Private Letter Ruling
Number: 202005021
Internal Revenue Service
November 5, 2019
   
   
   
Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
   
Number: 202005021
Release Date: 1/31/2020
   
Date: November 5, 2019
Employer ID number:
Contact person/ID number:
Contact telephone number:
Form you must file:
Tax years:
   
UIL Number: 501.03-30, 501.36-03
   
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.
   
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 
   
   
   
Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
   
Date: August 26, 2019
   
Employer ID number:
Contact person/ID number:
Contact telephone number:
Contact fax number:
   
UIL:
501.03-30
501.36-01
   
Legend:
B = Date
C = Date
D = State
E = Name
x = Number
   
Dear *******:
   
We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons 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 previously granted exemption under Section 501(c)(3) of the Code on B. Your exemption was revoked due to the non-filing of Form 990 for ******* consecutive years. Accordingly, you submitted this new Form 1023, application for exemption for retroactive reinstatement.
   
You were incorporated on C in E. The Articles of Incorporation state that you are creating schools internationally to encourage individuals to participate in their personal healing, which in turn will assist the process of healing on a global scale.
   
Your only activity you have conducted since your inception of x years ago is the operation of E. E is a restaurant that is open to the general public from *******-******* for brunch/lunch during the hours of *******.
   
In addition, E:
   
- Serves healthy food options consisting of vegan, vegetarian and gluten free dishes at prices similar to that of other establishments;
   
- Is set up similar to a cafeteria with self-serve stations;
   
- Is staffed by a paid chef and *******;
   
- Is located in a ******* in the vicinity of an ******* store, a ******* store and ******* other eating establishments.
   
You have ******* members on your board of directors. Your only income has been from the receipts from E. Your expenses consist of cost of sales, occupancy expenses, insurance, and have only been for E's operations.
   
You stated that you intend to operate schools to help people ******* and to ******* through education as well as bring ******* as intervention methods for those at risk.
   
Finally, you indicated that you operate B to pay for educational materials to advance your exempt purpose of creating schools to encourage individuals to participate in their personal healing.
   
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)(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.
   
Treasury Regulation Section 1.501(c)(3)-1(e)(1) states an organization may qualify for tax exemption under Section 501(c)(3) of the Code although it operates a trade or business as a substantial part of its activities,
   
1. If the operation of such trade or business is in furtherance of the organization's exempt purpose or purposes,
   
2. and also, if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in Section 513 of the Code.
   
In Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir. 1974), the court held that an organization has the burden of proving that it satisfies the requirements of the particular exemption statute. The court noted that whether an organization has satisfied the operational test is a question of fact.
   
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.
   
In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation formed to provide consulting services did not satisfy the operational test under Section 501(c)(3) of the Code because its activities constituted the conduct of a trade or business that is ordinarily carried on by commercial ventures organized for profit. Its primary purpose was not charitable, educational, or scientific, but rather commercial. In addition, the court found that the organization's financing did not resemble that of the typical Section 501(c)(3) organizations. It had not solicited, nor had it received, voluntary contributions from the public. Its only source of income was from fees from services, and those fees were set high enough to recoup all projected costs and to produce a profit. Moreover, it did not appear that the corporation ever planned to charge a fee less than "cost." And finally, the corporation did not limit its clientele to organizations that were Section 501(c)(3) exempt organizations.
   
