Organization remained exempt but was classified as a private foundation

Plain-English summary

The IRS made a final determination that an environmental organization remained exempt under Section 501(c)(3) but did not qualify as a publicly supported charity under Section 509(a)(2). It was therefore classified as a private foundation effective July 1, 2018. An attached examination report had earlier proposed revoking the exemption because the organization had never held conservation property, conducted monitoring, held board meetings, received funds, or otherwise begun operations. The organization argued that work performed by a related land-conservation organization under a memorandum of understanding should count as its own activity. The examination report rejected that argument because the memorandum had not been approved or reviewed by the organization's board and contemplated only future activities. The final Appeals letter instead resolved the case through private-foundation classification, requiring Form 990-PF and potentially exposing the organization to Chapter 42 excise taxes.

Ruling snapshot

• Question: Did the organization qualify as a public charity under Section 509(a)(2), and did it operate for exempt purposes under Section 501(c)(3)?
• Outcome: denied public-charity classification, but exemption retained
• Key authorities: IRC §§ 170(h), 501(c)(3), 509(a), 509(a)(2), 4947(a)(1), 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service                                      Date: FEB 13 2024
Independent Office of Appeals

IRS                                                           Person to contact:
                                                              Name:
                                                              [redacted]
                                                              Employee ID Number:
                                                              [redacted]
                                                              Phone:
                                                              [redacted]
Release Number: 202419020                                     Fax:
Release Date: 5/10/2024                                      [redacted]
                                                              Hours:
                                                              [redacted]
                                                              Employer ID number:
                                                              [redacted]

                                                              Uniform issue list (UIL):
                                                              0501.03-30

Certified Mail

Dear [redacted]:

This is a final adverse determination regarding your private foundation classification under Internal Revenue
Code (the "Code") Section 509(a). Although you are exempt under Section 501(c)(3) of the Code, you do not
qualify as a public charity described under IRC Section 509(a)(2) but, rather, as a private foundation described
under Section 509(a) of the Code effective July 1, 2018.

We made the adverse determination for the following reasons:

Organization has not shown that it meets the public support test to qualify under Section 509(a)(2) of the Code.

You're required to file Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as
Private Foundation. Mail your form to the appropriate Internal Revenue Service Center per the form's
instructions.

You're subject to Chapter 42 excise taxes, unrelated business income taxes, and employment taxes (where
applicable) based on your activities. Please see Publication 557, Tax-Exempt Status for Your Organization, for
more details.

You can get any forms or publications mentioned in this letter by visiting our website at www.irs.gov/forms
or by calling 800-TAX-FORM (800-829-3676).

You've agreed to waive your right to contest this determination under the declaratory judgment provisions of
Section 7428 of the Code.

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

                                                   Sincerely,

                                                   Valeria B Farr
                                                   Appeals Team Manager

Enclosures:
IRS Appeals Survey

cc:
[redacted]

Letter 1372-A (Rev. 10-2021)
Catalog Number 62961S

Department of the Treasury                         Date:
Internal Revenue Service                          November 16, 2022
Tax Exempt and Government Entities                Taxpayer ID number:
                                                   [redacted]
                                                   Form:
                                                   [redacted]
                                                   Tax periods ended:
                                                   [redacted]
                                                   Person to contact:
                                                   Name:
                                                   [redacted]
                                                   ID number:
                                                   [redacted]
                                                   Telephone:
                                                   [redacted]
                                                   Fax:
                                                   [redacted]
                                                   Address:
                                                   [redacted]
                                                   Manager's contact information:
                                                   Name:
                                                   [redacted]
                                                   ID number:
                                                   [redacted]
                                                   Telephone:
                                                   [redacted]
                                                   Response due date:
                                                   December 16, 2022

CERTIFIED MAIL - Return Receipt Requested

Dear [redacted]:

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.

   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.

