Educational organization lost exemption for private benefit and commercial activity
Apply this to your situation
This page covers one taxpayer's ruling from 2025, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Plain-English summary
An educational organization offered fee-based courses, workshops, seminars, and online materials while contracting with related for-profit businesses for teaching services. The IRS examination found that the organization received nearly all of its income from program service revenue, received no charitable contributions in the year examined, and paid almost 80 percent of its revenue to a related for-profit provider. The IRS concluded that the arrangement substantially benefited private interests and that the organization operated for a substantial commercial purpose. Because more than an insubstantial part of its activities did not further exempt purposes, the IRS revoked its section 501(c)(3) status effective September 1, 2019. The examination report stated in the alternative that, if exemption continued, the organization should be reclassified under section 509(a)(2).
Ruling snapshot
- Question: Did the organization continue to operate exclusively for exempt purposes under section 501(c)(3)?
- Outcome: Revocation effective September 1, 2019
- Key authorities: IRC §§ 501(c)(3) and 509; Treas. Reg. § 1.501(c)(3)-1; Est of Hawaii v. Commissioner; Living Faith, Inc. v. Commissioner
Full text (IRS public release)
,t".,&\I Department of the Treasury Date:
WJJ Internal Revenue Service
--
February 14, 2025
ntities Taxpayer ID number (last 4 digits):
IRS Form:
Tax periods ended:
ID
Te
Release Number: 202519011 Fa
Release Date: 05/09/2025
-
Last day to file petition with United States
UIL Code: 501.03-00 Tax Court:
CERTIFIED :VIAIL - Return Receipt Requested
Dear
\Vhy we are sending you this letter
This is a final determination that you don't qualify for exemption from federal income tax under Iutemal
Revenue Code (IRC) Sectiou 501(a) as au organization described in IRC Section 50l(c)(3). effective
September L 2019. Yom- determination letter dated August 8. 2002, is revoked.
Our adverse determination as to your exempt status was made for the following reasons: Yon have not
demonstrated that you are operated exclusively for exempt purposes within the meaning of section 50l(c)(3).
Organizations that are not exempt under IRC Section 50 l generally are required to file federal income tax retmns
and pay tax. where applicable. For :ftnther instmctions. fonns and infonuation please visit IRS.gov.
What you must do if yo11 disagree with this determination
If you want to contest our final detenuination. you have 90 days from the date this detennination letter was
mailed to you to file a petition or complaint in one of the three federnl courts listed below.
How to fde your action for declaratory jm:lgme-nt
If yon decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:
• The United States Tax Court
• The United States Com1 of Federal Claims, or
• The United States District Cmui for the District of Columbia
You must file a petition or complaint in one of these three com1s within 90 days from the date we mailed th.is
detennination lette1· to you. You can download a :fillable petition or complaint fom1 and get info1mation about
:filing at each respective comt's website listed belmv or by contacting the Office of the Cle1-k of the Com1 at one
of the addresses below. Be sure to include a copy of this letter and any attaclunents and the applicable filing fee
with the petition or complaint.
You can eFile your completed U.S. Tax Court petition by following the instrnctions and user guides available
on the Tax Com1 website at ustaxcourt.gov/dawson.html. You will need to register for a DA\VSON account to
do so. You may also file your petition at the adch-ess belmv:
Letter 6337 (Rev. 3-2024)
Catalog Number 74808E
United States Tax Court
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov
The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:
US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov
US District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001
dcd. uscourts.gov
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.
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 if 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. Visit TaxpayerAdvocate.IRS.gov/contact-us or call 877-777-4778 (TTY/TDD 800-829-4059)
to find the location and phone number of your local advocate. Learn more about TAS and your rights under the
Taxpayer Bill of Rights at TaxpayerAdvocate.IRS.gov. Do not send your Tax Court petition to TAS. Use the
Tax Court address provided earlier in the letter. Contacting TAS does not extend the time to file a petition.
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 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.
You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.
Letter 6337 (Rev. 3-2024)
Catalog Number 74808E
Keep the original letter for your records.
