Member-benefit organization loses Section 501(c)(3) exemption

Plain-English summary

An organization claimed to provide financial help for medical and other needs, but membership was limited to members of a particular group and their families. Its articles did not limit it to exempt purposes, and the IRS found that it served private rather than public interests. During examination, the organization also failed to provide adequate contemporaneous minutes, gross-receipt records, volunteer and contract information, raffle records, grant records, and proof of exempt activities. The IRS concluded that the organization failed the organizational and operational tests and did not meet federal recordkeeping and reporting requirements. Its Section 501(c)(3) exemption was revoked retroactively to the stated effective date.

Ruling snapshot

• Question: Did the organization continue to qualify for Section 501(c)(3) exemption?
• Outcome: Revocation. The organization failed to establish exempt organization and operation, absence of inurement, and required recordkeeping.
• Key authorities: IRC §§ 501(c)(3), 509(a)(2), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6001-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 202113008
Release Date: 4/2/2021
Date: May 8, 2020

UIL: 501-03.00
Taxpayer ID Number:
Form:
Tax Period(s) Ending:
Person to Contact:
Identification Number:
Telephone Number:
Fax Number:

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear [redacted]:

This is a final determination that you do not qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC
Section 501(c)(3), effective May 1, 20XX. Your determination letter dated June 22, 20XX is
revoked.

Our adverse determination as to your exempt status was made for the following reasons:

Organizations described in IRC Section 501(c)(3) of the Code and exempt
under Section 501(a) must be both organized and operated exclusively for
exempt purposes. You have not demonstrated that you are operated
exclusively for charitable, educational, or other exempt purposes within the
meaning of Section 501(c)(3). An organization will not be so regarded if more
than an insubstantial part of its activities is not in furtherance of an exempt
purpose. You have not established that you have operated exclusively for an
exempt purpose.

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury
Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were
organized and operated exclusively for exempt purposes and that no part of your earnings
inured to the benefit of private shareholders or individuals.

Contributions to your organization are no longer deductible under IRC Section 170.

1

Organizations that are not exempt under IRC Section 501 generally are required to file federal
income tax returns and pay tax, where applicable. For further instructions, forms, and
information please visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment
under the provisions of IRC Section 7428 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 was mailed to you. Please contact the clerk of
the appropriate court for rules and the appropriate forms for filing petitions for declaratory
judgment by referring to the enclosed Publication 892. You may write to the courts at the

following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

U. S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you
file a petition for declaratory judgment under IRC Section 7428.

We’ll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501 (c)(3).

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

Taxpayer Advocate assistance can’t be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have
been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

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

Sincerely,

Maria D. Hooke
Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date: May 22, 2019
Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
Person to Contact:
Employee ID:
Telephone:
Fax:
Manager’s Contact Information:
Employee ID:
Telephone:
Response Due Date:

CERTIFIED MAIL — Return Receipt Requested

Dear [redacted]:

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue

Code (IRC) Section 501(c)(3).

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and

return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods

above.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this

letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
   send additional information as stated in 1 and 2, above, you'll still be able to file a protest
   with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-

Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we’ve issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
   Government Entities) if you feel the issue hasn’t been addressed in published precedent
   or has been treated inconsistently by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

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 adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

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

For additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

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

for Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

Pub 892
Pub 3498-A

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Form 886-A (Rev. January 1994)
EXPLANATIONS OF ITEMS
Name of taxpayer: [redacted]
Tax Identification Number: [redacted]
Year/Period ended: APRIL 30, 20XX

ISSUES

Whether the exempt status of [redacted] (the Organization) under IRC § 501(c)(3) should be
revoked, effective May 1, 20XX because it is not organized and operated exclusively for exempt purposes within
the meaning of section 501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(b)?

FACTS
Organizational Test

[redacted] filed Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501 (c)(3) of the
Internal Revenue Code, on May 1, 20XX. In a determination letter dated June 22, 20XX, the Internal Revenue
Service granted tax exempt status under IRC § 501(c)(3) as a public charity as described in IRC §
170(b)(1)(A)(vi).

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 empower them 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.

[redacted] attested that their organizing document contains the dissolution provision required under § 501(c)(3) or that
they did not need an express dissolution provision in their organizing document because they rely on the operation
of state law in the state in which they are formed for their dissolution provision. [redacted] checked the box to attest that
they have the organizing document necessary for the organizational structure indicated above.

The Articles of Incorporation the Tax Compliance Officer (TCO) obtained from [redacted] do not limit the purpose of the
organization to one or more exempt purposes. The organization was established for private benefit and offers no
public purpose. Their articles of incorporation state “the corporation is organized as a charitable organization that
will provide financial assistance for medical treatment, personal circumstances and other related matters to the
families of [redacted] who are suffering from financial hardships on account of medical or other needs
and to raise awareness of the diseases, their causes, effects and treatments which might affect its members.”

