IRS revokes a historic-preservation foundation's 501(c)(3) status as an instrument of a related private social club

View official IRS release (PDF)

Plain-English summary

A foundation had been recognized as a 501(c)(3) public charity to preserve the history and architecture of a downtown area, with particular focus on one historic building. On audit the IRS found it was not really operating for the public. The building was owned and occupied by a related social club (itself exempt under 501(c)(7)) and was used mainly by the club's members and their guests, with no public tours or genuine public access. The foundation shared the club's address, accounting staff, and books, and its board was appointed by, and had to be members of, the club. Most tellingly, the foundation paid for an HVAC system in the clubhouse through a circular arrangement: the club borrowed the money for the system, then lent the same amount to the foundation, which repaid it, so members received clubhouse improvements funded by tax-deductible donations. The IRS concluded the foundation served the private interests of the club and its members rather than the public, failed the operational test, and preserved nothing under any enforceable conservation restriction (the club could ignore the reviewer, and the arrangement was terminable on 90 days' notice, so nothing ran in perpetuity). It revoked the exemption, primarily retroactive to the original recognition date for material misrepresentation, and ended deductibility of contributions under section 170.

Ruling snapshot

• Question: Does a foundation that funds and operationally supports a related 501(c)(7) social club's clubhouse qualify as a 501(c)(3) charity, or is it operated for the private interests of the club and its members?
• Outcome: Revocation (primary position retroactive to the original December 12, 20XX recognition date for material misrepresentation; alternative position effective September 1, 20XX, the first day of the examined year)
• Key authorities: IRC § 501(c)(3), (c)(7); IRC §§ 6001, 6033, 170(h), 512(a)(3); Treas. Reg. §§ 1.501(c)(3)-1(c), (d), 601.201(n)(6); Rev. Rul. 75-470, 86-49, 69-573; Better Business Bureau v. United States, 326 U.S. 279 (1945); Est. of Hawaii v. Commissioner; Portland Golf Club v. Commissioner

Full text (IRS public release)

Person to contact:
Name:

Employee ID number:
Telephone:

Fax:
Number 202149015 Employer 10 number:

Release Dale. 12/10/2021

g4e> Department of the Treasury °:
Fy) Internal Revenue Service Date: SEP VA 202

Uniform Issue List (UIL):
501.03-00

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)
of the Code.

We have hereby revoked the favorable determination letter to you dated , and you are no longer
exempt under Section 501(a) of the Cade effective

We made the adverse determination for the following reasons:

You have not established that you are operated exclusively for exempt purposes as required by section 501(c)(3)
of the Code. Although your stated purposes include the preservation and memorialization of the history and
architecture of . your operations have instead been focused on the renovations of a single building that
is owned and occupied by a related social club and used primarily by its members. As such, you are operated
primarily for the non-exempt purpose of maintaining a building for the private interests of the social club and its
members, rather than for the public. You have therefore not established that your operations do not more than
insubstantially serve the private interests of your members or other designated individuals or that your net
earnings do not inure to the benefit of private shareholders or individuals.

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

You're required to file federal income tax returns on Forms 1120, U.S. 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 deleting certain identifying information. We 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.

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

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code 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

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 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 income lax 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. 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 ts 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 questions, contact the person at the top of this letter.

Sincerely,

Charles P. Rettig
Commissioner
By

Enclosure: Publication 892

ce:

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

Date: November 5,201

| internal Revenue Service Taxpayer Identification Number:

IRS Tax Exempt and Government Entities
Exempt Organizations Examinations

¥i Department of the Treasury

For:
Tax Year(s) Ended:
Person to Contact

Employee ID:
Telephone:
Fax:
Manager's Contact Information:

Eniployee 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 revoke your tax-exempt status as an organization described in internal Revenue
Code (IRC) Section 501 (¢)}(3).

{f you agree

lf you haver’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 adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods
above.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

lf 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 fle 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. [f 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

Letter 3618 (Rev, 28-2017)
Catalog Humber 34800F

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 adverse determination letter.

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.

For 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),

lf you have questions, you can contact the person shown at the top of this letter.
Sincerely,

PV aie bherrke by

Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 4621-A
Form 886-A
Form 6018
Publication 892
Publication 3498

2 Letter 3618 (Rev. 98-2017)
Catalog Number 34809F

Issues:
(i) Does the (hereafter “the Foundation’)

qualify for exemption under Internal Revenue Cude (IRC) § 501(c)(3)7
(2) if the Foundation doesn’t qualify for exempt status, what is the effective date of
revocation?

Facts:

The is a corporation located at
that effective December 12, 20XX was recognized as exempt under IRC § 501(c)(3) as further
described under IRC § 170(b)(1)(A)(vi).

The Foundation is located at the same address as the (hereafter “the *).
The was recognized as exempt under IRC § 501(c)(7) in August 19XX. The Foundation’s
books and records are maintained by the accounting department, the Foundation’s books
and records are included in the books and records, and the Foundation is included as part
of the external audit.

Foundation Application Form 1023 and Organization

Form 1023, Application for Recognition of Exemption under § 501(c)(3) of the internal Revenue
code, received by the IRS on May 15, 20XX. The Form 1023 was signed by
on May 3 Z0XX.