Lynn A. Brinkley
Director, Exempt Organizations Examinations
Enclosures;
Publication 1
Publication 594
Publication 892
Letter 6337 (Rev. 3-2024)
Catalog Number 74808E
~
Department of the Treasury Date:
fdJ Internal Revenue Service 09/30/2024
IRS Tax Exempt and Government Entities Taxpayer ID number:
Form:
-
Tax periods ended:
Person to contact:
Name:
ID num er:
Addr
Manager's contact Information;
CERTIFIED MAIL - Return Receipt Requested Name:
ID number:
Telephone:
Response due date:
Dear
Why you're receivi11g this letter
We enclosed a copy of our audit report. Form 886-A, Explanation ofitcms, 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 shovvn at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 50l(c)(3) for the periods above.
After we issue the final adverse detennination 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. Se11d 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 I and 2, above, you'll still be able to file a protest with IRS Appeals Office after
the meeting or af\cr 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 suppmt of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Detennination on Tax-Exempt Status.
Letter 3618 (Rev. 3•2024)
Catalog Number 34609F
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 tcdmical 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.
lfwe 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 Otlice 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 quality thr T AS assistance. which is always free. TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.
Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/fonns-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.
Lynn A. Brink: ey
Director, Exempt Organizations Examinations
Enclosures:
1-'orm 886-A, Explanation of Items
Form 6018, Consent to Proposed Actions
Publication l, Your Rights as a Taxpayer
Publication 892. How to Appeal an IRS Determination on Tax-Exempt Status
Publication 3498. The Examination Process
Letter 3618 (Rev. 3-2024)
Catalog Number 34S09F
Department of the Treasury - internal Revenue Seivice Schedule number or
Form886-A exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
Whether t h e - Inc's tax-exempt status should be revoked as a 501(c)(3)
organization~ I Revenue Code (IRC) because more than an insubstantial amount
of its activities is not in furtherance of an exempt purpose?
("the Organization"} was incorporated in
The Organization stated its purposes to be to conduct activities which are exclusively charitable
and educational within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1954.
The Organization received tax exemption status as a charitable organization within the meaning of
IRC Section 501 (c)(3) and was classified as a publicly supported organization under IRC Sections
509(a)(1) and 170(b)(1)(A)(vi) in August of 2002.
The Organization receives financial support in the form of
In the original Determinations Application submitted by the Organization, it stated the following in
reference to financial su ort:
The President o , also serves as managing director of a for-profit
corporation cal In 2007 Or anizati •
contract with t ,a
Althou di
ned by contract states that
c engaged "the servi rovide educational content
organized and produce "
The Organization claims the contract is no longer effective. However, the Organization continues
to pay Instructor Fees to the . Between Se tember 1, 2019 a n d ~ , 2020, the
Organization paid the This was a l m o s t - of Organization's
total revenue o durmg his same period.
catalog Number 20810W Page _j__ www.irs.gov Form 986-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form886-A exhibit
(May2017) Explanations of Items
Name of taxpayer Tax Identification Number {last 4 digits) Year/Period ended
The Organization's studio closed in 1111 and it no longer has programming there.
The activities of the organization since then include'teaching courses, workshops, and community
events.
The Organization hosts a websit The landing page mentions
membership-based content for a nving, growing commurn o educators committed to enriching
one-on-one work with students and clients." The co ht information at the bottom of the page
says, . All ri hts reserved." Underneath is a
weblin "
During th udit, the Organization
• ompanies, • •
For a five-year period, including the year under examination, the Organization received the
following support:
Calendar Year Totals
Gifts, grants. contributions, and
membership fees received as
support. (Do not include any
"unusual arnnts.•\ - • • - - ■
Tax revenues levied for the
organization's benefit and either
n,.,d to or exnAnded on its behalf
- - • - • ■
The value of services or facilities
furnished by a governmental unit
to the oroanization without charae
■
- - - Ill 1111
Catalog Number 20810W Page_2_ www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasul)I - Internal Revenue Service Schedule number or
Form886-A exhibit
(May2017) Explanations of Items
Name of taxpayer Tax Identification Number {last 4 digits) Year/Period ended
The portion of total contributions
by each person {other than a
-
governmental unit or publidy
supported organization) included
on line 1 that exceeds 2% of the
total support
Public Suooort
Gross income from interest,
dividends, payments received on
securities loans, rents, royalties
and income from similar sources
■
• ■
• • •
Net income from unrelated
business activities, whether or not
the business is reoularlv carried on
■
- - • • 1111
Other income. Do not include gain
or loss from the sale of capita!
