Determination Letter
201610025
Released March 4, 2016
Revocation
Transcribed from scan
Farm employee housing foundation loses exemption
Apply this to your situation
This page covers one taxpayer's ruling from 2016, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
Transcribed from a scanned original: the IRS released this determination as an image-only PDF. The full text below is a machine transcription, proofread against the scan. Check the original PDF before quoting exact language.
View official IRS release (PDF)
Plain-English summary
The IRS revoked a private foundation's section 501(c)(3) status because its primary activity was providing housing exclusively to employees of its founders' family-owned farming business. The foundation used its exempt status to obtain a federal farm-labor housing loan and rent subsidies, and the IRS concluded that the resulting benefits primarily served the founders, their business, and its employees rather than the public. The examination also identified scholarships paid without an approved objective selection procedure and a contribution to a political candidate. The IRS treated those payments as taxable expenditures under section 4945 and required corporate income tax returns after revocation.
Ruling snapshot
- Question: Did the foundation primarily serve public charitable purposes, and were its scholarship and political payments permissible private-foundation expenditures?
- Outcome: Revocation, with section 4945 excise taxes on identified taxable expenditures.
- Key authorities: IRC §§ 501(c)(3), 507, and 4945; Treas. Reg. §§ 1.501(c)(3)-1 and 53.4945-4
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Appeals Office
San Jose Appeals, MS-7100
55 S. Market St., Suite 440
San Jose, CA 95113 Employer Identification Number:
Date: DEC 11 2015 Person to Contact:
Number: 201610025
Release Date: 3/4/2016
UIL:
501.33-00
Certified Mail
Dear
This is a final adverse determination regarding your exempt status under section 501 (c)(3) of the Internal
Revenue Code (the "Code"). It is determined that you do not qualify as exempt from Federal income tax
under section 501 (c)(3) of the Code effective January 1, xxxx.
Our adverse determination was made for the following reason(s):
1. You are not operated exclusively for exempt purposes within the meaning of Code§ 501 (c)(3)
and Treasury Regulation§ 1.501(c)(3)-1(d). You do not engage primarily in activities that
accomplish one or more of the exempt purposes specified in Code§ 501 (c)(3). More than an
insubstantial part of your activities are in furtherance of a non-exempt purpose.
2. You are not operated primarily for a public purpose as is required by Code§ 501(c)(3) and
Treasury Regulation § 1.501(c)(3)-1 (d)(ii). Your operations result in substantial benefit to private
interests.
Contributions to you are not deductible under section 170 of the Code.
You are required to file Federal income tax returns on Forms 1120. File your return with the appropriate
Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and
information please visit www.irs.gov.
If you were a private foundation as of the effective date of the adverse determination, you are considered
to be taxable private foundation until you terminate your private foundation status under section 507 of
the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th
Day of the fifth month after the end of your annual accounting period.
Processing of income tax returns and assessments of any taxes due will not be delayed should a petition
for declaratory judgment be filed under section 7428 of the Code.
We will make this letter and the proposed adverse determination letter available for public inspection
under Code section 6110 after deleting certain identifying information. We have provided to you, in a
separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the
documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.
If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for
filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write
to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication
892.
You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is
not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have
to file a petition in a United States Court. The Taxpayer Advocate can however, see that a tax matters
that may not have been resolved through normal channels get prompt and proper handling. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this
letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate
for more information.
If you have any questions, please contact the person whose name and telephone number are shown in
the heading of this letter.
Sincerely Yours,
Appeals Team Manager
Enclosure: Publication 892 and/or 556
cc:
~%) Department of the Treasury Date:
AUG 6 2014
~&IJIInternal Revenue Service
IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:
Form:
Tax year(s) ended:
Person to contact/10 number:
Contact numbers:
Phone Number.
Fax Number: : ..
Manager's name /10 num~er:
Manager's contact number:
Phone Number:
Response due date:
Certified Mail - Return Receipt Requested
Dear
Why you are receiving this letter
We propose to revoke your status as an organization described in section 50l(c)(3) of the Internal Revenue
Code (Code). Enclosed is our report of examination explaining the proposed action.
What you need to do if you agree
If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action- Section
7428, and return it to the contact person at the address listed above (unless you have already provided us a
signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in
section 50l(c)(3).
After we issue the final revocation letter; we'll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.
Ifwe don't hear from you
If you don't respond to this proposal within 30 calendar days from the date ofthis letter, we'll issue a final
revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a
declaratory judgment because you failed to exhaust your administrative remedies.
Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s)
shown above. as well as for subsequent tax years.
What you need -to do if you disagree with the proposed revocation
If you disagree with our proposed revocation, you may request a meeting or telephone conference with the
supervisor ofthe IRS contact identified in the heading ofthis letter. You also may file a protest with the
Letter 3618 (Rev. 6-2012)
Catalog Number 34809F
IRS Appeals office by submitting a written request to the contact person at the address listed above within 30
calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations
division and resolves most disputes informally.
For your protest to be valid, it must contain certain specific information including a statement of the facts, the
applicable law, and arguments in support of your position. For specific information needed for a valid protest,
please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status,
and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes
information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation
referred to in Publication 3498 generally doesn't apply after we issue this letter.
You also may request that we refer this matter for technical advice as explained in Publication 892. Please
contact the individual identified on the first page of this letter if you are considering requesting technical
advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt
Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.