In Part I of the Form 1023, Line 11, the Foundation was incorporated on December 12, 20XX.
In Part V of the Form 1023, the original Board of Directors were:

Name Title Mailing Address

Director / President
Director / Vice President
Director / Secretary

The Form 1023 was analyzed. Below is a summary of the relevant parts of this analysis:

e in Part V1, Line 16, the Foundation would provide goods, services or funds to
organizations and the Foundation provided an attached explanatory summary.

e That summary states that the Foundation will provide grants to the for the purpose
of preserving the historic building and to provide funds for the preservation of other
historic buildings in the future.

e InPart VHI, Line 13a, the Foundation indicated that it would make grants, loans or other
distributions to organizations, that the Foundation would have a contract with each of
those organizations, and that the Foundation required a grant proposal. The Foundation
provided an attached explanatory summary.

[Page 1]

« That summary states that the Foundation will operate with the principle purpose of
preserving the historical and architecturally significant — building and other similar
structures, Grants will be made to the to preserve and protect the Building. There
may be foundation grants of similar nature in the future

«@ InPart VIN, Line 15, The Foundation stated thatthe — has the authority to appoint the
Foundation’s Board of Directors The will apply for grants for the preservation of the

building. The officers of the will be elected by the
Foundation Board and will work with of in maintaining its
independence.

included with the Form 1023 was a copy of the Articles of Incorporation. These articles were
analyzed. Article Four states in relevant part, that the Foundation is organized and operated
with particular focus on the building occupied by the and the downtown Area,

Included with the Form 1023 was a copy of the bylaws. These bylaws were analyzed. Below is
a summary of the relevant portions of these bylaws:

» In § _, the affairs and business of the Foundation shall be managed by a Board of
Directors. This board shall have at least 0 directors and no more than 0 directors. The
directors are appointed by the Board of Governors of the . The directors must be
members of the .

» in§ ofthe bylaws, part , the Foundation may (but is not obligated to) conduct
educational programs and tours of the for which a fee no greater than necessary
to defray event expenses may be charged.

e in§ of the bylaws, part , any action in furtherance of the purposes set forth in these
Articles that relates to the exterior and interior structural architecture of the building
occupied by the _ Shall be taken only after consultation with—and the approval
of—ithe appropriate officials of the (or
lacks jurisdiction, then after the consultation with—and approval of—officials of any other
organization that is an authority on the preservation of the architecture of the
building and the area).

Narrative Description of Activities

Attached to the Form 1023 was a narrative description of activities labeled as Part IV. This
narrative was analyzed. Below is a summary of the relevant parts of that analysis:

e On Page i, the building has been listed on the by
the as of April 16, 20XX. All work on the exterior of the
building must be reviewed and approved by the of the

, pursuant to standards established for the

e The building (also called “the Building") is located in downtown on public
streets with its architecture visible to the public. There are numerous events held at the
Building during the year to which non-members of the general public are invited to
attend. During the past months, the estimates that more than 0 non-

[Page 2]

members attended such events in the Building and had the opportunity to enjoy the
interior architecture of the Building.

© On Page 3, in the first full paragraph, any proposed preservation or repair projects by the

Foundation must be first reviewed and approved by wf
(hereafter * *). No projects shall be undertaken by the Foundation
unless approved by . All projects shall be pursuant to a contract between the

Foundation, the and

e TheFoundation intends to conduct two principal activities: (i) review proposals and fund
projects to preserve the historic building, and (i) raise funds to support these
preservation projects. The will identify preservation projects needed by the
Building and submit proposals to the Foundation, If the project is approved, the
Foundation will fund all or @ portion of the project. The Foundation expects to spend
0% of ifs time engaged in this activity. The other 0% of the time will be spent in fund
raising activities.

Argument for Foundation Exemption and Agreement
Attached to the Form 1023 is a letter from dated May 15, 20XX and signed
by that summarizes the legal argument for why the Foundation should be

exempt under IRC § 501 (c}(3). The legal argument is summarized below:

e Organizations that preserve one particular structure or several structures in a historically
significant area have both been recognized as exempt (Revenue Ruling 86-49, 1986-1
C.B. 243; Revenue Ruling 75-470, 1975-2 C.B. 207).

e {tn order to ensure that all Foundation activities and expenditures advance its exempt
purpose, the Foundation and the [club] have executed a contract with

to review and approve all preservation activities and

expenditures,
Included with the Form 1023 was the agreement dated April 18, 20XX between , the
and the Foundation. The following is a summary of that agreement:

® agrees to review any project involving the Building that is proposed to be
undertaken by the Foundation.

@ shall evaluate the proposals against the Secretary of the Interiors
Rehabilitation Standards for Preservation Projects, however may approve a
proposal even if it does not comply in all respects with such standards.

e the Foundation shall not undertake any project unless certifies that the

project work is important to the historic preservation of the Building.

e TheFoundation need not comply in all respects to all standards in every situation.
The Foundation will reimburse at the market rate for architectural reviews by a
principle architect in the , area plus a percentage for overhead.

e The Foundation agrees to prepare a baseline report of the existing conditions of the
exterior and interior structures of the Building.

[Page 3]

® The duration of the agreement is years from the date of the agreement execution.
This agreement will automatically renew for subsequent terms of years unless
notice is given in writing by one of the three parties,

« The agreement can de terminated with a 90 day writien notice by any of the three
parties.

