IRS Revokes Organization's Exempt Status

Person to Contact: * * *

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal Revenue Code (the "Code"). It is determined that you do not qualify as exempt from Federal income tax under section 501(c)(3) of the Code effective January 1, xxxx.

Our adverse determination was made for the following reason(s):

You are required to file Federal income tax returns on Forms 1120. File your return with the appropriate Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and information please visit www.irs.gov.

If you were a private foundation as of the effective date of the adverse determination, you are considered to be taxable private foundation until you terminate your private foundation status under section 507 of the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th Day of the fifth month after the end of your annual accounting period.

Processing of income tax returns and assessments of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Code.

We will make this letter and the proposed adverse determination letter available for public inspection under Code section 6110 after deleting certain identifying information. We have provided to you, in a separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication 892.

You also 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 matters that may not have been resolved through normal channels get prompt and proper handling. If you want Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate for more information.

If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.

After we issue the final revocation letter; we'll announce that your organization is no longer eligible for contributions deductible under section 170 of the Code.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the applicable law, and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please contact the individual identified on the first page of this letter if you are considering requesting technical advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Thank you for your cooperation.

* * * * *

 

 

 

 

ISSUES

 

Form 1023, Application for Recognition of Exemption, was filed by * * * on * * *. It states its purpose is to distribute charitable contributions to:

• Religious organizations

• Schools and Universities

• Other cultural, historical, or educational organizations.

* * * was incorporated in the State of * * * on * * * by the Department of Commerce and Consumer Affairs State of * * *. These documents state that * * * will operate exclusively for charitable, religious, educational, scientific or literary purposes. Upon dissolution, assets shall be distributed for exempt purposes described under IRC § 501(c)(3) or to federal, state, or local government. The organization will not engage in any act of self-dealing as defined in § 4941(d) of the IRC. None of the corporation's assets or net earnings will inure in whole or part to the benefit of any private individual except in furtherance of charitable, religious, educational, scientific or literary purposes.

Related Entity:

* * * incorporated in * * * as a for-profit agricultural business, founded, owned, and operated by * * * and his family. Its commercial operations are on approximately * * * farm acres and it provides full-time employment to approximately * * * people. * * * office is located at * * *.

All tenants of * * * low income agricultural housing activity are * * * employees. * * * deducts rent from its employees' payroll for the amount of the employees' rent that is due to the * * *.

No references or links to * * * were found on * * * website. * * * has no website.) * * * website, * * *, encourages fundraisers to purchase, then sell, * * * produce inventory at farmers markets. An excerpt from * * * website follows:

• An advertisement with costs for entertainment including a Giant Corn Maze, rides, and a list restaurants selling their food. The advertisement promotes "The Market Place" that "shoppers can browse". * * * Thursday * * *.

• * * *s hosts Easter Egg Hunt, with hay rides, rock climbing, inflatables and more. From 9 a.m.-5 pm., * * *. Call * * *, ext. 41. (* * *).

• While the * * * say they are concerned about the fate of the workers, they maintain they are good corporate citizens who offer corn maze and pumpkin patch events for school kids and Easter egg hunts for children in the community, during which they teach them about agriculture and farm life. (* * *.com: * * * Investigated for State and Federal Labor Violations)

* * * filed Form 990 for year * * * that reported fundraising activities. Forms 990-PF for years * * * through * * * that reported housing activities. Providing housing to * * * employees is Foundation's primary activity per filed Forms 990-PF from * * * to present. * * * states it had no activities until * * * when it reported gross receipts of $* * * as public contributions from fundraising. Receipts of $* * * were from "* * * and $* * * from "Easter Egg Hunt". After expenses of $* * *, Foundation showed a loss of $* * *. No distributions of donations or grants were made by * * *.

Housing Rental: * * * through * * * activities:

The following are chronological activities for * * * housing:

• May * * * Board Meeting:

• Foundation's board met to approve action to pursue a USDA Farm Labor Housing Loan.

