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GiftLaw Note: ORG was formed as a private foundation under 509(a) of the Code.  ORG’s purpose is to organize, direct and sponsor youth football, cheerleading and pom-pom programs for youths between the ages of 5 and 14 years old. ORG generates income from registration fees, commissions from team pictures, concession fees, fundraisers, raffles, the Golf Fundraiser and a cheerleading competition. The IRS sent ORG a letter stating, “Our records indicate this organization is not a private foundation within the meaning of section 509(a) because it is classified under section 170(b)(1)(A)(vi).”
 
According to Section 509(a)(2), an organization that receives more than one-third of its support from the general public does not qualify as a private foundation.  For an organization to be excluded from private foundation status under 509(a)(2), it must normally receive more than one-third of its support from any combination of gifts, grants, contributions, membership fees and gross receipts from permitted sources.  Also, it must not receive more than one-third of its support from the combination of gross investment income and unrelated business taxable income. Here, the Service determined that ORG received more than 33 1/3% of its support from the general public.  Therefore, ORG qualifies as an organization described in Section 509(a)(2) and is not a private foundation.
 
December 13, 2013    PLR 201349020     IRS Modifies Foundation’s Classification
 
12/06/2013 (05/01/2012)

Dear * * *

We have enclosed a copy of our report of examination explaining why we propose modifying your foundation status under section 509(a) of the Internal Revenue Code (Code).

Your exempt status under section 501(c)(3) of the Code is still in effect.

If you accept our findings, take no further action. We will issue a final letter modifying your foundation status.

If you do not agree with our proposed modification of your foundation status, you may provide additional information that you would like to have considered, or you may submit a written appeal. The enclosed Publication 3498, The Examination Process, and Publication 892, Exempt Organization 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.

If you request a conference with Appeals, you must submit a written protest within 30 days from the date of this letter. 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. 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 letter.

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.
ISSUES

Whether ORG's is excluded from private foundation status because they are a publicly supported organization described in Section 509(a)(2).
FACTS

ORG organize, direct and sponsor youth football, cheerleading and pom program for youths between the ages of 5 years old through 14 years old. They provide guidance, coaching, uniforms, referees and equipments relating to the above sports.

ORG generate their income from the following sources:
  • Registrations Fees (Football, Cheerleading and Pom)
  • Commissions from team pictures
  • Concession Fees
  • Fundraisers
  • Raffles
  • Golf Fundraiser
  • Cheerleading Competition

ORG received a letter from the Service dated February 09, 20XX, stating that "Our records indicate this organization is not a private foundation within the meaning of section 509(a) because you are described in section(s) 509(a)(1) and 170(b)(1)(A)(vi).

ORG also received another letter from the Service dated April 20, 20XX, stating that "Our records indicate this organization is not a private foundation within the meaning of section 509(a) because it is classified under section(s) 170(b)(1)(A)(vi).

For the 4-year period, ORG received the following support: Membership Fees, Gross Receipts, Gross Investment Income, Total Support, Less Gross Receipts, Public Support %.

LAW

509(a) of the Code provides that the term "private foundation" means a domestic or foreign organization described in section 501(c)(3) other than an organization described in section 170(b)(1)(A) other than in clauses (vii) and (viii).

Section IRC 170(b)(1)(A)(vi) of the Code describes an organization that normally receives a substantial part of its support (exclusively of income receive in the exercise or performance by such organization its charitable, educational or other purpose of function constituting the basis of its exemption under section 501(a) from a governmental unit or from direct or indirect contributions from the general public.

An organization is publicly supported so as to qualify under IRC 170(b)(1)(A)(vi) if it "normally" receives at least 33 1/3% of its total "support" from governmental units, direct or indirect contributions from the general public, or a combination of these sources.

An organization that does not meet the 33 1/3% test may nonetheless be considered publicly supported if:

a. it "normally" receives a substantial part of its support from governmental units, the general public or a combination of these sources and

b. it satisfies a number of other factors that collectively evidence continuing public involvement in its affairs.