• - •
- - ---
■ ■ 1111 ■
-
assets
Total Sunnort
Gross receipts from related
activities etc.
-- '-- ~
terms , it states that "all funds are remitted uage
could be found in another contract provide y e In the
Organization's general ledger, payments were made by th
Organization used the proceeds from these events to pay
" hus, the contract provide for a minimum payment guaran ee plus a split
o e pro Is. ow ere in the contract, nor elsewhere, did the Organization establish that it
provided financial assistance to those who cannot afford the seminars that it puts on under
contract with these for-profit entities. This same Ian ua e is used in another contract that the
Organization provided for the for-profit , further supporting that the Organization
appears to be operating for a commercia purpose rather than exclusively for exempt purposes.
Catalog Number 20810W Page_3_ www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasmy - Internal Revenue Service Schedule number or
Form886-A exhibit
(May2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
Additionally, according to the books and records provided, as well as the filed Form 990, the
Organization did not receive any charitable contributions or donations for the year under audit. All
the revenue received was ro ram service revenue, which is derived from theiranization
contractin with for- rofit com anies to rovide educational seminars on and-
via the Organiza I0n. Per-rcmns-
e income generated was from program
service revenue.
The Organization did not contract the teaching services of any other organizations or instructors
besides
I.R.C. Section 501(c)(3) generally
Section 501(a) exempts organizations described in Section 501(c) of the Code from federal
income taxation.
Section 501(c)(3) of the Code exempts from federal income tax organizations organized and
operated exclusively for charitable, educational, and other exempt purposes, provided that no part
of the organization's net earnings inures to the benefit of any private shareholder or individual.
Section 1.501 (c )(3 )-1 (a)( 1) of the regulations, organizational and operations tests, provides that in
order 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. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.
Section 1.501 (c )(3 )-1 (c )( 1) of the regulations provides that an organization will be regarded as
"operated exclusively" for one or more exempt purposes, only if it engages primarily in activities
which accomplish one or more of such exempt purposes specified in IRC 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.
Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part inure to
the benefit of private shareholders of individuals.
Section 1.501(c)(3)-1(d)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest. Thus, it is necessary for an organization to establish that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator or his
Catalog Number20810W Page_4_ www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
family, shareholders of the organization, or persons controlled, directly or indirectly, by such
private interests.
Private Foundations
Section 509(a)(1) of the Code provides that the term "private foundation" means a domestic or
foreign organization described in section 501 (c)(3) other than an organization described in section
170(b)(1 )(A) other than clauses (vii) or (viii). This includes organizations described in Section
170(b)(1 )(A)(vi) of the Code that normally receive a substantial part of its support from a
governmental unit or from direct or indirect contributions from the general public.
Treasury Regulations (Treas. Reg.) 1.170A-9(e)(2) further define an organization as publicly
supported if it receives 33 1/3 percent of its total support from contributions made by the general
public.
Section 509(a)(2) of the Code excludes from the term "private foundation" an organization that
normally receives more than one-third of its support in each taxable year from any combination of
gifts, grants, contributions, or membership fees, and gross receipts from admissions, sales of
merchandise, performance of services that is related to the exempt function and does not receive
more than one-third of its support in each taxable year from the sum of gross investment income
and unrelated business income.
Treas. Reg. 1.170A-9(e)(7)(ii) states that organizations dependent primarily on gross receipts from
related activities will not be treated as satisfying the 33 1/3 percent-of-support test under 509(a)(1)
if it receives almost all of its support from gross receipts from related activities and an insignificant
amount of its support from contributions made by the general public.
