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Saturday, May 4, 2024
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GiftLaw Pro |
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GiftLaw Note:
Organization is tax-exempt under Sec. 501(c)(3) and was formed immediately following Hurricane Katrina in 2005. Organization's administrative file states it was formed to assist women. It planned to help victims of Hurricane Katrina through various development programs. Organization's pamphlet states that it was formed to bring business women together from diverse occupations and lifestyles and provide them with opportunities to help themselves and others. Organization's website identified four programs: a mentorship program, Women Daily Health Awareness, Back to Work, Rainbow Kids and Katrina Rita Employ Now. Organization assisted with job training and job placement, training and retention. Its activities include fundraising through party/mixer networking, bake sales, car washes, golf tournaments and some donations. Organization charges annual membership fees and requires members to have a baccalaureate degree from an accredited university, at least six years professional work experience or be a business owner meeting a required minimum gross annual revenue. The website provides membership information, benefits information, business partners and a business directory for members.
The Service questioned whether Organization qualifies for Sec. 501(c)(3) exemption because it is not organized exclusively for an exempt purpose. Sec. 501(c)(3) provides that exempt corporations or foundations must be organized and operated exclusively for charitable or educational purposes and no part of the net earnings may inure to the benefit of any individual. In addition, Reg. 1.503(c)(3)-1 states that organizations are organized and operated exclusively for charitable or educational purposes if the organizational and operational tests are satisfied. The organizational test requires that the organization's articles provide that it is formed for one or more Sec. 501(c)(3) exempt purposes and is not expressly permitted to carry on, other than insubstantially, activities that are not in furtherance of one or more exempt purposes. In this case, Organization existed for business networking purpose. It failed the "exclusive charitable purposes" test and its exemption was revoked.
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Dear * * *:
This is a final determination regarding your exempt status under section 501(c)(3) of the Internal Revenue Code (IRC). Recognition of your exemption from Federal income tax as an organization described in Internal Revenue Code section 501(c)(3) is hereby revoked effective January 1, 20XX because it is determined that you are not operated exclusively for an exempt purpose.
IRC 501(c)(3) exempts from taxation organizations which are organized and operated exclusively for charitable or educational purposes, no part of the net earnings of which inure 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 and which do not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office.
We have determined that you are not operating exclusively for any charitable purpose, educational purpose, or any other exempt purpose. Our examination reveals that you are not engaged primarily in activities which accomplish charitable, educational, or other exempt purposes as required by Treas. Reg. 1.501(c)(3)-1(c)(1). Your activities more than insubstantially furthered non-exempt purposes.
We are revoking your exemption from Federal income tax as an organization described in section 501(c)(3) of the Internal Revenue Code effective January 1, 20XX.
Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code.
You are required to file Federal income tax returns on Form 1120. These returns should be filed with the appropriate Service Center for all years beginning January 1, 20XX.
Processing of income tax returns and assessment of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.
If you decide to contest this determination in court, you must file a pleading seeking a declaratory judgment in the United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia before the 91st day after the date this final determination was mailed to you. Please contact the clerk of the appropriate court for rules regarding filing pleadings for declaratory judgments and refer to the enclosed Publication 892. You may write to these courts at the following addresses:
You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call too-free and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at * * *.
We will notify the appropriate State Officials of this action, as required by section 6104(c) of the Internal Revenue Code.
If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.
Sincerely Yours,
Vicki L. Hansen, Acting Director, EO Examinations
Dear * * *:
We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.
If you accept our findings, take no further action. We will issue a final revocation letter.
If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office consideration within 30 days from the date of this letter to protest our decision. Your protest should include a statement of the facts, the applicable law, and arguments in support of your position.
An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed issues, explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.
You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue a determination letter to you based on technical advice, no further administrative appeal is available to you within the IRS regarding the issue that was the subject of the technical advice.
If we do not hear from you within 30 days from the date of this letter, we will process your case based on the recommendations shown in the report of examination. If you do not protest this proposed determination within 30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for the District of Columbia determines that the organization involved has exhausted its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter. We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the Code.
You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:
If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.
Thank you for your cooperation.
Sincerely,
Marsha Ramirez, Director, EO Examinations
ISSUE
1) Whether ORG qualifies for exemption under Section 501(c)(3) of the Internal Revenue Code?
2) Whether ORG should file exemption under 501(c)(6)?
FACTS
ORG was established immediately following Hurricane Katrina in 2005. According to the organization's administrative file, the organization was formed to help "build women". The organization also stated that it would assist victims of Hurricane Katrina, specifically women through various development programs.