Membership is limited to members [redacted] and their families. Membership is not
open to the public.

Operational Test

Charitable organizations must show that they engage in activities which accomplish its exempt purpose, its net
earnings do not inure to the benefit of private shareholders or individuals, and it does not expend a substantial part
of its resources attempting to influence legislation or political campaigns, and it serves a valid purpose that confers
public benefit.

[redacted] failed to establish their activities accomplish an exempt purpose. [redacted] failed to provide documentation to prove no

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 EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

APRIL 30, 20XX

private shareholders or individuals benefitted from the earnings of the organization. [redacted] failed to establish the public
benefits from their organization’s activities.

Correspondence and Information Document Requests (IDR)

Charitable organizations are required to keep sufficient records to establish the amount of gross income,
deductions, credits, or other matters required to be shown on a tax return. They are required to submit them to the

IRS upon request.

• February 13, 20XX: Letter 3606 was sent with IDR #1. The due date was March 16, 20XX. The TCO
requested organizing documents, meeting minutes, detailed description of all activities conducted, records
of gross receipts, workpapers used to prepare the return, and a copy of the general ledger. The TCO stated,
“the following documentation does not need to be provided immediately. Please be prepared to provide
them, as they may be requested at a future date.” The items listed were calendar of events for all
fundraisers, volunteer information, contract and payment information, raffle payouts, records of payments
received, source documents to include receipts, statements, invoices, cancelled checks, credit card
statements, bank statements, documentation regarding possible political contributions, records for grants
issued, and documentation establishing how the awards were granted.

• February 25, 20XX: Letter 5798 was sent. The negotiated due date was April 30, 20XX.

• April 16, 20XX: Fax received from [redacted], the Power of Attorney for [redacted]. “Regarding the
Information Document Request, following are: Organizing documents, minutes of board meetings from
5/20XX to 4/20XX, Description of specific purpose for which the organization was formed.”

○ The minutes of board meetings was actually a summary of meeting minutes, not the
contemporaneous records.

• April 29, 20XX: Fax received from [redacted]. “Following please find: Description of activities,
information regarding contributions, profit and loss balance sheet, tie-in to tax return, general ledger.”

○ The description of activities was a brief outline.
○ [redacted] provided a handwritten document of last names with a number written beside them. Per
[redacted], these are the contributions members make directly from their checking account.
• May 1, 20XX: Letter 5077-B was sent with IDR #2. The due date was for May 16, 20XX. The TCO
requested meeting minutes, records of gross receipts, a written explanation along with supporting
documentation for possible political contributions, records for fundraising events, and records for raffles

conducted.
○ [redacted] provided a written statement explaining the possible political contributions were donations

made to the organization from various political campaigns.

[redacted] failed to provide the actual meeting minutes, records of gross receipts, volunteer information, contracts,
payment information, raffle gross receipts and payouts, records of grants awarded, and proof of exempt activities.

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

Form 886-A (Rev. January 1994) EXPLANATIONS OF ITEMS
Schedule number or exhibit
Name of taxpayer Tax Identification Number Year/Period ended
APRIL 30, 20XX
LAW
IRC § 501(c)(3)

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international
amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to
the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on
propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and
which does not participate in, or intervene in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public office shall be exempt from taxation.

IRC § 509(a)(2)

an organization which--(A) normally receives more than one-third of its support in each taxable year from any
combination of -- (i) gifts, grants, contributions, or membership fees, and (ii) gross receipts from admissions, sales
of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or
business (within the meaning of section 513), not including such receipts from any person, or from any bureau or
similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such
receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year, from persons
other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental
units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses
(vii) and (viii)), and (B) normally receives not more than one-third of its support in each taxable year from the sum
of--(i) gross investment income (as defined in subsection (e)) and (ii) the excess (if any) of the amount of the
unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511.

IRC § 170(b)(1)(A)(vi)

an organization referred to in subsection (c)(2) which normally receives a substantial part of its support (exclusive
of income received in the exercise or performance by such organization of its charitable, educational, or other
purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit
referred to in subsection (c)(1) or from direct or indirect contributions from the general public.

Treasury Regulation § 1.501(c)(3)-1

(b) Organizational test—(1) In general. (i) An organization is organized exclusively for one or more exempt
purposes only if its articles of organization (a) Limit the purposes of such organization to one or more exempt
purposes; and (b) 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.

(c) Operational test—(1) Primary activities. 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). An organization will not be so regarded if more than an insubstantial part
of its activities is not in furtherance of an exempt purpose.