Because of the references to the of , the website for
of was analyzed. The information from this website is
summarized below:

8 is a entity organized in 19XX and incorporated as a
non-profit in 19XX

ry is a membership organization with over 0 mernbers that is the primary
advocate for the preservation of the region's historic structures

® advocates ihe use of historic tax credits fo fund historic preservation

e Onits website, does not claim to be an exempt organization described in
IRC § 501(c)(3)

Form 990 Summary

The Form 990, Return of Organization Exempt From Income Tax, for the years ended
8/3 1/20XX and 8/31/20XX were analyzed. Both years are, in relevant part, summarized
below:

8/3 1/2OXX 8/3 1/20XX
Part | Summary
Line 8 Contributions 0 0
Line 10 Investments 0 0
Line 17 Other Revenue 0 0
Line 12 Total Revenue 8) 0
Line 13 Grants paid 9) 0
Line 17 Other Expenses 0 0
Line 18 Total Expenses 0 0
Line 20 Total Assets G 0
Line 21 Total Liabilities Q ___ oO
Line 22 Net Assets -0 ~0

Part IX Statement of Functional Expenses

Line 7 Grants

Line iig Other expenses
Line 20 Interest

Line 24a Project Costs

[The dollar value column for the Part IX functional-expense lines above (Grants, Other expenses, Interest, Project Costs) is illegible in the original scan; all amounts were redacted.]

[Page 4]

Part X, Balance Sheet 8/31/20KXX 8/31/20KX

Line 1 Cash (nor-interest) 0 0

Line 2 Savings 0 0

Line 3 Pledges 0 0

Line 4 Accounts Receivable 0 0

Line 16 Total Assets 0 0

Line 17 Accounts Payable 0 0

Line 25 Other Liabilities 0 0

Line 2/7 Unrestricted net assets ~Q -§

Line 33 Total Net Assets ~0 -0

Line 34 Total Net liabilities & net assets 0 0

For the year ended 8/31/20XX, the board officers are (President), (Vice
President), (Secretary). [Redacted] is the CEO and is the CFO.

Initial Interview and Tour

On May 2, 20XX the was toured and an initial interview was performed. Those attending
the interview were (Chief Finance Officer), {Prior CFO) and
(examiner).

When examiner arrived for the interview, examiner didn't get more than a few feet inside the
building before the staff stopped examiner. Non-members cannot wander freely around. At

the time of the interview, according to , ihe Foundation preserves historic
structures, principally the building. The Foundation doesn’t own the building and there
are no facade conservation easements on the building. The [club] approves all

projects carried out by the Foundation,

There are no public tours provided to the public. The principal people seeing the interior of the
building are the members and their guests. At the time of the tour, one large room was carrying
out an activity sponsored by a member. That member had several guests that were attending a
lecture. The staff made sure that those guests could only use the room and the bathrooms. The
rest of the facilities and building were not open to the guests to use.

Information Document and Request
On June 6, 20XX the IRS examiner asked for the following information:

» Minutes of meetings for the fiscal years ended 8/31/20XX and 8/31/20XX
e The Chart of Accounts for the fiscal years ended 8/31/20XX

[Page 5]

A copy of the account summaries and accounting worksheets used that connects the
books and records to the Form 990 returns

A copy of the contract

Substantiation that non-members attended events in the building for the fiscal year
ended 6/37/20XX that includes—but is not limited fo-what these events were, how many
attended, the purposes of the events and if these individuals were guests of a member
or members

Substantlation that demonstrates that the

Foundation is carrying out charitable activities

The response dated August 16, 20XX was analyzed. The response consists of a cover
letter from The summary of this letter is given below

e & ® ¢

Foundation board minutes for August 37, 20XX and August 31, 20XX is included

Foundation chart of accounts

Reconcitiation of the books and records to the Form 990

$0 of the Foundations’ directors’ expenses are allocated percent of the

director's compensation

Certification that the building is listed in the 3
agreement. This certification provides, in large part, the basis for the IRS

approving the Foundation’s application for tax-exemption under IRC § 501(c)(3).

The purpose of the agreement is for to review any project involving the

building to determine whether the project, or aspects of it, are for historic preservation of

the building.

With regards to IDR item #6, it is important to note that the public benefit and purpose

for exemption, generally speaking is not due to the public use of the building but is due to

the maintenance, restoration and overall ability of the Foundation to preserve the

building so that the public can view the architectural significance of the building.

A letter from , the attorneys who handled the original Form 1023 application

for the Foundation. The memorandum clearly identifies the basis for which the IRS

awarded the Foundation its tax-exemption.

Each portion of the response was analyzed. In the October 18, 20XX minute. The relevant

parts of the minute and CFO report is summarized below.
e the loan will be fully dispersed in 0 to O days and will have a principal balance
of $0

The principle and interest payments will be $0 per month or $0 per year

The loan is a 0-year loan with a fixed interest rate of 0%

When the Foundation makes disbursements to , it is accounted for in the
program services line. It doesn't get capitalized on the or the Foundation’s books.
This is typical of 501(c)(3).

[Page 6]

e There are four avenues for fund-raising: (1) annual events such as the
and the (2) annual giving and one-time gifts; (3) reaching out to corporations who
are not members; (4) planned giving
The planning meeting determines what is done at the
The Foundation ensures that Foundation money is spent on preservation initiatives for
the downtown clubhouse

« When the Board approved the project, the understanding was that the Foundation
would carry the obligation for the note to fund the project

e The project knocked out $0 in infrastructure that had been looming for many
years. There is a comprehensive [plan] that is being updated consistently

e How can the Foundation raise additional funds to allow for more progress to be made’?
A suggestion was to have a Foundation director sit on the planning committee

e How can the Foundation help the event? Put the word out and encourage
sponsorships.