Contacting the Taxpayer Advocate Office is a taxpayer right
You have the right to contact the.office ofthe Taxpayer Advocate. Their assistance isn't a substitute for
established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally
correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court.
They can, however, see that a tax matter that hasn't been resolved through normal channels gets prompt and
proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. Ifyou
prefer, you may contact your local Taxpayer Advocate at:
Internal Revenue Service
Office of the Taxpayer Advocate
For additional information
If you have any questions, please call the contact person at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we need to
contact you.
Thank you for your cooperation.
Sincerely,
Barbara L. Harris
Acting, Director, EO Examinations
Enclosures:
Report of Examination
Form 6018
Publication 892
Publication 3498
Letter 3618 (Rev. 6-2012)
Catalog Number 34809F
Department of the Treasury • Internal Revenue Service Schedule No. or
Form 886A
Name ofTaxpayer
I Explanation of Items Exhibit #1
Year/Period Ended
December 31,
ISSUES:
1. Whether exempt status under Internal Revenue Code (IRC) §
501 (c)(3) should be revoked since its primary purpose is the provision of housing to
the founders' farm employees, which serves the private interests of the
founders.
2. Whether certain payments, identified below, constitute taxable expenditures defined
under IRC §§ 4945(d)(2) and (3), and should be taxed under IRC §§ 4945(a)(1) and
(b)(1). .
FACTS:
Organization Background
Form 1023, Application for Recognition of Exemption, was filed by
on . It states its purpose is to distribute charitable
contributions to:
o Religious organizations
o Schools and Universities
o Other cultural, historical, or educational organizations.
It further states that its financial support will come from contributions from individuals
and professional people. Fundraising will be planned with individual solicitations. The
activities will be conducted in by officers and directors. It is not a
supporting organization, a private operating foundation, or a home for the aged or
handicapped. It does not provide any scholarship benefits or student aid. The facilities
and operations will not be managed by another organization or individual under a
contract. It is not a party to any leases and does not provide services or products.
was incorporated in the State of on by the
Department of Commerce and Consumer Affairs State of These documents
state that will operate exclusively for charitable, religious, educational,
scientific or literary purposes. Upon dissolution, assets shall be distributed for exempt
purposes described under IRC § 501 (c)(3) or to federal, state, or local government
The organization will not engage in any act of self-dealing as defined in §4941 (d) of the
IRC. None of the corporation's assets or net earnings will inure in whole or part to the
benefit of any private individual except in furtherance of charitable, religious,
educational, scientific or literary purposes.
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page:--
Department of the Treasury • Internal Revenue Service Schedule No. or
Form 886A
Name ofTaxpayer
1 Explanation of Items Exhibit #1
Year/Period Ended
December 31,
Officers
President
Vice President, Director
Director
Treasurer
The
The address for all officers is
by and
bylaws were signed
Related Entity:
incorporated in as a for-profit agricultural business, founded, owned, and
operated by and his family. Its commercial operations are on approximately
' farm acres and it provides full-time employment to approximately - people.
office is located a•
All tenants of low income agricultural housing activity are
employees. deducts rent from its employees' payroll for the amount of the
employees' rent that is due to thE:
No references or links to were found on website. has
no website.) website, , encourages fundraisers to purchase,
then sell, produce inventory at farmers markets. An excerpt from · website
follows:
Other Activities: has advertised a variety of public events since the year
of or earlier. It has provided weekly farmers markets since the year of · -
Examples of internet postings advertise similar seasonal activities hosted by
These include:
o An advertisement with costs for entertainment including a Giant Corn
Maze, rides, and a list restaurants selling their food. The advertisement
2
Department of the Treasury - Internal Revenue Service
Form 886-A(Rev.4-68) Page:--
Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A
Name ofTaxpayer
I Explanation of Items Exhibit #1
Year/Period Ended
December 31,
promotes "The Market Place" that "shoppers can browse".
1: Thursday
o s hosts Easter Egg Hunt, with hay rides, rock climbing,
inflatables and more. From 9 a.m.-5 pm.,.
Call , ext. 41.
t .~)
o While the say they are concerned about the fate of the
workers, they maintain they are good corporate citizens who offer com
maze and pumpkin patch events for school kids and Easter egg hunts for
children in the community, during which they teach them about
agriculture and farm life. ( . ·.com: . ·
Investigated for State and Federal Labor Violations)
Reported Activities
filed Form 990 for year that reported fund raising activities. Forms
990-PF for years · · through _ that reported housing activities. Providing housing
to ' employees is Foundation's primary activity per filed Forms 990-PF from
to present. 1 states it had no activities until · when it reported gross
receipts of$ as public contributions from fund raising. Receipts of$ were
from " and ~ from "Easter Egg Hunt". After expenses of
$ , Foundation showed a loss of $ No distributions of donations-or grants
were made by
Housing Rental: through activities:
The following are chronological activities for housing:
• May Board Meeting:
Foundation's board met to approve action to pursue a USDA Farm Labor
Housing Loan.
• May Letter of Conditions from USDA:
This letter describes the housing as " units, Employees" and
shows the activity as · Units of Section 521 Rental Assistance
3
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page:-
Depa..rtro=t of the Treasury -Internal Revenue Service · Schedule No. or
Form 886A
Explanation of Items Exhibit #1
Name ofTaxpaycr Year/Period Ended
December 31,
The letter states proof of IRS 501(c)(3) status is required and describes USDA
§3560.555 Eligibility requirements(a)(1) as "A broad-based (has a membership
that reflects a variety of interests in the area where the· housing will be located)
nonprofit organization of farm workers."
