IRS revokes a treatment program's exemption for private benefit

Plain-English summary

The IRS revoked a treatment program's section 501(c)(3) status after concluding that it served private interests and allowed earnings to benefit insiders. The program charged for treatment but did not establish meaningful charity-care policies or show that its fees were materially below those of commercial providers. Practitioners set charges within a range and received a percentage of collections without an earnings cap, an arrangement the IRS found allowed substantially all net receipts to pass to private individuals. The IRS also cited a family-dominated board, related-party contracting, weak internal controls, and the absence of a conflict-of-interest policy. Taken together, the commercial operations, compensation arrangements, and governance structure showed that the program was not operated exclusively for charitable purposes. Contributions ceased to be deductible, and the organization became responsible for corporate income tax filings from the revocation's effective date.

Ruling snapshot

• Question: Did the treatment program continue to qualify under section 501(c)(3) when its operations, compensation, and governance benefited private individuals?
• Outcome: revocation
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 56-185, 69-266, 69-383, 69-545, and 70-186

Full text (IRS public release)

Department of the Treasury Date: May 9, 2022
Internal Revenue Service
Tax Exempt and Government Entities Taxpayer ID number:
Form:
Tax periods ended:
Release Number: 202249019 Person to contact:
Release Date: 12/9/2022 Name:
ID number:
UIL Code: 501.03-00 Telephone:
Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Why we are sending you this letter
This is a 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), effective

. Your determination letter dated , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have failed to
establish that you are operated exclusively for an exempt purpose within the meaning of IRC
Section 501(c)(3), and that no part of your earnings inures to the benefit of private individuals or shareholders.

Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax
returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov.

Contributions to your organization are no longer deductible under IRC Section 170.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was
mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment

If you decide to contest this determination, you may file an action for declaratory judgment under the provisions
of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court
of Federal Claims or 3) the United States District Court for the District of Columbia.

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court U.S. Court of Federal Claims U.S. District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 Washington, DC 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for
declaratory judgment under IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you aren’t an
organization described in IRC Section 501(c)(3).

Letter 6337 (12-2020)
Catalog Number 74808E


Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

ee ;

a A. Brinkley N
x

Acting Director, Exempt Organizations Examinations
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

Date:

Department of the Treasury February 24, 2022
Internal Revenue Service Taxpayer ID number:
IRS Tax Exempt and Government Entities :
orm:
Tax periods ended:

Person to contact:
Name:
1D number:
Telephone:
Fax:
Address:

Manager’s contact information:
Name:
ID number:

Telephone:
Response due date:
March 4th, 2022

CERTIFIED MAIL - Return Receipt Requested

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(c)(3).

If you agree

If you haven’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.

If 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 file a protest
with IRS Appeals Office after the meeting or after we consider the information.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If 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
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).

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

Sincerely,

Sean E. O’Reilly
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

2 Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

_
Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A P id

Explanations of items exhibit

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended
Issue
Does the (the Program) qualify for tax exemption under

Internal Revenue Code section 501(c)(3) by serving a public rather than private interest, where no net
earnings inure to the benefit of any private shareholder or individual?

Facts
The Program was incorporated in the State of on as a nonprofit public benefit
corporation. Article III of the Articles of Incorporation states its specific purpose is “

.” Article V states the Program is “organized
and operated exclusively for scientific or educational purposes within the meaning of IRC Section
501(c)(3).” Article VII states “the property of this corporation is irrevocably dedicated to scientific or
educational purposes and no part of the net income or assets of this corporation shall ever inure to the
benefit of any director, officer or member thereof or to the benefit of any private person.”

The Program submitted Form , Application for Recognition Under Section 501(c)(3) of the Internal
Revenue Code, to the Internal Revenue Service (IRS) on . On Part I Line 1, the Program
described its activities as such:

“es

”

On Part II Line 2, the Program listed its sources of financial support in order of size as: 1. Contributions and
gifts, and 2.

On Part II Line 4b, the Program wrote “none” for annual compensation of the organization’s governing
body.

