Organization Operated for Significant Purpose to Benefit For Profit Business, Exempt Status Retroactively Lost

To retain status as a §501(c)(3) charitable organization, an entity must not only have been organized for charitable purposes (a requirement for initial qualification), it must also be operated exclusively for charitable purposes in order to retain that status.  A failure on the second test caused the organization in the case of Giving Hearts, Inc. v. Commissioner, TC Memo 2019-94[1] to retroactively have its status revoked by the IRS.

The case involves an attempt by a business that was negatively impacted by the National Do Not Call Registry, a program conducted jointly by the Federal Trade Commission and the Federal Communications Commission, to blunt the impact of that program.  The business, Windows Plus, relied primarily upon telemarketing calls to sell replacement windows and other home improvement services to homeowners.

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Organization Operated for Commercial, Not Exempt, Purpose

In the case of Abovo Foundation, Inc. v. Commissioner, TC Memo 2018-57, the taxpayer was asking the Tax Court to rule that the organization qualified as a §501(c)(3) tax-exempt organization. The Tax Court, siding with the government, found that the entity failed to qualify.

The organization’s stated purpose was summarized as follows in the opinion:

Abovo's primary purpose would be to deliver quality management consulting services to medical providers and advance Government programs through patient safety initiatives. Its quality management services would include “defining, identifying, analyzing, measuring and controlling systems and processes to ensure desirable outcomes”. In addition, Abovo would provide “uplifting services for the elderly and veterans”, housing for low-income individuals, and internal auditing services.

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IRS Issues Final Regulations on Streamlined Applications for §501(c)(3) Exempt Organization Status

The IRS has adopted as final regulations the proposed regulations issued in June of 2014 that allowed for a streamlined application for tax-exempt status under IRC §501(c)(3) in T.D. 9819.  These same regulations were issued in 2014 as temporary regulations which, with the issuance of the same regulations in final form, are now withdrawn.

The streamlined application process takes place entirely online, with the organization filling in Form 1023-EZ online at http://www.pay.gov.

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Organization Formed to Support "Community Journalism" Did Not Qualify for Exempt Status

In PLR 201720010 the IRS ruled the fact that an organization is not being operated to generate a profit and may be providing services to organizations that are themselves performing charitable and educational purposes does not mean the organization providing the services can qualify as a §501(c)(3) organization.  The organization in question was therefore denied its request to be granted §501(c)(3) status.

The organization had changed its proposed purpose a few times as it attempted to assist in the development of community oriented independent journalism initiatives.  Originally the organization had planned to develop open source software to be used by such organizations, but such software became available from other sources. 

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IRS Makes List of Organizations Granted Exemption via Form 1023-EZ Available for Download Online

The IRS announced in News Release IR-2017-41 that it has now made available lists of approved exemption applications that were obtained using Form 1023-EZ, Streamlined Application for Recognition of Exemption.

The information, provided in the form of an Excel spreadsheet, provides approved applications by year beginning with mid-2014 when the streamlined form was first released.  The IRS will release updated information quarterly.

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Narrow Scholarship Criteria Found to Limit Benefits to Founder's Son, Exempt Status Denied

In PLR 201652029 the IRS was asked to grant an organization a tax exemption under §501(c)(3).  The organization was one formed to grant annual scholarships to graduating seniors of a particular high school who met certain criteria.

Initially this seems like a reasonable request since the organization’s purpose was to further education, and it was going to grant scholarships based on merit-based criteria.  But it turns out that criteria caught the IRS’s attention when the IRS looked at applying those criteria to what had actually taken place in the past.

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Organization Where 50% of Funds Raised to Be Used to Benefit Specific Cancer Patient Denied Exempt Status

Organizations that wish to qualify as a tax-exempt organization under IRC §501(c)(3) must serve a public rather than private interest pursuant to Reg. §1.501(c)(3)-1(d)(ii).  That issue tripped the application of the organization that is the subject of PLR 201651016.

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Exempt Status Lost Due to Failure to Actually Undertake Exempt Activities for 11 Years

In the case of Community Education Foundation v. Commissioner, T.C. Memo. 2016-223 the taxpayer was contesting the IRS’s revocation of the organization’s tax exempt status under IRC §501(c)(3).  The IRS was not alleging that the organization carried on something that wasn’t in line with its exempt purpose, but rather simply that the organization was actually carrying on any purpose.

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Religious Organization Formed to Operate Coffee Shop Denied Tax-Exempt Status

In PLR 201645017 the IRS denied tax-exempt status to a religious organization that established a coffee shop that it planned to use to spread a religious message to members of the community.  The exemption was denied because the IRS determined, under the facts of the case, that a substantial portion of the organization’s operations would be devoted to operating the coffee shop in a commercial manner.