• May * * * Letter of Conditions from USDA:

• This letter describes the housing as "* * * units, * * * Employees" and shows the activity as * * * Units of Section 521 Rental Assistance

  The letter states proof of IRS 501(c)(3) status is required and describes USDA § 3560.555 Eligibility requirements (a)(1) as "A broad-based (has a membership that reflects a variety of interests in the area where the housing will be located) nonprofit organization of farm workers."

• July * * * Loan Received:

• * * * received a USDA farm labor housing loan of $* * * plus rental assistance funding to provide housing for migrant farm workers.

• July * * * Building Purchased:

• * * * purchased a * * * unit building, at * * * for $* * *. At the time of * * * purchase, several of * * * employees resided at this apartment building.

  Renters of the apartment building were released as tenants with the exception of * * * employees. All tenants since purchase have been, or are related to, * * * employees.

• September * * * Management Contract:

• * * * contracted * * * to be the managing agent of the apartments (per a Management Agreement with "* * * Labor Housing"). * * * is owned and controlled by * * * has no known relationship with * * * or * * *.

• August * * * Housing Applicants:

• An * * * Labor Housing" document states all applications will be placed on a master waiting list. The managing agent will keep detailed records regarding applications on list, housed, rejected, or canceled. All applicants will be notified in writing of status. Rejections will be made in writing with appeal rights.

• April of * * * Building Repairs:

• A building permit was issued for minor repairs and re-roofing of the * * * apartments. The owner on the building permit is shown as * * *.

Revenue

For year ended December 31, * * *. * * * Form 990-PF reported the following:

 

 

 

 

For contributions of $* * *, no money was contributed to * * * on. Instead, the amount represents * * * forgiveness of a debt for expenses * * *s paid in a prior year. The expenses were incurred for * * * year event called "* * *." * * * claims that because * * * did not repay * * * for * * * expenses. * * * considered itself to have made contributions to Foundation in year * * *. The examiner found internet advertisements showing * * * as the sponsors of the event. No mention of * * * was found.

Expenses: Qualifying Distributions and Undistributed Income

Form 990-PF for tax year * * * states: Qualifying Distributions of * * * were made for "scholarships to students", and that "Contributions were only given to preselected charitable organizations." Excess distributions carried from year * * * totaled * * * $* * *

Qualifying Distributions: Scholarship to Students

The auditor requested all documents related to * * * scholarship authorization, criteria, solicitation, and recipient selection process. * * * had no supporting documentation related to their scholarships and no IRS approval of their scholarship programs. * * * stated it had no specific documented formalities and that scholarship availability was mostly communicated by word of mouth.

* * * records for the $* * * of "scholarship to students" expenditure on Form 990 show the following payments: * * * paid directly to Ms. * * *, a member of * * * pharmacy fraternity at * * *. Ms.'s school transcripts were mailed to * * *s "scholarship letter states "Your parents are very proud of you." * * * explained that * * * met a member of Ms. * * * family, who is with the state legislature, during an event hosted by the * * * Bureau. Ms. * * * learned of the scholarship at this event and she was subsequently selected to receive the scholarship based on high academic achievement. Other payments are as follows.

• $* * * letter of appreciation is addressed to * * *

• $* * * donation to a local High School.

• $* * * paid directly to * * * The * * * believes that this was paid as a replacement for a lost check paid out in prior years to assist in expenses for school books. No supporting documentation was provided.

Public records show * * * is a * * * member of the * * * House of Representatives, representing the * * * District since * * *. In * * * and * * * won re-election. State of * * * Campaign Spending Commission reports that "Committee: Friends of * * *" contributions included $* * * received on * * * from * * *. (Friends of * * *: Report On: * * * Supplemental January 1 - June * * *)

Qualifying Distributions: Excess distributions

The auditor requested records to explain the $* * * distribution carried from year * * * to the year * * *. The distributions were paid for the amounts and purposes as follows:

• Housing (Rental)

• * * * Year Sunset on the Plains Expenses

• Payments to individuals

• Payments to Schools and Church

The amount of $* * * was included in liabilities for a bill paid by * * * for * * *. No documents supported that * * * was liable for this expense.