On Part II Line 12a, the Program checked “no” for the organization requiring payment from the recipients of
provided benefits, services, or products. On Part II Line 12b, the Program checked “no” for the organization
limiting its benefits, services, or products to specific individuals or classes of individuals.

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

On Part III Line 9i, the Program selected it is not a private foundation because it qualifies under Section
509(a)(2) as normally receiving not more than one-third of its support from gross investment income and
more than one-third of its support from contributions, membership _, and gross receipts from activities
related to its exempt functions.

Attached to the Form was a proposed budget detailing the following:

Table 1 — Proposed Budget on Form

Budget
Income
Gifts and contributions $
$
Disbursements

Written material, preparation, production and printing
Distribution and mailing

Secretarial and office expense

Legal and accounting

Net accumulation:
Second Year Budget

Income
Gifts and contributions

-Disbursements

Written material, preparation, production and printing _
Distribution and mailing

Secretarial and office expense

Legal and accounting _

Educational Activities

Net accumulation:

The Program included in its application for exemption a copy of its Bylaws. Article IV, Dedication of
Assets, states “no part of the net earnings of the Corporation shall inure to the benefit of, or be distributable
to its members, trustees, officers, directors or other private persons, except that the Corporation shall be
authorized and empowered to pay reasonable compensation for services rendered and to make payments and
distributions in furtherance of the purposes set forth in the purpose clause hereof.”

In response to a request for additional information, the Program provided the following descriptions of its
activities in a letter dated

Catalog Number 20810W Page 2 www irs.gov Form 886-A (Rev. 5-2017)

Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A P y

Explanations of items exhibit

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended
The are considered nominal compared to charged by for-profit programs;”
“The procedure for an individual who would like to participate but cannot afford the is as follows.

The individual applies to the Program. There is then a telephone screening to determine whether the
Program is appropriate for that individual. If it appears appropriate, the individual is asked to come in

for an . The evaluation is to determine if the Program is likely to be helpful to the
At that time finances are discussed to evaluate what portion of the cost, if any, the can afford to

In this same response, the Program provided the following information about compensation:

“The statement of revenue and expenses previously submitted for salary

because at the present time there are . Everyone involved is their time. at such

time as it can be afforded, only will be hired. No officer or board member will

b e ; ”

“There are salaried employees or other compensated individuals;” and

“ or is an of the organization.”
The Program filed the Form _, Return of Organization Exempt From Income Tax, for the year ended

on . On Part I Line 1, the Program described its mission to “provide

services to individuals who have .” On Part I Lines 3 and 4, the Program left how

many voting members and how many independent voting members are part of the governing body. On Part I
Line 5, the Program listed person employed during the calendar year.

The Program filed the Form for the year ended on . On Part I Line
1, the Program described its mission to “provide services to individuals with .” On Part I
Line 3, the Program listed voting members of the governing body, and left Line 4 for the number
of independent voting members of the governing body. On Part I Line 5, the Program listed individuals
employed during the calendar year, and on Line 6 listed volunteers.

On Part III Line 1 of both Forms (for and ), the Program described its organization as
follows:

Catalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)

Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A P Y

. ibi
Explanations of Items ent

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

On Part IV Line 28a of both Forms ___, the Program checked “yes” to being party to a business transaction
with a current or former officer, director, trustee, or key employee.

On Part VI Line la ofboth Forms __, the Program listed voting members of the governing body. On
line 2, the Program checked “yes” to any officer, director, trustee, or key employee having a family
relationship or a business relationship with any other officer, director, trustee, or key employee. On line 3,
the Program checked “yes” to the organization delegating control over management duties customarily
performed by or under the direct supervision of officers, directors, or trustees, or key employees, to a
management company or other person.

