Private Letter Ruling
Number: 202248011
Internal Revenue Service
May 25, 2022
   
   
   
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
   
Number: 202248011
Release Date: 12/2/2022
   
UIL: 501.03-00
   
Date: May 25, 2022
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
   
CERTIFIED MAIL - RETURN RECEIPT REQUESTED
   
   
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 are not described in IRC section 501(c)(3) because you are not organized and operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3) and Treasury Regulations Sections 1.501(c)(3)-1(b)(1) and 1.501(c)(3)-1(c)(1). You do not engage primarily in activities that accomplish one or more of the exempt purposes specified in Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(d).
   
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
400 Second Street, NW
Washington, DC 20217
   
U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
   
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).
   
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 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
   
   
Lynn A. Binkley
Acting Director, Exempt Organizations Examinations
   
Enclosures:
Publication 1
Publication 594
Publication 892
   
cc:
   
   
   
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
   
Date:
November 17, 2021
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Manager's contact information:
Name:
ID number:
Telephone:
Response due date:
   
CERTIFIED MAIL - Return Receipt Requested:
   
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.
   
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.
   
Sincerely,
   
   
for Sean E. O'Reilly
Director, Exempt Organizations
Examinations
   
Enclosures:
Form 886-A
Form 6018
   
   
   
                          
   
 ISSUES  
   
Whether ****** (the Organization) qualifies for exemption from federal income tax under Internal Revenue Code (IRC) Section (Sec.) 501(c)(3).
   
 FACTS    
   
Formation   
The Organization was incorporated as a nonprofit corporation on ****** in ****** using the generic Articles of Incorporation provided by the state and listed ******, ****** and ****** as the Board of Trustees/Directors.
   
On ******, prior to its first meeting, the Organization submitted a "Certificate of Amendment to Articles of Incorporation for Nonprofit Corporations" to the state of ****** stating that its purpose was "to give youth incentive to work toward goals and receive experiences that improve their lives and (to) operate exclusively for charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code." The Certificate of Amendment also included the requisite purpose and dissolution clauses, including the requisite language restricting private inurement and political activity.
   
Application for Recognition of Exemption   
On ****** the Organization submitted a Form ******, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Under Part IV, "Narrative Description of Your Activities," in the attachment to the Form ******, the Organization provided the following:
   
****** is a nonprofit corporation organized and operated exclusively for educational and charitable purposes. The specific purpose of this organization is to instruct or train individuals, with a focus on youth, for the purpose of developing their goals and improving their lives.   
   
The remainder of the three-page description provided a detailed explanation of how the Organization would carry out its activities through Speaking Engagements and Online Empowerment, its two main programs.
   
Exemption   
On ****** the Organization received recognition of exemption under IRC §501(c)(3) as a public charity, effective ******.
   
Activities   
During the tax years ended ****** and ****** the Organization conducted speaking engagements at schools where ****** provided insights from his own life experiences as a child living through an abusive relationship in order to reach out to children and youth who might be living in similar abusive relationship. Afterwards, he met with those in need one on one to determine how to best meet their needs. When possible, affected children and youth were invited to attend a ****** camp, "******," to participate in fun activities and informal counseling sessions to help them break down the barriers created by abuse and empower them to move forward with their lives. These activities met the tax-exempt requirements as prescribed under IRC Sec. 501(c)(3).
   
Financials Per Form   
   
       
   
[Note that the Organization didn't file a Form ****** for the tax year ended ******. Further, as discussed in the Examination section below, the Organization didn't consider the ****** file provided for ****** to be complete or reliable. As such, no financials are provided herein for the tax year ended ******.]
   
Examination   
On ******, Revenue Agent ****** (RA ****** ) issued an initial contact letter, Information Document Request (IDR), and Publication 1 to inform the Organization of the examination and request an Initial Interview on ******.
   
The initial contact letter package was returned as undeliverable to RA ****** on ******, so identified six different addresses for the officers as listed on the Form ****** and resent the package to those addresses on ****** requesting an Initial Interview on the same date, ******.
   
