Private Letter Rulings - IRS Revokes Organization's Exempt Status
GiftLaw Note:
Org was recognized as a tax-exempt private foundation under Sec. 501(c)(3). Org filed a Form 990-PF return, which listed travel expenses and the assets of the organization. Upon further inquiry by the Service, Org stated that the cost of its assets included a piano used for weekly choir practice, a computer, a Mercedes-Benz automobile used to visit other non-profit organizations and leasehold improvements to a facility for programs and youth. The facility's address was that of Org, which happened to also be the residence of Org's president. Further inquiry revealed the piano, automobile and leasehold improvements were available for the personal use of president's family. Org also revealed its travel expense consisted of airfare for the president's personal use that Org paid by mistake. Org had no documentation to support its claims that it operated for exempt purposes. The issue before the Service was whether to revoke Org's exempt status.
Section 501(c)(3) grants tax-exempt status to foundations organized and operated exclusively for exempt purposes. An organization is not regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of an exempt purpose or if its earnings inure in whole or in part to the benefit of private individuals. Here, the Service revoked Org's exempt status because it provided no evidence of its charitable programs or purposes other than its own statements. In addition, even if Org had charitable programs, nearly all of its assets were used to benefit the president and the president's family, including an addition to president's home, a luxury automobile for the president's use and a piano in the president's home. Lastly, Org paid airfare for the president to go on a trip that did not further Org's exempt purposes.
Section 501(c)(3) grants tax-exempt status to foundations organized and operated exclusively for exempt purposes. An organization is not regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of an exempt purpose or if its earnings inure in whole or in part to the benefit of private individuals. Here, the Service revoked Org's exempt status because it provided no evidence of its charitable programs or purposes other than its own statements. In addition, even if Org had charitable programs, nearly all of its assets were used to benefit the president and the president's family, including an addition to president's home, a luxury automobile for the president's use and a piano in the president's home. Lastly, Org paid airfare for the president to go on a trip that did not further Org's exempt purposes.
8/30/2013 (6/4/2013)
Dear * * *:
This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal Revenue Code (the "Code"). It is determined that you do not qualify as exempt from Federal income tax under section 501(c)(3) of the Code effective November 1, 2008.
The revocation of your exempt status was made for the following reason(s):
A substantial amount of your organization's assets inured to the private benefit of your founder. Because a substantial amount of your charitable assets were used for private purposes, the organization is not operated exclusively for exempt purposes described in section 501(c)(3) of the Code.
Contributions to your organization are not deductible under section 170 of the Code.
* * * * *
ISSUE
Is the ORG an organization exempt from tax under section 501(c)(3) of the Internal Revenue Code?
FACTS
ORG received a letter of determination dated May 7, 20XX, from the Internal Revenue Service recognizing it as a private foundation exempt from tax under section 501(c)(3) of the Internal Revenue Code.
The organization filed a Form 990-PF for the period ending October 31, 20XX, with was received by the Internal Revenue Service on April 12, 20XX.
The return showed the book value of land, building and equipment of $* * * as of October 31, 20XX and the cost basis of $* * *. The total assets of the organization were listed as $* * * as of October 31, 20XX
The return also showed travel expenses of $* * *
Total income of the organization was a $* * * contribution. Expenses were, $$* * * in depreciation, the $* * * travel expense, $* * * in bank service charges, a $* * * filing fee and a $* * * donation to the CO-1, STATE.
Upon inquiry by the Internal Revenue Service, the organization stated that the cost of the assets was, $* * * for a piano, which it stated was used weekly for choir practice, * * * $* * * for a computer, $* * * for an automobile used to visit other non-profit organizations and $* * * for leasehold improvements used as a facility for programs and youth. The leasehold improvements were made at ADDRESS, CITY, STATE, which is the address of the organization and also the residence of the President of the organization.
The travel expense was airfare between CITY and COUNTRY.
Upon further inquiry by the Internal Revenue Service, the organization stated that the piano and the automobile and the leasehold improvements were available for personal use by family of the president. The leasehold improvement was for a 460 square foot study room at the rear of ADDRESS. The airfare was for personal use and the organization stated it was "filled by mistake" but did not state if the organization had been reimbursed.
The Internal Revenue service had also requested a list of events held by the organization, including a description, membership, attendance and supporting documentation. The organization stated that its activities included, but were not limited to bible study, choir and fellowship. It did not provide any documentation.
It also stated that the automobile was used for visiting other non-profit organzations, church meetings, prayer meetings and to transport elderly to church and other church related works. The organization had no record of use of the automobile for either business or personal use. The automobile was a Mercedes-Benz and the registered owner was the president of the organization.
LAW
Section 501(c)(3) of the Internal Revenue Code provides for exemption from tax for "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 . . . 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."
Section 1.501(c)(3)-1(c) of the income tax regulations provides that (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 Link 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 earnings inure in whole or in part to the benefit of private shareholders or individuals."
In Better Business Bureau v. United States, 326 U.S. 279, 283, the court stated that the presence of a single substantial nonexempt purpose precludes exempt status for an organization, regardless of the number or importance of the exempt purposes.
GOVERNMENT'S POSITION
In this instance the organization has provided no evidence other than its own statements, that it has any charitable program whatsoever. Even if it had a charitable program, almost all of the assets consists of an addition to the president's home, a luxury automobile available for the president's personal use, and a piano in the president's home. The organization paid for airfare for the president's trip to COUNTRY, which it admitted was not for exempt purposes.
The presence of any substantial non-exempt purpose precludes exempt status. In this case, the organization has a substantial non-exempt purpose, which is to provide benefits to its president. Therefore it is not exempt under section 501(c)(3) of the Internal Revenue Code.
TAXPAYER'S POSITION
The taxpayer has not submitted its position.
CONCLUSION
Exemption under section 501(c)(3) of the Internal Revenue Code is revoked for ORG effective November 1, 20XX.