• July Loan Received:
1 received a USDA farm labor housing loan of$ plus rental
assistance funding to provide housing for migrant farm workers.
• July Building Purchased:
purchased a unit building, at . fo~ ,
At the time of purchase, several of employees resided at
. this apartment building.
Renters of the apartment building were released as tenants •. with the exception
of employees. All tenants since purchase have been, or are
related to, employees.
• September Management Contract:
contracted to be the managing agent of the apartments (per a
Management Agreement with " Labor Housing"). is owned and
controlled by has no known relationship with
or
• August Housing Applicants:
An Labor Housing" document states all applications will be placed
on a master waiting list. The managing agent will keep detailed records
regarding applications on list, housed, rejected, or canceled. All applicants will
be notified in writing of status. Rejections will be made in writing with appeal
rights.
• April of t: Building Repairs:
A building permit was issued for minor repairs and re-roofing of the
apartments. The owner on the building permit is shown as
4
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page:--
Form 886A
Department of the T rcaswy - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit #1
Name ofTaxpayer Year/Period Ended
December 31,
Activities for Year of Examination
Revenue
For year ended December 31, Form 990-PF reported the following:
<:ontributions, Gifts, Grants, etc. $
- Labor Housing l_
Total Revenue $
The examination results show the following revenue:
Labor Housing Revenue (Rent Tenants) $
Labor Housing Revenue (Rent Subsidy) i.
Total Revenue $
Rental income was collected by contracted management company,
The records for the rental activities were maintained by
For contributions of$ . , no money was contributed to on. Instead, the
amount represents forgiveness of a debt for expenses s paid in a prior
year. The expenses were incurred for year event called " ·
" claims that because 1 did not repay for
expenses. considered itself to have made contributions to Foundation in year
The examiner found internet advertisements showing : as the
sponsors of the event. No mention of - was found.
Expenses: Qualifying Distributions and Undistributed Income
Form 990-PF for tax year states: Qualifying Distributions of . were made for
"scholarships to students", and that "Contributions were only given to preselected
charitable organizations." Excess distributions carried from year totaled $
Qualifying Distributions: Scholarship to Students
The auditor requested all documents related to scholarship authorization,
criteria, solicitation, and recipient selection process. had no supporting
documentation related to their scholarships and no IRS approval of their scholarship
programs. stated it had no specific documented formalities and that
scholarship availability was mostly communicated by word of mouth.
5
Form 886-A(Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
Department of the Treasury- Internal Revenue Service Schedule No. or
Form 886A
Name ofTaxpayer
I Explanation of Items Exhibit #1
Year/Period Ended
December 31.
records for the $ of "scholarship to students" expenditure on Form
990 show the following payments: paid directly to Ms. , a member of
pharmacy fraternity at Ms.'s school transcripts were mailed to
·s "scholarship letter" states "Your parents are very proud of you."
explained that met a member of Ms. family, who is with
the state legislature, during an event hosted by the· Bureau. Ms. learned
of the scholarship at this event and she was subsequently selected to receive the
scholarship based on high academic achievement. Other payments are as follows.
• $ letter of appreciation is
addressed to
• $ donation to a local High School.
• ~ . paid directly to The believes that
this was paid as a replacement for a lost check paid out in prior years
to assist in expenses for school books. No supporting documentation
was provided,.
There was also $ paid to "Friends of
Representative). provided a copy of check#· , dated
and noted as "donation". The financial institution's copy of the same check shows the
note as" event tickets" and "donation". stated this payment for the
political candidate "was a mistake by an. employee who wrote a check
from· main account". · transferred$ from its bank
account #1 to its bank account #2 to correct the mistake. Regardless, no
reimbursement to from was evidenced.
Public records show is a member of the , House of
Representatives, representing the I District since· . In and·
won re-election. State of Campaign Spending Commission reports that
"Committee: Friends of ·"contributions included$ received on
from . (Friends of. :Report On:.
Supplemental January 1 - June )
Qualifying Distributions: Excess distributions
The auditor requested records to explain the $ distribution carried from year
to the year The distributions were paid for the amounts and purposes as
follows:
6
Form 886-A(Rev.4-G8) Departmenr of the Treasury- Internal Revenue Service
Page:--
Schedule No. or
I
Department of the Treasury- Internal Revenue: Service:
Form886A
Explanation of Items Exhibit #1
Name ofTaxpaycr Year/Period Ended
December 31, .
0
Housing (Rental)
0
Year Sunset on the Plains Expenses
0
Payments to individuals
0
Payments to Schools and Church
Liabilities
The amount of$ was included in liabilities for a bill paid by for
. No documents supported that was liable for this expense.
Tax Law - Exempt Status
Exempt Purpose
IRC § 501 provides for the exemption from federal income tax of corporations
organized and operated exclusively for charitable or educational purposes, provided
that no part of the net earnings inures to the benefit of any private shareholder or
individual. ·
§ 1.501(c)(3)-1(c)(1) of the Income Tax Regulations (Regulations) provides that an
organization operates exclusively for exempt purposes only if it engages primarily in
activities that accomplish exempt purposes specified in IRC 501(c)(3). An organization
must not engage in substantial activities that fail to further an exempt purpose. In Better
Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283 (1945), the Supreme
Court held that the "presence of a single ... [nonexempt] purpose, if substantial in
nature, will destroy the exemption regardless of the number or importance of truly ...