On Part VII Section A of Form for year ended , the Program listed the following
officers, directors, and trustees:

Table 2 — List of Officers, Directors, and Trustees on Form for
Average Hours Position R tabl
Name and Title & Individual trustee or eportae
per Week , Officer | compensation
director
, Pres X xX
Pres xX xX
, Secy_ x xX
On Part VII Section B for the year ended , the Program listed the following independent
contractor:
Table 3 — List of Independent Contractors on Form
Name and business address Description of services Compensation
$
On Part VII Section A of Form for year ended , the Program listed the following

officers, directors, and trustees:

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)

: Schedule number or
Department of the Treasury — Internal Revenue Service oc
Form 886-A P

. hibi
Explanations of Items exe

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

Table 4 — List of Officers, Directors, and Trustees on Form for
Average Position
‘ — Reportable
Name and Title Hours per Individual trustee or Officer | compensation
Week director
, President Xx X §
Treasurer
Pres Xx xX
, secretary x X
On Part VII Section B for the year ended , the Program listed no independent contractors
that received more than $ © in reportable compensation from the organization.
In , the assigned agent began an examination of the Program’s books and records for the
year ended
The Program’s accountant, , provided Balance Sheets as of and
which showed the following accounts:
Table 5 — Balance Sheets
Assets
Cash — $ $

Other Current Assets -- Suspense -
Accumulated Depreciation — Furniture - -
Furniture and Equipment — Other
Total Assets
Liabilities and Equity

Credit Card Pay -
Total Liabilities -
Unrestricted Net Assets
Net Income -
Total Liabilities and Equity

provided Profit & Loss Statements for through and which showed
the following:

Table 6 — Profit and Loss Statements
Income

$ $

Total Income
Expense

Bank Charges

Account Fees

Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A

Department of the Treasury — Internal Revenue Service Schedule number or

Explanations of Items exhib

Name of taxpayer

Tax Identification Number (last 4 digits) | Year/Periods ended

Depreciation

Dues

Advertising

Outside Services

Payroll Expenses

Rent

Salaries -

Tax and Licenses

Total Expense

Net Income :

provided a contract between it and the , . Professional Corporation ( )
fora of$ /hour, witha minimum of hours/week. The agreement was signed by the Secretary at the
time, ,on for the following services:
e Supervision of all , including independent contractors and trainees

e Overseeing the running of the Program to ensure that the highest quality of care is being provided;
this shall include ongoing evaluation with the staff

e Collaboration with any other professionals working with the (e.g.

)

Management of the bookkeeping, including deposits, expenses and balancing the budget
Preparation of all tax information

Organize and direct training for in the community who are interested in learning more
about the treatment of population
The assigned agent conducted an interview on with , President and
CFO, and , the accountant and Power of Attorney to the organization. and

provided the subsequent information.

The organization’s primary purpose is to provide for adults and adolescents on treating

runs the whole organization—directs and hires the independent contractors;

does the financials, bookkeeping, and tax filings; reviews charts, supervises the contractors,
and works with insurance companies as needed. also organizes community outreach
programs such as—hosting community classes on for adolescents and adults on treating

; going to schools in the area to present to the students; speaking to

students on how to diagnose and treat ; and training and staff on

how to treat
and

, is the organization’s Vice President,
, recently joined the Board as the Secretary. The Board meets once a

year, unless something comes up during the year, then another meeting would be held to discuss.
None of the Board members receive compensation or other benefits.

Catalog Number 20810W

Page 6 www. irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or

- . exhibi
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

The organization only receives income from . The collect the , then

collects the cash and checks and deposits them into the organization’s bank account.

is responsible for preparing the bank deposits, but the are the ones that collect the

from the prepares and signs outgoing checks and is the only in the

organization authorized to sign the check. prepares annual bank reconciliation reports. For
someone to be reimbursed for business expenses, they would submit a receipt to , though
the organization does not generally reimburse anyone for expenses does get reimbursed
for the telephone bill, and was once reimbursed for the accounting fee when it was paid for with
personal card instead of the organization’s card.

The organization is billed by the Professional Corporation ( ) for
consultations and expertise. is trained in and has years of experience.
The contract between the organization and the was signed by the Vice President. The —_ was

set for the services provided, based on what they thought the organization could afford to pay.