According to the president, President, the organization was formed to assist women, families and communities. The purpose as stated in the organization's pamphlet is to "bring together business women of diverse occupations and lifestyles and provide them with the opportunities to help themselves and others grow personally and professionally through leadership, education, networking support, and recognition". Following Hurricane Katrina, the organization assisted with CO-1, job placement, training and job retention. The organization's normal activities include networking parties/mixers, bake sales, car washes and golf tournaments to raise funds. The organization also occasionally receives donations. There are a total of * * * members and membership fees are $* * * annually. Membership requirements stated that all members must meet one of the following: Baccalaureate or higher degree from an accredited university, individual with at least 6 years of professional work experience, individual who is a business owner and generated a minimum of $* * * gross annual revenues, and associate members (must work along committee chair for 6 months to be request and be considered for full membership).
According to the organization's website, the organization was clearly formed for the common interest of women business owners and networking in the greater City area. The website provides information regarding membership, membership benefits, partners (business partnership) and business directory for members. The website also listed 4 activities that the organization engages in: Team PWN Mentorship program. Women Daily Health Awareness, Back to Work, Rainbow kids and Katrina Rita Employ Now.
LAW
IRC 501(c)(3) states that 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.
TAX-REGS, § 1.501(c)(3)-1 states that organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals
(a) Organizational and operational tests
(1) In order to be exempt as an organization described in section 501(c)(3), 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.
(2) The term "exempt purpose or purposes", as used in this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section.
(b) Organizational test
(1) In general
(i) An organization is organized exclusively for one or more exempt purposes only if its articles of organization (referred to in this section as its "articles") as defined in subparagraph (2) of this paragraph:
(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.
(ii) In meeting the organizational test, the organization's purposes, as stated in its articles, may be as broad as, or more specific than, the purposes stated in section 501(c)(3). Therefore, an organization which, by the terms of its articles, is formed 'for literary and scientific purposes within the meaning of section 501(c)(3) of the Code shall, if it otherwise meets the requirements in this paragraph, be considered to have met the organizational test. Similarly, articles stating that the organization is created solely "to receive contributions and pay them over to organizations which are described in section 501(c)(3) and exempt from taxation under section 501(a)" are sufficient for purposes of the organizational test. Moreover, it is sufficient if the articles set forth the purpose of the organization to be the operation of a school for adult education and describe in detail the manner of the operation of such school. In addition, if the articles state that the organization is formed for "charitable purposes", such articles ordinarily shall be sufficient for purposes of the organizational test (see subparagraph (5) of this paragraph for rules relating to construction of terms).
(iii) An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in section 501(c)(3).
Thus, an organization that is empowered by its articles "to engage in a manufacturing business", or "to engage in the operation of a social club" does not meet the organizational test regardless of the fact that its articles may state that such organization is created "for charitable purposes within the meaning of section 501(c)(3) of the Code."
(iv) In no case shall an organization be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in section 501(c)(3). The fact that the actual operations of such an organization have been exclusively in furtherance of one or more exempt purposes shall not be sufficient to permit the organization to meet the organizational test. Similarly, such an organization will not meet the organizational test as a result of statements or other evidence that the members thereof intend to operate only in furtherance of one or more exempt purposes.
Revenue Ruling 80-287
A nonprofit lawyer referral service arranges at the request of any member of the public an initial half-hour appointment for a nominal charge with a lawyer whose name is on an approved list maintained by the organization. Any further contact between the lawyer and the client is arranged without the involvement of the organization. The referral service is not exempt under section 501(c)(3) of the Code, but is exempt as a business league under section 501(c)(6).
LAW
Internal Revenue Code Section 501(c)(6) states that business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players) not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
Revenue Ruling 76-400
A nonprofit membership organization of business and professional women that promotes acceptance of women in business and the professions qualifies for exemption under Code section 501(c)(6). The organization was formed as a membership organization of business and professional women to promote the acceptance of women in business and the professions.
GOVERNMENT'S POSITION
ORG primary purpose is clearly a business league that emphasizes education and business/professional development. Though the organization does participate in helping charitable classes such as Katrina Victims and children, it is not the organization's primary purpose. The primary purpose is for women business owners to grow and network with other business owners in the City area. The organization exhibits several characteristics of a business league, such as membership, membership directory, sponsors and development seminars.
Based on the facts and circumstances of the organization, we recommend that the organization be revoked for tax year ending December 31, 20XX. We also recommend that the organization apply for exemption under 501(c)(6).
TAXPAYER'S POSITION
The taxpayer's position is not known at this time.
CONCLUSION
As a result of our examination period ended December 31, 20XX, we have determined that your organization does not qualify as an exempt organization under IRC section 501(c)(3), We recommend ORG fill out Form 1024 and apply for exemption under 501(c)(6), A completed 1024 Application along with the appropriate fee should be mailed to:
Address
City, XYZ
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