Tax Law -- Exempt Status

Exempt Purpose

IRC § 501 provides for the exemption from federal income tax of corporations organized and operated exclusively for charitable or educational purposes, provided that no part of the net earnings inures to the benefit of any private shareholder or individual.

§ 1.501(c)(3)-1(c)(1) of the Income Tax Regulations (Regulations) provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in IRC 501(c)(3). An organization must not engage in substantial activities that fail to further an exempt purpose. In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283 (1945), the Supreme Court held that the "presence of a single . . . [nonexempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly . . . [exempt] purposes."

Regulations § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest. To meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests.

Regulations § 1.501(c)(3)-1(d)(2) defines the term "charitable" as used in § 501(c)(3) as including the relief of the poor and distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration.

Revenue Procedure 96-32, 1996-1 C.B. 717, 1996-20 I.R.S. 14. sets forth a safe harbor under which organizations that provide low-income housing will be considered charitable as described in § 501(c)(3) of the IRC because they relieve the poor and distressed as described in § 1.501(c)(3)-1(d)(2).06-.07 of the Regulations as follows:

An organization formed to provide low income housing to families but with preference for housing to employees of a farm proprietorship operated by the individual who created and controls the organization does not qualify for exemption under § 501(c)(3) of the IRC. The organization constructed ten rental units adjacent to the farm. Applicants for housing were preference according to type of position and length of employment on the farm. All of the units are occupied by regular employees of the farm. The individual pays the rent for the employees. All of the housing units are occupied by low income families. The organization was initially funded through a loan from a governmental agency and contributions from the individual. Its receipts are from rental payments and its disbursements are for repayments on the loan and upkeep of the rental units. Since the organization gave preference for housing to employees of the farm proprietorship operated by the individual who created and controls the organization, and all the units are in fact occupied by such employees, the organization is serving the private interests of the individual rather than a public interest. Accordingly, it is held that the organization's activities are not charitable and that it does not qualify for exemption from Federal income tax under § 501(c)(3) of the IRC. Rev. Rul. 72-147, 1972-1 C.B. 147

The court held that an organization that operated a school to train individuals for careers as political campaign professionals, but that could not establish that it operated on a nonpartisan basis, did not exclusively serve purposes described in IRC 501(c)(3) because it served private interests more than incidentally. The court found that the organization was created and funded by persons affiliated with a particular political party and that most of the organizations graduates worked in campaigns for the party's candidates. The court concluded the organization conducted its educational activities with the objective of benefiting the party's candidates and entities. Although the candidates and entities benefited were not organizational "insiders", the court stated that the conferral of benefits on disinterested persons who are not members of a charitable class may cause an organization to serve private interests within the meaning of IRC 501(c)(3)-1(d)(1)(ii). The court concluded by stating that even if the political party's candidates and entities did comprise a charitable class, [the organization] would bear the burden of proving that is activities benefited members of the class in a non-select manner. "American Campaign Academy", 92 T.C. at 1077.

The court held that an association formed in a private real estate development to operate parks, swimming pools, boat docks and other recreational facilities did not qualify as IRC 501(c)(3) organization. Although the organization provided some benefit to the general public, the primary intended beneficiaries were the residents and property owners of the private development. Thus, the organization operated for a substantial non-exempt purpose rather than for exclusively charitable purposes. Columbia Park & Recreation Association v. Commissioner, 88 T.C. 1 (1987), aff'd.

A nonprofit organization that provides specially designed housing to elderly persons at the lowest feasible cost and maintains in residence those tenants who subsequently become unable to pay its monthly fees is an organization operated exclusively for charitable purposes within the meaning IRC 501(c)(3). Rev. Rul. 79-18, 1979-2 C.B. 194. See also Rev. Rul. 72-124, 1972-1 C.B. 145; Rev. Rul. 61-72, 1961-1 C.B. 188; and Rev. Rul. 64-231, 1964-2 C.B. 139.