The organization charges on a based on the . The end is from
$ -$ asession,upto$ -$ a .In most paid around $

The organization does not have a specific policy in place for when a no longer has the ability

to pay, but there is a code of ethics that the cannot abandon their . Thus, ifa

lost their job, the would continue to treat them and make sure they have the resources they

need. However, this is based on the individual ; does not dictate how or when the
must continue to that

On , the assigned agent sent an Information Document Request to the Program to request
supporting documentation for sampled transactions from the general ledger. provided the
following invoices:

Table 7 — Invoice from for services provided
Date Service Amount Charged
$

Catalog Number 20810W Page 7 www. irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service schedule number or
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

L | | | |

The assigned agent conducted a subsequent interview with and on
and provided the subsequent information.
The Board of Directors in consisted of ; ; ;

( of the ), and , attorney. retired during , and the
new attorney, , joined after and has been on the board since. Currently, the Board
Members are: ; ; ; , and ;
attomey.

The organization does not have a conflict of interest policy. The organization had bylaws when it was
first formed in as part of the corporate package. The are paid based on a percentage of
the they collect: the collects the , and a certain percentage is given to
the organization to operate. This rate is determined based on the experience of the , and
whether they are licensed. In a way, the can determine their own compensation because they
set their own within a certain range. But the that come in generally have an idea
of how much they can . The maximum percentage is % of the to the

The compensation percentage is negotiated between and the individual . There are
no employment or similar contracts; they are verbal negotiations and then board approval. There is no
cap on the amount of income a can earn.

The determines a ability to pay during the initial intake session; the and the

negotiate the rate. Neither the nor the organization require a to provide
documents proving their financial status; it is simply based on a discussion between the and
the at the first appointment. However, if a says, ‘ , then this is not the
right place for them. The organization does not provide services for free. However, the organization
will do the initial evaluation for free, and may make a referral for them elsewhere.

To become a on the staff, at a minimum the individual must be pursuing a towards a
, or if they’re a ,a If

they have a , they must have or . The individual must also have a personal

interview with to see if they would be a good fit and treat the well.

The decide the preliminary course of treatment based on the intake appointment with the

a week, meets with the about each of the in the program
to discuss current progress and treatment to see if the course should change. The also discuss
involving a , , or providing a referral if the

needs are beyond the scope of the program.

Catalog Number 20810W Page 8 www.irs.gov Form 886-A (Rev. 5-2017)

Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A P "y

Explanations of Items exhibit

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended
The assigned agent asked and on about what the difference is between
the Program and a for-profit private practice. explained that the organization is different from a
for-profit because the community service and reduced was unsure how the organization is

structured differently form a for-profit.

On , the assigned agent sent the Program a memorandum of the notes taken during the prior
interviews and requested comments. responded via fax on with additions to some of
the prior responses given:

ee

Law

Section 501(c)(3) provides in part tax-exemption to corporations, and any community chest, fund, or
foundation, organized and operated exclusively for religious, charitable, or similar purposes, no part of the
net earnings of which inures to the benefit of any private shareholder or individual.

Section 1.501(a)-1(c) of the Income Tax Regulations (Regulations) defines “private shareholder or
individual” as referring to persons having a personal and private interest in the activities of the organization.

Regulations Section 1.501(c)(3)-1(a)(1) states that in order to be exempt as an organization described in
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 or operational
test, it is not exempt.

Regulations Section 1.501(c)(3)-1(c)(1) states that an organization is operated exclusively for charitable

purposes if it engages primarily in activities which accomplish one or more of such exempt purposes
specified in IRC Section 501(c)(3).

Catalog Number 20810W Page 9 www.irs.gov Form 886-A (Rev. 5-2017)

=

rtment of the Ti - Internal R Service Schedule number or
Form 886-A Depa men e reasury ntemal Revenue servi exhibit
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

Regulations Section 1.501(c)(3)-1(c)(2) states that an organization is not operated exclusively for charitable
purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Regulations Section 1.501(c)(3)-1(d)(1 (ii) states that an organization is not organized exclusively for any of
the purposes specified in Section 501(c)(3) unless it serves public, rather than private interests. Thus, it is
necessary for the organization to establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such interests.