The November 29, 20XX minute is summarized below:

e The main sources of revenue have been the a event every other
year and the program

We count on $0 to $0 from the

The main focus is to raise funds to pay for the project, which was $0

The debt service is $0 per year for this project

The loaned the funds to the Foundation for the project

The expense relates to the HVAC loan from the

The Chart of Accounts shows the following accounts:

&* ¢ @ & @

e Account Note Payable ~ HVAC at $0
e Account shows $0 retained earnings

e Account shows interest expense of $0

« Account shows charitable donations of $0.

The Trial Balance is cross referenced to Parts VIII, IX and X of the Form 990 for the fiscal year
ended 8/31/20XX.

The {in} ' has been listed in the
ton) April 16, 20XX. The agreement between of ' the
and the Foundation is the same agreement that was attached to the Form 1023.

Because of the reference in the minutes to the event, the website was analyzed. in
relevant part, the event is for members and their guests to gather for an
elegant evening of entertainment, food, drink, socializing, and bidding on auction items in

support of the

three foundations: the Foundation, the Foundation and the
Foundation.

[Page 7]

The consists of O business, professional and civic leaders and thelr familles. The
has 0 * ’ that carry out a variety of activities and invite guests to participate with
the members and their families in their activities. The hosts an annual
commemoration banquet and invites non-members to this activity.

According to (see Allachment One) HVAC stands for Heating, Ventilation and
Air Conditioning, it's a whole system with the sole purpose of making the indoor environment
comfortable.

and Foundation Promiasory Notes

The promissory note between the [club] and [lender] (see Attachment Two)
was analyzed. The terms of the note are summarized below:
e {his acommercial note between the and with a principle amount
of $0
e The date of the note is June 12, 20XX, the interest rate is 0% and the maturity date is
June 12, 20XX
e Article Two, the promises to pay the amounts advanced up to the maximum
principal balance of $0

e Article Seven: the agrees to make 0 payments of $0 beginning on February 12,
20XX with paymenis thereafter due on the 12" of each month and the unpaid principal
and interest due on June 12, 20XX

e Ajyticle Nine: the loan purpose is to pay for zero component projects at the downtown
clubhouse

e Article Ten: the pledged its fine arts collection as collateral

» Article Nineteen: obligation to pay the loan is independent of any obligation of
any other person who has agreed to pay the foan

e Article Twenty: the note cannot be amended unless made in writing between and

e Article Twenty-Seven: , Chief Finance Officer, signed the note on
behalf of the

On the same date as the loan between [club] and [lender] was completed, the
loaned the money to the Foundation (see Attachment Three). The terms of the note are
summarized below:

The principle amount of the loan is $0
The interest rate is 0% with a maturity date of June 12, 20XX

Article Five states that during phase 1 of the loan, 0 payments of accrued interest will be

made beginning July 12, 20XX, thereafter there are O payments of $0 beginning on
February 12, 20XX with the final payment being due on June 12, 20XX

e Anicle Seven states that the purpose of the loan is to provide funds for zero component

projects at the downtown clubhouse
e Article Seventeen: , President, signed the note on behalf of the

[Page 8]

Law:

Organizations organized substantially for pleasure, recreation, and other non-profitable
purposes, or to support such purposes, are exempt under IRC § 501(c)(7). Tha exemption of
social clubs is based on the logic of allowing members to pool their funds for recreational
purposes, rather than for a compelling public benefit. Congress granted exemption so that
these membership pools would not be taxed twice (at the member level and at the
organizational level) (see Portland Golf Club v. C.I.R., 497 U.S. 154, 110 S. Ct. 2780 (1990)).

Exempt function income means the gross income paid by members of the organization, their
dependents and guests goods, facilities or services in furtherance of the purposes constituting
the basis for exemption of the organization (IRC Section 512(a)(3)(B)). The term “unrelated
business taxable income” refers to gross income derived from any trade or business unrelated
to the purposes for which the organization is exempt (IRC Section 512(a)(1)). With regards to
unrelated business taxable income, there are special rules applicable to organizations
described in IRC Section 501(c)(7) (IRC Section 512(a)(3)(A)).

Rev. Proc. 71-17, 1971-1 C.B. 683, sets forth guidelines for determining the effect gross
receipts derived from use of a social club’s facilities by the general public have on the club's
exemption from federal income tax under section 501(c)(7) of the Code, The procedure defines
the term “general public,” as persons other than members of a club or their dependents or
guests.

Exemption under {RC § 501(c)(3) is provided for organizations that are organized and operated
exclusively for charitable, religious and educational purposes with no part of the net earnings
inuring to the benefit of any private shareholder or individual (IRC § 501(c)(3)). Inurement is
benefit to an individual member of the organization (Treasury Reg. Section 1.501(c)(3)-1(c)(1)).
The prohibition against inurement is absolute; the organization loses its tax-exempt status if

even a small percentage of income inures to a private individual (Church of Scientology of
Califomia v CIR, 823 F.2d 1310 (1987)}). An organization's net earnings may inure to the benefit
of private individuals in ways other than by the actual distribution of dividends or payment of
excessive salaries. The payment of expenses and expenditures on behalf of a private person is
also prohibited inurement (Founding Church of Scientology v. United States, 412 F.2d 1197, 188
Ct. Cl. 490).