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Organization That Primarily Benefitted Founders' Ill Child Denied Exempt Status

The private inurement prohibition applies to an exempt organization, even if that organization is clearly serving an individual that would otherwise been a reasonable recipient of benefits from a charity.  The IRS pointed that out in denying an application for tax exempt status in PLR 201637017.

Private inurement is an issue for many potential organizations that a client may be motivated to form, as often a personal experience and a problem of a specific individual will be the genesis of the idea to form the organization.  But the regulations under §501(c)(3) provide a strict prohibition on “private inurement” as the IRS points out in the ruling:

Treas. Reg. Section 1.501(c)(3)-1(c)(2) states regarding the distribution of earnings 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.

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Procedures for Required Notice to IRS of Intent to Operate as a §501(c)(4) Organizations Published

In Section 405 of the Protecting Americans from Tax Hikes, organizations that intend to operate as organizations exempt from tax uner §501(c)(4) must notify the IRS of that intent. [IRC §506] The IRS has issued temporary regulations [T.D. 9775] that were also issued as proposed regulations [REG-101689-16] to implement these rules, along with a Revenue Procedure [Revenue Procedure 2016-41] outling the notification procedure.

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Office Condominium Association Was Not a Tax-Exempt Business League Under IRC §501(c)(6)

As a tax-exempt organization it’s a bad situation to lose your exemption for a failure to file the required tax forms for three consecutive years.  But, as the association that requested reinstatement of their status as a §501(c)(6) organization discovered in PLR 201622033, it’s worse to discover that the IRS believes you never really were qualified to be treated as such an organization.

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IRS Reduces User Fee for Small Organizations Filing Form 1023-EZ for §501(c)(3) Status for Last Six Months of 2016

In Revenue Procedure 2016-32 the IRS announced a reduction in the 2016 user fee for certain exempt organization applications effective July 1, 2016.

The fee for organizations filing Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code will be reduced from $400 to $275. 

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While California Donor Disclosure Law Not Facially Unconstitutional, Court Finds It Unconstitutional Given State's Inability to Keep Donor Lists Confidential

California’s law requiring providing the California Attorney General with an unredacted list of donors was held constitutional by the Ninth Circuit, but less than a year later a District Court in the same Circuit found that the ruling only found the law not “facially unconstitutional” but that using an “as-applied” test the law was unconstitutional, granting again an injunction against its enforcement.

But, as we’ll describe below, the rulings are not as contradictory as they might appear when reading just the headlines.

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Membership Exempt Organization Tripped Up by Gross Revenue from Nonmembers Test

An issue that often arises in the area of exempt organizations is that they are governed by a number of special rules that, if violated, will cause an organization to lose its exempt status.  And often these organizations, as circumstances change, end up taking actions that run smack into these problems.

This was case for the organization whose loss of exempt status is detailed in PLR 201612014.  The organization was organized as a social organization under IRC §501(c)(7) to provide trap shooting, hunter safety and clubhouse activities to its members.

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Form 990-N Now to Be Filed Directly Via irs.gov Website

The IRS announced in the February Exempt Organization Update email that small tax exempt organizations filing the “e-Postcard” Form 990-N online will see changes in how they file in 2016.

Effective February 29, 2016 submissions of the Form 990-N will now be handled directly by the IRS via the irs.gov site.   Previously the form had been submitted through the website of the Urban Institute.

Organizations will need to complete a short registration process with the IRS before being able to use the new site.

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Farmer's Market Denied Tax Exempt Status Due to Having a Substantial Non-Exempt Purpose

An organization that ran a farmer’s market was found by the IRS to not qualify as a tax exempt §501(c)(3) organization in Private Letter Ruling 201601014

The organization operates a marketplace where farmers, businesses and artisans sell their goods directly to the public.  It also organizes special events where local craft vendors sell their goods, cooking demonstrations and other educational programs for adults, monthly educational events for children, and space at the market for local non-profits to promote their activities.

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Organization Operated Exclusively for Benefit of One Family, Exemption Retroactively Revoked

One of the “rules of thumb” for tax planning is that “smell counts” in any tax situation.  If the result just “looks bad” there’s a good chance that the courts will simply not allow it to stand.  This is doubly true with regard to §501(c)(3) charitable organizations that, while technically operated under principles that serve the public good, in reality always seem to benefit a very distinct, not so public, private group—like a single family.

That turned out to be the problem in the case of the Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc., v. United States, 2015 TNT 128-15.

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Guidance Provided to Hospitals on Publication of Provider Lists as Part of Financial Assistance Policy

Notice 2015-46 provides guidance to charitable hospitals on how to comply with the requirement in Reg. §1.501(r)‑4(b)(1)(iii)(F) that a hospital must include a provider list in its financial assistance policy (FAP).   The list must include all providers, other than the hospital itself, that deliver care in the facility and specify whether the individual providers are or are not covered by the FAP.

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