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Saturday, May 4, 2024
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GiftLaw Note:
FDN-1 and FDN-2 founded ORG with the exempt purpose of providing traditional and alternative medical services at little to no cost. FDN-1 and FDN-2 also created CO-1, a for-profit medical corporation.
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March 8, 2013 PLR 201309015 Medical Research Group Loses Exemption
3/1/2013 (10/12/2012)
ISSUES
Issue 1 -- Does ORG continue to qualify for exemption under Internal Revenue Code section 501(c)(3)?
Issue 2 -- Does inurement exist in the form of interest free and unpaid loans?
FACTS
The ORG (ORG) was founded in June 19XX by FDN-1 and FDN-2, husband and wife. The IRS issued a determination letter, dated November 11, 19XX. The letter recognized ORG as a tax exempt organization under Internal Revenue Code (Code) section 501(c)(3). The letter also recognized ORG as an organization described in Code section 170(b)(1)(A)(vi).
ORG's exempt purpose as stated in its articles of incorporation is as follows.
ORG is a non-profit, non stock corporation, organized exclusively and solely for a combination of educational and charitable purposes; its basic and primary purpose being to provide complete facilities for the study and provision of the optimum benefit to human life, both mental and physical; including thereunder the study and treatment of illness, their cause, prevention and cure; the study of and provision for the needs of the human body, both physical and mental including thereunder nutritional, recreational, spiritual, educational, philosophical, and other needs; the providing of, building, operation of, hospitals, schools, farms, recreational and other facilities necessary to the above purposes, and the cooperative joining with or working with and in conjunction with other corporations, associations, groups, individuals having or controlling the above facilities or any of them.
FDN-1 stated that ORG's primary exempt purpose was to provide traditional and alternative medical services at low or no cost to residents of City, State. FDN-1 & FDN-2 utilized traditional medical practices and alternative homeopathic remedies. They used the same techniques as traditional doctors and, with patients' cooperation, recommended alternative medical solutions. It is unclear from the testimony provided whether ORG ever operated its own medical clinic. Tax records for ORG from the period 19XX through 19XX have not been made available.
In 19XX, FDN-1 & FDN-2 created CO-1 (CO-1), a for-profit medical corporation. FDN-1 & FDN-2, along with other doctors, provided medical services through CO-1 and were paid wages by same. This for-profit clinic provided patient treatment for the years 19XX through 20XX. During this same period of time, ORG was dedicated solely to the collection and compilation of medical data produced by the patients of CO-1.
Under the banner of ORG, FDN-1 & FDN-2 compiled patients' response data to both the traditional and homeopathic treatment. ORG's ultimate (but never realized) goal is to have the data published in a book. From its inception in 19XX to the present, no agents, publishers or interested parties have been identified as supporting the publication of this material.
No evidence has been provided that ORG was ever a publicly supported organization. Since the formation of CO-1 in 19XX, ORG's primary source of funds has either been the direct donations of FDN-1 & FDN-2, investment income, or the sale of investments or other assets held by the organization. It appears that family members have been the only employees of the organization since its formation.
In the final years of CO-1, FDN-1 & FDN-2 devoted half days to ORG. FDN-1 stated that in 20XX she and FDN-2 were going to sell their portion of CO-1 to other doctors, but at the last minute the purchasing doctors changed their minds and CO-1 was closed instead (sometime in 20XX). Property owned by ORG was sold in January 20XX at a profit of almost $* * *.
FDN-2 died in 20XX. Prior to the sale of ORG's real estate, FDN-1 & FDN-2 and their son, RA-1 (RA-1), received modest compensation from ORG. After the windfall from the real estate sale, their compensation increased significantly. FDN-2's compensation went from $* * * in 20XX to $* * * in 20XX. RA-1's compensation was $* * * in 20XX, up to $* * * in 20XX, and $* * * in 20XX.
Prior to his death, FDN-2 was the person primarily in charge of compiling and organizing the medical data intended for publication. After his death, FDN-1 and RA-1 were tasked with translating and organizing the data into a practical format to publish a book. The data is stored in document boxes and fills an 8 by 10 foot storage room. The data consists of the unorganized, hand written notes of FDN-2. FDN-1 estimated that approximately * * *% of the collected material has been reviewed. She stated that only she and RA-1 can decipher the handwritten notes. RA-1 is not a medical doctor, but does hold a Ph.D in chemistry. He does not hold himself out to the public as an author or specialist in the field of naturopathic medicine, and thus far has not published any of his late father's material
Ten document boxes were observed by the Agent while touring the premises. There were also approximately 120 reel-to-reel audio tapes, purportedly holding two hours of recorded lectures which FDN-2 used as a reference in his work. Because of her husband's death, and her own medical issues, FDN-1 does not know when the transcription work will be finished. Purportedly, she and RA-1 dedicate approximately four hours a day to reviewing the material.