Operational Test
I.R.C. § 501 (c)(3) exempts from Federal income tax: corporations, and any community chest,
fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing
for public safety, literary, or educational purposes, or to foster national or international amateur
sports competition (but only if no part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of
which inures to the benefit of any private shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or otherwise attempting to influence legislation and
which does not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to) any candidate for public
office.
Treas. Reg.§ 1.501 (c)(3)-1 (a)(1) provides that in order to be a tax-exempt organization under
Code section 501 (c)(3), an organization must be organized and operated exclusively for one or
more exempt purposes.
Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explan~tions of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
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 of such exempt purposes specified in I.R.C. § 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.
The operational test of Section 1.501 (c)(3)-1 (c)(1) of the regulations is designed to ensure that the
organization's resources and activities are devoted to furthering exempt purposes. The operational
test examines the actual purpose for the organization's activities and not the nature of the
activities or the organization's statement of purpose. What an organization's purposes are and
what purposes its activities support are questions of fact. To pass the operational test, the
organization must be primarily engaged in activities which accomplish one or more of the exempt
purposes specified in Section 501 (c)(3) and the net earnings must not be distributed in whole or in
part for the benefit of private shareholders or individuals. American Campaign Academy v.
Commissioner, 92 T.C. 1053 (1989).
The existence of a single nonexempt purpose, if substantial in nature, will cause failure of
the operational test, regardless of the number or importance of truly exempt purposes.
Better Business Bureau v. United States, 326 U.S. 279 (1945). See also Stevens Bros.
Foundation, Inc. v. Commissioner, 324 F.2d 633, 638 (8 th Cir. 1963), cert denied. 376 U.S.
969 (1964) (ifthere is present in an organization's operations a single noncharitable
purpose substantial in nature, though it may have other truly and important charitable
purposes, it is not entitled to be exempt).
Private Benefit
An organization is not organized or operated exclusively for an exempt purpose unless it serves a
public rather than a private interest. To meet this requirement, it is necessary for an 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 private interests. Treas. Reg. 1.501 (c)(3)-1 (d)(ii)
Treas. Reg. 1.501(c)(3)-1(d)(iii) Examples. The following examples illustrate the requirement of
paragraph (d)(1 )(ii) of this section that an organization serve a public rather than a private interest:
Example 1. (i) 0 is an educational organization the purpose of which is to study history and
immigration. O's educational activities include sponsoring lectures and publishing a journal. The
focus of O's historical studies is the genealogy of one family, tracing the descent of its present
members. 0 actively solicits for membership only individuals who are members of that one family.
O's research is directed toward publishing a history of that family that will document the pedigrees
of family members. A major objective of O's research is to identify and locate living descendants of
that family to enable those descendants to become acquainted with each other.
Catalog Number 20810W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
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(ii) O's educational activities primarily serve the private interests of members of a single family
rather than a public interest. Therefore, 0 is operated for the benefit of private interests in violation
of the restriction on private benefit in paragraph (d)(1 )(ii) of this section. Based on these facts and
circumstances, 0 is not operated exclusively for exempt purposes and, therefore, is not described
in section 501 (c)(3).
Example 2. (i) 0 is an art museum. O's principal activity is exhibiting art created by a group of
unknown but promising local artists. O's activity, including organized tours of its art collection,
promotes the arts. 0 is governed by a board of trustees unrelated to the artists whose work 0
exhibits. All of the art exhibited is offered for sale at prices set by the artist. Each artist whose work
is exhibited has a consignment arrangement with 0. Under this arrangement, when art is sold, the
museum retains 10 percent of the selling price to cover the costs of operating the museum and
gives the artist 90 percent.
(ii) The artists in this situation directly benefit from the exhibition and sale of their art. As a result,
the principal activity of O serves the private interests of these artists. Because O gives 90 percent
of the proceeds from its sole activity to the individual artists, the direct benefits to the artists are
substantial and O's provision of these benefits to the artists is more than incidental to its other
purposes and activities. This arrangement causes Oto be operated for the benefit of private
interests in violation of the restriction on private benefit in paragraph (d)(1 )(ii) of this section.