[exempt] purposes."
Regulations § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or
operated exclusively for exempt purposes 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.
Regulations § 1.501(c)(3)-1(d)(2) defines the term "charitable" as used in § 501 (c)(3) as
including the relief of the poor and distressed or of the underprivileged, and the
promotion of social welfare by organizations designed to lessen neighborhood tensions,
to eliminate prejudice and discrimination, or to combat community deterioration.
Revenue Procedure 96-32, 1996-1 C.B. 717, 1996-20 I.R.S. 14. sets forth a safe harbor
under which organizations that provide low-income housing will be considered
charitable as described in § 501(c)(3) of the IRC because they relieve the poor and
distressed as described in § 1.501(c)(3)-1(d)(2).06-.07 of the Regulations as follows:
7
Form 886-A<Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
-------------------------------------------------------------
Department of the Treasury • Internal Revenue Service Schedule No. or
Form886A
Name of Taxpayer
I Explanation of Items Exhibit #1
Year/Period Ended
December 31,
To be recognized as exempt from income tax under § 501(c)(3), a low-income
housing organization must not only serve a charitable purpose but also meet the
other requirements of that section, including the prohibitions against inurement
and private benefit.
If an organization furthers a charitable purpose such as relieving the poor and
distressed, it nevertheless may fail to qualify for exemption because private
interests of individuals with a financial stake in the project are furthered. For
example, the role of a private developer or management company in the
organization's activities must be carefully scrutinized to ensure the absence of
inurement or impermissible private benefit resulting from real property sales,
development fees, or management contracts.
An organization of farmers formed to furnish farm laborers for individual farmers does
not qualify for exemption. The organization obtained requests from member farmers for
workers, assigns the laborers to the farmers, receives payment from the farmers, and
pays the laborers or their representatives. The organization's income is from a small
rental fee paid by the workers and fees and dues paid by the .farmers. Its funds are
used to operate a labor camp to house transient farm workers while they are working in
the area. The organization,.by engaging in the activities described above, is merely
providing services to individual farmers that they would have to provide for themselves
or get someone else to provide for them. Revenue Ruling (Rev. Rul.) 72-391, 1972-2
C.B. 249.
An organization formed to provide low income housing to families but with preference
for housing to employees of a farm proprietorship operated by the individual who
created and controls the organization does not qualify for exemption under § 501 (c)(3)
of the IRC. The organization constructed ten rental units adjacent to the farm.
Applicants for housing were preference according to type of position and length of
employment on the farm. All of the units are occupied by regular employees of the farm.
The individual pays the rent for the employees. All of the housing units are occupied by
low income families. The organization was initially funded through a loan from a
governmental agency and contributions from the individual. Its receipts are from rental
payments and its disbursements are for repayments on the loan and upkeep of the
rental units. Since the organization gave preference for housing to employees of the
farm proprietorship operated by the individual who created and controls the
organization, and all the units are in fact occupied by such employees, the organization
is serving the private interests of the individual rather than a public interest. Accordingly,
it is held that the organization's activities are not charitable and that it does not qualify
for exemption from Federal income tax under § 501(c)(3) of the IRC. Rev. Rul. 72-147,
1972-1 C.B. 147
The court held that an organization that operated a school to train individuals for
careers as political campaign professionals, but that could not establish that it operated
8
Form 886-A(Rev.4-68) Department of the Treasury- lntemal Revenue Service
Page:--
-~-----------------·--··------
Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A
Name ofTaxpayer
I Explanation of Items Exhibit #1
Year/Period Ended
December 31,'
on a nonpartisan basis, did not exclusively serve purposes described in IRC 501(c)(3)
because it served private interests more than incidentally. The court found that the
organization was created and funded by persons affiliated with a particular political
party and that most of the organizations graduates worked in campaigns for the party's
candidates. The court concluded the organization conducted its educational activities
with the objective of benefiting the party's candidates and entities. Although the
candidates and entities benefited were not organizational "insiders" , the court stated
that the conferral of benefits on disinterested persons who are not members of a
charitable class may cause an organization to serve private interests within the meaning
of IRC 501(c)(3)-1(d)(1)(ii). The court concluded by stating that even ifthe political
party's candidates and entities did comprise a charitable class, [the organization] would
bear the burden of proving that is activities benefited members of the class in a non-
select manner. "American Campaign Academy", 92 T.C. at 1077.
The court held that an association formed in a private real estate development to
operate parks, swimming pools, boat docks and other recreational facilities did not
qualify as IRC 501 (c)(3) organization. Although the organization provided some benefit
to the general public, the primary intended beneficiaries were the residents and
property owners of the private development. Thus, the organization operated for a
substantial non-exempt purpose rather than for exclusively charitable purposes.
Columbia Park & Recreation Association v. Commissioner, 88 T.C. 1 (1987), affd.
A nonprofit organization that provides specially designed housing to elderly persons at
the lowest feasible cost and maintains in residence those tenants who subsequently
become unable to pay its monthly fees is an organization operated exclusively for
charitable purposes within the meaning IRC 501(c)(3). Rev. Rul. 79-18, 1979-2 C.B.
194. See also Rev. Rul. 72-124, 1972-1 C.B. 145; Rev. Rul. 61-72, 1961-1 C.B. 188;
and Rev. Rul. 64-231, 1964-2 C.B. 139.