Regulations Section 1.501(c)(3)-1(d)(1)(iii) states that private benefit must not be substantial relative to the
public benefit, in a facts and circumstances test that requires public benefit from the organization’s activities
outweigh any individual benefit.

Regulations Section 1.501(c)(3)-1(d)(2) provides that the term “charitable” is used in Section 501(c)(3) in
its generally accepted legal sense. The promotion of health has long been recognized as a charitable purpose.

Revenue Ruling (Rev. Rul.) 56-185, 1956-1 C.B. 202 provides in part that an organization is not exempt
merely because it operates a hospital devoted to the treatment and care of patients. This ruling also sets forth
general requirements, among other things, relevant to when a hospital is exempt under Section 501(c)(3):

1. It must be organized as a nonprofit charitable organization for the purpose of operating a hospital for
the care of the sick. A nonprofit hospital chartered only in general terms as a charitable corporation
can meet the test as being organized exclusively for charitable purposes.

2. It must be operated to the extent of its financial ability for those not able to pay for the services
rendered and not exclusively for those who are able and expected to pay. It is normal for hospitals to
charge those able to pay for services rendered in order to meet the operating expenses of the
institution, without denying medical care or treatment to others unable to pay. It must not refuse to
accept patients in need of hospital care who cannot pay for such services.

3. It must not restrict the use of its facilities to a particular group of physicians and surgeons, such as a
medical partnership or association, to the exclusion of all other qualified doctors.

4. Its net earnings must not inure directly or indirectly to the benefit of any private shareholder or
individual. This includes use by or benefit to its members of its earnings by way of a distribution of

prof its, the payment of excessive rents or excessive salaries, or the use of its facilities to serve their
private interests.

Rev. Rul. 69-266, 1969-1 C.B. 151 provides in part that an organization formed and controlled by a medical
doctor to conduct research programs consisting of examining and treating patients who are charged
prevailing fees for services rendered is not exempt.

Rev. Rul. 69-383, 1969-2 C.B. 113 provides in part that a revenue-sharing arrangement for compensation on
the basis of a fixed percentage of departmental income will not necessarily preclude exemption, so long as
there was an arms’ length transaction, and the compensation is not excessive when compared to amounts
received by specialists with similar responsibilities.

Catalog Number 20810W Page 10 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

Rev. Rul. 69-545,1969-2 C.B. 117 provides in part that the “promotion of health” is considered to be a
charitable purpose in the general law of charity.

Rev. Rul. 70-186, 1970-1 C.B. 128 provides that private benefit must be a necessary by-product of the
activity that benefits the public at large and accomplishes exempt purposes. In other words, the benefit to the
public cannot be achieved without necessarily benefitting certain private individuals.

Airlie Foundation, Inc v. Commissioner of Internal Revenue (CIR), 70 T.C. 352 (1978) provides in cases
where an organization’s activities could be carried out for either exempt or nonexempt purposes, courts must
examine the manner in which those activities are carried out in order to determine their true purpose.

Birmingham Business College, Inc. v. Commissioner, 276, F.2d 476 provides in part that those in control of
an organization may not withdraw its earnings under the guise of salary payments.

Church by Mail, Inc. v. CIR, 765 F.2d 1387 (9th Cir. 1985) found that a substantial, if not principal purpose
of the organization was to generate income for the private benefit of its reverends and their families, who
were private persons.

Federation Pharmacy Services, Inc. v. CIR, 625 F. 2d 804 (8th Cir. 1980), dealt with a nonprofit
pharmaceutical service providing pharmacy services to the general public. It provided special discount rates
for handicapped and seniors in its area, although it was not committed to providing any drugs below cost or
free to indigents. Although its services did improve health in the area, it did not qualify for exemption
because it was primarily a commercial venture operated in competition with other area pharmacies.

