Charity set up to fundraise for one named accident victim is denied 501(c)(3) status

Plain-English summary

The IRS refused to recognize an organization as tax-exempt under section 501(c)(3) because it existed only to raise money for a single, named individual and his family. To qualify, an organization must pass both an organizational test (its governing documents must limit it to exempt purposes) and an operational test (it must actually operate for public, not private, purposes with no earnings inuring to private individuals). Here the applicant's articles of incorporation and its own Form 1023 said its sole activity was to fund the ongoing medical and living expenses of one accident victim (referred to as D), who was the founder's relative; the president was D's spouse, the group was named similarly to D, and D was the only beneficiary of its fundraising. The IRS applied Revenue Ruling 67-367 (a plan paying preselected named individuals serves private interests) and the Tax Court's decision in Wendy L. Parker Rehabilitation Foundation (a foundation aiding a family member was not exempt), and concluded the organization served a private rather than public interest and let its earnings inure to a private individual. Because the applicant did not file a protest within 30 days of the proposed adverse determination, the denial became final. Donors cannot deduct contributions under section 170, and the organization must file income tax returns. The document bundles the final adverse determination letter (Letter 4038) and the proposed adverse determination letter (Letter 4036), which contains the full facts, law, and analysis.

Ruling snapshot

• Question: Can an organization formed solely to fundraise for the medical and living expenses of one preselected, named individual qualify as a 501(c)(3) charity?
• Outcome: denied (final adverse determination; fails organizational and operational tests, serves private interest)
• Key authorities: IRC §§ 501(c)(3), 170; Treas. Reg. § 1.501(c)(3)-1(a), (b), (c), (d); Rev. Rul. 67-367; Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo 1986-348

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected (for example, "VIL" restored to "UIL" and "Cataiog" to "Catalog"), and OCR bullet markers rendered "e" were restored to bullets; wording is otherwise verbatim, and redacted legend placeholders (B, C, D) appear as the IRS released them.

Internal Revenue Service

ai Department of the Treasury
P.O. Box 2508
IRS Cincinnati, OH 45201

Date: December 20, 2018

Employer !D number:

Number: 201911008

Release Date: 3/15/2019 Contact person/ID number:
Contact telephone number:

Form you must file:

Tax years:

UIL: 501.03-02, 501.32-00, 501.32-01

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at

1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501 (c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

Department of the Treasury

Internal Revenue Service

Cincinnati, OH 45201
Date: October 4, 2018
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.03-02
C =Name 501.32-00
D = Name 501.32-01
Dear

We considered your application for recognition of exemption from federal income tax under Section 501 (a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

ISSUES
• Do you meet the organizational test under Section 501(c)(3) of the Code? No, for the reasons stated
below.

• Do you meet the operational test under Section 501(c)(3) of the Code? No, for the reasons stated below.

FACTS

You were formed as a corporation on date B in the state of C. Your Articles of Incorporation state you are
organized exclusively for charitable, religious, educational, and scientific purposes, including, for such
purposes, the making of distributions to organizations that qualify as exempt organizations under the Section
501(c)(3) of the Internal Revenue Code, or corresponding Section of any future federal tax code. In addition,
they state as your activity that you will provide funding for the ongoing medical and life expenses for D and his
family. Your corporate name and D’s name are also very similar.

Your Form 1023 shows that you are raising, and administering funds for the long-term care of D to insure
that he receives the supplemental financial help to assist with his extraordinary additional life expenses resulting
from a debilitating accident.

You will conduct your own fundraising programs through emails, personal contacts, phone solicitations as well
as multimedia campaigns, and running events. In the future, you may develop a website as well as use outside
fundraisers to solicit donations.

You are governed by a three-person board of directors including D’s wife who is your president and was one of
your incorporators. Your board members also administer your activities on a volunteer basis.

2
Initially, donations from family, friends and the public have provided your funding. In addition, you estimate
that % of your gross proceeds will be used for B and your expenses will consist of internet expenses and

other miscellaneous fundraising expenses.

Finally, you specifically indicated:

• You exist solely to fundraise for D,
• Your fundraising program is limited to D,
• Funds may not be used for any other purpose than to provide for the well-being of D, and
• Your purpose is to raise funds for this one individual only.
LAW

Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or
more of the purposes specified in such Section. If an organization fails to meet either the organizational test or
the operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more
exempt purposes only if its articles of organization limit the purposes of such organization to one or more
exempt purposes; and do not expressly empower the organization to engage, otherwise than as an insubstantial
part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 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 Section 501(c)(3) of the Code. An organization will not be so regarded if
more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(c)(2) states 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively
for exempt purposes unless it serves a public rather than a private interest. 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.

Revenue Ruling 67-367, 1967-2 C.B. 188, states a nonprofit organization whose sole activity is the operation of
a "scholarship" plan for making payments to pre-selected, specifically named individuals does not qualify for
exemption from federal income tax under Section 501(c)(3) of the Code because it is serving private interests
rather than public charitable and educational interests.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

3

In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, 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 for their family member.

APPLICATION OF LAW
You are not described in Section 501(c)(3) of the Code because you fail the organizational and operational tests
as per Treas. Reg. Section 1.501(c)(3)-1(a)(1).

You do not meet the requirements in Treas. Reg. Section 1.501(c)(3)-1(b)(I)(i). Your Articles of Incorporation
state as your activity that you will provide funding for the ongoing medical and life expenses for D and his
family. Because your Articles of Incorporation state that you will provide funding for the ongoing medical and
life expenses of a specific named individual, you are not organized exclusively for purposes described in the
regulations.

You do not meet the provisions in Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you were formed and are
solely operated to raise funds to pay for the medical and living expenses of D and his family. This shows you
were formed to further private purposes not public.

As described in Treas. Reg. Section 1.501(c)(3)-1(c)(2), you are not operated exclusively for exempt purposes
because your net earnings inure to the benefit of private shareholders or individuals. This is evidenced by the
fact that you were formed by D’s wife, who is also your president to help pay the medical and life expenses of D.

You are not described in Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations. You are operating for private
interests of C and his wife rather than public interests. This is evidenced by the following:

• You only exist to fundraising to pay the medical and living expenses of D and his family.
• D is the only beneficiary of your fundraising programs
• Your corporate name and D’s name are very similar.

You are like the organization described in Revenue Ruling 67-367. You were formed to benefit a preselected,
designated individual, D, who is the only beneficiary of your fundraising. You are also named after D which
illustrates you are serving private interests.

You are similar to the organization described in the court case Wendy L. Parker Rehabilitation Foundation,
because you were formed to pay the medical and living expenses for a preselected individual. Like this
organization, you are serving the private benefit of an individual and his family by paying these expenses and
relieving him and his family of their financial obligation.

CONCLUSION

You do not qualify for exemption under Section 501(c)(3) of the Internal Revenue Code, because you do not
meet the organizational and operational tests. You are not organized and operated exclusively for an exempt
purpose, you are operated for the purpose of benefiting D and his family. You serve a private rather than a
public interest and your net earnings are inuring to D and his family.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

If you don’t agree a
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• Acopy of this letter highlighting the findings you disagree with
• Anexplanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

5

Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W