In Easter House v. U.S., 12 Cl.Ct. 476, 486 (1987), aff'd, 846 F.2d 78 (Fed.Cir.) cert. denied, 488 U.S. 907, 109 S.Ct. 257, 102 L.Ed. 2d 246 (1988), the court found an organization that operated an adoption agency was not exempt under Section 501(c)(3) of the Code because a substantial purpose of the agency was a nonexempt commercial purpose. The court concluded that the organization did not qualify for exemption under Section 501(c)(3) because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency. The court rejected the organization's argument that the adoption services merely complemented the health-related services to unwed mothers and their children. Rather, the court found that the health-related services were merely incident to the organization's operation of an adoption service, which, in and of itself, did not serve an exempt purpose. The organization's sole source of support was the fees it charged adoptive parents, rather than contributions from the public. The court also found that the organization competed with for-profit adoption agencies, engaged in substantial advertising, and accumulated substantial profits. Accordingly, the court found that the "business purpose, and not the advancement of educational and charitable activities purpose, of plaintiff's adoption service is its primary goal" and held that the organization was not operated exclusively for purposes described in Section 501(c)(3). Easter House, 12 Cl.Ct. at 485-486.
   
In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (1991), the Court of Appeals upheld a Tax Court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the Seventh Day Adventist Church did not qualify for exemption under Section 501(c)(3) of the Code because the organization was operated for a substantial nonexempt commercial purpose. The court found that the organization's activities were "presumptively commercial" because the organization was in competition with other restaurants, engaged in marketing, and generally operated in a manner similar to commercial businesses.
   
Application of Law   
You are not as described in Section 501(c)(3) of the Code because you do not meet the operational test as per Treas.Reg. Section 1.501(c)(3)-1(a)(1). Your primary activity consists of operating E which is open to the general public. You operate in a manner consistent and in competition with other eating establishments.
   
You are not operating exclusively for charitable purposes as required under Treas.Reg. Section 1.501(c)(3)-1(c)(1). Your only activity since your inception is the operation of E whose prices and hours of operation are the same as those of similar eating establishments. As required by Treas.Reg. Section 1.501(c)(3)-1(d)(2), you have not shown that your operations accomplish exclusively charitable or educational purposes.
   
Operating an eating establishment on a regular and continuous basis is an unrelated trade or business for profit within the meaning of Section 513 of the Code. Pursuant to Treas.Reg. Section 1.501(c)(3)-1(e)(1), you do not meet the requirements for recognition of tax exemption under Section 501(c)(3) of the Code as your primary purpose as indicated by your only activity over the last x year is the operation of an unrelated trade or business for profit within the meaning of Section 513 of the Code.
   
You are similar to the organizations described in B.S.W. Group, Inc., Easter House, and Living Faith. You are in direct competition with other eating establishments in the area. Like a commercial for-profit business, you are open to the general public on a regular basis and your customers are not limited to a charitable class of individuals. Your only income has been from E's operations. You use your receipts from E to pay for the cost of sales, occupancy expenses, insurance and salaries. These facts show you are operating for a substantial nonexempt commercial purpose rather than for a tax-exempt purpose.
   
Per the court case, Harding Hospital, an organization seeking tax-exempt status under Section 501(c)(3) of the Code carries the burden of proving that it satisfies the requirements of the statute. You have been planning to operate educational programs throughout the world. However, since your inception of x years ago, you have primarily operated E. Therefore, the facts show that you do not qualify under Section 501(c)(3) of the Code.
   
Like the organization in the court case, La Verdad v. Commissioner, the information in the administrative record does not demonstrate that you would operate exclusively in furtherance of an exempt purpose. Therefore, denial of your request for tax-exempt status is reasonable.
   
Conclusion:   
Based on the facts and information submitted, you are not operated exclusively for exempt purposes because you are operated in a commercial manner.
   
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.
   
If you don't agree   
You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include:
   
- Your name, address, employer identification number (EIN), and a daytime phone number
   
- A statement of the facts, law, and arguments supporting your position
   
- A statement indicating whether you are requesting an Appeals Office conference
   
- The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative
   
- The following declaration:
   
For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, 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 they haven'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 gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information 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 later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).
   
Where to send your protest   
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:
   
U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
P.O. Box 2508
Cincinnati, OH 45201
   
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202
   
You can also fax your protest 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 they received it.
   
You can get 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 listed at the top of this letter.
   
Contacting the Taxpayer Advocate Service   
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 if 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.
   
Sincerely,
   
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements