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Saturday February 23, 2019
Private Letter Ruling
IRS Denies Exemption to Business Corporation
Organization was formed as a business corporation under the laws of the state of C. Organization's specific purposes include bringing an end to child slavery, assisting malnourished or ill children, providing educational funding for children, providing micro-financing for families to start small businesses and providing funding for caretakers to obtain higher education. Organization planned to dissolve its for-profit status and function as an exempt Sec. 501(c)(3) organization. Upon review of Organization's Articles of Incorporation ("Articles"), the Service noted that Organization is authorized to issue stock. The Service also indicated to Organization that its Articles lack a clause stating it will be operated exclusively for Sec. 501(c)(3) purposes and a clause stating that, upon dissolution, Organization's assets will be distributed for Sec. 501(c)(3) purposes. Organization later specified that it would amend its Articles and that it officially dissolved its for-profit status by filing Articles of Dissolution. The Service, however, was never provided copies of these documents.
Under Sec. 501(c)(3), in order for an organization to be exempt from tax it must be organized and operated exclusively for an exempt purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual. An organization is not operated exclusively for an exempt purpose if more than an insubstantial part of its activities is not in furtherance of an exempt purpose or if it fails to serve a public rather than a private interest. Sec. 1.501(c)(3)-1(c)(1); Reg. 1.501(c)(3)-1(d)(1)(ii). In Universal Life Church v. United States, the court concluded that an organization seeking tax exemption has the burden of establishing the right to tax-exempt status. Here, the Service found that Organization failed to provide supporting documentation to establish that it has met the requirements of Sec. 501(c)(3). Based on the information provided, the Service found that Organization failed to meet the organizational test because its Articles do not limit its purposes to those described in Sec. 501(c)(3) and lack a dissolution clause. Thus, because Organization failed to provide evidence establishing that it is organized for exempt purposes under Sec. 501(c)(3), the Service denied Organization's application for exemption.
Dear * * *:
This letter is our final determination that you don't qualify for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final.
Because you don't qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can't deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.
We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection (as required under Section 6110 of the Code) after deleting certain identifying information. Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice 437 on how to notify us. If you agree with our deletions, you don't need to take any further action.
We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements.
If you have questions about this letter, you can contact the person listed at the top of this letter. If you have questions about your federal income tax status and responsibilities, call our customer service number at 1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at 1-800-829-4933.
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements
Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) No Protest
Contact person/ID number: * * *
Contact telephone number: * * *
Contact fax number: * * *
UIL: 501.00-00, 501.03-05, 501.29-00
Date: May 24, 2018
Employer ID number: * * *
B = Date
C = State
Dear * * *:
We considered your application for recognition of exemption from federal income tax under Section 501(a) of the Internal Revenue Code (the Code). Based on the information provided, we determined that you don't qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please keep it for your records.
Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.
You were incorporated on B as a business corporation under C law. Your Articles of Incorporation ("Articles") do not include a purpose clause or a dissolution clause. In addition, your Articles authorize you to issue stock.
Your specific purposes are to partner with and assist non-profit organizations in several areas. Those areas include bringing an end to child slavery, assisting malnourished or ill children, providing educational funding for children, providing micro-financing for families to start small businesses, and providing funding for caretakers to obtain higher education.
We suggested that you amend your Articles to remove all references to stock and convert to a non-profit corporation in order to qualify for exemption under Section 501(c)(3) of the Code. In addition, we suggested that you include a purpose clause which states that you are operated exclusively for Section 501(c)(3) purposes and a dissolution clause which states that upon dissolution your assets will be distributed for Section 501(c)(3) purposes. To this you responded that you were "initially formed as a corporation for the benefit of ultimately applying for and converting to a non-profit organization with 501(c)(3) status." You said initially under the original Articles one shareholder possessed all shares of stock. Subsequent to approval of your 501(c)(3) request, you will amend your Articles to "remove all shares and references of shares."
You later indicated that you had dissolved the for-profit corporation. You submitted an unfiled copy of your Articles of Dissolution as a for-profit entity and indicated you filed Articles of Incorporation as a non-profit-entity. Despite multiple requests for filed copies of these documents, you have not provided any. We are left to rely on the information in the administrative case file.
Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are organized and operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net earnings may inure to the benefit of any private shareholder or individual.
Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described in section 501(c)(3) of the Code, 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. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization:
(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its activities, in activities that in themselves are not in furtherance of one or more exempt purposes.
Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or operation of law, be distributed for one or more exempt purposes.
Revenue Procedure 2018-5, 2018-1 I.R.B. 233, Section 3 states that a determination letter or ruling on exempt status is issued based solely upon the facts and representations contained in the administrative record. The applicant is responsible for the accuracy of any factual representations contained in the application. Section 6 (and its predecessors) provides that a favorable determination letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal income tax is claimed.
In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that "one seeking a tax exemption has the burden of establishing his right to a tax-exempt status."
New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that the actual purposes displayed in the administrative record supported the Service's denial, stated "It is well-accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the applicant." The court noted that if the petitioner had evidence that contradicted these findings, it should have submitted it as part of the administrative process. The court also highlighted the principle that exemptions from income tax are matters of legislative grace.
Application of law
A ruling on exempt status is based solely on facts and representations in the administrative file. You have not provided supporting documentation to establish you meet the requirements of Section 501(c)(3) of the Code.
Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg. 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in Section 501(c)(3).
You are formed as a for-profit corporation under state law. Your Articles do not limit your activities to those described in Section 501(c)(3) of the Code or contain a dissolution clause which dedicates your assets to Section 501(c)(3) purposes. As a result, you have not satisfied the organizational test described in Treas. Reg. Sections 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4).
Despite multiple requests for your filed Articles of Dissolution of the for-profit entity and Articles of Incorporation for the non-profit entity, you have failed to provide them. Therefore, there is not sufficient documentation to establish that you are exempt from taxation as required by Section 501(c)(3) of the Code and Rev. Proc. 2018-5. As in Universal Life Church, you have the burden of establishing that you qualify for tax exemption.
As stated in New Dynamics Foundation, an organization must establish, through its administrative record, that it meets the requirements for exemption. Any gaps in the administrative record will be resolved against the applicant. The Articles you provided with your application do not meet the statutory and regulatory requirements for exemption. You have failed to provide a filed copy of your Articles of Dissolution as a for-profit entity and Articles of Incorporation as a non-profit entity. Therefore, you have not established that you meet the requirements for exemption under Section 501(c)(3) of the Code.
Based on the information submitted, you have failed to establish that you are organized for exempt purposes within the meaning of Section 501(c)(3) of the Code and the related income tax regulations. Therefore, based on the administrative record, you fail to qualify for exemption under Section 501(c)(3).
If you don't agree
You have a right to file a protest if you don't agree with our proposed adverse determination. To do so, you must send a statement to us within 30 days of the date of this letter. The statement must include:
- Your name, address, employer identification number (EIN), and a daytime phone number
- A copy of this letter highlighting the findings you disagree with
- An explanation of why you disagree, including any supporting documents
- The law or authority, if any, you are relying on
- The signature of an officer, director, trustee, or other official who is authorized to sign for the organization, or your authorized representative
- One of the following declarations:
Under penalties of perjury, I declare that I examined this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts and such facts are true, correct, and complete.
For authorized representatives:
Under penalties of perjury, I declare that I prepared this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts and such facts are true, correct, and complete.
Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney.
We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't provided a basis for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.
If you don't file a protest within 30 days, you can't seek a declaratory judgment in court at a later date because the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).
Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable address:
Internal Revenue Service
EO Determinations Quality Assurance
P.O. Box 2508
Cincinnati, OH 45201
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202
You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received it.
If you agree
If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements.
You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If you have questions, you can contact the person listed at the top of this letter.
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements