Private Letter Ruling
Number: 202336027
Internal Revenue Service
June 13, 2023
   
   
   
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
   
Number: 202336027
Release Date: 9/8/2023
   
Date:
June 13, 2023
Taxpayer ID number (last 4 digits):
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Last day to file petition with United States
Tax Court:
   
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: You did not respond to our requests for information regarding your purpose and activities. 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. Further, no part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3).
   
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 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 can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either:
   
- The United States Tax Court,
- The United States Court of Federal Claims, or
- The United States District Court for the District of Columbia
   
You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective courts website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint.
   
You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below:
   
United States Tax Court   
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov   
   
The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below:
   
US Court of Federal Claims   
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov   
   
US District Court for the District of Columbia   
333 Constitution Avenue, NW
Washington, DC 20001
dcd.uscourts.gov   
   
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:
   
   
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 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.
   
You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies.
   
Keep the original letter for your records.
   
Sincerely,
   
Lynn A. Brinkley
Director, Exempt Organizations Examinations
   
Enclosures:
Publication 1
Publication 594
Publication 892
   
   
   
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
   
Date:
09/20/2022
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:
Manager's contact information:
Name:
ID number:
Telephone:
Response due date:
   
CERTIFIED MAIL -- Return Receipt Requested
   
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. Well 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.
   
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,
   
Christopher M. Holmes ******
for Lynn A. Brinkley
Acting Director, Exempt Organizations Examinations
   
Enclosures:
Form 4621-A
Form 886-A
Form 6018
Publication 892
Publication 3498
   
   
   
                          
   
ISSUES:   
   
Whether ****** exemption under section 501(c)(3) of the Internal Revenue Code ("IRC") should be revoked due to:
1. Its failure to operate for an exempt purpose; and
2. Its net earnings inured to the benefit of a disqualified person.
   
FACTS:   
   
Background
****** ("the ******") was incorporated in the state of ****** by ****** on ******. The one-page article of incorporation states:
   
- the ****** name is ******, a ****** Non Profit Religious Corporation,
   
- its specific purpose is "to provide religious education programs and to continue development of religious educations",
   
- it is organized and operated exclusively for charitable purpose within the meaning of IRC section 501(c)(3), and
   
- upon dissolution, its assets remaining shall be distributed to an organization exempt under section 501(c)(3).
   
On ******, ******, as ******, filed a Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, for the ******. A letter from ****** was included with the Form 1023, stating that he was a founding board member and willing to make a gift to the ****** of at least $ ****** if the ****** received their tax-exempt status in the coming year. The Form 1023 listed the following board members:
   
   
The ****** received their exemption under IRC section 170(b)(1)(A)(ii) on ******; the effective date of exemption was retroactive to ******. Additionally, the ****** was able to receive tax-deductible contributions under IRC section 170.
   
On ******, the ****** filed a certificate of amendment with the state of ****** that changed their name to ******.
   
Beginning with the ****** fiscal year, ending ******, the ****** began submitting ******. The filed ****** listed the ****** name as ****** and stated the following information:
   
       
   
Examination   
An information document request was sent to the ****** by the initial examining revenue agent on ******. No response was received from the University and a delinquency notice was sent on ******. Additionally, the University was notified of the Service's intent to make third party contacts in a letter sent on ******.
   
The subsequent examining revenue agent ("agent") attempted to locate the ****** officers, for the present and prior exam years, and was able to locate ******, the primary officer listed on the ******. A third-party summons for ****** testimony and available records was hand delivered to his last known personal residence on ******.
   
Interview   
On ******, an individual answering to the name of ****** presented himself to the agent at the Service office located in ******. Upon examining his identification, the agent determined that this was not ****** but an acquaintance. The interview was rescheduled to the following day. ****** presented himself on ******, for an interview and to provide available documents. Key points taken from the interview were:
   
- changes to the ****** accreditation authority caused a rush in the creation of post-secondary schools,
   
- ****** stated he had incorporated the ****** and multiple other organizations with the state of ****** at the behest of individuals that he declined to name,
   
- he was asked to help due to his familiarity with the school accreditation process,
   
- he was involved in the filing of the ******,
   
- the ****** address was owned by an associate of ******, who allowed him to use various suite numbers for mailing purposes based on vacancy,
   
- the ****** address was a mailbox set up by ****** to handle the dissolution of the ******,
   
- he could not recall a ****** or ******, and
   
- the ****** had never been active as a school.
   
****** stated that he was a consultant and not involved in the day-to-day operations for the ******. When asked to list any of the other board members or provide the name of the individual who enlisted his services, ****** stated he did not remember or declined to answer. The agent asked if ****** was to be compensated for his consultant services and he stated he was a volunteer and not compensated.
   