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

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,

                                                   [redacted], for
                                                   Lynn A. Brinkley
                                                   Acting Director, Exempt Organizations
                                                   Examinations

Enclosures:
Form 886-A
Form 6018

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

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

Issue:

Whether [redacted] continues to qualify for tax-exempt status as an
organization described in Internal Revenue Code (IRC) § 501(c)(3) or whether its exempt status
should be revoked for failure to meet the operational test under IRC § 501(c)(3)?

Facts

[redacted] (hereafter referred to as "[redacted]," "[redacted]," "[redacted]"
or "[redacted]") is a [redacted] located in [redacted], [redacted], that was recognized as
exempt from federal taxation as an organization described in IRC § 501(c)(3) and classified as a
non-private foundation under IRC § 509(a)(2), effective [redacted]. It has a fiscal year end of
[redacted].

Articles of Incorporation, dated [redacted], contain the following provisions:

o To promote the preservation and improvement of critical natural resources
  throughout the [redacted] states.

o To receive and maintain a fund(s) of real or personal property to use and apply
  exclusively for charitable, religious, scientific, literary, or educational purposes.

o The [redacted] shall not conduct or carry on any activities not permitted to be
  carried out by an organization exempt under IRC § 501(c)(3).

o The duration of the [redacted] is perpetual; if the [redacted] dissolves, the
  assets of the [redacted] are distributed exclusively to charitable, religious,
  scientific, literary or education organizations which qualify under IRC § 501(c)(3).

o The corporate powers shall be exercised by the Board of Directors, except as
  otherwise provided by statute, the Articles of Incorporation, or by the Bylaws
  hereafter adopted, and any amendments to the foregoing.

o Any action required or permitted to be taken at any meeting of the Board of
  Directors or of any committee thereof may be taken without a meeting.

The Bylaws of the [redacted], dated [redacted], provide that the [redacted] shall have no
members and that the business and affairs of the [redacted] shall be managed by the Board of
Directors. The Bylaws also set forth the titles for corporate officers with the President
designated as the principal executive officer of the [redacted]. Unless so authorized by the
Board of Directors, no officer, agent, or employee shall have any power or authority to bind the
[redacted] by any contract or engagement. It does not appear that the Bylaws were formally
adopted as there have been no meetings of the board of directors since the [redacted]
inception.

It was represented that there have been no amendments to the organizational documents.

According to the [redacted] Secretary of State, [redacted] was registered on [redacted]. It
listed its domestic address as: [redacted], [redacted], [redacted], with a mailing
address as c/o [redacted], [redacted], [redacted], [redacted]. The following
officers were listed in the registration:

[redacted]                       Title CEO
[redacted]                       Title D

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             1

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

[redacted]                       Title STD
[redacted]                       Title D
[redacted]                       Title D

The online Form 1023-EZ, its application for tax-exempt status, was completed on
[redacted], by [redacted] (Chairman / Director). This application indicated that
[redacted] was located at [redacted], [redacted], [redacted]. The application stated the names and
titles of the officers, directors and/or trustees as:

[redacted]                       Chairman / Director
[redacted]                       Secretary / Treasurer / Director
[redacted]                       Vice Chairman / Director
[redacted]                       Director
[redacted]                       Director

In its application, [redacted] attested that its organizing documents limited its purposes to
one or more exempt purposes under IRC § 501(c)(3), that it is not expressly empowered to
engage, other than to an insubstantial degree, in activities that do not further one or more
exempt purposes and that it has a proper dissolution clause. It further indicated that it was
organized and operated exclusively to further charitable, scientific, and educational purposes.

For the year ended [redacted], the Organization filed a [redacted].

Memorandum of Understanding (Attachment One):

[redacted] and [redacted] ([redacted]), purportedly entered into a Memorandum
of Understanding (MOU) (Attachment One) as of [redacted]. It was signed by
[redacted] ([redacted] Board President) and by [redacted] (CEO of [redacted]). The
representations made by the parties and the agreement between the parties is summarized
below:

• Both [redacted] are tax exempt organizations under IRC § 501(c)(3).

• Both [redacted] are "qualified organizations" as defined in IRC § 170(h)(3).

• [redacted] currently serves as the donee [redacted] for [redacted] with
  respect to land located in the State of [redacted].

• [redacted] has an appropriate level of capacity in the areas of land [redacted],
  acquisition, maintenance, enforcement, stewardship and financial
  management, scientific research, and the ability to provide administrative services called
  for under the Memorandum of Understanding, and [redacted]
  endeavors to obtain to the same level of capacity as the [redacted];

• Both [redacted] agreed to the following:

  o [redacted] will continue to hold and administer all stewardship funds provided by
    previous donors with respect to [redacted] or [redacted] donations as to land
    located in [redacted].

  o [redacted] will provide [redacted] with initial operating funds in the amount of
    $[redacted]. These funds will be reimbursed to the [redacted] in cash or in-kind support
    after [redacted] has obtained an appropriate level of capacity as determined
    by the [redacted] Board of Directors. These funds will be used to cover such startup
    costs as purchasing business equipment, field supplies, and the hiring of
    employees.

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             2

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

  o [redacted] will periodically fund [redacted] with additional cash and non-cash
    resources determined by the [redacted] Board of Directors and staff as compensation
    for [redacted] services under the MOU.

  o [redacted] recognizes that at some point in time, [redacted] will attain an
    appropriate level of financial ability and capacity to also hold [redacted]
    [redacted] in the State of [redacted]. At that time, [redacted] may assign certain
    [redacted] to [redacted] commensurate with [redacted]
    financial sustainability and may at some future time deed certain land to the [redacted].

  o [redacted] will provide financial record keeping services for [redacted] and assist in
    administering its approved policies and procedures.

  o [redacted] will continue to provide an office for [redacted] to use. At a future time,
    [redacted] will assist [redacted] in establishing office space in [redacted].

  o [redacted] will share its staff technical expertise with [redacted].

  o [redacted] staff will assist [redacted] staff, upon [redacted] request, with annual
    monitoring activities, projects, communication, and outreach activities.

  o [redacted] will accept assigned [redacted] from [redacted] per the
    conditions of the Agreement.

  o [redacted] will begin to accept donations of [redacted] and
    lands of its own volition.

  o [redacted] and [redacted] shall be mutually responsible for managing lands in the
    State of [redacted] and for performing annual monitoring inspections.

  o At some future time, [redacted] and [redacted] will take appropriate and timely
    action to enforce the terms of the [redacted].

  o All stewardship funds for previous and current projects will be managed by
    [redacted] unless and until both [redacted] and [redacted] agree to amend this procedure.

  o Each landowner of land subject to a [redacted] will be notified
    about any assignments of [redacted] by [redacted] to [redacted] in
    compliance with the terms of each respective [redacted] deed.

  o [redacted] will provide periodic updates at [redacted] board meetings.

  o This agreement will be reviewed annually on its anniversary by the Board of
    Directors of [redacted] and [redacted] and may be amended in writing upon mutual
    agreement of the parties.

Website

As part of our examination, we reviewed [redacted] website (see Attachment Two). On its
website, [redacted] claimed that it had "[redacted]"
and further that it has the in-house capacity and technology to complete all the
[redacted] services necessary for timely execution of a [redacted] project including writing
[redacted], creating baseline reports, and monitoring conserved properties.
[redacted] website referenced the monitoring of its [redacted]. Its website also contained
some basic information about [redacted] in general. Despite representations on
its website concerning [redacted] management plans, [redacted] validation and

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             3

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

verification providing federal tax deductions, state tax credits and property tax relief,
[redacted] acknowledged that it has no correspondence pertaining to these types of matters.
When asked about the general public's response to the website [redacted] did not respond.

Information from [redacted] responses to Information Document Requests:

There have been no board of director or committee meetings; therefore, there were no meeting
minutes to review. [redacted] representative stated that the [redacted] has commenced
no financial activities as the "[redacted] is currently creating an awareness of its role and
activities" in [redacted] and that its formal operations are still in the planning stage. The
[redacted] has not engaged any employees. It has no vendor contracts for services, such as
those with entities or persons providing baseline reports, monitoring or professional services.

[redacted] claims that it is a "[redacted]" set up by [redacted], part of a developmental
model to reduce chances of failure, achieve financial viability and growth for firms that
[redacted] supports, and that business development is the responsibility of [redacted]. The [redacted] set
forth a number of explanations in order to define the term [redacted]. Among other
things, the [redacted] described it as "a facility for the maintenance of controlled conditions to
assist in the cultivation of new companies," so that [they] can survive in the market and further it
is "designed to accelerate the growth and success of entrepreneurial companies through an
array of business support resources and services." The [redacted] states that it is the
recipient of [redacted] services provided by [redacted].

[redacted] acquisitions, stewardship fees, [redacted] monitoring, revenues,
personnel, [redacted] enforcement, ownership transfer of assets, records storage and general
guidelines for [redacted]. These appear to have been provided to [redacted] by
[redacted] but never adopted by [redacted] board. In response to questions about policy or
procedures pertaining to a property owner's use of the property or the exercise of reserved
rights, as well as for timber management, [redacted] refers to the [redacted]
recitals used by [redacted].

[redacted] noted that [redacted] protects [redacted] acres across [redacted] states which includes
approximately [redacted] acres in [redacted]. It stated that [redacted] holds [redacted] deeds of
[redacted] ([redacted]) in the State of [redacted]. According to [redacted], [redacted] verifies current
property ownership of the protected properties by visiting the respective county tax digest and
entering the property parcel number. [redacted] admits that even though there is an MOU
between it and [redacted], the annual monitoring requirements are the responsibility of [redacted].

Deeds

In its responses, [redacted] acknowledged that it held no [redacted] or
[redacted]. It also acknowledged that it had no correspondence with respect to any
transactions, including [redacted] rejections. Instead, it submitted the [redacted]

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             4

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

[redacted] deeds held by [redacted] in [redacted] and the related baseline reports for the Service's
review during the examination, as listed below:

Grantor          Grantee          Date          Baseline Preparer          Organization          Date
[redacted]

The [redacted] is a representative example of
the deeds (see Attachment Three) and, in relevant part, is summarized below:

• The Deed of [redacted] is granted this [redacted] day of [redacted] by
  [redacted] to, and for the benefit of, the [redacted]
  ([redacted]).

• § 1. Grant: Grantor, as an absolute charitable gift unconditionally and irrevocably hereby
  grant and convey unto [redacted], its successors, and assigns, forever a perpetual and
  irrevocable [redacted], upon, over and across the property.

• § 3. Baseline Document Report. The parties acknowledge that the Baseline
  Documentation Report has been prepared by a person familiar with [redacted],
  [redacted], the Property, and the environs. The Baseline Report has been reviewed and
  approved by [redacted] and the Grantor.

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             5

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

• § 10.7 Assignment. This [redacted] is transferable, but [redacted] may assign its rights and
  obligations under this [redacted] only to a "qualified organization" that is deemed to be so
  under IRC § 170(h). As a condition precedent to such transfer, [redacted] shall require its
  successors and assigns to enter into a specific written agreement to be bound by this
  [redacted], which written agreement shall state that the Purpose this [redacted] is
  intended to advance shall continue to be carried out by such transferee. [redacted] shall
  provide the Grantor at least [redacted] days advance notice of any assignments, so that
  Grantor can determine whether the proposed assignee satisfies the criteria of Section
  10.6.B. Grantor's prior written consent to assignment is necessary to make the
  assignment effective, and [redacted] shall not assign its rights hereunder without the Grantor's
  prior written consent.

