Educational organization lost exemption for private benefit and commercial activity

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

• • • • • • • • • ' -

(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)