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TAM 202249019

Religious, Charitable, etc., Institutions and Community Chest

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

# Issue

Department of the Treasury - Internal Revenue Service
Explanations of Items
Tax Identification Number (last 4 digits)
Schedule number or exhibit
Year/Periods ended
Does the (the Program) qualify for tax exemption under Internal Revenue Code section 501(c)(3) by serving a public rather than private interest, where no net earnings inure to the benefit of any private shareholder or individual?

# Facts

The Program was incorporated in the State of on as a nonprofit public benefit corporation. Article III of the Articles of Incorporation states its specific purpose is " ." Article V states the Program is "organized and operated exclusively for scientific or educational purposes within the meaning of IRC Section 501 ( c )(3 )." Article VII states "the property of this corporation is irrevocably dedicated to scientific or educational purposes and no part of the net income or assets of this corporation shall evc~r inure to the benefit of any director, officer or member thereof or to the benefit of any private person."
The Program submitted Form , Application for Recognition Under Section 501 (c)(3) of the Internal Revenue Code, to the Internal Revenue Service (IRS) on . On Part II Line 1, the Program described its activities as such:
"
"
On Part II Line 2, the Program listed its sources of financial support in order of size as: I. Contributions and gifts, and 2.
On Part II Line 4b, the Program wrote "none" for annual compensation of the organization's governing body.
On Part II Line 12a, the Program checked "no" for the organization requiring payment from the recipients of provided benefits, services, or products. On Part II Line 12b, the Program checked "no" for the organization limiting its benefits, services, or products to specific individuals or classes of individuals.
Catalog Number 20810W Page _1 _ www.irs.gov Form 886-A (Rev. 5-2017)
Form886-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/Periods ended
On Part III Line 9i, the Program selected it is not a private foundation because it qualifies under Section 509(a)(2) as normally receiving not more than one-third of its support from gross investment income and more than one-third of its support from contributions, membership , and gross receipts from activities related to its exempt functions.
Attached to the Form was a proposed budget detailing the following:
Table 1 - Proposed Bud2et on Form
Bud2et
Income
Gifts and contributions $
$
Disbursements
Written material, preparation, production and printin~ Distribution and mailing Secretarial and office expense Le2al and accounting Net accumulation:
Second Year Bud2et
Income
Gifts and contributions
-Disbursements
Written material, preparation, production and printing Distribution and mailing Secretarial and office expense Legal and accounting Educational Activities Net accumulation:
The Program included in its application for exemption a copy of its Bylaws. Article IV, Dedication of Assets, states "no part of the net earnings of the Corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, directors or other private persons, except that the Corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in the purpose clause hereof."
In response to a request for additional information, the Program provided the following descriptions of its activities in a letter dated
Form886-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/Periods ended
The are considered nominal compared to charged by for-profit programs;"
"The procedure for an individual who would like to participate but cannot afford the is as follows.
The individual applies to the Program. There is then a telephone screening to determine whether the Program is appropriate for that individual. If it appears appropriate, the individual is asked to come in for an . The evaluation is to determine if the Program is likely to be helpful to the At that time finances are discussed to evaluate what portion of the cost, if any, the can afford to pay;"
In this same response, the Program provided the following information about compensation:
"The statement of revenue and expenses previously submitted for salary because at the present time there are . Everyone involved is their time. at such time as it can be afforded, only will be hired. No officer or board member will be ;"
"There are salaried employees or other compensated individuals;" and " or 1s an of the organization."
The Program filed the Form , Return of Organization Exempt From Income Tax, for the year ended on . On Part I Line 1, the Program described its mission to "provide services to individuals who have . " On Part I Lines 3 and 4, the Program left how many voting members and how many independent voting members are part of the governing body. On Part I Line 5, the Program listed person employed during the calendar year.
The Program filed the Form for the year ended on 1, the Program described its mission to "provide services to individuals with Line 3, the Program listed voting members of the governing body, and left Line 4 . On Part I Line ." On Part I of independent voting members of the governing body. On Part I Line 5, the Program listed for the number individuals employed during the calendar year, and on Line 6 listed volunteers.