(2) Distribution of earnings. An organization is not operated exclusively for one or more exempt purposes if its net

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

Form 886-A (Rev. January 1994) EXPLANATIONS OF ITEMS
Schedule number or exhibit

Name of taxpayer Tax Identification Number Year/Period ended

APRIL 30, 20XX

earnings inure in whole or in part to the benefit of private shareholders or individuals.

Treasury Regulation § 1.501(a)-1
(c) Private shareholder or individual defined. The words private shareholder or individual in section 501 refer to

persons having a personal and private interest in the activities of the organization.

Treasury Regulation § 1.6001-1

(a) In general. Except as provided in paragraph (b) of this section, any person subject to tax under subtitle A of the
Code (including a qualified State individual income tax which is treated pursuant to section 6361(a) as if it were
imposed by chapter 1 of subtitle A), or any person required to file a return of information with respect to income,
shall keep such permanent books of account or records, including inventories, as are sufficient to establish the
amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of

such tax or information.

(c) Exempt organizations. In addition to such permanent books and records as are required by paragraph (a) of this
section with respect to the tax imposed by section 511 on unrelated business income of certain exempt
organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of
account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts
and disbursements. Such organizations shall also keep such books and records as are required to substantiate the
information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3.

(e) Retention of records. The books or records required by this section shall be kept at all times available for
inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents
thereof may become material in the administration of any internal revenue law.

Rev. Rul. 59-95, 1959-1 C.B. 627

An exempt organization was requested to produce a financial statement and statement of its operations for a certain
year. However, its records were so incomplete that the organization was unable to furnish such statements. The
Service held that the failure or inability to file the required information return or otherwise to comply with the
provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the
exempt status of an organization previously held exempt, on the grounds that the organization has not established
that it is observing the conditions required for the continuation of exempt status.

COURT CASES

For organization to pass operational test in order to obtain tax exempt status, it must engage primarily in activities
which accomplish one or more of exempt purposes, organization's net earnings may not inure to benefit of private
shareholders or individuals, organization must not expend substantial part of resources attempting to influence
legislation or political campaigns, and organizations seeking exemption from taxes must serve valid public purpose
and confer public benefit. Nationalist Movement v. C.I.R., 1994, 37 F.3d 216, certiorari denied 115 S.Ct. 1256,

513 U.S. 1192, 131 L.Ed.2d 136.

The requisite purpose of tax-exempt status does not consist simply of a charitable motive, i.e., a desire that

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

APRIL 30, 20XX

charitable benefit ultimately result from the organization’s activities, but rather requires that the organization is
operated to accomplish that purpose. Partners in Charity, Inc. v. Commissioner of Internal Revenue, No. 1701-
11X. August 26, 2013.

If an organization fails to meet either the organizational test or the operational test, it is not exempt for purposes of
section 501(a). Furthermore, the burden of proof is on petitioner to overcome the grounds set forth in respondent's
notice of determination. Gen. Conf. of the Free Church v. Commissioner, 71 T.C. 920, 926 (1979), Hancock
Academy of Savannah, Inc. v. Commissioner, supra at 492.

TAXPAYER’S POSITION

1. Taxpayer’s position is unknown at this time.
   GOVERNMENT’S POSITION

That [redacted] doesn’t meet the definition of a public charity described in IRC §
170(b)(1)(A)(vi) or IRC § 509(a)(2) and the tax-exempt status should be revoked for all years beginning on
or after May 1, 20XX.

Under Treasury Regulation § 1.501(c)(3)-1:

a. 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.

b. 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). An organization will not be so regarded if more than an insubstantial part of its
activities is not in furtherance of an exempt purpose.

c. 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.

[redacted] bears the burden of proving entitlement to their tax-exempt status. They
failed to do so. [redacted] failed to substantiate they meet the organizational and
operational tests. They failed to substantiate inurement does not exist within the organization.

Therefore, it is the government’s position [redacted] does not meet the definition of a
public charity as described in IRC § 170(b)(1)(A)(vi) or IRC § 509(a)(2) and their tax-exempt status should
be revoked.

CONCLUSION
Based on the foregoing reasons, [redacted] does not qualify for exemption under IRC

§ 501(c)(3) and its tax-exempt status should be revoked.

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

APRIL 30, 20XX

It is the IRS's position that the organization failed to establish that it meets the reporting requirements under
IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3).
Furthermore, the organization has not established that it is observing the conditions required for the
continuation of its exempt status or that it is organized and operated exclusively for an exempt purpose.
Accordingly, the organization's exempt status is revoked effective May 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods after May 1, 20XX.

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