In Foundling Church of Scientology v. United States, 412 F.2d 1197, (Ct. Cl.
1969), cert. denied, 397 U.S. 1009 (1970), an organization argued that the Court
should not find that the organization's earnings had inured to its founders since it
had made some payments to him as repayments on a loan. Since the
organization did not produce any documents evidencing this indebtedness, the
Court concluded that the plaintiff had failed to meet its burden of proof that a part
of the corporate earnings was not a source of benefit to private individuals.
In Wendy L. Parker Rehabilitation Foundation, Inc. v. C.I.R., T.C. Memo. 1986-348, the
Tax Court upheld the Service's position that a foundation formed to aid coma victims,
including a family member of the founders, was not entitled to recognition of exemption.
Approximately 30% of the organization's net income was expected to be distributed to
aid the family coma victim. The Court found that the family coma victim was a
substantial beneficiary of the foundation's funds. It also noted that such distributions
relieved the family of the economic burden of providing medical and rehabilitation care
9
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page:--
I Schedule No. or
Department of the Treasury - Internal Revenue Service
Form886A
Explanation of Items Exhibit #1
Name ofTaxpayer Year/Period Ended
December 31,
for their family member and, therefore, constituted inurement to the benefit of private
individuals.
Benefit does not have to involve the flow of funds. See Rev. Rul. 76-206 (providing
services to a for-profit that would otherwise have had to have been purchased). Benefit
does not require that payments for goods or services be unreasonable or exceed fair
market value. EST of Hawaii v. Commissioner, 71 T.C. 1067 (1979).
A nonprofit organization formed to aid immigrants in overcoming social, cultural, and
economic problems by providing personal counseling, referrals to helpful agencies,
social and recreational activities, instruction in English, and distributing a newsletter
containing information on attaining citizenship, securing housing, and obtaining medical
care is operated exclusively for charitable and educational purposes and qualifies for
exemption under IRC 501(c)(3). Rev. Rul. 76-205, 1976-1 C.B. 154.
IRC 501 provides for exemption from income tax for organizations described in IRC
501(c) and IRC 501(d). §501(c)(3) provides this exemption for corporations,
associations and trusts that are organized and operated for charitable, educational,
literary, religious, and or scientific purposes, to test for public safety, for fostering
national or international amateur sports competition (with certain limitations,) or for.
preventing cruelty to animals or children.
IRC 501 (c)(3) also requires that no part of the net earnings inures to the benefit of any
private shareholder or individual, that no substantial part of the activities of is to carry
on propaganda, or otherwise attempt to influence legislation, and that it not participate
in, or intervene in any political campaign on behalf of (or in opposition to) any candidate
for public office.
IRC 507(a) sets forth the requirements for a private foundation to be terminated, either
voluntarily under IRC 507(a)(1), or involuntarily under IRC507(a)(2). The two
requirements for involuntary termination, are that 1) there have been either willful
repeated acts (or failures to act), or a willful and flagrant act (or failure to act), that give
rise to liabilities for taxes under Chapter 42, and 2) that for this reason the Secretary
notifies the organization that it is subject to a termination tax imposed by IRC 507(c).
IRC 509 defines private foundations to be organizations described in IRC 501(c){3) that
do not meet one of the exceptions further listed in IRC §§ 509(a)(1 ), 509(a){2),
509(a)(3), or 509(a)(4).
Tax Law: Private Foundation and Excise Taxes (IRC 4945):
IRC §§ 4945(a) and 4945(b) impose excise taxes on taxable expenditures defined in
IRC 4945(d).
10
Form 886-A(Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
Form 886A Dep:u:tmcnt of the Treasury- lntcnul Revenue Service -schedule No. or
Explanation of Items Exhibit #1
Name of Taxpayer Year/Period Ended
December 31,
IRC 4945(a)(1) imposes a 20% excise tax for each taxable expenditure that is to be
paid by the private foundation.
IRC 4945(b)(1) imposes an excise tax of 100% on the foundation for taxable
expenditures that are not "corrected" (IRC 4945{i)) within the taxable period, that shall
be paid by the private foundation.
IRC 4945(b)(2) imposes an excise tax of 50% on the foundation manager in cases
where taxes are imposed under IRC 4945{b)(1), and the foundation manager refused to
agree to part or all of the "correction" (IRC 4945{i)). This tax is to be paid by the
foundation manager.
IRC 4945(c)(2) limits the tax imposed by IRC 4945(a){2) to $5,000, and the tax imposed
by IRC 4945(b)(2) to $10,000.
Political & Legislative:
IRC 4945(d)(1) holds that taxable expenditures include any amounts_expended by a
private foundation to carry on propaganda, or otherwise to attempt, to influence
legislation, which includes. any attempt to influen.ce any legislation through ~n attempt to
affect the opinion of the 'general public or any segment thereof, and any attempt to
influence legislation through communication with any member or employee of a
legislative body, or with any other government official or employee who may participate
in the formulation of the legislation (except technical advice or assistance provided to a
governmental body or to a committee or other subdivision thereof in response to a ·
written request by such body or subdivision, as the case may be), other than through
making available the results of nonpartisan analysis, study, or research (IRC 4945(e)(1)
and 4945{e)(2)).
A private foundation influences the outcome of a specific public election if it
participates or intervenes, directly or indirectly, in any political campaign on
behalf of or in opposition to any candidate for public office. (Regulation 53.4945-
3(a)(2)). The term "candidate for public" means an individual who offers himself
or herself, or is proposed by others, as a contestant for an elective national,
state, or local public office.