On Part III Line 1 of both Forms follows:
"
Catalog Number 2081 OW
(for and ), the Program described its organization as
Form886-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/Periods ended
On Part IV Line 28a of both Forms , the Program checked "yes" to being party to a business transaction with a current or former officer, director, trustee, or key employee.
On Part VI Line la of both Forms , the Program listed voting members of the governing body. On line 2, the Program checked "yes" to any officer, director, trustee, or key employee having a family relationship or a business relationship with any other officer, director, trustee, or key employee. On line 3, the Program checked "yes" to the organization delegating control over management duties customarily performed by or under the direct supervision of officers, directors, or trustees, or key employees, to a management company or other person.
On Part VII Section A of Form officers, directors, and trustees: for year ended , the Program listed the following Table 2 - List of Officers, Directors, and Trustees on Form for
Average Hours
Position
Reportable
Name and Title Individual trustee or per Week director Officer compensation , Pres X X Pres X X , Secy X X On Part VII Section B for the year ended contractor: , the Program listed the following independent Table 3 - List of Independent Contractors on Form
Name and business address
On Part VII Section A of Form officers, directors, and trustees:
I Description of services I Comoensation
I I$ for year ended , the Program listed the following Schedule number or Department of the Treasury - Internal Revenue Service Form886-A exhibit
Explanations of Items
Year/Periods ended
Tax Identification Number (last 4 digits)
Name of taxpayer for
Table 4 - List of Officers, Directors, and Trustees on Form Average Position
Reportable
Individual trustee or
Hours per
Name and Title
Week , President
Treasurer
Pres , Secretary
On Part VII Section B for the year ended compensation Officer director X X $ X X X X , the Program listed no independent contractors in reportable compensation from the organization. that received more than $ In , the assigned agent began an examination of the Program's books and records for the year ended The Program's accountant, , provided Balance Sheets as of and which showed the following accounts:
Table 5 - Balance Sheets
Assets
Cash- $
Other Current Assets - Suspense
-
Accumulated Depreciation - Furniture
Furniture and Equipment - Other
Total Assets
Liabilities and Equity
Credit Card Pav
Total Liabilities
Unrestricted Net Assets
Net Income
Total Liabilities and Equity provided Profit & Loss Statements for the following:
Table 6 - Profit and Loss Statements
Income
$ $
Total Income
Expense
Bank Charges
Account Fees
$
-
-
-
-
- through and which showed
Form886-A
Name of taxpayer
Depreciation
Dues
Advertising
Outside Services
Pavroll Exoenses
Rent
Salaries
Tax and Licenses
Total Expense
Net Income
Department of the Treasury - Internal Revenue Service
Explanations of Items
Tax Identification Number (last 4 digits)
-
-
Schedule number or exhibit
Year/Periods ended provided a contract between it and the , . Professional Corporation ( ) for a of$ /hour, with a minimum of hours/week. The agreement was signed by the Secretary at the time, , on for the following services:
• Supervision of all , including independent contractors and trainees
• Overseeing the running of the Program to ensure that the highest quality of care is being provided; this shall include ongoing evaluation with the staff
• Collaboration with any other professionals working with the ( e.g. )
• Management of the bookkeeping, including deposits, expenses and balancing the budget
• Preparation of all tax information
• Organize and direct training for about the treatment of in the community who are interested in learning more population The assigned agent conducted an interview on with CFO, and , the accountant and Power of Attorney to the organization. provided the subsequent information. , President and and The organization's primary purpose is to provide for adults and adolescents on treating runs the whole organization--directs and hires the independent contractors; does the financials, bookkeeping, and tax filings; reviews charts, supervises the contractors, and works with insurance companies as needed. also organizes community outreach programs such as-hosting community classes on for adolescents and adults on treating ; going to schools in the area to present to the students; speaking to students on how to diagnose and treat ; and training and staff on how to treat , is the organization's Vice President, and , recently join the Board as the Secretary. The Board meets once a year, unless something comes up during the year, then another meeting would be held to discuss.