Banking Activity   
At the interview, ****** provided the ****** monthly bank statements for the exam period and stated that only he had access to the University's checking account and debit card. The monthly statements for the ****** checking account ending in ****** showed the following transactions.
   
       
       
       
       
   
The agent asked ****** to provide additional information on the source of the cash deposits, the nature of the expenditures, names of individuals present at the restaurants, and how the ending balance at the fiscal year end of ******, was spent by the ****** stated that the deposits were donations, most from individuals residing in the ******; the expenditures were meals and gifts, and he speculated that the remaining funds were used to dissolve the ******. No additional documentation was received by the agent to support ****** statements.
   
LAW:   
   
IRC section 501(c)(3) exempts from Federal income tax corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or education purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of the 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.
   
IRC section 4958(c) defines the term "excess benefit transaction" as any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for performance of services unless such organization clearly indicated its intent to so treat such benefit.
   
IRC section 4958(e) defines "applicable tax-exempt organization" as an organization described in either section 501(c)(3) or section 501(c)(4) of the Internal Revenue Code or an organization which was so described at any time during the five-year period ending on the date of the excess benefit transaction.
   
IRC section 4958(f)(1) defines a "disqualified person" as (A) any person who was, at any time during the five-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization, (B) a member of the family of a disqualified person, and (C) a 35% controlled entity.
   
Section 1.501(c)(3)-1(a)(1) of the Federal Tax Regulations (the "Regulations") provides that in order to be exempt as an organization described in section 501(c)(3), 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.
   
Section 1.501(c)(3)-1(c)(1) of the Regulations states 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.
   
Section 1.501(c)(3)-1(c)(2) of the Regulations provides 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.
   
Section 1.501(c)(3)-1(d)(3)(i) of the Regulations defines the word "educational", as used in IRC section 501(c)(3), as -
   
(a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or
   
(b) The instruction of the public on subjects useful to the individual and beneficial to the community.
   
Section 1.501(c)(3)-1(f)(2)(ii) of the Regulations states that in determining whether to continue to recognize the tax-exempt status of an applicable tax-exempt organization (as defined in section 4958(e) and section 53.4958-2) described in section 501(c)(3) that engages in one or more excess benefit transactions (as defined in section 4958(c) and section 53.4958-4) that violate the prohibition on inurement under section 501(c)(3), the Commissioner will consider all relevant facts and circumstances, including, but not limited to, the following -
   
A. The size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;
   
B. The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization's
   
C. Whether the organization has been involved in multiple excess benefit transactions with one or more persons;
   
D. Whether the organization has implemented safeguard that are reasonably calculated to prevent excess benefit transactions; and
   
E. Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6) and section 53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction.
   
TAXPAYER'S POSITION:   
   
The ****** position is unknown at this time; however, the ****** had dissolved with the state of ****** as of ******.
   
GOVERNMENT'S POSITION:   
   
It is the government's position that the ****** exemption under IRC section 501(c)(3) should be revoked due to (1) failure to operate for an exempt purpose and (2) net earnings inured to the benefit of a disqualified person.
   
The ****** received its exemption as a school; however, no evidence was provided to the agent that demonstrated or showed that the ****** attempted to instruct or train individuals, or the public, as described in section 1.501(c)(3)-1(d)(3)(i) of the Regulations. There was no curriculum provided to the agent, no evidence that instructors were hired, and no students found to be enrolled. In the interview with ******, he cited lack of support from others, who he did not name, for the ****** not becoming operational. Despite never being active, on ******, the ****** paid $ ****** to file ******, ****** a program of the Department of Homeland Security.
   
A review of the available documents show that ****** was involved in the incorporation, application for exemption, opening and use of the bank account, filing the ******, and controlling the ****** mailing addresses. It is determined that ****** meets the criteria in IRC section 4958(f)(1) as exercising a substantial influence over the ****** operations and is a disqualified person. Additionally, the ****** meets the definition of an applicable tax-exempt organization as described in IRC section 4958(e).
   
During the exam period, the ****** statements show that the ****** had the following bank transactions:
   
       
   
As the only individual with access to this bank account and the sole debit card holder, ****** withdrew $ ****** in cash from this account and charged $ ****** in personal transactions that consisted of restaurants throughout ******, travel, retail store purchases, Department of Motor Vehicle fees, homeowner association fees, and personal medical expenses. Currently, it is unknown how the ****** spent the remaining funds of $ ****** and if this bank account is still open.
   
CONCLUSION:   
   
Due to the ****** failure to operate for an exempt purpose and its net earnings inuring to the benefit of a disqualified person, the government proposes to revoke the ****** exemption under IRC section 501(c)(3) effective ******.
   
If this revocation becomes final, the ****** will no longer be able to accept tax deductible contributions under IRC section 170 and will be required to file ******, for the fiscal period ending ******, and for all subsequent tax periods for which the ****** remains subject to Federal Income Tax.