• § 10.9 Notices. Any notice, demand, request, consent, approval, or communication that
  either party desires or is required to give to the other regarding the specifics of the
  [redacted] shall be in writing and either served personally or sent by first class mail or
  electronic correspondence (email) to (among others) [redacted], and [redacted].

• § 10.10 Recordation. [redacted] shall record this instrument in timely fashion in the official
  records of [redacted] County, [redacted] and may re-record it at any time as may be required to
  preserve its rights in this [redacted].

• § 10.26 Executory Limitation. If [redacted] dissolves, ceases to exist, is unable or unwilling to
  carry out its responsibilities under this [redacted], or no longer qualifies under IRC §
  170(h) or is no longer authorized to acquire and hold [redacted] under
  [redacted] law, then [redacted] shall have the right, subject to the provisions of § 16 herein, to
  transfer the [redacted] created by this [redacted] to any public agency or
  private nonprofit organization that, at the time of the transfer, is a qualified organization
  under IRC § 170(h), but only if that organization expressly agrees to assume the
  responsibility imposed on [redacted] by the [redacted].

Despite acknowledging that it held no [redacted], [redacted] alleged that [redacted] had acted in
its stead producing monitoring reports and notification letters using [redacted] letterhead.

Monitoring Reports and Monitoring Report cover letters (notice letters) were requested with
respect to the [redacted] deeds. The following information was provided
to the IRS as listed below:

Monitor          Monitor Date          Notice Letter Date          Monitor Org
[redacted]

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             6

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

[redacted]

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             7

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

The monitoring report and Notice Letter for [redacted] is attached as an example
of what was provided (see Attachment Four). The letterhead on that monitoring report and
notice letter is [redacted] until [redacted] when the letterhead changes to [redacted]. The person signing the
report is the monitor, [redacted], an [redacted] employee. [redacted] signed the notice
letter as CEO. With respect to all the reports and notice letters for the other [redacted] deeds,
there is a similar pattern with [redacted] letterhead used on the reports and notice letters until [redacted] at
which time [redacted] letterhead is used. Monitoring reports for the years [redacted] were all
signed by the monitor, all of whom were [redacted] employees. "No report submitted" means that no
documentation was providing substantiating [redacted] claim that monitoring reports were
produced on the [redacted] letterhead by it or [redacted].

The [redacted], for [redacted], for the years ended
[redacted] and [redacted] (see Attachment Five) were reviewed. The responses on both
returns were virtually identical in most respects. Below is a summary of [redacted] return for the
year ended [redacted]:

• In Part III, Statement of Program Service Accomplishments, Question 4a, stated (in
  relevant part), "...[redacted] conducted the monitoring of its [redacted] using
  its professional environmental staff to inspect and document the condition of the
  properties...".

• On Schedule D, Supplemental Financial Statements, Part II, Question 3, asking about
  the number of [redacted] modified, transferred, released, extinguished, or
  terminated by the organization during the year, is blank.

• On Schedule D, Part XIII, Supplemental Information, is the statement: [redacted] provides a
  publication entitled, "General Guidelines For [redacted] Projects" to all

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             8

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

  Donors which details the responsibility of the [redacted] in provided monitoring of the
  properties under [redacted] not less than annually.

• On Schedule I, Part II, which lists [redacted] grants and other assistance to domestic
  organizations, no grants were given to [redacted].

• The Schedule O, Supplemental Information to Form 990 or 990-EZ, states (in relevant
  part) that [redacted] conducted monitoring of its [redacted] using its
  professional environmental staff to inspect and document the condition of properties... to
  ensure compliance with [redacted] requirements. In total, the [redacted] provides
  protection for [redacted] properties totaling [redacted] acres in a [redacted]-state region of the [redacted].

• On Schedule R, Related Organizations and Unrelated Partnerships, [redacted] does not
  mention [redacted] nor does [redacted] mention anywhere in its returns that
  it was providing "[redacted] services" to [redacted]. Similarly, in Part VI.B.,
  [redacted] answered "no" to the question of whether it had any local chapters, branches or
  affiliates.