Subsequently, RA ****** left the Service and the case was transferred to Revenue Agent ****** (RA ******) on ******. [Note that the case was subsequently transferred to Revenue Agent ****** (the Examiner) on ******.]
   
****** rescheduled the Initial Interview and conducted the interview on ****** with ******, the Organization's Secretary and point of contact for the examination, ******, CPA (POA ******), and ******, CPA (POA ******).
   
During the Initial Interview, ****** confirmed that the Board of Directors listed on the Form ****** for the tax year ended ****** was correct but explained that he and ****** were currently the only board members left. ****** also stated that ****** and ****** were now married. [Note that for purposes of this document we will refer to ****** by ****** name, as ****** or ******, since that corresponds with ****** name of record for the years under examination.]
   
 ****** further stated during the Initial Interview that the Organization provided funds for ****** and ****** personal expenses. In addition, he indicated these personal expenses were commingled within the books and records of the Organization and that there was no form of tracking to bifurcate the personal expenses from the Organization's expenses.
   
As stated in the Organization's Form ****** for the tax year ended ******, and further confirmed during the examination, ****** currently serves as the Organization's President and ****** currently serves as the Organization's Secretary.
   
The Organization's Form ****** for the tax year ended ****** listed $ ****** for ****** and $ ****** for ****** as "Reportable compensation from the organization (W-2/1099)" on Part VII, Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors.
   
****** noted that the Organization hadn't filed a Form ****** for the tax year ended ****** prior to the beginning of the examination, so he asked why this was the case during the Initial Interview. ****** stated that the Organization was still trying to figure out its books and records for ******. ****** explained that ******, the Organization's Treasurer, was responsible for the Organization's books and records and for all of its required tax filings. ****** stated that she had filed the Form ****** for the tax year ended ****** without allowing him or ****** to review or approve the Form ******. ****** further explained that in ****** he and ****** discovered that ****** was misappropriating funds. When confronted, ****** departed abruptly and left the Organization's books and records that were still intact in disarray. As such, ****** indicated that he and ****** weren't sure if the books and records or the Form ****** for the tax year ended ****** were correct and were in the process of researching this information when the examination began. Thus, the Form ****** for the tax year ended ****** wasn't filed.
   
A review of the Organization's records and documentation provided by ****** revealed that ****** received $ ****** and ****** received $ ****** as reasonable compensation for services provided in ******. These amounts were included in the agreed Employment Tax examination for the Organization with instructions to issue Forms W-2 to ****** in the amount of $ ****** and ****** in the amount of $ ******.
   
Examination of the Organization's books and records and the Organization's bank records indicated that ****** was a signatory of the Organization's bank account number ****** and that she was provided a debit card ending in number ****** associated with the Organization's bank account number ******.
   
A review of the Organization's books and records relative to this information revealed the following:
   
1. Besides the amount of reasonable compensation ****** received during the tax year ended ******, ****** also received bank transfers from the Organization's bank accounts totaling $ ****** and received checks written to her, or for personal items purchased or paid for by her, from the Organization totaling $ ******.
   
2. Besides the amount of reasonable compensation ****** received during the tax year ended ******, ****** also received checks written to her, or for personal items purchased or paid for by her, from the Organization totaling $ ****** and the Organization made a payment to the IRS on her behalf in the amount of $ ******.
   
3. During the tax year ended ****** the Organization transferred $ ****** and wrote three checks totaling $ ****** to ******, an entity controlled by ******. As such, these amounts have been included in the ****** Bank Transfers and Checks as payments made to ****** below.
   
Further examination of the Organization's books and records for the tax year ended ******, taking into account the amount paid to ****** as compensation during ******, indicated that the Organization paid for the following purchases recorded on the aforementioned debit card assigned to ******:
   
       
   
As such, the examination of the Organization's books and records for the tax years ended ****** and ****** revealed that ****** received additional income from the Organization as follows:
   
       
   
Examination of the Organization's books and records revealed that ****** was provided debit cards ending in numbers ****** and ****** associated with the Organization's bank account number ******and a debit card ending in number ****** associated with the Organization's bank account number ******.
   