Where an organization receives at least 10% but less than 33 1/3% of its total support form contributions made directly or indirectly by the general public or form governmental units, Reg. 1. 170A-9(e)(3) provides that the Service will then look to the factors (described above) to determine whether the organization is in the nature of a publicly supported organization. An organization with at least 10% public support that also shows sufficient characteristics indicating it is in the nature of a publicly supported organization my qualify, as an organization described in IRC 170(b)(1)(A)(vi).

The regulations make clear that the 10% requirement is minimal so that an organization without this minimal amount of public support is not described in IRC 170(b)(1)(A)(vi).

This computation should not be considered if the organization is primarily supported on gross receipts from related activities. Regulations 1.170A-9(e)(7)(ii).

For an organization to be excluded from private foundation status as an organization described in IRC 509(a)(2), it must normally receive more than one-third of its support from any combination of gifts, grants, contributions, membership fees, and gross receipts from permitted sources, and not more than one-third of its support from gross investment income and the excess of the amount of unrelated business taxable income over the amount of taxes imposed by IRC 511.

a. Reg. 1.509(a)-3(a)(4) states that the one-third support test and the one-third gross investment and unrelated income test are designed to insure that an organization that is excluded from private foundation status under IRC 509(a)(2) is responsive to the general public rather than to a limited number of donors or other persons.

509(a)(2) is an organization which normally receives more than one-third of its support in each taxable year from any combination of gifts, grants, contributions, or membership fees, and gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business, not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year, from persons other than disqualified persons with respect to the organization, from governmental units described in or from organizations described in section 170(b)(1)(A) and, normally receives not more than one-third of its support in each taxable year from the sum of gross investment income and the excess (if any) of the amount of the unrelated business taxable income over the amount of the tax imposed by section 511.

The 509(a)(2) exclusion requires a two-part test, the first test is the one-third support test.

In computing whether an organization meets the one-third support test of IRC 509(a)(2)(A),

a. the organization's total support (as defined in IRC 509(d)) is the denominator of the fraction.

b. The numerator is the amount of support received (subject to certain limitations) from any combination of gifts, grants, contributions and membership fees, and gross receipts from admissions, sales, performance of services, or furnishing of facilities related to an activity which is not an unrelated trade or business. Reg. 1.509(a)-3(a)(2).
 
GOVERNMENT POSITION

ORG's $* * * in public support constitutes revenue from registration fees, gross receipts and fundraising. This amount is * * *% percent of its total support less investment income.

It is the Government's position that since * * *% percent public support is greater than the required * * *% percent public support, the organization qualifies as an organization described in section 509(a)(2) of the code. The organization's foundation status should be modified from an organization described in section 509(a)(1) and 170(b)(1)(A)(vi) of the code to an organization described in section 509(a)(2) of the code.

The effective date of this modification will be January 1, 20XX.

TAXPAYER POSITION

The taxpayer appears to be in agreement that they qualifies as a publicly supported organization under Section 509(a)(2) because they completed for the tax period ending December 31, 20XX and 20XX, Forms 990 and 990-EZ Schedule A Part 1, checked Line 9 "An organization that normally receives more than * * *% of its support from contributions, membership fees, and gross receipts from activities related to it exempt functions subject to certain exceptions, and no more than * * *% of its support from gross investment incomes and unrelated business taxable income from business" and Part III Support Schedule for Organization described in Section 509(a)(2).

CONCLUSION

ORG foundation status should be modified from a publicly supported organization described in section IRC 509(a)(1)-170(b)(1)(A)(vi) of the code a publicly supported organization described in section to IRC 509(a)(2).

"Please note that this is not a final report. The draft report is subject to review and modification by our Mandatory Review staff. You will receive the final report from Mandatory Review"
 

Related Topics On IRS Modifies Foundation’s Classification

7.2.8  Reorganization and Termination:    As circumstances change, a private foundation may need or want to reorganize by converting to a public charity, converting to a taxable organization, merging with another private foundation, splitting into two or more private foundations or terminating by distributing its assets to a public charity. Specific rules apply when any of these reorganizations occur.



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