Law:

Section 501(c)(3) of the Code exempts from federal income tax organizations that are
"organized and operated" exclusively for religious, charitable, scientific, literary, or educational
purposes. In addition, no part of the organization's net earnings may inure to the benefit of the
private shareholder or individual, no substantial part of its activities may be devoted to lobbying
and it may not intervene in political campaigns, directly or indirectly.

Treasury Reg. § 1.501(c)(3)-1(a)(1) provides that to be exempt as an organization described in
section 501(c)(3) of the Code, the organization must be one that is both organized and operated
exclusively for one or more of the purposes specified in that section. It is a conjunctive test,
each test must be separately satisfied, and if an organization fails to meet either the
organizational or operational test, then it is "fatal to qualification and to continued entitlement to
exempt status." Columbia Park & Recreation Ass'n., Inc. v. Commissioner, 88 T.C. 1, 13 (1987),
aff'd. without published opinion, 838 F.2d 465 (4th Cir. 1988).

The regulations enumerate the following exempt purposes as including religious, charitable,
scientific, testing for public safety, literary, education or prevention of cruelty to children or
animals. Treas. Reg. § 1.501(c)(3)-1(d)(1)(i). In Rev. Rul. 76-204, 1976-1 C.B. 152, the Service
recognized that land conservancy can be a charitable purpose.

Treasury Reg. § 1.501(c)(3)-1(c)(1) provides that, an organization will be regarded as operated
exclusively for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more exempt purposes specified in section 501(c)(3). An organization will not
be so regarded if more than an insubstantial part of its activities is not in furtherance of an
exempt purpose. Finally, an organization must be operated for public, rather than private
interests. Treas. Reg. § 1.501(c)(3)-1(d)(1).

Tax exemption is a matter of legislative grace, a privilege, rather than a right. Christian Echoes
National Ministry v. U.S., 470 F.2d 849, 857 (10th Cir. 1972), cert. denied 414 U.S. 864 (1973).
The Organization bears the burden to show that it satisfies the operational test. Easter House
v. U.S., 12 Cl. Ct. 476 (1987) and cases cited therein.

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             9

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

In the case of Community Education Foundation v. Commissioner, T.C. Memo. 2016-223, it was
determined that petitioner, Community Education Foundation, no longer qualified for exemption
from Federal income tax under IRC § 501(a) because it did not meet the operational test
requirements for an IRC § 501(c)(3) organization. Specifically, the organization in the case over
time did not meaningful organize or allocate revenue to any of its purported activities for which it
had been granted exemption. It admitted to a significant period of inactivity and failed to
demonstrate that it engaged in activities furthering exempt purposes described in IRC §
501(c)(3).

Taxpayer Position:

[redacted] intent is to provide [redacted] services specifically to the State
of [redacted] as specified in the Memorandum of Understanding (MOU) between it and the
[redacted] ([redacted]). Referring to the MOU, [redacted] states that [redacted] is to provide
business support for [redacted].

When asked to explain how [redacted] is operating in [redacted] stead, [redacted] replied:

The [redacted] holds [redacted] deeds of [redacted] in the State of [redacted]. Even though
a MOU exists between the [redacted] ([redacted]) and [redacted] (start-up
[redacted]), it is the ultimate responsibility of the [redacted] to ensure that the annual
monitoring requirements are met. To facilitate the initiation of [redacted] the
monitoring responsibilities, the [redacted] has (1) created a website for [redacted],
and (2) begun to integrate the [redacted] logo on all correspondence.

[redacted] claims that because of the MOU, and that because [redacted] activities can be
attributed to [redacted], [redacted] therefore continues to qualify for exemption under IRC
§ 501(c)(3). [redacted] did not respond to the IRS questions asking it to support its
arguments for why its receipt of [redacted] services from [redacted] or the MOU would permit the
activities and purposes of [redacted] to be attributed to [redacted] such that [redacted]
continues to qualify for exemption.

