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TAM 202243013

Religious, Charitable, etc., Institutions and Community Chest

Official textIRS Written Determinations (PLR · TAM · CCA)irs.gov
Summarize

# ISSUE

# FACT

1. Whether the (" ") is an applicable taxexempt organization under Section 501(c)(3) of the Internal Revenue Code ("the Code")
2. Whether the of the Code
Benefits are taxable to participating parents under Code Section 61, The applied for Federal exemption described under IRC Section 501(c)(3). It formed on . The determination letter granted the exemption under Section IRC 509 (a)(2) as an organization that normally receives more than % of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions and no more than % of its support from gross investment income, and unrelated business taxable income.
However, 'Form , Short Form Return of Organization Exempt From Income Tax for tax years ended , and , specifically, the Schedule A shows the Public Status as IRC 170(b)(l)(A)(vi), an organization that normal received a substantial part of its support from government unit or a from the general public with public support calculated as %. These returns are not consistent with the determination letter originally granted to the organization The provides financial support for the at The is a membership organization. Common with most volunteer organizations, only a minority of ' members provides most of the work required. members receive additional benefits based on the hours they work as volunteers at fundraisers which is calculated and documented in the "Shares Program Benefits." Once volunteers earned their , those shares are used at the discretion of the family that earned the hours.
During the year under audit, , the at had while only paid for the memberships. The cannot require fees paid for participant pursuant to which " ... prohibits a enrolled in a from being required to pay a pupil fee, as defined, for participant in an educational activity." The used "the term voluntary donations" as "membership fees' to be a member.
The original Articles of the Incorporation in stated that the ' purpose was to promote personal interest and educational development in the as individuals and as a group, to promote interest in the activities and to promote incentives through financial aids through fund-raising activities. It is a organization where all matters brought for a vote shall be determined by a simple majority of members present. All amendments to the By Laws shall be determined by a majority vote of members presents.
Form 886-A
Name of taxpayer
Department of the Treasury - Internal Revenue Service
Explanations of Items
Tax Identification Number (last 4 digits) Schedule number or exhibit Year/Period ended Its original By Laws, Article 14, stated that " Upon the dissolution, abandonment or winding up of this corporation, the assets remaining after payment or provision for payment of its debts and liabilities of this corporation shall be distributed nonprofit fund, foundation or corporation or corporation which is organized and operated exclusively for educational purposes and which has established its tax exempt status under Section 501 (c) (3) of the Internal Revenue Code and under Revenue and Taxation Code."
An amendment to the laws adopted on revised the organization's purpose of the to state that it shall finance and promote the at and Membership and shall be open to any "interested adult" whose dues are current. In addition, The Article of Dissolution stated that " ... in the event of dissolution, disbandment, inactivation, or other termination of this , the funds and properties of the in excess of its liabilities shall be disposed of in accordance with the decision of the existing active membership, consistent with integrity and good judgment, by a majority vote of the members present a duty called general membership meeting".
The raises money through the following programs:
1. Memberships: sell memberships to interested . Memberships have additional for extracurricular benefits such as eligibility for discounts, free program T shirts ($ value), and free prizes for Family . Memberships cover two types: costs $ costs $ (includes tickets to dinner dance auction and ). required members to volunteer at least hours at the games per quarter.
2. Selling _ sells cards at the every night. This activity is crucial for as it raises of the annual budget. The organization has an arrangement with a company named will provide volunteers to sell to players and received $ per week. revenue total is $ plus tips. will allocate a portion of this revenue to the earned volunteers into their" Account." This can be used to offset the cost of and extracurricular experience (trips). This arrangement allows some families to cover the entire cost of the by regularly volunteering at
3. In additions, activities provide raised funds through the following programs: a dinner dance, , a dinner, , sales of , etc. These to volunteers similar to the selling of to players.
One of the 'biggest yearly events is organizing extracurricular trips. For the year in audit, ending organized a to on for days by bus.
Per 'cost analysis, each participant's cost is$ . The trip included about paying students and paying On day and day , the was on travel status by bus. On fay , The performed at at . On day , day , and day , The Form 886-A Department of the Treasury - Internal Revenue Service
