Revocation of 501(c)(3) status where training-fee income passes through to a for-profit run by the director

Plain-English summary

The IRS revoked the tax-exempt status of an organization that had been
recognized under section 501(c)(3) and treated as a public charity under
section 509(a)(2). The group collected training fees from members and
nonmembers, but on audit the examiner found it had no employees, no
assets, and did essentially nothing itself: nearly all of its income
flowed straight out to a for-profit limited liability company that was run
by the organization's own Executive Director, under a contract by which
the for-profit performed all operations, training, and decision-making.
The IRS concluded the organization served the commercial purposes of that
for-profit rather than a public interest, so it was not operated
exclusively for exempt purposes. The examiner relied on the private-benefit
regulation (an organization must serve public rather than private
interests) and two Tax Court cases, Christian Manner International and Est
of Hawaii, where nominally educational or religious activities that served
commercial interests were denied exemption. Because status is revoked,
contributions are no longer deductible under section 170, the organization
must file regular tax returns, and it must transfer its assets to an
eligible 501(c)(3). This document combines the final revocation letter
(Letter 6337), the earlier proposed-revocation letter (Letter 3618), and
the Form 886-A audit explanation.

Ruling snapshot

• Question: Should 501(c)(3) exemption be revoked where the
  organization merely collects and passes its income to a for-profit run
  by its director, serving private commercial interests?
• Outcome: Revoked (proposed revocation; taxpayer position unknown)
• Key authorities: IRC §§ 501(c)(3), 509(a)(2), 170(b)(1)(A)(vi),
  4942(j)(3); Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii); Christian Manner
  International Inc. v. Commissioner, 71 T.C. 661 (1979); Est of Hawaii v.
  Commissioner, 71 T.C. 1067 (1979)

Full text (IRS public release)

Department of the Treasury                    Date: September 9, 2021
Internal Revenue Service
Tax Exempt and Government Entities            Taxpayer ID number:
Number: 202240026

Release Date: 10/7/2022

Form:
Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
UIL: 501.03-00

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear

Why we are sending you this letter
This is a final determination that you don't 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
        . Your determination letter dated        , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: Organizations
described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated
exclusively for exempt purposes. You have not demonstrated that you are both organized and operated
exclusively for charitable, educational, or other exempt purposes within the meaning of IRC 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.

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.

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

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was
mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment
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.

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court        U.S. Court of Federal Claims    U.S. District Court for the District of Columbia
400 Second Street, NW          717 Madison Place, NW           333 Constitution Ave., N.W.
Washington, DC 20217           Washington, DC 20439            Washington, DC 20001

Letter 6337 (12-2020)
Catalog Number 74808E

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).

Information about the IRS Taxpayer Advocate Service
The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service
Taxpayer Advocate Office

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.
Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

cc:

Letter 6337 (12-2020)
Catalog Number 74808E


Department of the Treasury                    Date: 05/07/2021
Internal Revenue Service
Tax Exempt and Government Entities            Taxpayer ID number:
Form:

Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:
Manager's contact information:
Name:
ID number:
CERTIFIED MAIL - Return Receipt Requested          Telephone:

Response due date:

Dear

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 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.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F


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.

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.

Sincerely,

Karen T. Hood
Digitally signed by Karen T. Hood
Date: 2021.05.07 10:31:52 -0400
for
Sean O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F


Form 886-A          U.S. Treasury Department-Internal Revenue Service          Schedule No. or Exhibit
EXPLANATION OF ITEMS
Name of Taxpayer          Year/Period Ended

ISSUES:

1. Whether        , herein referred to as "        ", qualifies under IRC
   501(c)(3) and is described as a public charity under IRC Section 509(a)(2).

2. Whether "        " is operating in accordance with its exempt purpose.

FACTS:
The        was formed as a corporation in the state of        on        under the name of
        . On        , the name was changed to the current name. The organization filed a Form        on
        , stated that the corporation has past activities of the following:

The Form        application and attachments provide the requested Public Charity. On the Form
application and supplemental documentation had stated that the organization would have        members.
        would have financial support from fundraising, grants, contributions, and fees for goods and services. It also
stated that the goods and services were only available to certain individuals that were members. Determinations
had initially determined that        was a public charity under IRC Section 509(a)(2) in the Letter dated        .

The        has been filing Form        since the        tax year. Before        , no returns are
showing as having been filed for the        . Form        is the only tax return that has been
filed for the        return. No information returns were filed either.