Government Position:

In order to be exempt under IRC § 501(c)(3), an organization must be organized and must be
operating to carry out, or operationally support, an exempt purpose set forth in IRC § 501(c)(3)
or the corresponding regulation. Treas. Reg. § 1.501(c)(3)-1(a)(1). An organization will pass the
operational test, i.e., be viewed as operating exclusively for one or more exempt purposes, only
if it engages primarily in activities which accomplish one or more such exempt purposes
specified in IRC § 501(c)(3). Treas. Reg. § 1.501(c)(3)-1(c)(1).

When asked to provide a legal basis for why the activities of the [redacted] should be attributed to
[redacted], [redacted] pointed to the Memorandum of Understanding (MOU) as its legal
basis.

Reliance on the MOU is questionable for a number of reasons. Nearly [redacted] years after receiving
its exempt status (during which time it conducted no activities), [redacted] purportedly
entered into a MOU with [redacted], stated as being effective as of [redacted], which was

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             10

Form 886A       Department of the Treasury - Internal Revenue Service       Schedule No. or
                              Explanation of Items                          Exhibit

Name of Taxpayer                                                        Year/Period Ended
[redacted]                                                              [redacted]

signed by their respective Chief Executive Officers. In contrast to the Bylaw provisions for
contracts and agreements, it was never approved by the board of directors, nor was there any
authorization from the [redacted] board to any officer to execute any agreement. Moreover,
despite a provision in the MOU requiring annual review by the board of directors, it has never
been reviewed. Even assuming that it was entered into properly by the respective organizations,
giving it effect, the MOU contemplates future activities at some unknown unstated future date.
Until that date, the [redacted] is responsible for carrying out the required [redacted] purposes and
doing [redacted] activities with respect to its [redacted] in [redacted]. [redacted] has never transferred
or assigned any [redacted] in [redacted] to [redacted].

[redacted] hasn't had a board of directors' meeting ever. There has been no financial activity
ever. It has never received funds from [redacted]. [redacted] has not adopted or put into place any
operational policies with respect to functioning as a [redacted] organization. Of significance,
[redacted] doesn't hold title to any [redacted] or any land in [redacted]. It has
no contracts with any donors of property. It has not performed any monitoring of any
property. Its website lists erroneous and misleading information.

[redacted] incorporated in [redacted] and has never conducted any operations or activities. It
claims that it is still contemplating activities. Activities contemplated by an organization are not
enough for an organization that has received exemption a number of years ago based on its
representations that it would conduct activities. [redacted] still must operationally do—or try
to do—something exempt under IRC § 501(c)(3). It is not doing anything and never has.

[redacted] was granted exemption in its own right by representing that it would engage in
[redacted] activities. It can't shield its failure to engage "primarily in activities that accomplish
one or more exempt purposes" by relying on a MOU with another exempt organization with a
similar mission, nor through nomenclature as a so called "[redacted]" which receives
some services from another exempt entity. [redacted] may not attribute [redacted] activities to
itself in an attempt to satisfy the operational test.

Conclusion:

As stated in the government position, [redacted] has failed to demonstrate that it continues to
qualify for exempt status under IRC § 501(c)(3). Specifically, it has failed to demonstrate that it
meets the operational test of IRC § 501(c)(3) for the year under examination or any prior or
subsequent year. [redacted] has shown no reasonable acts or steps to begin operations
resulting in conducting any [redacted] or other exempt activity. It is similar to the organization
in the Community Education Foundation v. Commissioner case wherein the court concluded
that revocation was appropriate due to the organization's inactivity. Because [redacted] has
never at any time operated to further any charitable purpose or purposes, the Service proposes
to revoke the Organization as of [redacted], due to its failure to meet the operational test.

Form 886-A (Rev. 4-68)             Department of the Treasury - Internal Revenue Service             11