In Founding Church of Scientology v. United States, 412 F.2d 1197, (Ct. Cl. 1969), cert. denied, 397 U.S. 1009 (1970), an organization argued that the Court should not find that the organization's earnings had inured to its founders since it had made some payments to him as repayments on a loan. Since the organization did not produce any documents evidencing this indebtedness, the Court concluded that the plaintiff had failed to meet its burden of proof that a part of the corporate earnings was not a source of benefit to private individuals.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. C.I.R., T.C. Memo. 1986-348, the Tax Court upheld the Service's position that a foundation formed to aid coma victims, including a family member of the founders, was not entitled to recognition of exemption. Approximately 30% of the organization's net income was expected to be distributed to aid the family coma victim. The Court found that the family coma victim was a substantial beneficiary of the foundation's funds. It also noted that such distributions relieved the family of the economic burden of providing medical and rehabilitation care for their family member and, therefore, constituted inurement to the benefit of private individuals.

Benefit does not have to involve the flow of funds. See Rev. Rul. 76-206 (providing services to a for-profit that would otherwise have had to have been purchased). Benefit does not require that payments for goods or services be unreasonable or exceed fair market value. EST of Hawaii v. Commissioner, 71 T.C. 1067 (1979).

A nonprofit organization formed to aid immigrants in overcoming social, cultural, and economic problems by providing personal counseling, referrals to helpful agencies, social and recreational activities, instruction in English, and distributing a newsletter containing information on attaining citizenship, securing housing, and obtaining medical care is operated exclusively for charitable and educational purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76-205, 1976-1 C.B. 154.

IRC 501 provides for exemption from income tax for organizations described in IRC 501(c) and IRC 501(d). § 501(c)(3) provides this exemption for corporations, associations and trusts that are organized and operated for charitable, educational, literary, religious, and or scientific purposes, to test for public safety, for fostering national or international amateur sports competition (with certain limitations,) or for preventing cruelty to animals or children.

IRC 501(c)(3) also requires that no part of the net earnings inures to the benefit of any private shareholder or individual, that no substantial part of the activities of is to carry on propaganda, or otherwise attempt to influence legislation, and that it not participate in, or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office.

IRC 507(a) sets forth the requirements for a private foundation to be terminated, either voluntarily under IRC 507(a)(1), or involuntarily under IRC 507(a)(2). The two requirements for involuntary termination, are that 1) there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), that give rise to liabilities for taxes under Chapter 42, and 2) that for this reason the Secretary notifies the organization that it is subject to a termination tax imposed by IRC 507(c).

IRC 509 defines private foundations to be organizations described in IRC 501(c)(3) that do not meet one of the exceptions further listed in IRC §§ 509(a)(1), 509(a)(2), 509(a)(3), or 509(a)(4).

Tax Law: Private Foundation and Excise Taxes (IRC 4945):

IRC §§ 4945(a) and 4945(b) impose excise taxes on taxable expenditures defined in IRC 4945(d).

IRC 4945(a)(1) imposes a 20% excise tax for each taxable expenditure that is to be paid by the private foundation.

IRC 4945(b)(1) imposes an excise tax of 100% on the foundation for taxable expenditures that are not "corrected" (IRC 4945(i)) within the taxable period, that shall be paid by the private foundation.

IRC 4945(b)(2) imposes an excise tax of 50% on the foundation manager in cases where taxes are imposed under IRC 4945(b)(1), and the foundation manager refused to agree to part or all of the "correction" (IRC 4945(i)). This tax is to be paid by the foundation manager.

IRC 4945(c)(2) limits the tax imposed by IRC 4945(a)(2) to $5,000, and the tax imposed by IRC 4945(b)(2) to $10,000.

Political & Legislative:

IRC 4945(d)(1) holds that taxable expenditures include any amounts expended by a private foundation to carry on propaganda, or otherwise to attempt, to influence legislation, which includes any attempt to influence any legislation through in attempt to affect the opinion of the general public or any segment thereof, and any attempt to influence legislation through communication with any member or employee of a legislative body, or with any other government official or employee who may participate in the formulation of the legislation (except technical advice or assistance provided to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be), other than through making available the results of nonpartisan analysis, study, or research (IRC 4945(e)(1) and 4945(e)(2)).