The Form        for the tax year ended        was selected for examination.
The Form        states that the        is to provide        ,        , and        to the professional
        state community dedicated to improving        .        receives its revenue from training fees from members
and nonmembers. This is the only form of revenue that the EO has received since        , except in        when
they received $        of other income. (No returns available to view before        ).

Department of the Treasury - Internal Revenue Service          Form 886-A          Page 1


Form 886-A          U.S. Treasury Department-Internal Revenue Service          Schedule No. or Exhibit
EXPLANATION OF ITEMS
Name of Taxpayer          Year/Period Ended

Total          $          $          $
Paid to          $          $          $          $
Remain in          $          $          ($          $0          ($

        has a contract with        in which        performs all operations and training for the individuals that
        are offered. The chart above shows that        % of all income received since        has been paid to
        as training expenses.        does not have any employees, assets including building, fixtures, vehicles, or
investments. In the year under audit, the only payments that were made were to        .        owns        .
It also pays all employees. The contract with        , which was signed        , went into effect on        .
It automatically renews unless terminated.

The Form        shows income that comes in and goes directly out to        .        is a for profit
organization that the Executive Director of        owns        % of.        has a contract with        in which
        performs all operations and makes all decisions for the        . It does not show any other expenses.
There are no assets listed on the return and research shows that the        does not own any        . The bank
account has an ending balance of less than $        for the year.

The minutes of        dated        , state that the Executive Director was given the authority to sign tax returns,
training participation agreements and other contractual documents.

LAW:
IRC 501(c)(3) exempts from tax corporations, and any community chest fund, or foundation, organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, 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, and which does
not participate in, or intervene in (including the publishing and distributing of statements), any political campaign
on behalf of (or in opposition to) any candidate for public office.

IRC 170(b)(1)(A)(vi) describes 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) [IRC Sec. 501(a)]) from a governmental unit referred to in subsection (c)(1) or from direct or indirect
contributions from the general public.

IRC 509(a) describes a private foundation as an organization other than ones described in: (1) Section
170(b)(1)(A), (2) who normally receives more than one third contributions from public, (3) organizations
organized to perform functions for other organizations, or (4) organizations who perform public safety test.

IRC 4942(j)(3) defines a private operating foundation as an organization in which qualifying distributions are
made directly for the active conduct of its own exempt purpose activities and one that substantially more than
half of its assets are devoted directly to its own exempt purpose activities.

Treas. Reg. 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for
exempt purposes unless it serves a public rather than a private interest. To meet this requirement, an
organization must "establish that it is not organized or operated for the benefit of private interests...."

Treas. Reg. 1.509(a)-4(a)(1) provides that Section 509(a)(3) excludes from the definition of private foundation
those organizations which meet the requirements as described in the subparagraphs of this regulation.

Christian Manner International Inc. v. Commissioner of Internal Revenue, 71 T.C. 661 (1979) states petitioner
was organized pursuant to the Nonprofit Corporation Act of Texas. Its articles of incorporation indicate that the
purposes for its organization were religious, charitable, and educational in nature. Petitioner's primary activity
was the publication and sale of books written by its founder which were religiously inspired and oriented but
were sold commercially at a profit. Held, respondent did not err in denying petitioner's application for exemption
under section 501(c)(3), I.R.C. 1954.

Est of Hawaii v Commissioner of Internal Revenue, 71 T.C. 1067 (1979) states Petitioner engaged in activities
relating to 'est' programs involving training, seminars, lectures, etc., in areas of intra-personal awareness and
communication. Such activities were conducted under licensing arrangements with for-profit corporations. Held,
in an action for a declaratory judgment under sec. 7428(a), I.R.C. 1954, petitioner's activities, although
educational in nature, served the commercial purposes of the for-profit corporations and petitioner was
therefore not operated exclusively for exempt purposes within the meaning of sec. 501(c)(3), I.R.C. 1954.

GOVERNMENT'S POSITION:
An organization described under IRC 501(c)(3) must be formed for charitable, religious or educational purposes.

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

        is like the plaintiff in Est of        and serving the commercial purposes of the for-profit limited liability
corporation,        .

TAXPAYER POSITION:
The taxpayer position is unknown at this time.

CONCLUSION:
        does not qualify as a tax-exempt entity described under IRC 501(c)(3) since the        is used to only collect
and disburse funds.        does not perform any operations and is serving the commercial purposes of a
for-profit.

As a taxable entity,        is required to file Form        and relinquish all assets that must be transferred to an
eligible 501(c)(3) entity.

We are proposing revocation of the IRC Section 501(c)(3) tax exemption for the        effective        .

Department of the Treasury - Internal Revenue Service          Form 886-A          Page 4