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Monday January 18, 2021

Private Letter Ruling

Exempt Status of Foundation for Foster Children Revoked

GiftLaw Note:
Foundation was incorporated as a Sec. 501(c)(3) nonprofit with a stated purpose of providing opportunities to foster children. This purpose is met by sponsoring children and encouraging fitness, developing positive self-esteem, goals and healthy relationships. To maintain the sponsorship, the foster children must meet a minimum number of community service hours and educational requirements. On Foundation's 1023EZ, the same person was listed as President, Secretary and Treasurer. The IRS examined Foundation's bank statements and found many of its expenditures to be personal in nature.

An organization may be tax-exempt under Sec. 501(c)(3) if it is 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, provided that no part of its net earnings inures to the benefit of any private shareholder or individual. Under Reg. 1.501(c)(3)-1(a)(1), an organization must be organized and operated exclusively for one of the above purposes. Regulation 1.501(c)(3)-1(c)(1) states that an organization will fail the operational test if more than an insubstantial part of its activities are not in furtherance of an exempt purpose. Under Reg. 1.501(c)(3)-1(d)(1)(ii), an organization must further public purposes rather than private interests. Under Sec. 6033(a)(1), each entity that is exempt under Sec. 501(a) is required to file an annual return stating items of gross income, receipts and disbursements. The Service determined that Foundation failed to make its annual reports and its President and Treasurer used its funds for personal uses. Therefore, the Service revoked Foundation's exempt status.
PLR 202052036 Exempt Status of Foundation for Foster Children Revoked

Form 886-A Explanation of Items

Issues


Should * * * tax-exempt status under section 501(c)(3) of the Internal Revenue Code be revoked because it failed to demonstrate that it is operates for a charitable purpose?

Should * * * tax-exempt status be revoked because it operates for the private benefit of the President and Founder of the organization?

Facts


* * * (* * *) was incorporated as a nonprofit corporation in the state of * * * on * * *. Its purpose is to provide opportunities for foster children by paying/sponsoring for * * * to encourage fitness and develop positive self-esteem, goals, and healthy relationships. The Foundation requires these foster children to meet a minimum number of community service hours to meet monthly and educational requirements to maintain their sponsorship.

The Internal Revenue Service (IRS) granted * * * exempt status under IRC 501(c)(3) in a letter dated April 20XX. The determination letter also noted that * * * was further classified under IRC 509(a)(2) and 170(b)(1)(A)(vi). The effective date of this exemption is the date of incorporation.

Article 4.3 of * * * Bylaws names * * * the Chair of the Board at each annual meeting.

Article 5.3 states that "any time this Corporation compensates its President or Treasurer, the Corporation shall have a Compensation Committee consisting of at least three Directors and exclusively of Directors."

Section 6.5 Resignation of Officers in the bylaws states in part that "Any Officer may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary of the Corporation.

* * * filed Form 1023EZ with the IRS, and list * * * as President, * * * as Secretary, and as Treasurer.

On February 26, 20XX, during a conversation with * * *-officer, * * * stated that * * * was not the Treasurer but the Secretary for a short time. * * * stated that she did not have access to * * * checking account nor the authority to approve expenditures. * * * stated that * * * was no longer operating. I asked * * * if * * * provided a written letter resigning from * * * position with the organization, and * * * response was no.

First contact was made by phone with * * *, President on February 26, 20XX after a year of extensive research, mailing letters and phone calls. Agent advised President that an audit letter was mailed to the address that * * * presently resides, and that it was never returned by postmaster. * * * stated that * * * had not received the audit letter.

* * *, President states in a phone call on February 26, 20XX that the organization was no longer operational, and it had ceased operations in mid-20XX.

In a phone call on April 6, 20XX, * * *, President confirmed receipt of my audit letter. Stated that * * * did not have the organization's bank statements, and that * * * would not provide them to * * * without a current account.

On April 16, 20XX, * * * provided the following documents: * * * Articles of Incorporation, Form 1023EZ, Corporate Profile, Bylaws, Minutes of 1st Meeting, Mission Statement * * * Ambassador Program & Job Requirements, Athlete application for child & commitment statement, Team Meetings — 2/12/XX, 2/26/XX, 4/21/XX, 5/7/XX, 6/11/XX, 7/16/XX.

A summons was issued by Agent * * * to * * *, and a signed certified receipt was received on 4/23/20XX to provide bank statements for * * * for fiscal years ended December 31, 20XX and December 31, 20XX.