Based on these facts and circumstances, 0 is not operated exclusively for exempt purposes and,
therefore, is not described in section 501 (c)(3).
Example 3. (i) 0 is an educational organization the purpose of which is to train individuals in a
program developed by P, O's president. The program is of interest to academics and
professionals, representatives of whom serve on an advisory panel to 0. All of the rights to the
program are owned by Company K, a for-profit corporation owned by P. Prior to the existence of
0, the teaching of the program was conducted by Company K. 0 licenses, from Company K, the
right to conduct seminars and lectures on the program and to use the name of the program as part
of O's name, in exchange for specified royalty payments. Under the license agreement, Company
K provides O with the services of trainers and with course materials on the program. 0 may
develop and copyright new course materials on the program but all such materials must be
assigned to Company K without consideration if and when the license agreement is terminated.
Company K sets the tuition for the seminars and lectures on the program conducted by 0. 0 has
agreed not to become involved in any activity resembling the program or its implementation for 2
years after the termination of O's license agreement.
(ii) O's sole activity is conducting seminars and lectures on the program. This arrangement causes
0 to be operated for the benefit of P and Company K in violation of the restriction on private
benefit in paragraph (d)(1 )(ii) of this section, regardless of whether the royalty payments from Oto
Company K for the right to teach the program are reasonable. Based on these facts and
circumstances, 0 is not operated exclusively for exempt purposes and, therefore, is not described
in section 501 (c)(3).
Catalog Number 20810W Page 7 www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
In Revenue Ruling (Rev. Rul.) 76-152, 1976-1 C.B. 151, there was found to be substantial private
benefit to local artists from an organization which was formed to promote community
understanding of modern art trends. The organization selected works of the local artists for exhibit
and possible sale at its public gallery. The organization paid 90% of the sale proceeds to the
artists.
In Est of Hawaii v Commissioner of Internal Revenue, 71 T.C. 1067, 1080-81 (1979), aff'd, 647
F .2d 170 (9th Cir. 1981 ), the organization engaged in activities relating to 'est' programs involving
training, seminars, lectures, etc., in areas of intra-personal awareness and communication. Such
activities were conducted under licensing arrangements with for-profit corporations. The Service
found that the petitioner's activities, although educational in nature, served the commercial
purposes of the for-profit corporations and petitioner was therefore not operated exclusively for
exempt purposes within the meaning of sec. 501 (c)(3), I.R.C. 1954.
Private benefit does not require a finding that payments for goods or services be unreasonable or
exceed fair market value. For example, in Est of Hawaii v. Commissioner, the Tax Court stated:
Nor can we agree with petitioner that the critical inquiry is whether the payments made
to International were reasonable or excessive. Regardless of whether the payments
made by petitioner to International were excessive, International and EST, Inc.,
benefited substantially from the operation of petitioner. kl
th
Similarly, in Church by Mail v. Commissioner, 765 F. 2d 1387 (9 Cir. 1985), aff'g TCM 1984-349
(1984), the Tax Court found it unnecessary to consider the reasonableness of payments made by
the applicant to a business owned by its officers. The 9th Circuit Court of Appeals, in affirming the
Tax Court's decision, stated:
The critical inquiry is not whether particular contractual payments to a related for-profit
organization are reasonable or excessive, but instead whether the entire enterprise is
carried on in such a manner that the for-profit organization benefits substantially from the
operation of the Church.
Where the driving force behind the creation and operation of an organization was the potential for
substantial ongoing private profit to the organizers, the organization was found not to operate
exclusively for exempt purposes under section 501 (c)(3). Copyright Clearance Center, Inc. v.
Commissioner, 79 T.C. 793 (1982). In that case, the court distinguished cases in which the
financial benefits to private interests were of relatively minor consequence in respect to the basic
exempt objectives of the organization and found that the financial benefits to the organizers from
organization's operations were not only frequent and concrete, but also potentially of considerable
magnitude. Id.