Charitable purposes are: Religious, Charitable, Scientific, Testing for Public Safety, Literary,
Educational or prevention of cruelty to children or animals (Treasury Reg. § 1.501(c)(3)-
1(d){1)(i). The term “charitable* as used in IRC § 501(c)(3) is used in its generally accepted
legal sense (Treasury Reg. § 1.501(c)(3)-1(d)(2)). The Historic Preservation Act of 1966 (16
U.S.C. §§ 461, 470) provides that it is a national policy to preserve the public use of historic
sites, buildings and objects of national significance for the inspiration and benefit of the people
of the United States.

"Conservation Purpose” means tho presarvation of an historically important area or a cortified
historic structure (IRC § 170(h)(4)(A){fv)). A certified historic structure means any building,
structure or land which is listed in the National Register (IRC § 170(h}{4)(C)). In order to be

[Page 9]

considered to be exclusively for conservation purposes, the interest must have written
restriction(s) or written equitable servitude(s) that limits the use of the property (Belk v. CIR, 140
T.C. No. 1 (2013) aff'd Belk v. CIR, 774 F.3d 221 (2014)) and prohibits any change in the
exterior of the building which is inconsistent with the historical character of the property (IRC
§ 170(h)(4)(B)()()) in perpetuity (IRC § 170(h)(5)). The organization enforcing these restrictions
must have the resources to manage, and authority to enforce, the restrictions (IRC
§ 170(h)(4)(B) dG).

A non-exempt entity that substantially benefits from the activities of the exempt organization,
and exerts considerable control over the exempt organization and how the exempt organization
carries out its activities means the exempt organization is being used as an instrument to
further the private benefit of the non-exempt and does not qualify as tax exempt (Est. of Hawaii
v. Commissioner, 71 T.C. 1067 (1979)).

An organization formed to promote an appreciation of history through the acquisition,
restoration and preservation of buildings having special historical or architectural significance,
and after the building is restored opening the structures for viewing by the general public with its
operations financed from admission fees to the restored buildings and from contributions from
the public is educational and charitable within the meaning of [RC § 501(c)(3) because it is
operated like a museum (Revenue Ruling 75-470, 1975-2 C.B. 207 (1975)),

An organization formed for the purpose of preserving the historic or architectural character of a
community through the acquisition and occasional restoration of historically or architecturally
significant properties, and subsequent disposition of those properties subject to restrictive
covenants that generally restrict the use and enjoyment of the property granted in perpetuity by
controlling its physical or visual aspects to such a degree that the organization has the right to
bar any interior or exterior alterations without the consent of the organization is educational
within the meaning of IRC § 501(c)(3). These restrictive covenants preserve the designated
properties in thelr historical state for the benefit of the public, rather than merely ensuring their
conformity to locally imposed standards. (Revenue Ruling 86-49, 1986-1 C.B. 243).

An organization will not be regarded as exempl under IRC § 501(c)(3) if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose (Treasury Reg.
§ 1.501(c)(3)-1(c)(1)). The purposes toward which an organization directs its activities, and not
the nature of the activities themselves, determine whether the organization meets the
operational test (B.S.W. Group Inc. v. Commissioner, 70 T.C. 352, 356-357 (1978)). The
requisite purpose for tax-exempt status under IRC Section 501(c)(3) does not simply consist of
a charitable motive, but rather requires that the organization is operated to accomplish that
purpose (Partners in Charity Inc. v. C.I.R., 141 T.C. No. 2 (2013)).

An organization is not organized and operated exclusively for one or more charitable purposes
unless it serves a public rather than a private interest (Treasury Reg. § 1.501(c)(3)-1(d)(1)).
An organization is not dedicated to one or more exempt purposes if its assets are not dedicated
to an exempt purpose (Treasury Reg. § 1.501(c)(3)-1(b)(4)), An organization is required to keep
records, substantiate its activities and reflect those activities in its returns (IRC §§ 6001, 6033}.

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An organization's net earnings may inure to the benefit of private individuals in ways other than
by the actual distribution of dividends or payment of excessive salaries (Founding Church of
Scientology v United States, 188 Ct. Cl. 490, 412 F. 2d 1197 (1969)}. Upon a conclusion that
relevant facts reveal private benefit, the organization will not qualify as operating primarily for
exempt purposes absent a showing that no more than an insubstantial part of its activities
further the private interests or any other nonexempt purposes (see American Campaign
Academy v. C.I.R., 92 T.C. 1053, 1066 (1989)).

For purposes of determining tax-exernpt status, factors indicating prohibited inurement and
private benefit include control by the founder over the entity's funds, assets and
disbursements, use of antty moneys for personal expenses, ard ioans to the founder showing
a ready private source of eradif (Treasury Reg. § 1.501(c)(3)- 1(d) (i).

A nonprofit organization formed to dredge a navigable waterway fronting the properties of its
members does not qualify for tax exemption under IRC § S01(c)(3) because the waterway was
little used by the general public, but its navigability greatly affected the value of the members’
properties. The Court held that because the benefit to the general public was incidental and the
organization was using its funds to foster private interests the organization was serving private
interests and so was not charitable (Benedict Ginsberg v. Commissioner, 46 T.C. 47 (1966)).

