Organization loses exemption for nonexempt activities and private benefit

Plain-English summary

A tax-exempt organization promoted education and careers in a redacted field through member events, mentoring, advocacy, youth workshops, and grants. The IRS found that a substantial share of its activities consisted of social and collaborative gatherings that promoted the common business interests of its members rather than charitable or educational purposes. It also found that the organization's payments to interns were not qualified scholarships because recipients were not required to attend educational institutions and the funds were not restricted to qualified tuition and related expenses. Because most of the organization's spending went to a lottery-like program that served recipients' private interests, the IRS concluded that its funds inured to private individuals. The IRS revoked section 501(c)(3) status effective June 17 of the redacted formation year.

Ruling snapshot

• Question: Did the organization continue to qualify under section 501(c)(3) despite substantial member-focused activities and payments benefiting selected individuals?
• Outcome: Revocation, effective from the organization's original exemption date.
• Key authorities: IRC §§ 117, 170, and 501(c)(3); Treas. Reg. §§ 1.117-3, 1.117-6, and 1.501(c)(3)-1; Rev. Rul. 66-103, Rev. Rul. 69-257, and Rev. Rul. 71-504.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street M/C 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: JUN 28 2016

Number: 201640025
Release Date: 9/30/2016

Person to Contact:
Identification Number:
Telephone Number:
In Reply Refer to:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

UIL: 501.03-00

CERTIFIED MAIL- Return Receipt Requested

Dear

This is a Final Adverse Determination Letter that your exempt status under section 501(c)(3)
of the Internal Revenue Code (IRC) is revoked. Recognition of your exemption under IRC
section 501(c)(3) is revoked effective June 17, 20XX.

Our adverse determination was made for the following reason(s):

You have not established that you are operated exclusively for an exempt
purpose or that you have been engaged primarily in activities that accomplish
one or more exempt purposes within the meaning of IRC section 501(c)(3).

You have not established that no part of your net earnings inure to the benefit
of any private shareholder or individual within the meaning of IRC section

501(c)(3).

Contributions to your organization are not deductible under section 170 of the Internal
Revenue Code.

You are required to file Federal income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the year ending December 31, 20XX and for all
years thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should
a petition for declaratory judgment be filed under section 7428 of the Internal Revenue
Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District

Court of the United States for the District of Columbia before the 91st day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect your taxpayer rights. We can offer you help if your tax problem is causing a
hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you
qualify for our assistance, which is always free, we will do everything possible to help you.
Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely yours,

Margaret Von Lienen

Director, EO Examinations
Enclosure:
Publication 892

Department of the Treasury Date: April 7, 2016
Internal Revenue Service

Tax Exempt and Government Entities
Exempt Organizations Examinations

Taxpayer Identification Number:

Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager's Name/ID Number:

Manager's Contact 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 501(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 501(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.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final 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.

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

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 of the IRS contact identified in the heading of this letter. You also
may file a protest with the 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 of the 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. If you 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,

Paul A. Marmolejo
Acting Director, EO Examinations

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
20XX12
Issue:
Should tax exempt status under section 501(c)(3) of the Internal

Revenue Code (Code) be revoked because

1. it does not operate exclusively for charitable or educational purposes, and
2. its earnings inure to the private benefit of individuals?

Facts:

incorporated in on June 17, 20XX. Articles of
Incorporation state the corporation is

”

The Articles of Incorporation also provide that “

”

filed Form 1023, Application for Recognition of Exemption Under Section
501(c)(3) of the Internal Revenue Code, with the Internal Revenue Service (Service) on August 5, 20XX
and listed three main pursuits and objectives:

a) Promoting the education and careers of , through
training and awarding of grants in cases of exceptional talent
b) Sponsoring the for
c) Advocate for by educating firms in the value of a
singular goal is “ .” It will achieve this goal

through the following activities:

e Community — Build the local community of
through social events, lectures, seminars and volunteer opportunities.

e Mentoring — Foster mentoring opportunities between This
provides essential networking opportunities for the mentees and reinvigorates the passion of the
mentors.

e Advocate — Engage the management of educating them on the value of a
and encouraging them to invest in their

The information submitted with the exemption application Form 1023 also stated that will provide
grants to qualifying individuals with exceptional talent . The sources of financial
support will be from contributions from the from other exempt organizations.

Form 886-A (1-1994) | Catalog Number 20810W Page 1 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX12

expected annual revenues for its first three years of operation in the amounts of $X,XXX, $X,XXX, and
$XX,XXX, respectively.

