority of your assets (no less than 80%) to charities. You will also install a
member charity committee to determine to which charities donations are made.

Concerning adding more trustees, Z has the authority and ability to:

e Appoint one or more additional trustees;
e Reduce the number of tustees then serving, aud
e Remove and replace any trustee, with or without cause.

You initially expect a majority of your revenuc to come from donatious. Expenditures ate for producing aud
marketing B, professional fees, and Z’s salary.

You finally wrote that Z commissioned reviews through a well-known film industry screenplay hosting site. B
teceived positive reviews. Z also received strong positive comments from three nationally prominent historians
who are experts in the area of history portrayed in B.

Law

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

Treasury Regulation (Treas. Reg.) Section 1.501(c)(3)-1(a)(1) states that, 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.

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Treas. Reg. Section 1.501(¢)(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 mote 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(d)(L)(ii) provides that an organization is not organized or operated
exclusively for 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 persous who created it.

lu Revenue Ruling (Rev Rul) 60-351, 1960 2B L69, a corporation was organized and operated on a non
profit basis, It published @ foreigu language magazine containing fiction, poelty, book reviews aud aillcles
which it states was of a literary, scientific and educational character. The magazine was available to the general
public through regular paid subscriptions. The corporation's income was derived mainly from subscriptions and
sales of individual copies of the publication, aud some was Nom adveilslug aud contiibutions. Its expeoudituies
consisted of fees paid to authors for their works, salaries. printing, advertising, shipping packing. postage and
other operating costs incurred in the publication of the magazine. [t was devoted to publishing a magazine and
selling it to the genoral public in accordance with ordinary commercial publishing practices. It was held that the

corporation was not an exempt chutituble, scicntific, lilcrary or educational organization within the meaning of
IRC Section 501(c)(3).

In Rev. Rul. 77-4, an organization’s only activities were preparing and publishing a weekly newspaper that
presented local, national and world news, solicited advertising, and sold subscriptions. The Service held that
the newspaper’s activities were indistinguishable from ordinary commercial publishing practices.

In Better Business Bureau of Washington. D.C.. Inc. v. United States, 326 U. §. 279 (1945), the Supreme Court

concluded that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
under IRC Section 501(c)(3), regardless of the number and importance of truly exempt purposes.

In Fides Publishers Assoc. v. United States, 263 F. Supp. 924 (1967) the government retroactively revoked the
taxpayer's exempt status, concluding that, for the previous five years, the taxpayer was engaged primarily, if not
solely, in publishing activities. The court noted that, to qualify for IRC Section 501(c)(3) exemption, the taxpayer
must be "organized and operated exclusively for" an exempt purpose. [he court rejected the taxpayer's argument
that, rather than its primary activity. the court should focus on the end to which that activity was taken, namely,
religious education. ‘The court pointed out that the taxpayer's sole activity and purpose was the carrying on of the
publishing trade and hold that the taxpayer's purpose, rather than its goals, were the foous of Section 501(c)(3).

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974), the court held that an organization
seeking a ruling as to recognition of its tax-exempt status has the burden of proving that it satisfies the
requirements of the particular exemption statute.

In Airlic Foundation v. IRS, 283 P. Supp. 2d 58 (D.D.C. 2003), the court laid out the factors for determining
whether an organization's activity is of a commercial nature. These factors include competition with for profit
commercial enlilies; extent and degree of below cost services provided; pricing policies; reasonableness of
financial reserves and use of promotional methods (e.g., advertising). Ultimately, it was determined that Airlie
did not qualify for exemption under Section 501(c)(3) of the Code.

Application of law

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

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You ate 110l operated exclusively for one or more exempt purposes under [RC Section SU1(c)(3) as described in
Treas. Reg. Section 1.501(c)(3) 1(a)(1) because you fail the operational test.

You do not meet the provisions of Treas Reg Section 1 501(c)(3)-1(¢)(1) because more than an insubstantial
part of your activities 1s not in furtherance of an exempt purpose. For example, Z granted you a Certain
Exclusive Limited License for the historical era film screenplay B which he wrote and copyrighted in his name
in order to raise funds to produce it The terms of the Certain Exclusive Limited TL icense concerning the
deadlines for taising funds as well as the fact that Z. retains tights to tnetchaudising shows you are operated for
substantial nonexempt private purposes.

Furthermore, you ave sei viug a substantial non exetmpt comercial purpose because of the manner in which you
are planning to produce, distribute and promote the film if funding is obtained. This also causes you to fail the
operational test under IRC Section 501(c)(3).

As required by Treas. Reg. Section 1.501(¢)(3)-1(¢)(2), you ate nol operated oxclusively for oxeimpl purposes
because your net earnings inure to the benefit of Z. Kor example, you were formed by Z. to raise money by
soliciting donations to produce B into a movie and subsequently market it and distibute it. Z will 1etain tights for
meichaudising. In addition, your board consists of one person, Z, who controls all aspects of your operations and
will benefit from your operations. This precludes exemption under IRC Section 501(c)(3).