IRC162 sets forth the types of ordinary and necessary expenses that may be allowed
as deductions in carrying on any trade or business. IRC162(e) denies a deduction
under IRC162 for certain lobbying and political expenditures. IRC162(e)(1) proceeds to
list the expenditures which are not deductible, including amounts paid or incurred in
connection with influencing legislation (IRC162(e)(1)(A)), participating in, or intervening
in, any political campaign on behalf of (or in opposition to) any candidate for public
office {IRC 162{e)(1)(B)), any attempt to influence the general public, or segments
thereof, with respect to elections, legislative matters, or referendums (IRC
11
Form 886-A(Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
Form 886A Department of the Treasury- Internal Revenue Service Schedule No. or
Explanation of Items Exhibit #1
Name ofTaxpayer Year/Period Boded
December 31. ·
162(e)(1)(C)), or any direct communication with certain executive branch officials in an
attempt to influence the official actions or positions of those officials. (IRC162(e)(1)(D)).
IRC § 4945(i)(1) sets forth that with respect to any "taxable expenditure" (IRC §
4945(d)), the terms "correction" and "correct" mean the recovery of part or all of the
expenditure to the extent possible, and where full recovery is not possible such
additional corrective action as is prescribed by the Secretary by§ 4945(i)(2) holds that
with respect to any "taxable expenditure" (IRC 4945(d)), the "taxable period" is the
period beginning with the date on which the taxable expenditure occurs and ending on
the earlier of A) the date of mailing of a notice of deficiency with respect to the tax
imposed by IRC § 4945(a)(1), or B) the date on which tax imposed by§ 4945(a)(1) is
assessed. ·
Scholarships and Grants:
Grants to individuals must be made in accordance with procedures approved in
advance by the Internal Revenue Service. To secure such approval, a private
foundation must demonstrate in its request for advance approval that:
o Its procedure awards grants on an objective and non-discriminatory
basis;
o The procedure is reasonably calculated to result in perforn'lance by
grantees of the activities that the grants are intended to finance; and
o The foundation will supervise grants to determine whether grantees
have fulfilled the grant terms.
See Regulations 53.4945-4(b)(2).
IRC 4945(g)(1) excludes from the term "taxable expenditure" scholarship grants
that are subject to the provisions of IRC 117(a) and are to be used for study at
an educational institution described in IRC 170(b)(1)(A)(ii). IRC 4945(g) provides
further that these individual grants must be provided on an objective and
nondiscriminatory basis pursuant to a procedure approved in advance by the
Secretary.
Termination of a Private Foundation:
IRC 507(a) sets forth the requirements for a private foundation to be terminated, either
voluntarily under IRC §507(a)(1 ), or involuntarily under IRC § 507(a)(2). The two
requirements for involuntary termination, are that 1) there have been either willful
repeated acts (or failures to act), or a willful and flagrant act (or failure to act), that give
rise to liabilities for taxes under Chapter 42, and 2) that for this reason the Secretary
notifies the organization that it is subject to a termination tax imposed by IRC § 507(c).
12
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page:--
Schedule No. or
I
Dqnrt:mmt of tht: Treasury - lntt:mal Revenue Servict:
Form886A
Explanation of Items Exhibit #1
Name ofTaxpayer Year/Period Ended
December 31,
IRC 509 defines private foundations to be organizations described in IRC § 501(c)(3)
that do not meet one of the exceptions further listed in §§ 509(a)(1), 509(a)(2),
509(a){3), or 509(a){4).
Income Tax:
IRC § 11 imposes a tax for each taxable year on the taxable income of every
corporation. ·
IRC § 61 of the Code defines gross income as all income from whatever source
derived.
IRC § 162 of the Code allows as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business.
§ 1.6001-1(d) of the Regulations requires corporations to make such returns, render
such statements, or keep such specific records as will enable the Service to determine
whether or not such corporation is liable for tax under subtitle A of the Code.
§ 1.6012-2 of the Regulations requires every corporation subject to taxation under
subtitle A of the Code to make a return of income regardless of whether it has taxable
income or regardless of the amount of its gross income. In addition, this regulation
specifies Form 1120 as the required return of a corporation.
GOVERNMENT'S POSITION:
1. provision of low income housing exclusively to the founders'
employees, constitutes activities that primarily serve the private interests of the
founders.
2. is not operated exclusively for a charitable purpose and does not meet
this reqUirement to qualify for exemption from Federal income tax under IRC §
501(c)(3).
3. recognition of exempt status under § 501(c)(3) should be revoked
because n does not meet the requirements .
4. liable for excise taxes applicable to private foundations on payments
made directly to individuals and to a non-qualifying organization.
13
Form 886-A(Rev.4-68) Department or the Treasury- Internal Revenue Service
Page:--
Deputment of the Treasury - lntemal Revenue Service Schedule No. or
Form 886A
Name ofTa.xpayer
I Explanation of I terns Exhibit #1
Year/Period Ended
December 31,
5. The aforementioned payments are in violation of IRC § 4945(d), and is
liable for the amount of tax.
6. is subject to taxation under subtitle A of the IRC as described below.
Private Benefit
was formed for the private benefit of its-founders, the
family members, and their family-owned commercial farms. is
organized and primarily operated in a manner to further the commercial farm
ventures of and the family. ·
recognized that to receive a government grant for housing its farm workers, proof
of IRC 501 (c}(3} status was required by USDA This status can secure key funding and
facilitate lender and governmental agency approval of the funding transfers.