A private foundation influences the outcome of a specific public election if it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office. (Regulation 53.4945-3(a)(2)). The term "candidate for public" means an individual who offers himself or herself, or is proposed by others, as a contestant for an elective national, state, or local public office.

IRC 162 sets forth the types of ordinary and necessary expenses that may be allowed as deductions in carrying on any trade or business. IRC162(e) denies a deduction under IRC162 for certain lobbying and political expenditures. IRC162(e)(1) proceeds to list the expenditures which are not deductible, including amounts paid or incurred in connection with influencing legislation (IRC 162(e)(1)(A)), participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office (IRC 162(e)(1)(B)), any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums (IRC 162(e)(1)(C)), or any direct communication with certain executive branch officials in an attempt to influence the official actions or positions of those officials. (IRC 162(e)(1)(D)).

IRC § 4945(i)(1) sets forth that with respect to any "taxable expenditure" (IRC § 4945(d)), the terms "correction" and "correct" mean the recovery of part or all of the expenditure to the extent possible, and where full recovery is not possible such additional corrective action as is prescribed by the Secretary by § 4945(i)(2) holds that with respect to any "taxable expenditure" (IRC 4945(d)), the "taxable period" is the period beginning with the date on which the taxable expenditure occurs and ending on the earlier of A) the date of mailing of a notice of deficiency with respect to the tax imposed by IRC § 4945(a)(1), or B) the date on which tax imposed by § 4945(a)(1) is assessed.

Scholarships and Grants:

Grants to individuals must be made in accordance with procedures approved in advance by the Internal Revenue Service. To secure such approval, a private foundation must demonstrate in its request for advance approval that:

• Its procedure awards grants on an objective and non-discriminatory basis;

• The procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance; and

• The foundation will supervise grants to determine whether grantees have fulfilled the grant terms.

IRC 4945(g)(1) excludes from the term "taxable expenditure" scholarship grants that are subject to the provisions of IRC 117(a) and are to be used for study at an educational institution described in IRC 170(b)(1)(A)(ii). IRC 4945(g) provides further that these individual grants must be provided on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary.

Termination of a Private Foundation:

IRC 507(a) sets forth the requirements for a private foundation to be terminated, either voluntarily under IRC § 507(a)(1), or involuntarily under IRC § 507(a)(2). The two requirements for involuntary termination, are that 1) there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), that give rise to liabilities for taxes under Chapter 42, and 2) that for this reason the Secretary notifies the organization that it is subject to a termination tax imposed by IRC § 507(c).

IRC 509 defines private foundations to be organizations described in IRC § 501(c)(3) that do not meet one of the exceptions further listed in §§ 509(a)(1), 509(a)(2), 509(a)(3), or 509(a)(4).

Income Tax:

IRC § 11 imposes a tax for each taxable year on the taxable income of every corporation.

IRC § 61 of the Code defines gross income as all income from whatever source derived.

IRC § 162 of the Code allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

§ 1.6001-1(d) of the Regulations requires corporations to make such returns, render such statements, or keep such specific records as will enable the Service to determine whether or not such corporation is liable for tax under subtitle A of the Code.

§ 1.6012-2 of the Regulations requires every corporation subject to taxation under subtitle A of the Code to make a return of income regardless of whether it has taxable income or regardless of the amount of its gross income. In addition, this regulation specifies Form 1120 as the required return of a corporation.

* * * was formed for the private benefit of its-founders, the family members, and their family-owned commercial farms. * * * is organized and primarily operated in a manner to further the commercial farm ventures of * * * and the * * * family.

* * * recognized that to receive a government grant for housing its farm workers, proof of IRC 501(c)(3) status was required by USDA. This status can secure key funding and facilitate lender and governmental agency approval of the funding transfers.