You are not as defined in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are operating for the private
interests of Z. Z is the author of B, over which he has secured Federal Copyright protection. Z is using you as a
vehicle to apply for grants to fund the production and associated costs with B. Further, the fact that Z is retaining
rights to merchandising and the fact that licensing rights will revert back to Z if sufficient funding is not
obtained, shows you are serving his private interests.

You are like the organizations denied exemption in Rev. Rul. 60-351 and 77-4 because if the funds are raised,
you intend to produce and promote B in a manner similar to ordinary commercial filmmaking practices. B will
be available to the general public for the cost of a movie ticket and advertised to the general public.

You are similar to the organization in Fides Publishers Assn. y. United States, which printed, published

and sold products to promote religious culture. The organization argued, rather than focusing on its
pilinary activity, the court should focus on the end to which that activity was conducted, namely religious
education. You have indicated your purpose is to advance and promote history through funding,
producing, promoting and distributing the movie based on B. Much like the organization in this case, you

have a substantial nonexempt commercial purpose which precludes exemption under IRC Section
501(c)(3).

You are similar to the organization described in Better Business Bure. i ‘. In¢ Inite
Although you may have some educational purposes, the presence of the non-exempt commercial and private
purposes disqualify you from exemption under IRC Section 501(c)(3).

You are operated for a substantial nonexempt commercial purpose like the organization described in Airlie
Foundation. For example, you sought reviews and comments from experts to determine if there would be a
market for B. You plan to use broadcast and print media outlets to advertise B. You have not supplied any

evidence of B being viewed free of charge but indicate you hope to distribute 8 through multiple means of

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

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exhibiliou lucluding regular for-profit theaters. This shows that you intend to compete with other films,
regardless of their content.

Your position

You indicated that Z has extended the license agreement to date F. You also provided more details on how B is
an educational endeavor because it is based on historical facts and dialogue as well as provided statements from
renowned historical authors and experts praising the historical aspects of B You also contend that the
educational valuc of B outweighs auy potential comuercialily.

You addtessed the cotunercialily factors that were expressed in Ainli¢ For exatuple, your

© Indicated that there is no competition because films of this specific subgenre are nonexistent.
e Indicated that B would be financed by donations and not investments.

Additionally, your pricing policies as defined in the terms of the License, state that you arc: (a) required to use
your best cfforts to facilitate viewing of B to high schools in the United States; and (b) encouraged but not
1equied to caltibit B in theaters aud opeu-aii venues in the United States on ot atouud the Fourth of J uly
holiday, in perpetuity - in both cases at a discounted or preferably no fee.

You are required to use your best efforts to undertake an exclusive extended theatrical release of B as a

completed film (exhibited in theaters) immediately upon B’s completion. It is Z’s firm belief that the completed
film should be viewed by the citizenry in a communal setting.

You further stated that because at the time of this application, the film project is in its infancy, with no
agreements for the production and distribution in place, you cannot in any meaningful way outline the terms of
any theattival release pricing policies. It is uot ccttain that you will be in a position to contol dieatlcal Viewing
pricing. However you are unlike (commercial) theatrical releases because any net profits resulting from the

exhibition of B will ultimately be distributed to charities. All of these facts support and do not impair the case
for exemption.

You went on to discuss the two-pronged test which consists of: 1) what is the purpose of the organization
claiming tax-exempt status? and 2) to whose benefit does the activity inure?

Your operational goals are simple and finite: to (1) raise charitable funds sufficient to fully fund production of
B; (2) make and exhibit B to as wide an audience as possible (including in American high schools); and (3)
distribute substantially all of the revenues from B to designated charities within a reasonable time. This boils
down to two benefits: education inuring to the people and financial support inuring to qualified soldier and
youth charities Any other claimed benefit must (a) be identified; (b) be real (not merely theoretical), and (c) be
determined to be substantial, in order to render you undeserving of exemption.

Our response to your position

You have not provided 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 described, you are
operating for substantial nonexempt private and commercial purposes. Simular to the organization in Harding
Hospital. Inc. v. United States, you have failed to provide sufficient information to prove to us that you are
operating exclusively for purposes described lu Section 501(¢)(3).

Letter 4034 (Rev. 11-201 8)
Catalog Number 47628K

Conclusion
Based on the information submitted, you are not operated exclusively for one or more purposes described in
IRC Section 501(c)(3). You are operated for substantial nonexempt private and commercial purposes. Your net

earnings also inure to the benefit of Z. Accordingly, you do not qualify for exemption under IRC Section
501(c)(3).

If you agree

If you agree with our proposed adverse determination, you dow’t need to do anything. LE we dow’t heat ftom
you within 40 days, we'll issue a (inal adverse determination letter ‘That letter will provide Information on
yout income tax Ming requirements.

If you don't agree

You have a tight to protest if you don't agice with our proposed adverse deteunination. ‘I'v 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, | declare that | 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, cettified public accountant, or other individual euolled 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 adininistiative process first (IRC Section /428(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 FO Detertninations Quality Assurance
Mail Stop 6403 550 Main Steet, Mail Stop 6403

PO Box 2508 Cineinnalt, OLL 45?0?

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 slalement, 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-'AX-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, Exompt Organizations
Rulings and Agreements

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