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GiftLaw Note: ORG operates as a private foundation under Sections 501(c)(3) and 509(a) of the Code. ORG's purpose is to make grants to one or more charitable organizations. ORG's trustee quitclaimed a residential piece of real estate to the foundation but did not transfer the mortgage on the property. ORG's trustee continues to live in the residence and pay the mortgage payment to the lender. Trustee admitted as part of an interview that all expenses on its Form 990-PF were personal expenses. The foundation has not made any grants to charitable organizations from its inception until the end of the examination period.

Section 4941(d)(1)(D) provides that self-dealing means any direct or indirect payment of compensation by a private foundation to a disqualified person. Section 4941(a)(1) states that a disqualified person includes a person who is a substantial contributor to the foundation or a foundation manager. Section 4946(b)(1) states that a foundation manager is an officer, director, or trustee of a foundation. Here, the Service found that Trustee was a disqualified person engaged in self-dealing. Trustee was ORG's trustee and only contributor. He controlled daily operations and had complete signatory authority in billing approval. Further, Trustee admitted that all expenses on Form 990-PF were personal. As a result, the Service revoked ORG's exempt status.
November 1, 2013 PLR 201309018 IRS Revokes Foundation's Exempt Status
3/1/2013 (10/11/2012)

ISSUES


Whether ORG (ORG) continues to qualify for exemption under Section 501(c)(3) of the Internal Revenue Code?

Whether Trustee-1 (Trustee) is a disqualified person, as defined by section 4946(a)(1)(A) of the Code, with respect to ORG?

Whether the use of ORG funds by Trustee is an act of self-dealing as defined by section 4941(d)(1)(D)?

FACTS


ORG (ORG) was issued a final determination letter on September 26, 20XX. It stated that ORG was a private foundation within the meaning of § 501(c)(3) and § 509(a) and required to file a Form 990-PF annually.

ORG's Form 1023 stated that the foundation was formed on March 10, 20XX. This is also the date on the trust agreement. The stated purpose of the foundation was to make grants to one or more organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code.

ORG's trustee Quit Claimed a residential piece of real estate, located at Address, City, State, to the foundation on April 30, 20XX.

ORG's trustee did not transfer the mortgage debt on the property located at Address, City, State, to the foundation at the time of the Quit Clam Deed transfer. ORG's trustee continues to live in the residence and pay the mortgage payments to the lender.

Trustee admitted in the interview on October 11, 20XX that all expenses on Form 990-PF were personal expenses.

The foundation had not made any grants to charitable organizations from its inception to the end of the examination period.

Examination of ORG's books and records for the periods under examination revealed the following withdrawal information:

Trustee-1 had self-dealing transactions with ORG totaling $$* * *, $$* * * in 20XX and $$* * * in 20XX.

LAW


Code § 501(a) provides that an organization described in § 501(c)(3) is exempt from income tax. Code § 501(c)(3) exempts from federal income tax corporations organized and operated exclusively for charitable, educational, and other purposes, provided that no part of the net earnings inure to the benefit of any private shareholder or individual. The term charitable includes relief of the poor and distressed. Federal Tax Regulations ("Regulations") § 1.501(c)(3)-1(d)(2).

Regulations § 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in Code § 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.

Regulations § 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in Code § 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. The existence of a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the operational test. Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945).

Regulations § 1.501(c)(3)-1(c)(2) provides that the operational test is not satisfied where any part of the organization's earnings inure to the benefit of private shareholders or individuals, and where the organization serves a private benefit rather than public interests.

IRC § 4941(d)(1)(D) states that for purposes of this section, the term "self-dealing" means any direct or indirect payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person.

IRC § 4946(a)(1) states that for purposes of this subchapter, the term "disqualified person" means, with respect to a private foundation, a person who is (A) a substantial contributor to the foundation, or (B) a foundation manager (within the meaning of subsection (b)(1)),

IRC § 4946(b)(1) defines the term "foundation manager" as an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation).

GOVERNMENT'S POSITION


An applicable tax-exempt organization.

ORG was granted exemption under Section 501(c)(3) and Section 509(a) of the Internal Revenue Code, on September 26, 20XX, as a private foundation. As such, ORG is an applicable tax exempt organization.

Disqualified Person.

For a person to be considered a "disqualified person" he/she must have been a substantial contributor to the foundation (IRC § 4946(a)(1)(A)) or a foundation manager within the meaning of IRC § 4946(b)(1).

Trustee-1 is the Trustee of ORG and its only contributor. For the years under examination, Trustee-1 had control of the daily operations of the foundation, including single signatory authority in billing approval. As the sole contributor to ORG and the person having complete operational control of the operations of the organization for the years under examination, Trustee-1 meets the definition of a disqualified person under IRC § 4946(a)(1)(A) and IRC § 4946(b)(1).

Self Dealing

The Trustee admitted in interview on October 11, 20XX that all expenses on Form 990-PF were personal. (4941(d)(1)(D)).

CONCLUSIONS


The stated purpose of the foundation was to make grants to one or more organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code. ORG has not made any grants to charitable organizations from its inception to the end of the examination period.

Trustee-1, Trustee of ORG, was a disqualified person with respect to ORG for the periods under examination. Trustee-1 had transactions with ORG that met the definition of self-dealing that made her liable for tax under IRC § 4941.

Trustee-1, Trustee of ORG, admitted in interview on October 11, 20XX that all expenses on Form 990-PF were personal. Therefore, all payments made by the foundation were for the private benefit of the trustee and not for operations exclusively for one or more exempt purposes. This payments to the trustee, Trustee-1, causes ORG to fail to meet the operational test. By failing the operational test ORG is not exempt (Regulations § 1.501(c)(3)-1(a)(1)).

ORG should be revoked back to its formation, March 10, 20XX.

Related Topics On IRS Revokes Foundation's Exempt Status

7.2.1  Classification as a Private Foundation:    All Sec. 501(c)(3) charities are classified either as private foundations or as public charities. Public charities tend to be the traditional "charitable" organizations such as schools, hospitals, churches, museums and organizations that work with broad segments of the public. Typically, a single wealthy family forms a private foundation as a charity that invests money and uses it to make grants to other charities.



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