The founders used their IRC 501(c)(3) exempt status to obtain government subsidies for housing, then used the benefits exclusively for employees of the founders' business, * * * did not seriously solicit tenants other than * * * employees and several instances support that Farms' considered the * * * its very own foundation (The names of documents (USDA loan is for "* * * units, * * * Employees, * * * Units of section 512 rental assistance"). The ultimate result is that any benefit from the housing activity went exclusively and directly to * * *, its founders, and employees. The organizations activities are fully oriented to its own membership rather than to the general public. As noted in G.C.M. 38459, "an organization which serves a private interest other than incidentally is not entitled to exemption as an organization described in IRC § 501(c)(3).

* * * activities and expenditures benefit * * * had unfettered use of funds and used them for private purposes to pay for its self-promotional community events, including * * * Markets and other events that included sales of products and of for-profit vendors' products. * * * control was used to benefit by insiders (family members) as evidenced by insider contributions that were changed at whim to loans.

Substantial Non-exempt Purpose

* * * substantial non-exempt purpose was one of qualifying for a federal housing loan and rent subsidies for * * * employees while avoiding the regulatory requirements that competing for-profit farms must contend with to acquire the same loans and rent subsidies. The government loan for the housing was dependant on the organization enjoying recognition of tax exempt status under IRC § 501(c)(3). It is not furthering a charitable or educational purpose to ensure * * * had a ready supply of farm labor through provision of housing expenses paid for the government for its employees only. Further, low-income tenants were not provided tools or opportunities to better their situation through training related to home ownership, unlike the case in Rev. Rul. 67-138.

* * * situation can also be distinguished from situations 1 through 3 of Rev. Rul. 70-585, none of which primarily benefited their individual members, founders, or other insiders.

To be recognized as exempt from income tax under IRC § 501(c)(3), a low-income housing organization must not only serve a charitable purpose but also meet the other requirements of that section, including the prohibitions against inurement and private benefit.

* * * has not established that it does not provide preferential services or benefits to its members other than those of a purely incidental nature.

As in Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283, the "presence of a single . . . [nonexempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly . . . [exempt] purposes."

* * * is like the organization described in Rev. 72-147, where all units of the housing have been occupied by employees (or employees' family members) of a farm proprietorship operated by the individual who created and controls the * * *. Although providing housing for low-income families furthers charitable purposes, doing so in a manner that gives preference to employees of the founder's business primarily serves the private interest of the founder rather than a public interest.

* * * is similar to Easter House where the court found that the health-related services were merely incidental to the organization's operations of a service which, in and of itself, did not serve an exempt purpose. And the business purpose, and not the advancement of education and charitable activities purpose, of the activity is the primary goal. (Easter house, 12Cl. CT. at 485-86.) Here, with * * *, any charitable purpose of providing housing for the poor is incidental to * * * actual business purpose of housing their employees while obtaining government subsidies available only to non-profit organizations.

Further, * * * like the organization described in Rev. Rul. 72-391, 1972-2 C.B. 249. Where the furnishing of housing for transient farm laborers is merely a necessary adjunct for the accomplishment of the organization's purpose", in * * * case, that of securing a labor force for the founder's business. Similarly, * * * is like the organization in Rev. Rul. 69-280, C.B. 1969-1 that operated primarily and directly for the benefits of the individual members rather than for the community as a whole.

* * * provides substantial financial benefits to * * * by essentially providing it with a means of housing their employees and providing an easy source of capital to purchase real estate to accomplish this. Utilizing the exempt status of * * * eliminates roadblocks to obtaining a housing loan, and saves considerable time and money to repay the loan through government payment of low rent subsidies and * * * payroll deductions for rent. As such, * * * serves a private interest more than incidentally, contrary to § 1.501(c)(3)-1(d)(1)(ii) of the Regulations.

Revocation

* * * does not qualify for exemption from tax under IRC 501(c)(3) because it has failed to operate exclusively for exempt purposes as required by IRC 501(c)(3), Treas. Reg. § 1.501(c)(3)-1(a)(1), and Treas. Reg. § 1.501(c)(3)-1(a)(2) because more than an insubstantial part of its activities is not in furtherance of exempt purposes. A substantial part of its funding, expenses, staff, and program is in furtherance of increasing profits of the founders' agricultural business. * * * recognition of exempt status under § 501(c)(3) should be revoked.