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) group enjoyed sight-seeing at , a dinner at . Only members could use a discount of$ and the cost of the Schedule number or exhibit Year/Period ended , and a to offset The asserted a disclaimer under the membership application and donation solicitations as following: "Please note that you or your is [sic] not required to purchase, donate, or contribute any of [sic] item or monetary donations associated with participating in the . However, if you voluntarily decided to purchase, donate, or contribute any item or monetary donation associated with the participant in the and provide them to the Director, the item or monetary donation will be shared equally amount [sic] all the members of the program in order for each totient [sic] to have the opportunity to participate. In additionally, [sic] the will be organizing fundraising events in which you and/or your will have the option to participate or help raise money to support the . It is not mandatory that you and your participate in any fundraising events as a condition of participant in the "
The disclaimer is added as a result of the investigation of potential violation of , where the , received high volume of uniform complaints regarding the imposition of student fees and/ or improper fundraising efforts.
The instructed during the annual fundraising event that "all donations are tax deductible and any donations over$ will receive a letter."
Its Membership Form indicated fees for various of programs and membership types ( and ). collected total fees and called it as "Donation"
The did not provide a written disclosure statement to donors of a quid pro quo contribution in excess of$ . A quid pro quo contribution is a payment made to a charity by a donor partly as a contribution and partly for goods or services provided to the donor by the charity. Per Section 6115, the required substantiation written disclosure must:
1. Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the value of goods or services provided by the charity and
2. Provide the donor with a good faith estimate of the value of the goods or services that the donor received.
A penalty is imposed on a charity that does not make the required disclosure in connection with a quid pro quo contribution of more than $ . Per Section 6714, the penalty is $ per contribution, not to exceed $ per fund raising event or mailing. During the year under audit, you have in the program, where have paid memberships. There is no documentation to show you provided disclosure statements to Form 886-A Name of taxpayer donors. In addition, the provide volunteers to each Department of the Treasury - Internal Revenue Service Explanations of Items claimed it received $ night.
Tax Identification Number (last 4 digits) in donations from Schedule number or exhibit Year/Period ended to The provided a function and program that allows to have a discretionary pool of funding to enhance their experience in the program. The money in the can be used to pay for things like, food provided at , extra T shirts, , etc.
Share Programs Policy:
1. Reserved Funds are the result of money earned through a variety of fund-raising activities which are reserved for an individual family. These reserved funds are available to the family to use for the trips and other specified activities.
2. Reserved Funds are recorded as a family total. Distribution among family members is left to the discretion of the family
3. Funds cannot be transferred from one family to another
4. Funds are held for a family for use by when they enter the program
5. Unused fund revert to the General Fund.
6. The may designate part or all the profits of specific fund raisers as eligible for the share program
7. Distribution to individual share accounts is based on the profits of the activity of the level of individual participation as determined by the
Shares Program:
1. Shares are the result of working or contributing to the . Shares are accumulated by family and recorded as hours of credits. Shares cannot be transferred from one family to another
2. As the end of each quarter a dollar value is given to each share
3. Once the share value for the quarter has been set and authenticated by the treasurer, it is not changed as the result of subsequent corrections to shares accumulated
4. The share value can be adjusted to reflect subsequent corrections to the net profit earned for the quarter.
Script Shares Program:
The purchase at a discounted rate. This is the "Cost"
Individuals purchase from the at the face value of the . This is the "Value"
The difference between the cost and the value is the "Margin". The Margin is divided into Margin Shares according to % individual buyer, % Share Agent, and % Margin shares are recorded and accumulated by family. At the end of each quarter, a dollar value is given to a Margin Share based on the number of margin shares accumulated and the net profit for the quarter.
Form 886-A Department of the Treasury - Internal Revenue Service
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended Dollar values are added to the family's share.
Other Fund-Raising events: , Banquet, , etc.
During the audit, we learned that the ' internal control policy and procedures are weak. In addition, the have oversight over the bookkeeper's roles. The bookkeeper served as a representative under a Form 8821, Tax Information Authorization and was terminated from both roles during the examination. were not able to provide reconciliation of bank statement or reconciliation of their accounting. were not able to provide general ledger accounts grouping that flows to the Form , Return of Organization Exempt from Income Tax. failed to give adequate explanation and documentation for the adjusted journal entry of$ in prior years as a book correction. Its records and explanation are inadequate.