Catalog Number 20810W Page 8 www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - internal Revenue Service Schedule number or
Form886-A exhibit
(May2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
When a for-profit corporation benefits substantially from the manner in which the activities of a
related tax-exempt organization are carried on, the organization is not operated exclusively for
exempt purposes within the meaning of I.RC.§ 501(c)(3), even if it furthers other exempt
purposes. International Postgraduate Medical Foundation v. Commissioner, T.C. Memo, 1989-36.
In that case, the organization spent 90% of its revenue on production and distribution of brochures
which emphasized the recreational sightseeing activities of the tours during which its educational
seminars were offered. The primary benefactor of its operations was found to be the for-profit tour
company that provided air and land travel for the seminars. Id.
When an organization conducts a business in a commercial manner, that fact weighs heavily
against exemption. Living Faith. Inc. v. Commissioner, 950 F.2d 365, 373 (7th Cir. 1991), aff'g
T.C. Memo. 1990-484. "The particular manner in which an organization's activities are conducted,
the commercial hue of those activities, competition with commercial firms, and the existence and
amount of annual or accumulated profits, are all relevant evidence in determining whether an
organization has a substantial nonexempt purpose." Id. at 372. Similarly, when an organization
engages in a substantial fee-for-service or other business activity and the activity does not further
the organization's exempt purpose, the organization is not operated exclusively for an exempt
purpose. Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs.; see Partners in Charity. Inc. v.
Commissioner, 141 T.C. at 168-169.
Where a non-profit corporation that purported to serve recognized charitable class of the elderly,
but did not provide burial benefits without regard to members' ability to pay funeral expenses or
establish that membership fees were nominal charges, and the organization operated in a fee-for-
service manner, and it did not serve a public benefit, as it did not provide burial benefits to
nonmembers of the community and did not provide subsidized due program, it was found not to
operate exclusively for one or more exempt purposes. Korean-Am. Senior Mut. Ass'n. Inc. v.
Commissioner, T.C. Memo 2020-129.
Government's Position
Based on the application of the law to the facts described above, the Organization has not
demonstrated that is operated exclusively for exempt purposes within the meaning of section
501(c)(3).
The Organization operated for the substantial non-ex •
hi fi_ _ For the tax year und • •
~ r o f i t - was paid
reve ue o - • for ~ing teachi .
-
The facts are similar to those in Est of Hawaii v. Commissioner, discussed above, in which the
petitioner's activities, although educational in nature, served the commercial purposes of the for-
profit corporation and petitioner was therefore not ~ated exclusively for exempt purposes within
the meaning of sec. 501(c)(3). Here, although the . . seminars were educational in nature, the
Catalog Number 20810W Page...i,_ www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
for-profi- with whom the exempt organization contracted to provide such activities
substantially benefitted from the operation of the exempt organization.
The relationship between the Or anization and the., and the fees paid to the - by the
Organization for the services of are very similar to those in Example 3 of Treas. Reg.
1.501 (c)(3)-1 (d)(iii). In that example, is an educational organization the purpose of which is to
train individuals in a program developed by P, O's president. All of the rights to the program are
owned by Company K, a for-profit corporation owned by P. Per an agreement, Company K
provides O with the services of trainers and with course materials on the program. O's sole activity
is conducting seminars and lectures on the program. This arrangement causes O to be operated
for the benefit of P and Company K in violation of the restriction on private benefit in paragraph
(d)(1 )(ii) of this section, regardless of whether the royalty payments from Oto Company K for the
right to teach the program are reasonable.
The facts are also similar to Revenue Ruling (Rev. Rul.) 76-152, 1976-1 C.B. 151, in which there
was found to be substantial private benefit to local artists from an organization which was formed
to promote community understanding of modern art trends. In that case, the organization paid
90% of the sale proceed~ic gallery to the artists. Here, almost 80% of the total
revenue was paid to the _ _
T h eanization
i f i r also operated for a substantial commercial purpose. The same services offered
by for-profit- were being marketed through the Organization. The facts are
similar tot ose in Korean-~enior Mut. Ass'n, Inc. v. Commissioner, discussed above. The
- seminars, like the burial benefits in that case, were not provided without regard to attendees'
ability to pay nor was it established that the seminar fees were nominal charges. The organization
operated in a fee-for-service manner, and it did not serve a public benefit, as it did not provide
educational services to non-paying members of the community and did not provide a subsidized
program.