Note: Once a private foundation's exempt status is revoked, it is considered a taxable private foundation until it terminates its private foundation status under the provisions § 507 of the Code. It must continue to file Form 990-PF and pay any applicable private foundation excise taxes (calculated on Form 4720) until termination.

Taxable Expenditures

The * * * is subject to the excise taxes under § 4945. Outlined below are the analyses of the liabilities and the computation of the taxes for each year.

The grants or scholarships to individuals were made prior to receiving approval, therefore, it constitutes taxable expenditures under IRC 4945(d)(3). Regardless, the scholarship would not have met the approval criteria that requires grants to be awarded on an objective and nondiscriminatory basis. No data supports that any type of selection criteria was established or followed. (See IRC 4945(d)(3), 4945(g) and Regs. 53.4945-4(a)(ii)).

* * * contributions to a candidate for public office are taxable expenditures subject to chapter 42 excise taxes. The * * * internal transfer of funds did not correct the distribution. (See IRC 4945(b))

Forgiven loan shown as Contribution to * * *

The examiner could uncover no evidence to support that the * * * event was related to * * *, but rather public credit was given to * * * and it was held on * * * for-profit property. Nor does evidence support that * * * was liable for the event expenses. All advertisements support that this was one of * * * promotional and revenue generating events that * * * has been conducting for several years independent of * * *.

The amount of $* * * "contribution" representing * * * forgiveness of an unproven debt is disallowed.

The excess distribution carryover from the prior year, of * * * was based on $* * * of distributions of which only $* * * were qualifying distributions. (See calculation below.) However, further documentation was not supplied to support that this amount of qualifying distributions exceeded a determined amount of * * * year minimum distributions. Therefore, no excess distribution carry over to the * * * year return will be allowed at this time.

 

 

 

TAXPAYER'S POSITION

 

* * * required to file Federal income tax returns on Forms 1120 for the tax period ending December 31, * * *, as stated in the heading of this letter, and for all tax years thereafter.

Because * * * was a private foundation as of the effective date of revocation, it is considered to be a taxable private foundation until it terminates its private foundation status under § 507 of the Code. In addition to the income tax return, you must also continue to file Form 990-PF by the 15th day of the fifth month after the end of your annual accounting period. For information on termination your private foundation status, IRM 7.26.7 and IRC 507(a) and (b).

§ 4945 Computations

The taxable expenditures made by the * * * under §§ 4945(d)(3) and 4945(d)(5), subject the foundation to imposition of the first tier excise tax under § 4945(a)(1), at a tax rate of 10%. Since correction of the expenditures has not been made, § 4945(b)(1) imposes a second tier excise tax of 100% against the foundation.

The total taxable expenditures of $* * * include the following:

 

 

 

 

For the foregoing reasons, * * * is not an organization described in § 501(c)(3) and revocation of its exempt status is proposed effective January 1.

Forms 1120 returns should be filed for the tax periods ending on or after January 1, * * * Forms 990-PF and 4720 are also applicable to private foundations.

Information: Form 1120 Filing Requirement:

Taxation under subtitle A of the Code: A corporate organization whose tax-exempt status is revoked is brought current on its filing and tax liabilities by transferring the Form 990 data to converted Forms 1120 and assessing any tax due. If Foundation's exempt status is revoked, Forms 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods ending on or after January 1, * * *.

§ 1.6012-2 of the Regulations requires every corporation subject to taxation under subtitle A of the Code to file Form 1120 to report the income and deductions per §§ 61 and 162 of the Code respectively.

For the year * * *, the examiner adjusted the revenue (from $* * * to * * *) to reflect the additional tenant and subsidy rental income shown on * * * records. The expenses were adjusted (from $* * * to $* * *) to disallow the $* * * of donation disbursements made to individuals and to a non-qualified entity.