The founders used their IRC 501 (c)(3) exempt status to obtain government
subsidies for housing, then used the benefits exclusively for employees of the
founders' business, did not seriously solicit tenants other
than employees and several instances support that Farms' considered
the its very own foundation (The names of documents (USDA loan is
for" units, Employees, · Units of section 512 rental assistance").
The ultimate result IS tnat any benefit tram the housing activity went exclusively
and directly to , its founders, and employees. The organizations activities
are fully oriented to its own membership rather than to the general public. As
noted in G.C.M. 38459, "an organization which serves a private interest other
than incidentally is not entitled to exemption as an organization described in IRC
§ 501(c}(3}.
, activities and expenditures benefit had unfettered use of
funds and used them for private purposes to pay for its self-promotional community
events, including Markets and other events that included sales of
products and of for-profit vendors' products. · control was used to benefit by
insiders (family members} as evidenced by insider contributions that were changed at
whim to loans.
Substantial Non-exempt Purpose
substantial non-exempt purpose was one of qualifying for a federal
housing loan and rent subsidies for employees while avoiding the
regulatory requirements that competing for-profit farms must contend with to
14
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page:--
Department of the Treaswy • Internal Revenue Semce Schedule No. or
Form886A
Name ofTa.xpayer
I Explanation of Items Exhibit #1
Year/Period Ended
December 31,
acquire the same loans and rent subsidies. The government loan for the housing
was dependent on the organization enjoying recognition of tax exempt status
under IRC § 501 (c)(3). It is not furthering a charitable or educational purpose to
ensure had a ready supply of farm labor through provision of housing
expenses paid for the government for its employees only.· Further, low-income
tenants were not provided tools or opportunities to better their situation through
training related to home ownership, unlike the case in Rev. Rul. 67-138.
situation can also be distinguished from situations 1 through 3 of
Rev. Rul. 70-585, none of which primarily benefited their individual members,
founders, or other insiders.
To be recognized as exempt from income tax under IRC § 501(c)(3), a low-
income housing organization must not only serve a .charitable purpose but also
meet the other requirements of that section, including the prohibitions against
inurement and private benefit.
has not established that it does not provide preferential services or
benefits to its members other than those of a purely incidental nature.
As in Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283 ,
the "presence of a single ... [nonexempt] purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly ...
[exempt] purposes." ·
is like the organization described in Rev. Rul. 72-147, where all units of
the housing have been occupied by employees (or employees' family members)
of a farm proprietorship operated by the individual who created and controls the
Although providing housing for low-income families furthers
charitable purposes, doing so in a manner that gives preference to employees of
the founder's business primarily serves the private interest of the founder rather
than a public interest.
. is similar to Easter House where the court found that the health-
related services were merely incidental to the organization's operations of a
service which, in and of itself, did not serve an exempt purpose. And the
business purpose, and not the advancement of education and charitable
activities purpose, of the activity is the primary goal. (Easter house, 12 Cl. Ct. at
485-86.) Here, with , any charitable purpose of providing housing for
the poor is incidental to . actual business purpose of housing their
employees while obtaining government subsidies available only to non-profit
organizations.
15
Form 886-A(Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
Form 886A
Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit #1
Name ofTaxpayer Year/Period Ended
December 31,
Further, . like the organization described in Rev. Rul. 72-391, 1972-
2 C.B. 249. Where the furnishing of housing for transient farm laborers is merely
a necessary adjunct for the accomplishment of the organization's purpose", in
. case, that of securing a labor force for the founder's business.
Similarly, is like the organization in Rev. Rul. 69-280, C.B. 1969-1
that operated primarily and directly for the benefits of the individual members
rather than for the community as a whole.
· provides substantial financial benefits to · by essentially
providing it with a means of housing their employees and providing an easy
source of capital to purchase real estate to accomplish this. Utilizing the exempt
status of · eliminates roadblocks to obtaining a housing loan, and
saves considerable time and money to repay the loan through government
payment of low rent subsidies and · payroll deductions for rent. As such,
serves a private interest more than incidentally, contrary to §
1.501(c)(3)-1(d)(1)(ii) of the Regulations.
Revocation
does not qualify for exemption from tax under IRC 501 (c)(3) because it has
failed to operate exclusively for exempt purposes as required by IRC 501(c)(3), Treas.
Reg. § 1.501(c)(3)-1(a)(1), and Treas. Reg. § 1.501(c)(3)-1(a)(2) because more than an
insubstantial part of its activities is not in furtherance of exempt purposes. A substantial
part of its funding, expenses, staff, and program is in furtherance of increasing profits of
. the founders' agricultural business. . recognition of exempt status under §
501(c)(3) should be revoked.
Note: Once a private foundation's exempt status is revoked, it is considered a taxable
private foundation until it terminates its private foundation status under the provisions §
507 of the Code. It must continue to file Form 990-PF and pay any applicable private
foundation excise taxes (calculated on Form 4720) until termination.
Taxable Expenditures
The is subject to the excise taxes under § 4945. Outlined below are
the analyses of the liabilities and the computation of the taxes for each year.
The grants or scholarships to individuals were made prior to receiving approval,
therefore, it constitutes taxable expenditures under IRC 4945(d)(3). Regardless, the
scholarship would not have met the approval criteria that requires grants to be awarded
on an objective and nondiscriminatory basis. No data supports that any type of
selection criteria was established or followed. (See IRC 4945(d)(3), 4945 (g) and Regs.
