Project Design Organization Fails to Qualify for Exemption

Contact person/ID number: * * *

This letter is our final determination that you don't qualify for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final.

Because you don't qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can't deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection (as required under Section 6110 of the Code) after deleting certain identifying information. Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice 437 on how to notify us. If you agree with our deletions, you don't need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have questions about your federal income tax status and responsibilities, call our customer service number at 1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at 1-800-829-4933.

Sincerely,

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)

Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) -- No Protest

We considered your application for recognition of exemption from federal income tax under Section 501(a) of the Internal Revenue Code (the Code). Based on the information provided, we determined that you don't qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please keep it for your records.

For the first step of this program you "will work to enhance group, of small businesses, to incorporate them such concepts in the area of project or others, related to their best business productivity." You said "each design seminar or course, is a time of preparation, in relation to the working group, where this is to be implemented, either, by differences in education and others, we must also prepare supporting material and necessary to each member of the seminars or courses, to achieve the knowledge and experience reach, which is being delivered."

We asked for a more detailed description of your activities, including what specific activities you conduct. You responded that you are "an organization of cooperation, through support in the preparation of projects, both these, as charitable, education, scientific, technological, It may be another, which has no relation to: -- politics, religion, terrorism, weapons, defense projects, drugs, or violence of any kind." When we asked who participates in the activities, you said "the company which needs our cooperation and the corporation." We asked where you conduct your activities and you said, "Defined by each project." We asked when or how often the activities occur and you said, "This is a new corporation, the corporation needs time to have a good story." We asked what fees, if any, are charged and how you determine them. You said "All cost and expenses necessary, defined in each project." When asked what percentage of your time and resources you spend on your activities you said, "The required for each project, defined in each project."

Because your response provided no substantive information regarding your activities, we asked for more clarification. You provided the following:

You also described the role of your project managers. You said, "For each project manager, whom, will be responsible for managing the action, to develop the project in a professional manner, and then be sought for these projects, applicants will be hired to, fulfill the conditions, moral and intellectual, to develop each project."

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described in Section 501(c)(3) of the Code, 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.

Treas. Reg. Section 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 Section 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.

Rev. Proc. 2016-5, 2016-1 I.R.B. 188, provides that the Service will recognize the tax-exempt status of an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption is claimed. Section 4.02 states that a determination letter or ruling on exempt status is issued based solely upon the facts and representations contained in the administrative record. It further states:

Levy Family Tribe Foundation, Inc. v. Commissioner, 69 T.C. 615 (1978), provides that an applicant for exemption carries the burden to sufficiently describe its activities in order to meet the operational test of Section 501(c)(3) of the Code. The court states, "[N]owhere in the administrative record is there any description or explanation of how this activity furthers an exempt purpose. The record is replete with unsupported generalizations. These explanations are too general and lack the facts necessary to establish public, rather than personal, purposes of the organization."

Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531 (1980), provides that an application for tax-exempt status "calls for open and candid disclosure of all facts bearing upon [an Applicant's] organization, operations, and finances to assure [that there is not] abuse of the revenue laws." Further, in the absence of such disclosure, "the logical inference is that the facts, if disclosed, would show that the [Applicant] fails to meet the requirements of [Section] 501(c)(3)."

In Basic Unit Ministry of Alma Karl Schurig v. Commissioner, 511 F. Supp. 166 (D.D.C. 1981), affd, 670 F.2d 1210 (D.C. Cir. 1982), the court upheld the IRS's denial of exempt status as a religious organization in a declaratory judgment action. The court held that in factual situations where there is evident potential for abuse of the exemption provision, a petitioner must openly disclose all facts bearing on the operation and finances of its organization. Here plaintiff did not proffer sufficiently detailed evidence of its charitable disbursements, or the extent of its support of its members. Rather, plaintiff continually responded that it had already provided the data, or could not furnish anything further. Therefore, the court found that the applicant did not meet its burden to positively demonstrate that it qualifies for the exemption. The Court of Appeals for the District of Columbia Circuit, in affirming that the organization had not met its burden of establishing that no part of its net earnings inured to any private individual, observed:

In New Dynamics Foundation v. United States, 70 Fed. Cl. 782, 798 (Fed. Cl. 2006), the U.S. Court of Federal Claims held that the Service properly denied tax exempt status under Section 501(c)(3) to a nonprofit corporation that was organized to promote and contribute to charitable causes. In reaching this conclusion, the court stated, "It is well-accepted that, in initial qualification cases [any] gaps in the administrative record are resolved against the applicant," adding that courts "can draw inferences adverse to a taxpayer seeking exempt status where the taxpayer fails to provide evidence concerning its operations, or where the evidence is vague or inconclusive."

