PLR202510013 Organization’s Exempt Status Revoked

3/7/2025 (12/14/2024)

Dear * * *:

Why we are sending you this letter

This is a final determination that you don’t qualify for exemption from federal income tax under Internal

Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ____. Your determination letter dated ______, is revoked.

Our adverse determination as to your exempt status was made for the following reasons: Organizations

described in IRC Section 501(c)(3) and exempt from tax under Section 501(a) must be both organized and

operated exclusively for exempt purposes and no part of the net earnings may inure to the benefit of any private shareholder or individual. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. You have not demonstrated that you are organized and operated exclusively for an exempt purpose or that you have been engaged primarily in activities that accomplish one or more exempt purposes as required by Treas. Reg. section 1.501(c)(3)-1(c)(1). Moreover, your organization was operated for the private interests of its deceased founder rather than the public, contrary to the requirements of Treas. Reg. section 1.501 (c)(3)-l(d)( 1 )(ii). Your income or assets have inured to the benefit of private shareholders or individuals which is prohibited by IRS Section 501(c)(3) and Treasury Reg. section 1.501(c)(3)-1(c)(2). As such, you have failed to meet the requirements of IRC Section 501(c)(3) and Treasury Reg. section 1.501(c)(3)-1(a). You have also failed to demonstrate that you are a church or convention or association of churches within the meaning of IRC sections 509(a)(l)/170(b)(l)(A)(i). See the attached Final Report of Revenue Agent under IRC Section 7611(g) for more information.

Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov.

Contributions to your organization are no longer deductible under IRC Section 170.

What you must do if you disagree with this determination

If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either:

• The United States Tax Court,
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court’s website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint.

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below:

United States Tax Court

400 Second Street, NW

Washington, DC 20217

ustaxcourt.gov

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below:

US Court of Federal Claims

717 Madison Place, NW

Washington, DC 20439

uscfc.uscourts.gov

US District Court for the District of Columbia

333 Constitution Avenue, NW

Washington, DC 20001

dcd.uscourts.gov

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428.

We’ll notify the appropriate state officials (as permitted by law) of our determination that you aren’t an organization described in IRC Section 501(c)(3).

The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can’t resolve your tax problem with the IRS or if you believe an IRS procedure just isn’t working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Visit TaxpayerAdvocate.IRS.gov/contact-us or call 877-777-4778 (TTY/TDD 800-829-4059) to find the location and phone number of your local advocate. Learn more about TAS and your rights under the Taxpayer Bill of Rights at TaxpayerAdvocate.IRS.gov. Do not send your Tax Court petition to TAS. Use the Tax Court address provided earlier in the letter. Contacting TAS does not extend the time to file a petition.

Where you can find more information

Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information.

Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter.

You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.

Sincerely,

Lori Stieber

for Lynn Brinkley

Director, Exempt Organizations Examinations

Enclosures:

Publication 1

Publication 594

Publication 892

Form 4621-A, Form 886-A

Issue:

Whether **** continues to qualify as an organization exempt from federal taxation under section 501(c)(3) of the Internal Revenue Code (“IRC”).

Facts:

**** was formed as a nonprofit corporation in the State of ____ on____. Per its Articles of

Incorporation, **** purpose is to “establish and maintain a church and to provide a place of public

worship in the____; [redacted section].

The IRS granted **** tax exempt status as a church under IRC section 501(c)(3) on ____.

____ was a founder of ****. He remained an officer and board member of **** until he resigned on ___. **** passed away on ____.

In ___, **** purchased a parcel of land at ___ for $___. In subsequent years, a home was constructed on this parcel of land. **** held title to the property until ___, when a Quitclaim Deed was executed to transfer the property from **** to ____ for listed consideration of $___.

As part of a lawsuit, ___, who was, at the time, ___ spouse, gave a sworn deposition in ___. In this deposition, ___ made the following statements regarding **** and the ownership of the property in ____:

Regarding **** activities:

• “… in the ___ years I have been with ___, there has never been one religious service conducted by ****. In the ___ years I have been with ___, there has never been an educational event conducted by ****. There has never been a church building.”
• “… the Church has never performed or hosted a single life cycle event or conducted a charitable act.”
• “Aside from legal niceties, there is no distinction between ___ and ****. He uses it and operates it on his own for his own purpose.”
• “There was never an organized board of directors or membership distinguishable from ___. He would routinely use me, my mother, my father, his mother, and other family members as “directors of the board” whenever he wanted **** to perform some function.”
• The address ____ uses as **** corporate office, ______ is our marital residence. I lived there with him from ____ until I left. The house is a duplex. We “lived upstairs and ran our ____ business in the downstairs. There is no separate and distinct church office in that building.”

Regarding **** activities:

• “____ and I built the home at ____, the property at issue in this case, first, as a winter home, and second, as a future retirement home for us personally. We used our marital funds to buy the property, then build the house on it.”
• “The property is now my primary residence.”
• “We found the subject property for sale, which at the time was just vacant land. We decided to buy it through a land contract for $___ at *% interest. ____ insisted that the property be held in the name of ****.
• “A couple of years before, my aunt died, and I inherited about $____. ____ Convinced me in ___ to pay that money into ****. Attached as **** are the cashier’s checks where I paid $ ___ to ****. These funds were used as the initial payment on the property.”
• **** did not have its own source of income or money. The only way in which **** got money was because ____ would take money from our personal accounts and pay it into **** accounts. It was our marital funds that ____ took from our marital accounts that were used to buy the property and, later, build the home that is on it now.”
• “Attached as **** are copies of construction supply invoices from ____ for the supplies necessary to build our ___ house. All these invoices were paid with money either directly from our personal accounts or from **** accounts, with money transferred from us.”
• “In ____, my sister died suddenly of a heart attack after surgery. I became concerned about what would happen to me if ___ died, and the property was not in our names. At that time, I insisted that the property be transferred out of the name of **** and into our names. ___ agreed.”
• There was never a signed writing of any kind, nor was there any oral contract or agreement between me, ____ and **** for the sale for the property. I do believe there is a written Bill of Sale. All the money used to buy the land and build and maintain the home was marital money from ___ and me. I never agreed to pay any additional consideration for the property, nor would I have. If anything, the transfer of property to me and ____ was exchange for money owed and/or already paid to ****. Ther was never a distinction between ____ and ****.