53.4945-4(a)(ii)).
16
---------------------------------------------------------------
Form 886-A(Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
Department of the Treasury • Internal Revenue Service . Schedule No. or
Form 886A
Explanation of Items Exhibit #1
Name ofTaxpayer Year/Period Ended
December 31,
• contributions to a candidate for public office are taxable
expenditures subject to chapter 42 excise taxes. The · internal
transfer of funds did not correct the distribution. (See IRC 4945(b)}
Forgiven loan shown as Contribution to
The examiner could uncover no evidence to support that the ·
event was related to , but rather public credit was given to and it
was held on • for-profit property. Nor does evidence support that
was liable for the event expenses. All advertisements support that this was one of
' promotional and revenue generating events that has been conducting
for several years independent of
The amount of$ · "contribution" representing forgiveness of an unproven
debt is disallowed.
The excess distribution carryover from the prior year, of was based on $
of distributions of which only $ were qualifying distributions. (See calculation
below.) However, further documentation was not supplied to support that this amount
of qualifying distributions exceeded a determined amount of year minimum
distributions. Therefore, no excess distribution carry over to the year return will
be allowed at this time.
Year S Distributions of$ , Shown as Excess Distributions on Year J
Qualifying
Non- Non-Qualifying
Amount Purpose Qualifying Distribution
-;-
-. Housing (Rental) .- ..
Year Sunset on the Plains Expenses I
1-
1 Scholarship Scholarship Recipient:
.-
. , ..
-- l_, ~ .•
'
--.
':
··-·· -i
' ...... School ~
.-
' 1 School
Total Non-Qualifying Distributions from Year
Total Qualifying Distributions from Year
-
,- I
I
. 17
Form 886-A(Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
.-----------------------
Form 886A
Department of the Treasury- lntemal Revenue Service Schedule No. or
Explanation of Items Exhibit #1
Name ofTaxpayer Year/Period Ended
December 31,
TAXPAYER'S POSITION:
The taxpayer has not yet provided their opinion.
CONCLUSION:
has not demonstrated that it is operated exclusively for exempt
purposes within the meaning IRC § 501(c)(3) and Treasury Regulations §
1.501(c)(3)-1(d). did not engage primarily in activities that accomplish
one or more exempt purposes specified in § 501(c)(3). It is operated for a
substantial non-exempt purpose and for the benefit of private, rather than public,
· interests and its activities resulted in substantial private benefit.
; required to file Federal income tax returns on Forms 1120 for the
tax period ending December 31, -, as stated in the heading of this letter, and
for all tax years thereafter.
Because was a private foundation as of the effective date of
revocation, it is considered to be a taxable private foundation until it terminates· ·
its private foundation status under § 507 of the Code. In addition to the income
tax return, you must also continue to file Form 990-PF by the 15th day of the fifth
month after the end of your annual accounting period. For information on
terminating your private foundation status; IRM 7.26.7 and IRC 507(a) and (b).
§4945 Computations
The taxable expenditures made by the under §§ 4945(d)(3) and
4945(d)(5), subject the foundation to imposition of the first tier excise tax under §
4945(a)(1), at a tax rate of 10%. Since correction of the expenditures has not been
made, § 4945(b)(1) imposes a second tier excise tax of 100% against the foundation.
The total taxable expenditures of $ include the following:
$' paid directly to Ms.
~ paid directly to
$· paid to "Friends of
1
The tax is computed as shown below:
-·
Year
·-
-
Taxable expenditures - -i
§ 4945(a)(1) rate Yo
18
Form 886-A.{Rev.4-68) Department of the Treasury • Internal Revenue Service
Page:--
Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A
Name ofTaxpayer
I Explanation of Items Exhibit #1
Year/Period Ended
December 31, ·I
§ 4945(a)(1) excise tax
Taxable expenditures
§ 4945(b)(1) rate X 100%
I
§ 4945(b)(1} excise tax - -
Total § 4945 taxes $ I
Returns and payments should be sent to the following mailing address:
Internal Revenue Service
TE/GE Division M/S: W540 rb
Make check(s) or money order(s) payable to the United States Treasury.
For the foregoing reasons, is not an organization described in § 501 (c)(3}
and revocation of its exempt status is proposed effective January 1.
Forms 1120 returns should be filed for the tax periods ending on or after January 1,
Forms 990-PF and 4720 are also applicable to private foundations.
Information: Form 1120 Filing Requirement:
Taxation under subtitle A of the Code: A corporate organization whose tax-exempt
status is revoked is brought current on its filing and tax liabilities by transferring the
Form 990 data to converted Forms 1120 and assessing any tax due. If Foundation's
exempt status is revoked, Forms 1120, U.S. Corporation Income Tax Return, should be
filed for the tax periods ending on or after January 1, .
§ 1.6012-2 of the Regulations requires every corporation subject to taxation under
subtitle A of the Code to file Form 1120 to report the income and deductions per §§ 61
and 162 of the Code respectively.
For the year , the examiner adjusted the revenue (from $ to ,) to
reflect the additional tenant and subsidy rental income shown on records.
The expenses were adjusted (from $ · to $ ) to disallow the $ of
donation disbursements made to individuals and to a non-qualified entity.
19
Form 886-A(Rev.4-68) Department of the Treasury- Internal Revenue Service
Page:--
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