Round-up donation app failed to establish charitable operation

Plain-English summary

An organization proposed an app and website that would link to users’ payment cards, round purchases up to the next dollar, hold the added amounts in organization-owned accounts, and later distribute funds to user-recommended charities. It planned to earn a percentage fee, interest on held funds, and advertising revenue. The IRS asked for website and app pages and other operational details, but the organization did not provide a complete response, identify its fund-review committee or recipient organizations, or sign the submitted information under penalties of perjury. The administrative record therefore did not establish that the fee-for-service model furthered charitable purposes or avoided private benefit. The IRS denied exemption, and the denial became final after no protest was filed.

Ruling snapshot

• Question: Did the proposed round-up donation platform establish that it would operate exclusively for charitable purposes under section 501(c)(3)?
• Outcome: denied because the incomplete administrative record did not substantiate charitable operation or the absence of private benefit
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 2018-5; New Dynamics Foundation v. United States; Ohio Disability Association v. Commissioner

Full text (IRS public release)

Scanned document; transcription proofread page by page from the official IRS scan. Clear OCR errors were corrected, including bullet markers, a regulation paragraph label, spaced section references, and stray scan characters; wording is otherwise verbatim.

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
IRS Cincinnati, OH 45201

Date: February 6, 2019

Release Number: 201918017 Employer ID number:
Release Date: 5/3/2019

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-00; 501.33-00

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

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

cc:

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

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Date: Nov. 30, 2018

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date

C = State 501.03-00
D = Third Party Software Program 501.33-00
E = Third Party Information Website

x percent= _ percent

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 qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.
Facts

You were formed as a corporation on B in the state of C. Your Articles of Incorporation state that you are
organized and operated exclusively for charitable purposes.

In your statement filed with your state agency regarding your trade name, you state the kind of business
transacted or activities conducted under your trade name is a: “...donor-advised fund collecting donations
for public charities.” Your activity includes having end users input their personal information, including
their credit or debit card information, to your application (app). Your app then links to the end user’s
purchases made through their credit/debit card and rounds their purchase up to the nearest dollar amount,
with the increased amount being added to the end user’s account that has been set up by you. The end

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

2

users will recommend qualifying charities from your app. You state you will consider the end user’s
recommendation, and if satisfied, will distribute the funds in each end user’s account to qualifying public
charities. You also state you have full legal ownership and control over the funds in each end user’s
account.

You opine it is your general policy to distribute funds monthly. But situations may happen that allow you
to lengthen this period including: determining if there are insufficient funds to distribute, or additional
time is needed to determine if a grant is proper or additional time is needed to aggregate with other funds
to meet the minimum donation.

You assert you will use third party software programs (such as D) that integrate with credit card
companies and financial institutions to facilitate transactions. Further, D will charge you a “slight
transaction fee” which is part of your x percent cost you charge to your end users.

In addition to your app, you also have a website which will operate similarly. Your website will solicit
financial information from end users including debit card and credit card information. Users of the
website will then round their purchases up to the nearest dollar amount and the excess amount will be
distributed to a qualifying charity.

Criteria for not distributing funds to an end user’s recommended charity include, but are not limited to:

1. It would result in a “more than incidental benefit” to the user or to you as that term is used in
Section 4967 of the Code, or
2. The public charity requires a minimum donation, and the aggregate funds of all end users
recommending donations to such public charity do not reach the minimum donation, or
3. The charity is not a 501(c)(3) public charity in good standing.

You state if funds are unable to go to the end user’s recommended charity, you will distribute them to
another charity. You will also adopt procedures similar to expenditure responsibility under Section
4945(h) to avoid any excise taxes for not exercising said responsibility.

While holding end user’s funds before they are distributed to a charity, you state you will deposit said
funds in an interest-bearing account that you own.

You indicate individuals must sign a Donor-Advised Fund User Agreement that names a charity or
charities to which they wish to contribute. You will determine if the selected charities qualify for
exemption by confirming their status via IRS submissions and/or E, which is a third-party information
service website that specializes in non-profit reporting requirements. After you have approved a charity to
receive funding, individuals will be able to make contributions to accounts they create. You state you will
own and control these accounts.

The revenues you earn will be generated from three sources. First, funds collected from individuals who
use your mobile application, will be charged a fee of x percent. Second, funds received from individuals
who use your app will be placed into an interest-bearing account, generating interest revenue for you.
Third, you will receive advertising revenue from space you reserve on your mobile application. The
revenues collected will be used to pay for your operating expenses. You project that there will be no
salary expenses in the near future.

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

You state your website will have a place where potential donors may sign up and contribute funds. In addition,
you will pay for lists of individuals who have donated to charities in the past. You will then send emails to
these individuals in order to create national awareness and solicit donations.