An organization that has educational aspects because of its close relationship to education and
training of apprentices is still not organized and operated exclusively for educational purposes
because providing education is not its primary purpose or function. The primary purpose or
function was improving working conditions of a group of laborers, and the educational aspects
are incidental to that primary purpose (Revenue Ruling 59-6, 1959-1 C.B. 121).

An organization formed to organize, host, conduct and sponsor educational and other charitable
activities in its facilities was found to not be exempt. While the organization carried out a few
charitable and educational activities, these were incidental to its primary activities of operating a
commercial conference center (Arlie Foundation v. IRS, 283 F. Supp. 2d 58 (D.D.C. 2003)).

Because the chapter house also serves as a center for the social activities of its members and
is not an integral part of the college or under direct control of the college, a college
fraternity that maintains a chapter house for active members who are students of the school is
not exempt under IRC § 501(c)(3) but is exempt under IRC § 501(c)(7) (Revenue Ruling 69-
573, 1969-2 C.B. 125).

A donation is a gift defined as a voluntary transfer of property to another without consideration
(Seed v. Commissioner, 57 T.C. 265, 275 (1971)). lf the amount of the donation does not
exceed the benefit received by the donor then no charitable contribution has been made
(DeJong v. C.I.R., 36 T.C. 896 (1961)). Payments for services received are not charitable
donations (Hernandez v. C.I.R., 490 U.S. 680, 109 S. Ct. 2136 (1989)). By retaining contro! and
deriving personal benefit from the transferred property, no gift has been made (Davis v C.LR.,
81 7.C. No. 49, 87 T.C. 806 (1983)}, Organizations that facilitate tax avoidance schemes do not
qualify for exemption under IRC §501(c)(3) (Church of World Peace Inc. v. Commissioner, T.C.
Memo 1994-87 (1994), aff'd 52 F.3d 337 (10th Cir. 1995)). In this case, the church used its tax-
exempt status to create a circular tax avoidance scheme. Individuals made tax-deductible

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donations to the church. The church returned the funds in the form of tax-free “housing
allowances”.

The presence of a single non-exempt purpose, if substantial in nature, will destroy the
exemption regardless of the number or importance of truly exempt purposes (Better Business
Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279, 283 (1945)).

An exemption ruling or determination letter may be revoked or modified retroactively if the
organization omitted or misstated a material fact or operated in a manner materially different
from that originally represented to the IRS (Treasury Reg. § 601.201(n)(6), see Partners in
Charity v. C.I.R. (IBID)).

Taxpayer Position:

The letter from dated August 15, 20XX signed by provides the
basis for the Foundation’s argument that the Foundation qualifies for exemption under IRC §
501(c)(3) (see Attachment Four). The letter is summarized below.

e As set forth in the Form 1023, the Foundation’s organizational and operational purposes
are the preservation of the history and architecture of with particular focus on
the building occupied by the (“the building’).

e The building is a designated city landmark that has been enjoyed by locals and tourists
on a daily basis.

e As the driver crosses the , the building is the first building seen when
using the bridge and traveling into .

» The term charitable is used in its generally accepted legal sense (Treasury Reg. Section
4.801 (c){(3)-1(d}(2)}.

e Through the National Historic Preservation Act of 1966 (80 Stat. 915, 16 U.S.C. 470 et
seq.)(*the act”), the preservation of historic buildings and education of the public about
the historical and architectural significance of structures qualify as charitable and
educational purposes (see Revenue Ruling 75-470, 1975-2 C.B. 207; Revenue Ruling
86-49, 1986-1 C.B. 243).

e The act declared it a national policy to preserve for public use historic sites, buildings
and objects of national significance and authorized the Secretary of the Interior to
contract with states, municipal subdivisions, businesses and individuals to restore,
reconstruct, rehabilitate, preserve and maintain historic sites.

e Revenue Ruling 86-49 (IBID) involved an organization formed to preserve the historic
and architectural character of the community through acquisition, occasional restoration
and subsequent sale of the property with restrictive covenants on the property in order to
preserve the historic or architectural significance of the properties.

e Revenue Ruling 75-470 (IBID) concluded that a non-profit formed to acquire, restore
and preserve buildings having historic or architectural significance and to open such
buildings for viewing by the general public qualifies the organization for exemption under
IRC Section S04(c)(3).

[Page 12]

%

Every year, there are some events held at the building which are attended by
members of the public who are not members of the (such as the

celebration for all in the area).
e Pursuant to the Act, the [club] created and maintains the
The building has been [listed] since April 16,
20XX.

e All projects funded by the Foundation must be independently reviewed by the [reviewer], which must confirm that any Foundation proposed project is
consistent with the Foundation's exempt purpose.

e the agreement between the Foundation, the and was
included in the Information Document Response dated August 15, 20XX.
e The agreement provides that projects funded by the Foundation will be

limited to preservation and repair of the building exterior, and to the interior to the extent
necessary to preserve the building and its structural integrity.

« The Foundation has operated consistent with and in furtherance of its charitable
purpose.

e The Foundation shepherded the building's application for recognition on the

and has supported various projects to preserve and maintain the building.

e Various projects included wall and exterior wall repairs, roof replacements, lining roof
drains, plumbing repairs and upgrades throughout the interior walls and repair of the
main sewer drain and lateral sewer lines.

e The Foundation is currently doing fundraising to support a $0 exterior restoration
project.

e These projects benefit the public by preserving the historic building.