You have failed to establish that you are operated exclusively for charitable purposes as required by Treas. Reg. Section 1.501(c)(3)-1(a)(1). You indicated that you will develop design projects, but provided very little information regarding these projects. You will initially work with small businesses, as it relates to their productivity. Developing design projects for businesses is not, in and of itself, a charitable or educational activity. You have not substantiated that you engage primarily in activities that accomplish one or more exempt purposes specified in Section 501(c)(3) of the Code as described in Treas. Reg. Section 1.501(c)(3)-1(c)(1). Therefore, you are not exempt.

Rev. Proc. 2016-5 provides that an organization seeking exemption must fully describe all activities including standards, criteria, and procedures. After the submission of your Form 1023, you were asked multiple times to provide a written description of your past, current, and planned activities and you provided only vague responses. Moreover, you do not meet the requirements of Sections 4.03 and 4.03(2) of Rev. Proc. 2016-5 because you provided the same generalities each time we requested more details. Based solely on the administrative record, we do not have sufficient information to determine whether your future activities will fulfill exclusively charitable or educational purposes. Therefore, you have not met your burden as described in Rev. Proc. 2016-5.

An organization has the burden of proof to describe its activities in sufficient detail to permit the Service to determine whether it meets the definition of the Code section under which exemption is sought. The courts have ruled against applicants for tax exemption when the applicant's proposed activities are especially ambiguous. See Levy Family Tribe Foundation, Inc. v. Commissioner. You were not able to provide pertinent details about your activities. Further, where an organization provides mere generalizations in response to repeated requests by the Service for more detail on prospective activities, the courts have ruled against the applicant for exemption when such generalizations fail to show applicant qualifies for exemption. Peoples Prize v. Commissioner. An application for tax-exempt status calls for open and candid disclosure of all pertinent facts, as described in Bubbling Well Church of Universal Love, Inc. v. Commissioner. You have been neither open nor candid in your responses.

Additionally, you only have one governing body member, E, who is compensated. E has sole oversight and authority over you, creating the potential for abuse. Like the organization described in Basic Unit Ministry of Alma Karl Schurig v. Commissioner, the court held that in factual situations where there is evident potential for abuse of the exemption provision, a petitioner must openly disclose all facts bearing on the operation and finances of its organization. Despite repeated attempts to gather details regarding your operations, you have not openly disclosed all facts, which prevents you from meeting your burden of positively demonstrating that you qualify for exemption under Section 501(c)(3) of the Code.

As stated in New Dynamics Foundation v. United States, "It is well-accepted that, in initial qualification cases . . . gaps in the administrative record are resolved against the applicant," adding that courts "can draw inferences adverse to a taxpayer seeking exempt status where the taxpayer fails to provide evidence concerning its operations, or where the evidence is vague or inconclusive." Thus, your failure to provide clear and conclusive documentation concerning your operations, leads us to infer that you are not operating for an exempt purpose under Section 501(c)(3) of the Code.

• Your name, address, employer identification number (EIN), and a daytime phone number

• A copy of this letter highlighting the findings you disagree with

• An explanation of why you disagree, including any supporting documents

• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the organization, or your authorized representative

• One of the following declarations:

• For an officer, director, trustee, or other official who is authorized to sign for the organization:

  Under penalties of perjury, I declare that I examined this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts and such facts are true, correct, and complete.

  For authorized representatives:

  Under penalties of perjury, I declare that I prepared this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts and such facts are true, correct, and complete.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't provided a basis for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court at a later date because the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If you have questions, you can contact the person listed at the top of this letter.

Sincerely,