IHC Health Plans, Inc. v. CIR, 325 F.3d 1188 (2003) provides in part that to justify charitable exemption,
taxpayer health-care provider must make its services available to all in community plus provide additional
community benefits, which either further function of government-funded institutions or provide service that
would not likely be provided within community but for the subsidy, and additional public benefit conferred
must be sufficient to give rise to strong inference that public benefit its primary purpose for which
organization operates. The court also provides that the fact that an activity is normally undertaken by
commercial for-profit entities does not necessarily preclude charitable tax exemption, particularly where
taxpayer entity offers its services at or below-cost. The court also provides that in determining whether
charitable exemption is justified, taxpayer organization which does not extend some of its benefits to

individuals unable to make the required payments generally reflects commercial activity rather than
charitable one.

Lorain Ave. Clinic v. CIR, 31 TC 141 provides in part that the presence of a percentage compensation
agreement will destroy the organization’s exemption under section 501(c)(3) of the Code where such

arrangement transforms the principal activity of the organization into a joint venture between it and a group
of physicians.

Lowry Hospital Ass’n. v. CIR, 66 TC 850 provides in part that a close relationship between an exempt
hospital and a doctor or group of doctors may indicate private inurement, where the exempt hospital is part

Catalog Number 20810W Page 11 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

and parcel of the doctors’ personal medical practice and personal financial affairs. The two operations were
so integrally interwoven in their daily operation that only the faintest outlines of a separable operating
charity may be perceived.

Maynard Hospital Inc. v. CIR, 52 T.C. 1006 (1969) provides in part that it is doubtful whether an
organization’s operation can be “exclusively” for charitable purposes within the meaning of section
501(c)(3) when its income is being accumulated to increase directly the value of the interests of the
stockholders which they expect to receive beneficially.

Northwestern Municipal Ass’n v. United States, 99 F.2d 460, 463 provides in part that the phrase “net
earnings”, as used in Section 501(c)(3), may include “more than the term net prof its as shown by the books
of the organization or the difference between the gross receipts and disbursements in dollars.”

People of God Community v. CIR, 75 T.C. 127 (1980) provides in part that where a percentage
compensation arrangement when no upper limit exists, a portion of the organization’s earnings is simply
being passed on to the individual. The Court noted that the prohibition against inurement and the prohibition
against benefit to private interests do overlap.

Sonora Community Hospital v. CIR, 46 T.C. 51 (1966) provides in part that the mere fact that an
organization maintains a hospital does not in and of itself justify the conclusion that it was operated
exclusively for charitable purposes. While the diagnosis and cure of disease are indeed purposes that may
furnish the foundation for characterizing an activity as “charitable,” something more is required. The court
adds that of course, a “charitable” hospital may impose charges or fees for services rendered, and indeed its
charity record may be comparatively low depending upon all the facts, but a serious question is raised where
its charitable operation is virtually inconsequential.

Taxpayer’s Position
The taxpayer has not provided a position.

Government’s Position

Organizations exempt from federal income tax under Section 501(c)(3) may not allow its net earnings to
inure to the benefit of any private shareholder or individual. The Program is not organized and operated
exclusively for charitable purposes as its net earnings inures to be benefit of the President and the
evidenced by their structure, compensation arrangement, and governing body composition.

Structure

The Court provided in that in determining whether charitable exemption is
justified, an organization which does not extend some of its benefits to individuals unable to make the
required payments ( ) generally reflects a commercial activity rather than charitable one. The
Program does not have specific policies or procedures in place for determining the amount of charged
toa . The Program does not have a charity care or similar policy for treating or

who become unable to pay while undergoing treatment. The Program does not dictate how much a

Should be charged, but instead leaves the decision to the individual . The Program

Catalog Number 20810W Page 12 www. irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

originally provided that it is not a suitable treatment option for unable to pay, then later stated it
does consider offering services for free and has done so in the past. For these reasons, the Program is like
, where its operation reflects a commercial activity rather than a charitable one.