Upon receipt and review of * * * bank statements, it is apparent that many of the expenditures are personal in nature. Exhibit A for fiscal years ended December 31, 20XX and December 31,20XX list the vendors, services rendered and total amounts for each year. For FYE 20XX total personal expenses for * * * was $0. For FYE 20XX total personal expenses for * * * was $0. No records were provided to substantiate exempt business purpose. These expenditures were determined by Agent * * * to be excess benefit transactions.

Bank Statements for fiscal year ended December 31, 20XX and December 31, 2016 reports ATM cash withdrawals of $0 and $0, respectively. (Exhibit B) No records were provided to substantiate exempt business purpose.

Bank Statements for fiscal year ended December 31, 20XX and December 31, 20XX reports electronic withdrawals for online payroll payments transmitted to account numbers but no names are associated with these withdrawals. (Exhibit C) For FYE 20XX four (4) Individuals were paid at least $0. For FYE 20XX, one (1) individual was paid at least $0. Agent's research reports that no W2 or F1099's were filed with the IRS for FYE 20XX and FYE 20XX. No records were provided to substantiate exempt business purpose. The lack of substantiation to support that these expenditures were for tax exempt purposes further supports our position for revocation.

Bank Statements for FYE 20XX report checks written to one individual who was paid $0 for coaching. Bank Statements for FYE 20XXreport checks written to one company who was paid $0 for rent. Refer to Exhibit D for both years. Agent's research reports that no F1099 or W2 were filed with the IRS for FYE 20XX and FYE 20XX.

* * * provided a "Business Signature Card" that shows that * * * is the only signor on the checking account for * * * was issued IDR #3 on 8/24/20XX and IDR#4 on 03/26/XX both these requests included copies of all bank statements for FYE 20XX and FYE 20XX. The organization has not responded to my request to provide supporting documents (receipt, invoices & bills) for expenditures reported on bank statements.

Agent has left numerous messages for * * *, and * * * has not responded to my phone calls. Nor will schedule an audit with me to provide supporting documentation of financial records.

Law


Internal Revenue Code (Code) Section 501(c)(3) exempts from federal income tax organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, provided that no part of the organization's net earnings inures to the benefit of any private shareholder or individual.

Federal Tax Regulations (Regulations) Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization described in section 501(c)(3) of the Code, the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section.

Regulations 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.

Regulations Section 1.501(c)(3)-1(d)(1)(ii) provides that to meet the operational test, an organization must be engaged in activities furthering "public" purposes rather than private interests. It must not be operated for the benefit of designated individuals or the persons who created it.

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time prescribe.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe.

Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that every organization exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511 on its unrelated business income must keep such permanent books or accounts or records, including inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters required to be shown by such person in any return of such tax. Such organization shall also keep such books and records as are required to substantiate the information required by IRC § 6033.

Treas. Reg. § 1.6001-1(e) states that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees; and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law.

Treas. Reg § 1.6033-1(h)(2) provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and IRC § 6033.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of IRC § 6033 and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status.

In accordance with the above cited provisions of the Code and regulations under IRC §§ 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax.

IRC 4958(c)(1)(A) defines an excess benefit transaction as any transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to treat the benefit as payment for services.

IRC 4958(e) in part defines an applicable tax-exempt organization as any organization described in IRC 501(c)(3).

Taxpayer's Position


The Taxpayer's position is not known at this time. * * * did not response to Agent * * * requests to provide financial records to support their exempt activities for the years mentioned above.

Government's Position


Based on the above facts, * * * did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the organizational test or the operational test, it is not exempt.

In accordance with the above-cited provisions of the Code and regulations under sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status.

Using the rationale that was developed in Revenue Ruling 59-95, * * * failure to provide requested information should result in the termination of its exempt status.

Conclusion


* * * does not meet the requirements to be exempt under Code Section 501(c)(3) because it has not demonstrated that it is substantially operating for charitable purposes.

It is the IRS's position that the organization failed to meet the reporting requirements under IRC §§ 6001 and §§ 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3).

In addition, * * *, President and Treasurer of * * * used organization's funds for personal uses such as clothing, groceries, animal care, crafts, restaurants, gas, personal trainer, cosmetic surgery, cable, furniture, entertainment, alcohol and ATM Cash Withdrawals.

Based on the foregoing reasons, the organization does not qualify for exemption under section 501(c)(3), and its tax-exempt status should be revoked.

Accordingly, the organization's exempt status is revoked effective January 1, 20XX.

Published January 1, 2021

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