# LAW

Section 501(c)(3) of the Code provides for exemption from Federal Income Tax for corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation ( except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of ( or in opposition to) any candidate for public office.
Regulation§ l.501(c)(3)-l(a)(l) provides that, in order to be exempt as an organization described in section 50l(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.
Regulation§ 1.501 ( c )(3)-1 ( c )(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.
To meet the organization test, in general, the organization's governing instruments must include an acceptable clause (Treas. Reg. Section 1.501©(3)-l(b)(l)(i)(a), not include a powers clause which is too broad (Treas. Reg. Section l.501(c)(3)-l(b)(l)(i)(b), include a dissolution clause in most cases (Treas. Reg. section 1.501 (c)(3)-l(b)(4).
Distribution of assets on dissolution clause: An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt Form 886-A Name of taxpayer Department of the Treasury - Internal Revenue Service
Explanations of Items
Tax Identification Number (last 4 digits) Schedule number or exhibit Year/Period ended purposes, or to the federal government, or to a state or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the organizational test if its articles or the law of the state in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders
Reg. 1.501(c)(3)-l(d)(l)(ii) states that an organization is not organized or operated exclusively for exempt purpose unless it serves a public rather than a private interest. The regulation places the burden of proof on the organization to demonstrate that it is not organized or operated for the benefit of private interests such as designated individuals or persons controlled directly or indirectly by such private interests.
Reg. 1.501 (c)(3)-l(c)(l) indicates that an organization will not be exempt under IRC 501(c)(3) if more than an unsubstantial part of its activities is not in furtherance of an exempt purpose. Thus, an organization whose operations result in a private benefit that is more than insubstantial, will not be considered as serving as exempt purposes. This private benefit prohibitions applies to all kinds of persons and groups, not just to those" insiders" subject to the strictest inurement proscription. This private benefit prohibition is boarder in scope and overlaps the private inurement restriction to some extent, as in its coverage of "insider". Each proscription must be individually satisfied by organization seeking recognition of exemption under IRC 501 (c)(3).
Section 61 of the Code defines Gross Income to mean all income from whatever source derived, including (but not limited to) "compensation for services, including fees, commissions, fringe benefits, and similar items."
Section 6115 provides that charities must provide timely written disclosure statements to contributors who make payments described as "quid pro quo" contribution in excess of $75. Also, Section 170(f)(8)

(A) provides that no deduction will be allowed under IRC 170 for a contribution of $250 or more (whether in cash or property) unless the contributor had a contemporaneous written acknowledgment from the charity substantiating the contribution. Charity must meet these two requirements A "quid pro quo" contribution is defined as a payment made partly as a contribution and partly as payment for good or services provided to the contributor. Contribution is defined as a payment in excess of the fair market value of the goods or services received is a contribution depends on the intend of the donor.
Section 6714 imposed penalty to an organization failed to meet the disclosure requirement of Section 6115 with respect to a quid pro quo contribution, such organization shall pay a penalty of $10 for each contribution in respect of which the organization fails to make the required disclosure, except that the total penalty shall not exceed $5,000.