An additional information letter regarding your activities was issued to you requesting copies of your
website pages and application pages. We made several attempts to collect the requested information,
including extending the response due dates. However, a complete response to our request was not
forthcoming. Without reviewing copies of your website and app, you have not established to our
satisfaction that you are not organized and operated for private interests. In addition, the information that
was submitted was not signed under penalties of perjury.

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(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(d)(1)(ii) provides 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, to meet the
requirement of this subdivision, it is necessary for an organization to establish that it is not organized or
operated for the benefit of private interests such as the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interests.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable 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. The
term “charitable” also includes lessening of the burdens of government.

Revenue Procedure 2018-5, 2018-1 I.R.B. 233, Section 3, states that a determination letter or ruling on exempt
status is issued based solely upon the facts and representations contained in the administrative record. The
applicant is responsible for the accuracy of any factual representations contained in the application. Section
4.06(2) of the revenue procedure requires a penalty of perjury statement on all responses to requests for
additional information. Section 6 (and its predecessors) provides that a favorable determination letter or ruling
will be issued to an organization only if its application and supporting documents establish that it meets the
particular requirements of the section under which exemption from federal income tax is claimed.

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

4

In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that “one
seeking a tax exemption has the burden of establishing his right to a tax-exempt status.”

Pius XII Academy v. Commissioner, T.C. Memo. 1982-97 provides that an organization must establish through
the administrative record that it operates as an exempt organization. Denial of exemption may be based solely
upon failure to provide information describing in adequate detail how the operational test will be met.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization’s
request for tax-exempt status was reasonable.

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service’s denial, stated “It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant.” The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

Ohio Disability Association v. Commissioner, T.C. Memo 2009-261 states denial is justified because responses
to requests for additional information failed to supplement the initial application or clarify purposes and
activities, and generalizations did not provide sufficient detail to determine that the organization would be
operated exclusively for exempt purposes.

Application of law

A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of Section 501(c)(3) of the Code.
Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg. Section
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3).

Based on the information we have, you do not meet the operational test under Section 501(c)(3) of the Code
because you have not shown you are operating exclusively for charitable purposes as required under Treas. Reg.
Section 1.501(c)(3)-1(c)(1). You have not demonstrated how your fee for service model furthers charitable
purposes. Your activities will be limited to providing an avenue for individuals to make donations to their
selected charity via credit/debit card purchases. You have not established how your activities will meet the
definition of the term charitable as defined in Treas. Reg. Section 1.501(c)(3)-1(d)(2).

Without providing the information requested such as print-outs of your website and application, we cannot state
with certainty that you have established you are not organized or operated for the benefit of private interests
such as your founder or third parties involved in your operations such as D. (see Treas. Reg. Section
1.501(c)(3)-1(d)(1)(ii). Your response to our request for additional information was not signed under penalties
of perjury as required by Rev. Proc. 2018-5, Sec. 4.06(2).

You have not submitted sufficient information establishing you are operated exclusively for 501(c)(3) purposes.
(See Universal Life Church, Pius XII Academy, La Verdad, New Dynamics Foundation and Ohio Disability

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

5

Association). You did not respond to questions that would assist us in determining how you would further
charitable purposes. You did not submit copies of the application site or your website. You did not provide the
names of the individuals who are on your Fund Review Committee. You did not submit a list of the
organizations to whom you will distribute the donations. Therefore, there is not sufficient documentation to
establish that you are exempt from taxation as required by Section 501(c)(3) of the Code and Revenue
Procedure 2018-5. As in Universal, you have the burden of establishing that you qualify for tax exemption.

In Pius, La Verdad, and New Dynamics, it was established that an organization must establish, through its
administrative record, that it meets the requirements for exemption. Because you failed to provide sufficient
details in your initial application and the additional documentation you provided did not meet the statutory and
regulatory requirements for exemption, you have not established that you meet the requirements for exemption
under Section 501(c)(3) of the Code. As provided in New Dynamics, any gaps in the administrative record will
be resolved against the applicant. Similarly, in Ohio Disability Association, the court found that even when
additional information was provided, but it contained generalizations and failed to clarify purposes, denial is
justified. You did not provide supplemental information; therefore, we are unable to determine that you qualify
for exemption.

Conclusion

Based on the information submitted, you have failed to establish that you are operated exclusively for exempt
purposes within the meaning of Section 501(c)(3) of the Code and the related income tax regulations.
Therefore, based on the administrative record, you fail to qualify for exemption under Section 501(c)(3).

If you don’t agree
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

• A copy of this letter highlighting the findings you disagree with
• An explanation 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:

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

6

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
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 6-403 550 Main Street, Room 6-403

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.

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

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

cc:

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