In their agreement, the and the Foundation have agreed with that if

the building is ever sold or the is dissolved, the depreciated value of the
preservation projects funded by the Foundation must be repaid by the to the
Foundation so that such funds can be used for other IRC Section 501(c)(3) activities.

Government Position:

In order to qualify for exemption under IRC § 501(c)(3), the Foundation must be operated
exclusively for charitable purposes (IRC § 501(c)(3), Treasury Reg. § 1.501(c)(3}-1(d)(i}). The
purposes toward which an organization operates determine whether the Foundation meets the
operational test (B.S.W. Group v. Commissioner (IBID)).

The Foundation's governing body is appointed by the governing body of the . The
Foundation’s governing body have fo be members of the The Foundation is located at the
same address as the _ its activities are accounted for by the accounting department
and its activities are included in the books and records.

While the Form 1023 asserts that the building is open for the public use of thousands of people

and the letter dated August 15, 20XX asserts that use the clubon , the
Foundation did not provide any substantiation of this alleged use even when asked for it. At the

time of the initial interview, the facilities are available for the members to use and invite

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guests to attend. The —- website states that non-members are invited to participate in
activities. These non-members are guests of the and so are not members of the general
public (IRC Section 512(a)(3}(B), IRC Section $12(a)(1), Rev. Proc. 71-17, 1977-1 C.B. 683).
Absent substantiation of the public use of the building (as required by IRC § 6001), the
conclusion is that there Is no public use of the building. Because it is not open for public use,
unlike the organization described in Revenue Ruling 75-470 (IBID), the building is not operated
by the Foundation or anyone else like a museum.

The historic building owned by the is in the and so is a certified
historic building as defined in IRC § 170(h)(4)(C), and the preservation thereof is a conservation
purpose (IRC § 170(h)(4)(A)(iv)) if there are written restrictive covenants (Revenue Ruling 86-
49 (IBID), Belk v. Commissioner (IBID)). At the time of the initial interview, it was stated that
there is no facade conservation easement on the building.

The Foundation asserts that the has some form of expenditure control, or
an enforceable approval process that prevents the Foundation or the from doing routine
maintenance, interior decoration or other improvements to the interior of the building. A review

of that agreement shows that the doesn't have to comply with the
Depariment of Interior's required preservation practices, and the Foundation doesn't have to
abide by a decision made by the . These are not restrictive covenants.

For that reason, this agreement is not substantiation of any written restrictions (as required by
IRC § 6001 and Belk v. CIR (IBID)).

Because the and the Foundation can ignore the recommendations made by the
even if there were restrictions, they are not granted in perpetuity (IRC Section
170(h)(5)), the doesn't have the written authority to enforce any restrictions

that exists (IRC Section 170(h)(4)(B)(ii)), and the relationship between the = and
can be terminated with a 90 day notice (which is evidence of a lack of perpetuity of
the implied restriction(s)). The below facts further illustrate this issue.

The [club] borrowed funds from [lender] in order to pay for an HVAC system. On the same
day, the Foundation borrowed the same amount of funds from the , The Foundation pays
the same amount to the [club] — as the [club] is responsible for paying to its creditor .
According to its books and records, the Foundation is paying for an HVAC system.

The implementation of an HVAC system paid for by the Foundation effectively eliminates the
argument that the agreement with disallows the Foundation from doing any
improvements to the interior of the building. Obviously, this agreement has no effect on the
activities of the Foundation.

In conclusion, this agreement is not substantiation that any enforceable restrictive covenants in

place in perpetuity by {or anyone else) to enforce restrictive covenants
(see IRC §§ 6001). Because of these failures, the activities paid for by the funds obtained by the
from are not considered to be activities carried out for a conservation

purpose (Belk v. Commissioner (IBID)). Without a conservation purpose, ihe Foundation is not

[Page 14]

operating like the organization described in Revenue Ruling 86-49 (IBID) wherein restrictive
covenants were used to preserve and protect historic buildings.

that the historic building can be seen by the public is not enough to qualify the Foundation for
exempt status, the Foundation's principal activity has to consist of charitable purposes which, in
this case, includes preserving the historic building for the public benefit (see National
Preservation Act of 1966 (IBID), IRC § 501(c)(3), Treasury Reg. §§ 7.501(c)(3)-1(d}(1){i}) and
4.501 {c}(3)-1 (c)(1); Revenue Ruling 59-6 (IBID) and Arlie Foundation (IBID).

The Form 1023 stated that the would propose restoration projects to the Foundation for
the Foundation to approve The Form 1023 states that this comprises an estimated 0% of the
Foundation's activities. The other 0% of activities consisted In carrying out fundraising.

in the October 20XX minute, the planning committee decides what is done with the

building. From this minute, it is clear that the Foundation doesn't have a director that sits on that
planning committee. The [club] put up collateral and obtained a loan. Those loan proceeds were
then given to the Foundation as a loan to pay for the HVAC system.

There is no substantiation that the projects were provided to, or approved by, the
Foundation. There is no substantiation that the Foundation obtained the funds, decided how
those funds were to be used or had any part in the approval process that outlined the use of
those funds (see IRC § 6001). While the loan amount was reported on the Foundation's Form
990 in the total liabilities, the HVAC asset value was not reported on the Foundation’s Form 990
in the balance sheet.

