Private Letter Rulings - Foundation Denied Exemption Request
GiftLaw Note:
Foundation was founded with the express purpose of providing a single, named disabled person, X, with financial and daily living assistance. Foundation was even named after X. Foundation did not provide a copy of its Articles of Incorporation or its Bylaws. In follow-up correspondence on its request for tax-exemption, Foundation provided a mission statement wherein its purpose was expanded “to enrich the lives of persons with disabilities.” In addition, Foundation stated it planned to receive referrals from County and State agencies. A review of Foundation’s activities showed that it received funding to provide for the 24-hour care of X. All other evidence showed Foundation was operated to benefit only X.
Organizations seeking tax-exempt status under Sec. 501(c)(3) must show that they are both organized and operated exclusively for a tax-exempt purpose. An organization that fails either the organizational or operational test will be denied exemption. Organizations will fail the operational test if more than an insubstantial part of their activities is not in furtherance of exempt purposes. In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, the U.S. tax court held that an organization operating for the sole benefit of a single person could not claim exemption under Sec. 501(c)(3). Here, the Service found that Foundation was operated for the sole benefit of X. Even though Foundation claimed it was organized to serve persons with disabilities, evidence showed that it only provided support for X. Therefore, the Service denied Foundation’s request for tax exemption under Sec. 501(c)(3).
Organizations seeking tax-exempt status under Sec. 501(c)(3) must show that they are both organized and operated exclusively for a tax-exempt purpose. An organization that fails either the organizational or operational test will be denied exemption. Organizations will fail the operational test if more than an insubstantial part of their activities is not in furtherance of exempt purposes. In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, the U.S. tax court held that an organization operating for the sole benefit of a single person could not claim exemption under Sec. 501(c)(3). Here, the Service found that Foundation was operated for the sole benefit of X. Even though Foundation claimed it was organized to serve persons with disabilities, evidence showed that it only provided support for X. Therefore, the Service denied Foundation’s request for tax exemption under Sec. 501(c)(3).
12/24/2015 (9/15/2015)
Dear *********:
* * * *
ISSUES
Issue 1 — Should the ******** (Foundation) tax exempt status under Internal Revenue Code (Code) section 501(c)(3) be revoked on the grounds that inurement exists?
Issue 2 — Should the Foundation's tax exempt status under Code section 501(c)(3) be revoked on the grounds that it did not demonstrate it is operated for a charitable purpose?
FACTS
The Foundation submitted Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, (attachment 1) to the Internal Revenue Service (Service) on February 20, 20XX. An attachment to Part II, Activities and Operational Information, states in part:
The ******** Foundation serves as both the fiscal and supportive intermediary service organization which better serves that individual, the family and the county with a fighter level of autonomy and control. The ******** foundation is centered around ******** plan of care which provides vocational, and daily living supports. The Foundation allows to grow in relationships, contribute to his community, take responsibility for his decisions and actions, be treated with dignity and respect and have control over and manage his budget . . .
A copy of the Foundation’s Articles of Incorporation or Bylaws was not found in the Determination File.
The Foundation provided additional information to the Service in subsequent correspondence to secure tax exempt recognition and provided a Mission Statement (attachment 2, item 1a):
It is the aim of the ******** Foundation to provide for the highest quality supports to enrich the lives of persons with disabilities... We have a strong desire to provide a safe and compatible environment in which any individual can progress to their full potential... We aim to develop an individual plan of care to help promote skill development and assist any individual... We hope to promote a stress free environment and help individuals live as independently as possible... Our role as a support system is to assist any individual . . . It is our aim as an agency to continue to promote choices and independence for people . . .
In other correspondence (attachment 3, item 1d) the Foundation stated it was seeking non-profit status as a health service agency dedicated to the promotion or lifestyle of choice and independence for persons with disabilities.
In other correspondence (attachment 4, item 4a) the Foundation stated it was an Independent Support Coordination unit and was to receive referrals from County and State agencies.
In other correspondence (attachment 5, item 11a) the Foundation stated it would provide another option for persons with disabilities . . . all disabled individuals receive the individualized care... all disabled persons wishing to use the ******** Foundation . . .
In letter dated May 21, 20XX (attachment 6) the Foundation stated it was microboard organization set up to service persons with disabilities. Currently, the organization is providing services for the care of ********. The organization receives funding to provide 24 hour care for ********.
The Commonwealth of ******** Department of Public Welfare provided a Developmental Programs Bulletin, dated July 1, 20XX, (attachment 7) states a microboard is a small, non-profit corporation which is created with the specific intent of supporting an individual with developmental disability, and is committed to the individual's needs and desires for self-determination. A microboard works to address an individual's planning and support needs now and into the future. Such boards are created based upon the person-centered planning philosophy and are designated specifically to support one individual.
The ******** Microboard Association website (attachment 8) states that a microboard is a legal nonprofit organization but not a 501(c)(3).
LAW
Code section 501(c)(3) provides for exemption from income 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 (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.
Federal Tax Regulations
Section 1.501(c)(3)-1(a) states in part that in order to be exempt as an organization described in Code section 501(c)(3), the 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. The term "exempt purpose or purposes", as used in this section, means any purpose or purposes specified in section 501(c)(3).Section 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt purposes.
In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, the US Tax Court held that a substantial amount of the organization's funds were be expended for the benefit of Wendy Parker. Wendy Parker was pre-selected as the sole recipient of funds throughout your formation. The result of the operations is a substantial private benefit Wendy Parker, which precludes exemption under 501(c)(3).
Government's Position
Issue 1 — The Foundation's tax exempt status under Code section 501(c)(3) should be revoked on the grounds that inurement exists.The Foundation's sole purpose is to provide services to one person, ********. All of the Foundation's earnings inure to ******** benefit because all the Foundation's activities and incurred expenses relate to ******** care. All funds received are used and future funds will be used to provide services for ******** benefit. The Foundation's selection of as a substantial beneficiary of its disbursements the detrimental factor resulting in inurement. Because ******** is the only beneficiary of the Foundation's activities the inurement amount is 100% of the Foundation's earnings.
Issue 2 — The Foundation's tax exempt status under Code section 501(c)(3) should be revoked on the grounds that it did not demonstrate it is operated for a charitable purpose. The Foundation's proposed activities were to provide services to individuals, presumably a charitable class, but no documentation has been provided to substantiate the proposed activities. Providing services to one or a few individuals results in inurement and precludes the Foundation from being regarded as operating for a charitable purpose.
Taxpayer's Position
The taxpayer has not provided a definitive position; once a position is provided it will be incorporated into this report.CONCLUSION
A conclusion will be made once the taxpayer provides a response.