The Service issued Letter 947 to on August 29, 20XX with an effective date for exemption under
Section 501(c)(3) of the Code of June 17, 20XX. This ruling also determined met the public
charity classification under Section 170(b)(1)(A)(vi) of the Code.

filed the Form 990-N, e-postcard, for its first annual filing for the tax year ended December 31,
20XX. This is an information-only reporting that shows the current address for the organization and
confirms its gross receipts are under $XX,XXX. The Form 990-N filed also provides the organization’s
website as

was selected for an audit for the tax year ended December 31, 20XX. The information
requested for review during this audit was.
a. a detailed description of the activities conducting during the year under audit,
b. a statement of revenues, expenses, assets, and liabilities for the year under audit, and
c. copies of board of director's meeting minutes during the year under audit.

This information was provided via fax on November 9, 20XX. The purposes and activities for the first year
of operation were to through social and
community events. The following provides a listing of its activities during the first year:

o Held monthly board of director meetings to strategize, plan and organize events that built and
supported the .
o Held meetings and presentations for its members that covered topics such as

o Participated in a community event that was put on at the local schools.
put on a workshop for these middle school participants at this event.
o Held social gatherings for the members and promoted collaboration on

o Created a of funds to be used to pay for . This lessens the
cost barrier to , promotes the completion , and increases the
number of

With regard to the fund, further described that the recipients’
($XXX) comes with “ ” other than the recipient must take one of the required
( ) within a period. The money can be used for the $XXX

, or for any associated expense such as ,a , or whatever the

recipient may need

With the information submitted on November 9, 20XX, stated it had awarded
( ) to ; website viewed on March 31, 20XX showed
the number of who had received was XX.

During the tax year ending December 31, 20XX, received gross revenue of $X,XXX from
. It expensed a total of $XXX.XX of these funds conducting its activities. Of the $XXX.XX spent, $XXX
was distributed to , XXX each.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
20XX12
Law:

Internal Revenue Code (Code) Section 501(c)(3) provides, in part, exemption from federal income tax for
organizations that are organized and operated exclusively for religious, charitable, scientific, literary, or
educational purposes, provided that no part of the organization’s net earnings inures to the benefit of any
private shareholder or individual.

Federal Tax Regulations (Regulations) Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as
an organization described in section 501(c)(3) of the Code, the organization must be 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 or operational test, it is not exempt.

Regulations Section 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded as operated
exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of
exempt purposes.

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

Regulations Section 1.501(a)-1(c) defines private shareholder or individual within this section 501 as
persons having a personal and private interest in the activities of the organization.

Regulations Section 1.501(c)(3)-1(d)(1)(ii) provides that 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,
an organization must establish that it is not operated for the benefit of designated individuals or the persons
who created it.

Regulations Section 1.501(c)(3)-1(d)(3)(i) defines education as:

A. The instruction or training of the individual for the purpose of improving or developing his
capabilities, or
B. The instruction of the public on subjects useful to the individual and beneficial to the community.

Section 117(a) of the Code provides, in pertinent part, that gross income does not include any amount
received as a qualified scholarship.

Section 117(b) of the Code defines a “qualified scholarship” as any amount received by an individual as a
scholarship that, by the conditions of the scholarship, such amount is used for qualified tuition and related
expenses.

Regulations 1.117-3(a) and (d) provides that a “scholarship” is an amount paid to, or for the benefit of, a
student, whether an undergraduate or a graduate, to help him or her pursue studies. It includes the value
of room, board, laundry, and other similar services furnished to a student, as well as tuition, matriculation
costs, and other fees incurred in pursuit of studies.

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX12

Regulations 1.117-6(c)(2) defines “qualified tuition and related expenses’ as tuition and fees required for
the enrollment or attendance of a student at an educational organization described in section
170(b)(1)(A)(ii) of the Code as well as fees, books, supplies, and equipment required for courses of
instruction at such educational organization.

Regulations 1.117-6(c)(5) defines an educational organization in conjunction with the reference to Section
170(b)(1)(A)(ii) of the Code as one that has as its primary function the presentation of formal instruction
and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of
students in attendance at the place where its educational activities are carried on.

Rev. Rul. 66-103, 1966-1 C.B. 134 holds that an organization whose primary activity is to provide awards
and grants, including scholarship and fellowship grants, to needy individuals who would otherwise not be
able to pursue their studies for lack of funds, qualifies for exemption under section 501(c)(3) of the Code.
The organization is primarily engaged in a charitable activity of providing relief of the poor.

Rev. Rul. 69-257, 1969-1 C.B. 151 holds that an organization providing scholarships selected from a broad
class of applicants on the basis of scholastic standing, qualifies for exemption under section 501(c)(3) of
the Code. The organization is primarily engaged in the charitable activity of advancing education.