None of the Board members receive compensation or other benefits.
Form886-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/Periods ended The organization only receives income from . The collect the , then collects the cash and checks and deposits them into the organization's bank account. is responsible for preparing the bank deposits, but the are the ones that collect the from the prepares and signs outgoing checks and is the only in the organization authorized to sign the check. prepares annual bank reconciliation reports. For someone to be reimbursed for business expenses, they would submit a receipt to , though the organization does not generally reimburse anyone for expenses does get reimbursed for the telephone bill, and was once reimbursed for the accounting fee when it was paid for with personal card instead of the organization's card.
The organization is billed by the Professional Corporation ( ) for consultations and expertise. is trained in and has years of experience.
The contract between the organization and the was signed by the Vice President. The was set for the services provided, based on what they thought the organization could afford to pay.
The organization charges on a
$ -$ a session, up to $ -$ a based on the . In most . The paid around $ end is from The organization does not have a specific policy in place for when a no longer has the ability to pay, but there is a code of ethics that the cannot abandon their . Thus, if a lost their job, the would continue to treat them and make sure they have the resources they need. However, this is based on the individual does not dictate how or when the must continue to that On , the assigned agent sent an Information Document Request to the Program to request supporting documentation for sampled transactions from the general ledger. provided the following invoices:
Table 7 - Invoice from for services provided
Date Service Amount Chareed
$
Catalog Number 20810W Page_?_ www.irs.gov
Form886-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/Periods ended
The assigned agent conducted a subsequent interview with and on and provided the subsequent information.
The Board of Directors in consisted of
( ofthe ), and , attorney. retired during , and the new attorney, Members are: attorney. , joined after and has been on the board since. Currently, the Board , and The organization does not have a conflict of interest policy. The organization had bylaws when it was first formed in as part of the corporate package. The are paid based on a percentage of the they collect: the collects the , and a certain percentage is given to the organization to operate. This rate is determined based on the experience of the , and whether they are licensed. In a way, the can determine their own compensation because they set their own within a certain range. But the that come in generally have an idea of how much they can . The maximum percentage is % of the to the The compensation percentage is negotiated between and the individual . There are no employment or similar contracts; they are verbal negotiations and then board approval. There is no cap on the amount of income a can earn.
The determines a ability to pay during the initial intake session; the and the negotiate the rate. Neither the nor the organization require a to provide documents proving their financial status; it is simply based on a discussion between the and the at the first appointment. However, if a says, ' ., ' then this is not the right place for them. The organization does not provide services for free. However, the organization will do the initial evaluation for free, and may make a referral for them elsewhere.
To become a they have a interview with on the staff, at a minimum the individual must be pursuing a , or if they're a , a towards a . If , they must have or . The individual must also have a personal to see if they would be a good fit and treat the well.
The decide the preliminary course of treatment based on the intake appointment with the a week, meets with the about each of the in the program to discuss current progress and treatment to see if the course should change. The also discuss involving a , , or providing a referral if the needs are beyond the scope of the program.
Form886-A Department of the Treasury - Internal Revenue Service Schedule number or exhibit
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Periods ended The assigned agent asked and on the Program and a for-profit private practice. for-profit because the community service and reduced structured differently form a for-profit. about what the difference is between explained that the organization is different from a was unsure how the organization is On , the assigned agent sent the Program a memorandum of the notes taken during the prior interviews and requested comments. responded via fax on with additions to some of the prior responses given:
"
"'

# Law

Section 501(c)(3) provides in part tax-exemption to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, or similar purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.
Section l.501(a)-l(c) of the Income Tax Regulations (Regulations) defines "private shareholder or individual" as referring to persons having a personal and private interest in the activities of the organization.
Regulations Section l.501(c)(3)-l(a)(l) states that in order to be exempt as an organization described in Section 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 or operational test, it is not exempt.
Regulations Section 1.501 ( c )(3 )-1 ( c )( 1) states that an organization is operated exclusively for charitable purposes if it engages primarily in activities which accomplish one or more of such exempt purposes specified in IRC Section 501(c)(3).