In , the Court held that the diagnosis and cure of disease is not enough to
justify exemption, and while an organization may impose charges and for services rendered, a serious
question is raised where its charitable operation is virtually inconsequential. The Program wrote in its tax-
exemption application that are charged on an individual basis solely dependent upon the

s ability to pay, which are considered nominal compared to charged by for-profit programs.
However, the Program did not provide any evidence to show how its were determined to be than
comparable for-profit entities, such as research or surveys of similar in the region. The Program
charges on a Sliding scale based on the ability to pay, from $ -$  asession, but does
not have any policies to dictate how the determine the amount to charge a
stated that in , most paid around $ _ per session, which is at the high end of its range of $ -

$

The Program has taken little measures to ensure are charged based on their ability to pay, and that
charity care is provided to . Like , the Program’s charitable operation
is virtually inconsequential. The Court acknowledged that reasonable may be imposed but providing

medical services with little/no consideration for does not alone justify tax exemption. The
Program has provided little evidence to show a charitable operation beyond the diagnosis and treatment of

Like and , the amount charity care provided and
consideration for by the Program is virtually nonexistent, making it indistinguishable from
a for-profit program. The Program has not adequately established that its charitable operation is a significant
part to be considered substantially different from a for-profit enterprise to justify exemption.

Compensation of

The Court held in that the presence of a percentage compensation agreement will
destroy an organization’s tax exemption where such arrangement transforms the principal activity of the
organization into a joint venture between it and a group of physicians. The Program bears striking

similarities with , mainly that organizations did not fix the charges to be made to

but left the matter of determining the amounts of charges to be collected to the associated
Neither organization’s President knew upon what basis or method the individual fixed their
charges.
Moreover, both the . and the Program compensated their respective based ona
percentage of the individual , collected. This system for fixing the salaries of the
individual constituted a competitive system with incentives for increasing the extent of the
services rendered by the and the charged for such services. Of course, employees may receive

reasonable compensation for their services, but where the method for fixing compensation for services is

Catalog Number 20810W Page 13 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

predominantly one which compensates the individual based on the ratio of their and activity to the
whole, so that each is in competition with the other, the operation is one for profit.

Most importantly, both the and the Program distributed substantially all of their net
earnings to the associated . The Program indicated on both its Forms and its Profit and Loss
Statements for and that it derives % of its income from , and payments to the

make up over % of its expenses:

Table 8 — Income and Expense Sources
Income Percentage of Percentage of
Income Income
$ % $ %
Total Income $ % $ %
Percentage of Percentage of
Expenses Total Income Total Income
Outside Services $ % $ %
Payroll Expenses $ % - -
Salaries $ % - -
Total °
Expenses $ %o $ %

As the Court explained, because the compensation arrangements allow and incentivize charges to the
, the distribution of substantially all net receipts to the inures to their benefit, which is
expressly prohibited for tax-exempt organizations.

Additionally, the Court held in People of God Community v. CIR that where a percentage compensation
arrangement when no upper limit on earnings exists, a portion of the organization’s earnings is simply being
passed on to the individual. The Program stated that the highest percentage a can receive from

collected is %, and there is no cap or upper limit on the amount of income a can
receive. Thus, like the People of God Community, the Program’s earnings are being passed on to the
individuals to their private benefit. The Court also clarified that the prohibition on inurement extends to the
founders and other controlling individuals that have a personal stake in the organization’s receipts. In the
Program, the have complete control over the organization’s gross earnings and are distributed
substantially all of it through this compensation arrangement.

In Maynard Hospital Inc. v. CIR, the Court explained it is doubtful whether an organization’s operation can
be “exclusively” for charitable purposes within the meaning of section 501(c)(3) when its income is being
accumulated to directly increase the value of the interests of the stockholders which they expect to receive
beneficially. Though the Program’s are not stockholders, they have a personal financial interest in
the Program’s success due to the compensation arrangement. Thus, they are incentivized to accumulate the

Catalog Number 20810W Page 14 www. irs.gov Form 886-A (Rev. 5-2017)

—

Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A pa y

Explanations of Items exhibit

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

Program’s earnings to directly increase their personal distributions, causing doubt that the Program is
operated “exclusively” for charitable purposes.