Rev. Rul. 71-504, 1971-2 C.B. 231 ruled that a medical society currently exempt under Section 501(c)(6) of
the Code may not be reclassified as an educational or charitable organization under Section 501(c)(3) of
the Code. The ruling listed all of the activities of the society and identified those that made up a substantial
portion of the society’s total activities. While some of the society's activities were charitable and/or
educational, a substantial part of their activities were directed primarily at the promotion of the medical
profession and thus furthered the common business purposes of its members, activities that are not
considered educational or charitable. Therefore, the society may not be reclassified since it had substantial
non-charitable and non-educational purposes and activities.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Court held
that the presence of a single non-exempt purpose, if substantial in nature, will preclude exemption
regardless of the number or importance of truly educational or charitable purposes.

Government’s Position:

tax exempt status under Section 501(c)(3) of the Code should be revoked as of the effective
date their exemption was granted, June 17, 20XX. has not engaged in activities that are
exclusively educational, charitable, scientific, literary, or religious within the meaning of Section 501(c)(3) of
the Code. While some aspects of its activities would be considered educational in its presentations for
members and educational workshops for youth, a substantial number of its activities include social

gatherings and events aimed at building and supporting the . The
purposes for its ; , and organization’s
events are meant to enhance and . These latter activities serve to
accomplish its goals of promoting the and and

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX12

is similar to the organization in Rev. Rul. 71-504 because a substantial portion of its
activities are directed primarily at the promotion of and thus furthers the
common business purpose of its members. While some of the activities of the organization in the ruling
were charitable or educational, the presence of non-charitable and non-educational purposes prevented
the exemption reclassification to Section 501(c)(3) of the Code. Similarly, conducts activities
that have some aspects of being educational. However, a substantial portion of its activities are social and
collaborative gatherings aimed at developing good will or fellowship among its members. These activities
help “ .” These activities are not considered charitable or

educational as defined by the Code and Regulations.

situation is also similar to the decision described in the Better Business Bureau

of Washington, D.C., Inc. v. United States. This ruling held that the presence of a single non-charitable or
non-educational purpose, if substantial in nature, would preclude exemption under Section 501(c)(3) of the
Code, regardless of the number or importance of truly charitable or educational purposes.
conducted an educational workshop for young students and held a presentation for members on design.
These would meet the definitions for educational activities per the Regulations. However,
also conducted activities that are not considered charitable or educational, including its

, and These activities make up a large portion of its activities and they are meant
to accomplish its main focus and goal: .

With regard to the of to , these
are not considered . The are not attending
regular within the meaning of Section 170(b)(1)(A)(ii) of the Code. Additionally,

does not require nor regulate that the be used identified
under Section 117(b) of the Code and related Regulations. Therefore, is not similar to the
organization described in Rev. Rul. 69-257. Neither does require or base the

upon any . Thus, is not similar to the organization
described in Rev. Rul. 66-103. Consequently, the are not considered

for educational or charitable purposes. Since the do not further charitable or
educational purposes; the only serve the private interests of the recipients.

Section 501(c)(3) of the Code restricts the use of organizational funds for the private benefit of individuals.
The private benefit restriction applies to benefits provided to any individual, whether or not the individual is
in a position to control or influence the organization. The private benefit restriction operates against all
parties who receive a benefit not accorded the public as a whole. A private benefit will not jeopardize tax-
exempt status if it is incidental to the accomplishment of exempt purposes. However, an activity that
primarily serves private interests will jeopardize exempt status if it is carried on to a degree that is more
than an insubstantial part of the organization's activities.

During the first year of operation, distributed $XXX of its total $XXX expenses for the to
interns. As part of the information submitted in November 20XX for its examination, stated it had
distributed to a total of website shows it has distributed
funds for . These serve only the private interests of the

who are required to . As discussed above, the do not
further charitable or educational purposes and the do not serve a public
benefit as a whole. Therefore, with the majority of its funds distributed for the lottery, is not

Form 886-A (1-1994) Catalog Number 20810W -Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
20XX12

operated exclusively for exempt purposes and its funds inure to the benefit of private individuals. For these
reasons, exemption under Section 501(c)(3) should be revoked.

Taxpayer’s Position:

position is not known at this time. This is the first report issued to

Conclusion:

does not meet the requirements to be exempt under Code Section 501(c)(3) because it
has not operated exclusively for charitable or educational purposes since its formation. Moreover,
funds inure to the benefit of private individuals and do not further public purposes. Consequently,
tax exempt status under Code Section 501(c)(3) should be revoked effective June 17, 20XX, the effective
date exemption was originally granted.

Form 886-A (1-1994) Catalog Number 20810W Page 6 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service