The only conclusion that can be reached is that the Foundation does not own the HVAC system
that it is paying for. While the HVAC system may not be seen by the = members, these
members certainly benefit more from the presence of the HVAC system in the building then
does the general public (who has no access to the building). Because this activity serves a
private interest more than a public interest, this activity is not a charitable activity (IRC §

501 (c)(3), Treasury Rag §1.507 (¢)(3)-1 (a)(7 CH)

Payment for the HVAC means that the assets of the Foundation are not dedicated for a
charitable purpose (in violation of Treasury Reg. § 1.501(c)(3)-1(b)(4)). For this reason, the
Foundation does not qualify for exempt status (Treasury Reg. § 4.504 (¢)(3)-7 (b)(4)).

From the board minutes, the Foundation obtains from the a listing of repairs the

desires to have completed and raises funds to pay for those repairs. It is clear that operationally
the primary purpose of the Foundation is to support the in carrying out activities

{see B.S.W. Group Ine v Commissioner (IBID), Partners in Charity v C.1.R. ((BID)).
Operationally, the Foundation is an instrument of the that operates to further the non-
charitable purposes of the {see Est of Hawaii v C.1.R. (IBID)).

Just because the [club] is an exempt organization under IRC § 501(c)(7) does not mean, or
imply, that its activities are to benefit the public interest. The purpose for organizations like the
being granted exemption was to preclude double taxation on the same money (see

[Page 15]

Portland Golf Club v C.1.R. (IBID)). While the —_ is not prohibited from doing charitable
activities directly or indirectly through the Foundation, the Foundation has to demonstrate that
these activities are charitable activities that benefit the general public (IRC §§ 501(c)(3), 6001).

The Foundation is using donations (primarily from the members of the } fo support the
exempt activities of the . A donation is a gift defined as a voluntary transfer of property to
another without consideration (Seed v. Commissioner, 57 T.C. 265, 275 (1971)). If the amount
of the donation does not exceed the benefit received by the donor then no charitable
contribution has been made (DeJong v. C.I.R., 36 T.C. 896 (1961)), Payments for services
received are not charitable donations (Hernandez v. C.I.R., 490 U.S. 680, 109 S. Ct. 2136
(1989)). By retaining control and deriving personal benefit from the transferred property, no gift
has been made (Davis v. C.I.R., 81 T.C. No. 49, 61 T.C. 806 (1983)),

Not only does the [club] benefit, but the members who make these donations benefit. Instead of
paying dues or other charges that are not tax deductible to make these repairs, the donating
members receive tax deductible donations that provide repairs to the thereby indirectly
benefiting themselves, Ordinarily, the actual value of the member's donation to the Foundation
should be reduced by the amount of benefit the member receives. However, because of the
circular benefit provided, this is a tax scheme and the amount of donation made by a

member should be reduced to zero (see Church of World Peace Inc. v. Commissioner).
Because this tax scheme provides private benefit to the foundation members, the Foundation
doesn't qualify for exempt status

Based on the facts of this case, this case is an example of an organization serving a private
interest more than serving a public interest (see Founding Church of Scientology v. United
States (IBID), American Campaign Academy v. C.I.R. (IBID)). Unlike the organization described
in Revenue Ruling 86-49 (IBID) (which carried out, and supported projects, that benefited the
general public’s viewing of the historic features of the buildings more than they provided benefit
to private Interests) the Foundation operationally supports the activities of the thereby
violating Treasury Reg. § 1.501(c)(3)-1(d)(1)(ii). The Foundation failed to substantiate any
charitable activities or purposes.

While the Foundation may well qualify for exemption under IRC § 501(c)(7), it doesn't qualify for
axamption under IRC § 501(c)(3) (Revenue Ruling 69-573 (IB1D)). Like the organization in
Benedict Ginsberg v Commissioner (IBID) the Foundation's activities benefit the

and its members, and does not qualify for exempt status under IRC § 501(c)(3)

(see IRC § 501(c)(3), Treasury Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(i) and

1.501(c)(3)-1(c)(1), Better Business Bureau of Washington DC v. United States (IBID)).

Conclusion:

The Foundation portrayed and implied in its Form 1023 that it would operate independently and
separate from the fo carry out the charitable purpose of preserving the historic features and
architecture of the building and other historic buildings in the downtown area,
However, based on the facts of this case, operationally it is not distinguishable from the

and the activities thereof.

[Page 16]

For the reasons expressed in the government position, the Foundation materially
misrepresented how it would operate and the purposes for which it would operate. The
Foundation was organized and operated to further the exempt purposes of the and the
members thereof to such an extent that the Foundation operationally is not separate from, or
independent of, the

For this reason, the primary government position is that revocation of exempt status should be
retroactively applied and be effective December 12, 20XX (Treasury Reg. § 601.201(n)(6)).

The alternative position is that the exempt status of the Foundation should be revoked effective
the first day of the year under examination: September 1, 20XX.

Because the Foundation is no longer an exempt organization, the organization needs to file a
Form 1120, U.S. Corporate Income Tax Return, instead of a Form 990. Because there is no lax
affect from the revocation, the Foundation will need to file the Form 1120 in subsequent time
periods.

[Page 17]