Catalog Number 2081 OW Page _9_
Form886-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/Periods ended Regulations Section 1.501(c)(3)-l(c)(2) states that an organization is not operated exclusively for charitable purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.
Regulations Section 1.501 ( c )(3 )-1 ( d)( 1 )(ii) states that an organization is not organized exclusively for any of the purposes specified in Section 501 ( c )(3) unless it serves public, rather than private interests. Thus, it is necessary for the organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such interests.
Regulations Section 1.501(c)(3)-l(d)(l)(iii) states that private benefit must not be substantial relative to the public benefit, in a facts and circumstances test that requires public benefit from the organization's activities outweigh any individual benefit.
Regulations Section 1.501 ( c )(3)-1 ( d)(2) provides that the term "charitable" is used in Section 501 ( c )(3) in its generally accepted legal sense. The promotion of health has long been recognized as a charitable purpose.
Revenue Ruling (Rev. Rul.) 56-185, 1956-1 C.B. 202 provides in part that an organization is not exempt merely because it operates a hospital devoted to the treatment and care of patients. This ruling also sets forth general requirements, among other things, relevant to when a hospital is exempt under Section 501(c)(3):
1. It must be organized as a nonprofit charitable organization for the purpose of op,:!rating a hospital for the care of the sick. A nonprofit hospital chartered only in general terms as a charitable corporation can meet the test as being organized exclusively for charitable purposes.
2. It must be operated to the extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay. It is normal for hospitals to charge those able to pay for services rendered in order to meet the operating expenses of the institution, without denying medical care or treatment to others unable to pay. It must not refuse to accept patients in need of hospital care who cannot pay for such services.
3. It must not restrict the use of its facilities to a particular group of physicians and surgeons, such as a medical partnership or association, to the exclusion of all other qualified doctors.
4. Its net earnings must not inure directly or indirectly to the benefit of any private shareholder or individual. This includes use by or benefit to its members of its earnings by way of a distribution of profits, the payment of excessive rents or excessive salaries, or the use of its facilities to serve their private interests.
Rev. Rul. 69-266, 1969-1 C.B. 151 provides in part that an organization formed and controlled by a medical doctor to conduct research programs consisting of examining and treating patients who are charged prevailing fees for services rendered is not exempt.
Rev. Rul. 69-383, 1969-2 C.B. 113 provides in part that a revenue-sharing arrangement for compensation on the basis of a fixed percentage of departmental income will not necessarily preclude exemption, so long as there was an arms' length transaction, and the compensation is not excessive when compared to amounts received by specialists with similar responsibilities.
Catalog Number 20810W Page _j.Q_
Form886-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/Periods ended
Rev. Rul. 69-545,1969-2 C.B. 117 provides in part that the "promotion of health" is considered to be a charitable purpose in the general law of charity.
Rev. Rul. 70-186, 1970-1 C.B. 128 provides that private benefit must be a necessary by-product of the activity that benefits the public at large and accomplishes exempt purposes. In other words, the benefit to the public cannot be achieved without necessarily benefitting certain private individuals.
Airlie Foundation, Inc v. Commissioner oflntemal Revenue (CIR), 70 T.C. 352 (1978) provides in cases where an organization's activities could be carried out for either exempt or nonexempt purposes, courts must examine the manner in which those activities are carried out in order to determine their true purpose.
Birmingham Business College, Inc. v. Commissioner, 276, F.2d 476 provides in part that those in control of an organization may not withdraw its earnings under the guise of salary payments.
Church by Mail, Inc. v. CIR, 765 F.2d 1387 (9th Cir. 1985) found that a substantial, if not principal purpose of the organization was to generate income for the private benefit of its reverends and their families, who were private persons.
Federation Pharmacy Services, Inc. v. CIR, 625 F. 2d 804 (8th Cir. 1980), dealt with a nonprofit pharmaceutical service providing pharmacy services to the general public. It provided special discount rates for handicapped and seniors in its area, although it was not committed to providing any drugs below cost or free to indigents. Although its services did improve health in the area, it did not qualify for exemption because it was primarily a commercial venture operated in competition with other area pharmacies.