# ANALYSIS

Form 886-A Department of the Treasury - Internal Revenue Service
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended Your governing instrument does not meet the organization test required under purpose clause, power clause, and dissolution clause
Purpose Clause: You do not meet the requirement Your Original Article of Incorporation stated the following: a. The specific and primary purpose are to promote personal interest and the Members as individual as a group, to promote interest in the incentive through financial ads Or a. To operate a community organization for purposes development in activities and to promote b. The general purpose and powers are to have and exercise all rights and powers conferred on nonprofit corporation under the laws of , including the power of contract, rent, buy or sell personal or real property; provided, however, that this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the primary purpose of this corporation"
Your purpose clause is too broad as it does not limit the organization's purpose to one or more purpose specified in IRC section 501(c)(3). To promote personal interest and educational development in the activities and to promote incentive through financial aids are too board because they are not necessary within the status ofIRC Section 501 (c) (3).
Power Clause:
Your Article of Incorporation states that "The general purpose and powers are to have and exercise all rights and powers conferred on nonprofit corporation under the laws of , including the power of contract, rent, buy or sell personal or real property; provided, however, that this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the primary purpose of this corporation"
In addition, you do not have a power clause that will not allow your organization to carry on any activities not permitted by an organization exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. Since the primary purpose of this corporation are too board and not within the status of section IRC 501(c)(3) of the Code, hence your' s power clause does not meet the organization test.
Dissolution Clause:
Your amended by laws, approved on , Article , state that " in the event of dissolution, disbandment, inactivation, or other termination of this , the funds and properties of the in excess of its liabilities shall be disposed of in accordance with the decision of the existing active membership, consistent with integrity and good judgment, by a majority vote of the members present a duty called general membership meeting,"
Form 886-A Department of the Treasury - Internal Revenue Service
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Schedule number or exhibit Year/Period ended There is no provision in the amendment that requires that the shall distribute its net assets for one or more exempt purposes with thin the meaning of section 501 ( c )(3) of the Code.
Hence, your dissolution clause does not meet the organization test.
Organizations seeking exemption under IRC 501 (c) (3) are subject to the inurement provision and the prohibitions regarding operating for private benefits purpose rather than public purposes contained in Reg.
1.501 (a)-l(d)(l)(ii).
Your parent- members of the are in position to have such control over the activities of the club. They must be considered "insiders" for the purpose of determining whether there is inurement of income. The requirement that each participates in the activities in direct proportion to the benefits they expect to receive causes a direct benefit to flow to the . In fact, the earnings of the organizations are being used directly and specifically to pay for benefits to specific individuals rather than to a whole. lnurement if income is strictly forbidden under IRC 501(c)(3) without regard to the amount involved.
Because the financing arrangements of club have the effect of permitting the earnings of the organization to inure to the benefit of specific insiders (the controlled parents' members and their children). Your organization can not qualify for exemption under this Section.
You have a difficulty that most parents will not volunteer or raise funds to support its purposes. Hence the burden will fall on the remaining members who will choose to participate in fund-raising activities. For this reason, you created the to give "additional benefits to who participated in the Shares Program Benefits. This solution seems to favor However, this solution triggers the inurement/private interest prohibitions under the IRC 501 (c)(3) of the Code.
In addition, this private interest is substantial in nature as you open accounts for critical programs: , , etc. The program is your biggest money maker hence you require members to volunteer from hours per quarter. You earned about$ per week or$ for weeks plus tips. A Portion of this income is allocated to who participated in the fundraising event.
Hence, who earned benefits from participating from fundraising programs are subject to IRC Gross income Section 61 (unless the income is excluded from other Code Section). We do not see any exclusion to exempt earned income from the Family Shared Benefits. Hence, the income is taxable to the participants.
Your organization operates in such a manner to defeat recognition of exemption by crossing the line of these inurement/ private interest prohibitions.

# CONCLUSION

Form 886-A
Name of taxpayer
Department of the Treasury - Internal Revenue Service
Explanations of Items
Tax Identification Number (last 4 digits) Schedule number or exhibit Year/Period ended
1. You do not qualify under Section 501 (c)(3) of the Code as you failed both the organization test and operational test.
2. Benefits in each program is taxable under Code Section 61 to the participated In addition, your records are inadequate. You are subject to the quid pro quo donation disclosure requirement and the applicable penalties under Section 6115 and Section 6714.

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