The Or anization's website promotes the teachings of and directs visitors to his
site at , which by the trademark information, appears to be hosted by the-.
The Organization prov, es fee-base- seminars and fee-based materials on its website.It
receives all revenue from fee-based services, not public! funded sources such as donations. The
Organization paid of their revenue to the teaching
services. T ~ 1 z a t i o ~ n c l u d e two substantial nonexempt purposes : (1) private
benefit f o r - a n d - and (2) commercial purposes.
Taxpayer's Position
The Government's position has not been discussed with the taxpayer as of this report.
Conclusion
Catalog Number 20810W Page __1Q_ www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
Evidenced from the books and records and the responses received about the operations of the
EO:
1. The Organization's operations with and payments to the - d ~ d e r audit
constituted private benefit to t h e - and its managing d i r e c t o r - .
2. The Organization was operating for substantially commercial purposes.
- should be revoked as an exempt organization under Section 501 (c)(3) of the
~ e date of September 1, 2019.
Alternative Issue
In the alternative, if the Organization continues to qualify for exemption under IRC Section
501 (c)(3), should its foundation status be reclassified from IRC 509(a)(1) and 170(b)(1 )(A)(vi) to
IRC 509(a)(2)?
Law
Section 509(a)(1) of the Code provides that the term "private foundation" means a domestic or
foreign organization described in section 501 (c)(3) other than an organization described in section
170(b)(1 )(A) other than clauses (vii) or (viii). This includes organizations described in Section
170(b)(1 )(A)(vi) of the Code that normally receive a substantial part of its support from a
governmental unit or from direct or indirect contributions from the general public.
The Treasury Regulations (Treas. Regs.) section 1.170A-9(e)(2) further define an organization as
publicly supported if it receives 33 1/3 percent of its total support from contributions made by the
general public.
Section 509(a)(2) of the Code excludes from the term "private foundation" an organization that
normally receives more than one-third of its support in each taxable year from any combination of
gifts, grants, contributions, or membership fees, and gross receipts from admissions, sales of
merchandise, performance of services that is related to the exempt function and does not receive
more than one-third of its support in each taxable year from the sum of gross investment income
and unrelated business income.
Treas. Regs. section 1.170A-9(e)(7)(ii) states that organizations dependent primarily on gross
receipts from related activities will not be treated as satisfying the 33 1/3 percent-of-support test
under 509(a)(1) if it receives almost all of its support from gross receipts from related activities and
an insignificant amount of its support from contributions made by the general public.
Government's Position
As shown in the five-year period income sources chart set forth in the facts section above, the
Organization did not receive any public contributions or donations in four out of five years. The
Catalog Number 20810W Page Jj www.irs.gov Form 886-A (Rev. 5-2017)
Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
-
-
-
-
-
-
-
-
-
- ' - -
-
-
-
-
-
-
-
-
Organization receives all of its income from program service revenue in four out of the five years.
Treas. Regs. section 1.170A-9(e)(7)(ii) states that organizations dependent primarily on gross
receipts from related activities will not be treated as satisfying the 33 1/3 percent-of-support test
under 509(a)(1) if it receives almost all of its support from gross receipts from related activities and
an insignificant amount of its support from contributions made by the general public.
Taxpayer's Position
The Government's position has not been discussed with the taxpayer as of this report.
Conclusion
In the event that its exempt status is not revoked, - should be reclassified as
an exempt organization under Internal Revenue C ~ ( 1 ) and 170(b)(1 )(A)(vi) to
IRC Section 509(a)(2) with an effective date of September 1, 2019.
Catalog Number 20810W Page ___1L www.irs.gov Form 886-A (Rev. 5-2017)
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