IHC Health Plans, Inc. v. CIR, 325 F.3d 1188 (2003) provides in part that to justify charitable exemption, taxpayer health-care provider must make its services available to all in community plus provide additional community benefits, which either further function of government-funded institutions or provide service that would not likely be provided within community but for the subsidy, and additional public benefit conferred must be sufficient to give rise to strong inference that public benefit its primary purpose for which organization operates. The court also provides that the fact that an activity is normally undertaken by commercial for-profit entities does not necessarily preclude charitable tax exemption, particularly where taxpayer entity offers its services at or below-cost. The court also provides that in determining whether charitable exemption is justified, taxpayer organization which does not extend some of its benefits to individuals unable to make the required payments generally reflects commercial activity rather than charitable one.
Lorain Ave. Clinic v. CIR, 31 TC 141 provides in part that the presence of a percentage compensation agreement will destroy the organization's exemption under section 50l(c)(3) of the Code where such arrangement transforms the principal activity of the organization into a joint venture between it and a group of physicians.
Lowry Hospital Ass'n. v. CIR, 66 TC 850 provides in part that a close relationship between an exempt hospital and a doctor or group of doctors may indicate private inurement, where the ,exempt hospital is part Catalog Number 20810W Page_11._ www.irs.gov Form 886-A {Rev. 5-2017) Form886-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/Periods ended and parcel of the doctors' personal medical practice and personal financial affairs. The two operations were so integrally interwoven in their daily operation that only the faintest outlines of a separable operating charity may be perceived.
Maynard Hospital Inc. v. CIR, 52 T.C. 1006 (1969) provides in part that it is doubtful whether an organization's operation can be "exclusively" for charitable purposes within the meaning of section 501(c)(3) when its income is being accumulated to increase directly the value of the interests of the stockholders which they expect to receive beneficially.
Northwestern Municipal Ass'n v. United States, 99 F.2d 460,463 provides in part that the phrase "net earnings", as used in Section 501(c)(3), may include "more than the term net profits as shown by the books of the organization or the difference between the gross receipts and disbursements in dollars."
People of God Community v. CIR, 75 T.C. 127 (1980) provides in part that where a percentage compensation arrangement when no upper limit exists, a portion of the organization's earnings is simply being passed on to the individual. The Court noted that the prohibition against inurement and the prohibition against benefit to private interests do overlap.
Sonora Community Hospital v. CIR, 46 T.C. 51 (1966) provides in part that the mere fact that an organization maintains a hospital does not in and of itself justify the conclusion that it was operated exclusively for charitable purposes. While the diagnosis and cure of disease are indeed purposes that may furnish the foundation for characterizing an activity as "charitable," something more is required. The court adds that of course, a "charitable" hospital may impose charges or fees for services rendered, and indeed its charity record may be comparatively low depending upon all the facts, but a serious question is raised where its charitable operation is virtually inconsequential.
Taxpayer's Position
The taxpayer has not provided a position.
Government's Position
Organizations exempt from federal income tax under Section 50l(c)(3) may not allow its net earnings to inure to the benefit of any private shareholder or individual. The Program is not organized and operated exclusively for charitable purposes as its net earnings inures to be benefit of the President and the evidenced by their structure, compensation arrangement, and governing body composition.
Structure
The Court provided in that in determining whether charitable exemption is justified, an organization which does not extend some of its benefits to individuals unable to make the required payments ( ) generally reflects a commercial activity rather than charitable one. The Program does not have specific policies or procedures in place for determining the amount of charged to a . The Program does not have a charity care or similar policy for treating or who become unable to pay while undergoing treatment. The Program does not dictate how much a should be charged, but instead leaves the decision to the individual . The Program Page--12._ www.irs.gov Form 886-A (Rev. 5-2017)
Form886-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/Periods ended originally provided that it is not a suitable treatment option for unable to pay, then later stated it does consider offering services for free and has done so in the past. For these reasons, the Program is like , where its operation reflects a commercial activity rather than a charitable one.