A review of the Organization's books and records relative to this information revealed the following:
   
1. Besides the amount of reasonable compensation ****** received during the tax year ended ******, the Organization paid $ ****** for his life insurance and $ ****** to his ****** account.
   
2. Besides the amount of reasonable compensation ****** received during the tax year ended ******, the Organization paid $ ****** for his life insurance.
   
Further examination of the Organization's books and records for the tax years ended ****** and ******, taking into account the amount paid to him as compensation during ****** and ******, indicated that the Organization paid for the following purchases recorded on the aforementioned debit cards assigned to ******:
   
       
   
As such, the examination of the Organization's books and records for the tax years ended ****** and ****** revealed that ****** received additional income from the Organization as follows:
   
       
   
 LAW    
   
Internal Revenue Code (IRC)   
   
IRC Sec. 501(c)(3) exempts from income tax entities 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.
   
Treasury Regulations (Treas.Reg.)   
   
Treas.Reg. Sec. 1.501(c)(3)-1(a)(1) states 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.
   
Treas.Reg. Sec. 1.501(c)(3)-1(c)(1) states 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). 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. Sec. 1.501(c)(3)-1(c)(2) states 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. For the definition of the words private shareholder or individual, see paragraph (c) of section 1.501(a)-1.
   
Treas.Reg. Sec. 1.501(a)-1(c) states that the words private shareholder or individual in section 501 refer to persons having a personal and private interest in the activities of the organization.
   
 GOVERNMENT'S POSITION    
   
It is the Government's position that the Organization does not qualify for exemption under IRC Sec. 501(c)(3).
   
For an organization to qualify for exemption under IRC Sec. 501(c)(3), no part of the net earnings of the organization can inure to the benefit of any private shareholder or individual.
   
Under Treas.Reg. Sec. 1.501(c)(3)-1(c)(1), 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 IRC Sec. 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.
   
Under Treas.Reg. Sec. 1.501(c)(3)-1(c)(2) 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.
   
Under Treas.Reg. Sec. 1.501(a)-1(c) the words private shareholder or individual in section 501 refer to persons having a personal and private interest in the activities of the organization.
   
Based on the facts and circumstances stated above, ****** and ****** are individuals that have a "personal and private interest in the activities of the organization" and, thus, are "private shareholders and individuals" of the Organization.
   
Since ****** and ****** received additional income from the Organization over and above the amounts they received as reasonable compensation for services provided in ****** and ******, these amounts represent net earnings which "inure in whole or in part to the benefit of private shareholders or individuals," ****** and ******.
   
As such, the Organization failed to meet the requirements for tax exemption under IRC Sec. 501(c)(3) and the Regulations thereunder.
   
 TAXPAYER'S POSITION    
   
The Examiner discussed his findings with ****** and POA ****** and explained that the Government will be recommending revocation of the Organization's exemption under IRC Sec. 501(c)(3). ****** stated that the Organization ceased operations in ****** due to COVID-19. As such, it appears the Organization will accept the proposed revocation.
   
The Organization is being solicited for its position at this time.
   
 CONCLUSION    
   
The Organization does not qualify for exemption from federal income tax as it failed to substantiate that it is operated exclusively for one or more exempt purposes due to inurement, resulting in its failure to comply with the requirements of IRC Sec. 501(c)(3) and Treas.Reg. Sec. 1.501(c)(3)-1(c)(2).
   
It is the Government's position that the Organization failed to operate exclusively to accomplish one or more of such exempt purposes specified in IRC Sec. 501(c)(3). Because the Organization was not operated exclusively for the exempt purpose under IRC Sec. 501(c)(3), its Federal tax-exempt status under such section should be revoked effective ******. The Organization is liable for filing Form ******, U.S. Corporation Income Tax Return, and paying any related tax liabilities for the tax year ended ****** and all years thereafter.