Although FDN-2 may have lectured and published miscellaneous articles during his lifetime, no serious works of published medical information were provided as evidence of the importance or validity of the collected work. Due to the age of the collected data and lack of independent review, the marketability of the material has yet to be established.
FDN-1 and RA-1 are listed as President and Secretary/Treasurer, respectively, on ORG'S 20XX through 20XX Forms 990. FDN-1 has served as ORG's President since 20XX and has served on the Board since ORG's inception. RA-1 has been actively involved with ORG since 20XX and served as Secretary and Treasurer for four years. FDN-1 performs all of ORG's bookkeeping. She writes and signs checks and prepares the checkbook reconciliation. She provides a handwritten ledger to the CPA which is used to prepare the Forms 990.
ORG's 20XX through 20XX Forms 990, Schedule A, state that ORG qualifies for public charity status because it is a medical research organization operated in conjunction with a hospital described in Section 170(b)(1)(A)(iii). The hospital identified is CO-1. This information is contradicted by the fact that CO-1 was a small clinic, not a hospital, and ceased to provide medical treatment sometime in 20XX.
Loans to RA-1
ORG's records show that it loaned RA-1 a total of $* * * in ten separate loans from July 1, 20XX through June 30, 20XX. RA-1 stated that loan documents do not exist, and the loans were treated as short term loans with no interest. As of June 30, 20XX he had repaid $* * * of the loans, with the last payment made on October 15, 20XX. The table below provides loan and payment details.
| Loans to RA-1 |
| Date | Ck# | Amount | Payment | Balance |
| 07/19/XX | | | | |
| 08/06/XX | | | | |
| 08/21/XX | | | | |
| 09/26/XX | Payment | | | |
| 10/15/XX | Payment | | | |
| 12/01/XX | Payment | | | |
| 04/18/XX | | | | |
| 04/25/XX | | | | |
| 05/13/XX | Payment | | | |
| 08/02/XX | | | | |
| 09/02/XX | | | | |
| 10/01/XX | | | | |
| 10/26/XX | Payment | | | |
| 03/01/XX | | | | |
| 05/03/XX | | | | |
| 06/25/XX | Payment | | | |
| 10/15/XX | Payment | | | |
| | Totals | | | |
LAW
Section 501(c)(3) of the Internal Revenue Code (IRC) exempts from federal income tax organizations organized and operated exclusively for charitable, educational, and other exempt purposes, provided that no part of the organization's net earnings inures to the benefit of any private shareholder or individual.
Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations (Treas. Reg.) 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.
Treas. Reg. § 1.501(c)(3)-1(c)(1) of the regulations 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.
Treas. Reg. § 1.501(c)(3)-1(d)(ii) of the regulations (Treas. Reg.) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Thus, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.
An organization must establish that it serves a public rather than a private interest and "that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests." Income Tax Regulation section 1.501(c)(3)-1(d)(1)(ii). Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978); American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). Private benefits include an "advantage; profit; fruit; privilege; gain; [or] interest." Retired Teachers Legal Fund v. Commissioner, 78 T.C. 280, 286 (1982).
TAXPAYER'S POSITION
The taxpayer's representative provided a letter dated August 8, 20XX, stating that ORG is engaged in the study and research of traditional and alternative medicine, and that no intentional personal inurement exists.
GOVERNMENT'S POSITION AND CONCLUSION
ORG's tax exempt status should be revoked because it is not operated for an exempt purpose and inurement exists.
Issue 1 -- ORG does not qualify for exemption because it is not operated exclusively for an exempt purpose.
ORG did not establish that its present activity -- transcription of almost 40 years of accumulated medical data -- qualifies as an exempt purpose as defined in Regulations 1.501(c)(3)-1(d). ORG fails the operational test for an exempt organization for the years under examination.
Issue 2 -- ORG's earnings inured to the benefit of RA-1 in the form of $* * * of interest-free loans, $* * * in unpaid loans, and $* * * of unpaid interest on the same loans.
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