In , the Court held that the diagnosis and cure of disease is not enough to justify exemption, and while an organization may impose charges and for services rendered, a serious question is raised where its charitable operation is virtually inconsequential. The Program wrote in its taxexemption application that are charged on an individual basis solely dependent upon the s ability to pay, which are considered nominal compared to charged by for-profit programs.
However, the Program did not provide any evidence to show how its were determined to be than comparable for-profit entities, such as research or surveys of similar in the region. The Program charges on a sliding scale based on the ability to pay, from$ -$ a session, but does not have any policies to dictate how the determine the amount to charge a stated that in , most paid around $ per session, which is at the high end of its range of$ -$ The Program has taken little measures to ensure are charged based on their ability to pay, and that charity care is provided to . Like , the Program's charitable operation is virtually inconsequential. The Court acknowledged that reasonable may be imposed but providing medical services with little/no consideration for does not alone justify tax exemption. The Program has provided little evidence to show a charitable operation beyond the diagnosis and treatment of Like and , the amount charity care provided and consideration for by the Program is virtually nonexistent, making it indistinguishable from a for-profit program. The Program has not adequately established that its charitable operation is a significant part to be considered substantially different from a for-profit enterprise to justify exemption.
Compensation of
The Court held in that the presence of a percentage compensation agreement will destroy an organization's tax exemption where such arrangement transforms the principal activity of the organization into a joint venture between it and a group of physicians. The Program bears striking similarities with , mainly that organizations did not fix the charges to be made to but left the matter of determining the amounts of charges to be collected to the associated Neither organization's President knew upon what basis or method the individual fixed their charges.
Moreover, both the and the Program compensated their respective based on a percentage of the individual collected. This system for fixing the salaries of the individual constituted a competitive system with incentives for increasing the extent of the services rendered by the and the charged for such services. Of course, employees may receive reasonable compensation for their services, but where the method for fixing compensation for services is
Page -lL
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/Periods ended predominantly one which compensates the individual based on the ratio of their and activity to the whole, so that each is in competition with the other, the operation is one for profit. and the Program distributed substantially all of their net Most importantly, both the earnings to the associated . The Program indicated on both its Forms and its Profit and Loss Statements for and that it derives % of its income from , and payments to the makeup over % of its expenses:
Table 8 - Income and Expense Sources
Income
Percentage of Percentage of
Income Income
$ % $ %
Total Income $ % $ I %
Percentage of I Percentage of
I
Expenses Total Income
I Total Income
Outside Services $ % $ %
Pavroll Exoenses $ % - -
Salaries $ % - -
Total
$ % $ %
Expenses
As the Court explained, because the compensation arrangements allow and incentivize charges to the , the distribution of substantially all net receipts to the inures to their benefit, which is expressly prohibited for tax-exempt organizations.
Additionally, the Court held in People of God Community v. CIR that where a percentage compensation arrangement when no upper limit on earnings exists, a portion of the organization's earnings is simply being passed on to the individual. The Program stated that the highest percentage a can receive from collected is %, and there is no cap or upper limit on the amount of income a can receive. Thus, like the People of God Community, the Program's earnings are being passed on to the individuals to their private benefit. The Court also clarified that the prohibition on inurement extends to the founders and other controlling individuals that have a personal stake in the organization's receipts. In the Program, the have complete control over the organization's gross earnings and are distributed substantially all of it through this compensation arrangement.
In Maynard Hospital Inc. v. CIR, the Court explained it is doubtful whether an organization's operation can be "exclusively" for charitable purposes within the meaning of section 50l{c)(3) when its income is being accumulated to directly increase the value of the interests of the stockholders which they expect to receive beneficially. Though the Program's are not stockholders, they have a personal financial interest in the Program's success due to the compensation arrangement. Thus, they are incentivized to accumulate the Catalog Number 20810W Page _M_ Form886-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/Periods ended Program's earnings to directly increase their personal distributions, causing doubt that the Program is operated "exclusively" for charitable purposes.