In Birmingham Business College, Inc. v. CIR, the Court found that those in control of an organization may
not withdraw its earnings under the guise of salary payments. Again, the Program’s directly
controlled the amount of gross receipts collected and received substantially all of it as compensation. The
Program mirrors Birmingham Business College, as both organizations had controlling individuals
influencing the gross earnings, and later receiving those earnings as compensation.

It is not meant to be implied that all contingent compensation arrangements made by charitable
organizations will preclude tax-exempt status. In fact, Rev. Rul. 69-383 provides in part that a revenue-
sharing arrangement for compensation based on a fixed percentage of departmental income will not
necessarily preclude exemption, so long as there was an arms’ length transaction, and the compensation is
not excessive when compared to amounts received by specialists with similar responsibilities. However, the
record fails to show the Program engaged in arms’ length transactions with each , and determined
the compensation not to be excessive, as there is no cap or upper limit to the amount of compensation a

could receive. The record also fails to show what research or information was gathered to
determine a reasonable compensation amount, such as a compensation study or survey.

Lastly, Regulations Section 1.501(c)(3)-1(d)(1)(ii) states that it is necessary for the organization to establish
that it is not organized or operated for the benefit of private interests. The fact that the Program compensates
its based on a percent of the they collect, where each sets their own

to be charged, does not establish that it is organized or operated for public, rather than private, interests.

Governing Body Composition

Regulations Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized exclusively for any of
the purposes specified in Section 501(c)(3) unless it serves public, rather than private interests. Thus, it is
necessary for the organization to establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or their family, shareholders of the organization, or
persons controlled, directly or indirectly, by such interests.

The Program’s Board consists of the founder, , and . The contract
between personal corporation, the , and the Program was authorized by the Vice
President, . The bills the Program for services provides, and the
payment is authorized by the Program’s Board, . The Program does not
have a conflict-of-interest policy. The collect cash and checks from the , and is
responsible for collecting the money, and preparing the bank deposits. also prepares and

authorizes the outgoing checks and other payments and is the only in the organization authorized to sign
the checks. Based on these facts, the Program has not established that it is not organized or operated for the
benefit of private interests, which is required by IRC Section 501(c)(3) for tax exemption.

Rev. Rul. 70-186 provides that private benefit must be a necessary by-product of the activity that benefits
the public at large and accomplishes exempt purposes. In other words, the benefit to the public cannot be

Catalog Number 20810W Page 15 www.irs.gov Form 886-A (Rev. 5-2017)

Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A P rv

Explanations of Items exhibit

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Periods ended

achieved without necessarily benefitting certain private individuals. In contrast to this Revenue Ruling, there
is little evidence to suggest any private benefit conferred to and the is a necessary by-
product of the charitable operation, such as a conflict-of-interest policy, internal controls policy, arms’-
length transactions, or other safeguards to prevent misuse of assets and personal enrichment.

Net Earnings Inure to the Benefit of Private Interests
As discussed above, the Program’s charity care operation and consideration for is virtually
inconsequential, making it indistinguishable from a for-profit enterprise. This Program is not designed or
suitable for or who later become while receiving , calling
into question how the Program can be considered charitable. Additionally, the are incentivized by
their compensation arrangement to increase the charged to the and the extent of the services
rendered to the , going against the Program’s assertion that it is charitable and serves

. This compensation arrangement also allows for the Program’s net earnings to inure to benefit of the

Lastly, the Program’s organizational structure creates doubt that it is organized exclusively to serve public,
rather than private, interests, as the Board is comprised almost entirely of family, where little/no
evidence has been presented to show how private benefit is discouraged or prevented.

The record fails to show the Program is organized and operated exclusively for charitable purposes, where
no part of the net earnings inure to the benefit of any private individual, and thus does not qualify for tax
exemption under IRC Section 501(c)(3).

Conclusion

does not qualify for tax exemption under section
501(c)(3) because it serves private rather than public interests, where the net earnings inure to the benefit of
private individuals.

Since the Program will no longer have tax-exempt status beginning , they are liable for filing
Form , U.S. Corporation Income Tax Return, as of that date.
Catalog Number 20810W Page 16 www. irs.gov Form 886-A (Rev. 5-2017)