In Birmingham Business College, Inc. v. CIR, the Court found that those in control of an organization may not withdraw its earnings under the guise of salary payments. Again, the Program's directly controlled the amount of gross receipts collected and received substantially all of it as compensation. The Program mirrors Birmingham Business College, as both organizations had controlling individuals influencing the gross earnings, and later receiving those earnings as compensation.
It is not meant to be implied that all contingent compensation arrangements made by charitable organizations will preclude tax-exempt status. In fact, Rev. Rul. 69-383 provides in part that a revenuesharing arrangement for compensation based on a fixed percentage of departmental income will not necessarily preclude exemption, so long as there was an arms' length transaction, and the compensation is not excessive when compared to amounts received by specialists with similar responsibilities. However, the record fails to show the Program engaged in arms' length transactions with each , and determined the compensation not to be excessive, as there is no cap or upper limit to the amount of compensation a could receive. The record also fails to show what research or information was gathered to determine a reasonable compensation amount, such as a compensation study or survey.
Lastly, Regulations Section 1.501(c)(3)-l(d){l)(ii) states that it is necessary for the organization to establish that it is not organized or operated for the benefit of private interests. The fact that the Program compensates its based on a percent of the they collect, where each sets their own to be charged, does not establish that it is organized or operated for public, rather than private, interests.
Governing Body Composition
Regulations Section 1.501 ( c )(3 )-1 ( d){l )(ii) states that an organization is not organized exclusively for any of the purposes specified in Section 501(c)(3) unless it serves public, rather than private interests. Thus, it is necessary for the organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or their family, shareholders of the organization, or persons controlled, directly or indirectly, by such interests.
The Program's Board consists of the founder, , and . The contract between personal corporation, the , and the Program was authorized by the Vice President, . The bills the Program for services provides, and the payment is authorized by the Program's Board, . The Program does not have a conflict-of-interest policy. The collect cash and checks from the , and 1s responsible for collecting the money, and preparing the bank deposits. also prepares and authorizes the outgoing checks and other payments and is the only in the organization authorized to sign the checks. Based on these facts, the Program has not established that it is not organized or operated for the benefit of private interests, which is required by IRC Section 50l(c)(3) for tax exemption.
Rev. Rul. 70-186 provides that private benefit must be a necessary by-product of the activity that benefits the public at large and accomplishes exempt purposes. In other words, the benefit to the public cannot be Catalog Number 20810W Page -1§_ www.irs.gov Form 886-A (Rev. 5-2017)
Form886-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/Periods ended achieved without necessarily benefitting certain private individuals. In contrast to this Revenue Ruling, there is little evidence to suggest any private benefit conferred to and the is a necessary byproduct of the charitable operation, such as a conflict-of-interest policy, internal controls policy, arms'- length transactions, or other safeguards to prevent misuse of assets and personal enrichment.
Net Earnings Inure to the Benefit of Private Interests
As discussed above, the Program's charity care operation and consideration for is virtually inconsequential, making it indistinguishable from a for-profit enterprise. This Program is not designed or suitable for or who later become while receiving , calling into question how the Program can be considered charitable. Additionally, the are incentivized by their compensation arrangement to increase the charged to the and the extent of the services rendered to the , going against the Program's assertion that it is charitable and serves . This compensation arrangement also allows for the Program's net earnings to inure to benefit of the Lastly, the Program's organizational structure creates doubt that it is organized exclusively to serve public, rather than private, interests, as the Board is comprised almost entirely of family, where little/no evidence has been presented to show how private benefit is discouraged or prevented.
The record fails to show the Program is organized and operated exclusively for charitable purposes, where no part of the net earnings inure to the benefit of any private individual, and thus does not qualify for tax exemption under IRC Section 501(c)(3).
Conclusion does not qualify for tax exemption under section 501(c)(3) because it serves private rather than public interests, where the net earnings inure to the benefit of private individuals.
Since the Program will no longer have tax-exempt status beginning , they are liable for filing Form , US. Corporation Income Tax Return, as of that date.
Page_j§_ www.irs.gov Form 886-A (Rev. 5-2017)

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