On ____, the IRS issued a Notice of Church Tax Inquiry (“NCTI”) letter to **** due to concerns about whether **** 1) was operating as a church and 2) participated in an excess benefit transaction under IRC section 4958. These concerns stemmed from the court case cited above in which an individual stated that **** was not operating as a church and that real property owned by **** was transferred to individuals without sufficient consideration.

As part of the NCTI, the IRS asked **** several questions regarding its activities as well as the property. **** response to these questions was prepared by ____, current board member. ____ did not become involved with **** until ____. ____ responses to the NCTI indicated that **** had conducted religious services decades prior (_____), however no religious activities had been conducted in recent years.

To clarify her responses to the NCTI, the IRS agent conducted an interview with ____ on ____. During the interview, ____ indicated that there had been no funds in **** bank accounts since ____ or ____. She indicated that no church activities had been conducted in ___ or any recent year. When asked how long it had been since church activities had been conducted, she stated that, to her knowledge, no church activities had been conducted since the ____.

In the NCTI, the IRS asked whether _____ provided any financial consideration to **** for the ____ property that was transferred to them in ___. In her response, ____ indicated that the ____ made one payment of $ ___ on ____. To ____ knowledge, no other payments were made. In addition, she indicated that ____ currently resides at the ____ property. During the ____ interview, _____ indicated that the ____ property was originally purchased using funds earned from video sales through ____. ____ indicated that the ____ claimed that ____ was a separate business from ****. However, ____ stated that she had documents showing that ____ was actually a part of ****.

On ___, the IRS issued a Notice of Church Tax Examination (“NCTE”) to ****. The IRS attached an Information Document Request (“IDR”) to the NCTE. In the IDR, the IRS requested current ___ records, including financial information, a list of governing body members, meeting minutes, and samples of publications.

In her response to the NCTE, ____ provided an assortment of documents from years prior to ___. Several of these documents dated from decades prior.

In the NCTE response, **** did not provide any documentation to indicate that it had conducted religious activities in recent years, including the year under IRS examination.

In the NCTE response, ____ provided a *-page document which appears to have been prepared by founder ____. This document included a brief history of **** as well as information on the ____ property. In this document, ____ stated the following with regard to the ____ property:

• “All of the money that went into building the **** [_____ property] came from the ________. The records clearly show this is the case. From the purchase of the land to all the checks that were written to the various builders supply houses contractors and subcontractors.”
• “The property was never intended to be a residential property for ____ and ____.”

A document entitled “ New Account Setup” was also provided in response to the NCTE.

This document has several fields, which arc completed in handwriting. Below is a listing of a few of these

completed fields:

• Owner/President:
• Contact:
• Corporate Name:
• DBA:

**** also provided a Vendor License from the State of ____ Department of Taxation. The ___ organization name listed on this license was ____ and the Trade Name listed was ____.

The NCTE response also included a TIN (Taxpayer Identification Number) Certification document in which the name is listed as ____. The TIN was listed as ___, which is the EIN that is assigned to ****.

In addition, **** provided a copy of the Bill of Sale for the ____ property in its NCTE response. This document is dated ___ and indicates that **** sold the property to ____ for $____.

The NCTE response also included a copy of a canceled check dated ____ from ____ to **** for $___, which is noted “mortgage.” ____ had indicated that this was the only payment that the ____ made to **** for the ____ property.

The NCTE response also included **** court documents. One such document is a *-page trial brief of defendant ____ from a Domestic Relations case in ____ [Divorce proceeding between her and ____]. ____ passed away before the divorce proceeding was finalized. Hence, ____ and _____ were still legally married at the time of death. In this trial brief, ____ provided the following information on the ____ property:

• ____ and ____ used funds earned from ____ and ____ to pay construction costs.
• ___ has resided at the property since ___.

In this trial brief, ____ provided the following information on

• She claims that, after filing his divorce action, ____ had **** claim that it owned ____.
• ____ has never been part of **** but it was operated in close connection with ___.

[Redacted] trial brief stated the following regarding ****

• The ____ property is single-family home in an area zoned for single-family homes, and which specifically excludes churches, retreat houses, rectories, parsonages, etc.

Another court document included with the NCTE response was an ___ affidavit of *** _____ in which _____ stated “Although I am listed as secretary, I never understood the _____ to be anything but an entity completely and totally controlled by ____. I never attended any board meetings and never knew **** to have any religious services or congregants other than ___.”

Applicable Law:

IRC Section 501(c)(3) provides tax exemption for corporations and foundations that are operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that in order to be exempt as an organization described in IRC 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 test or the operational test, it is not exempt.

Treasury Regulation Section 1.501(c)(3)-1(c)(1) states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which 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.

Treasurv Regulation Section 1.501(c)(3)-1(c)(2) states 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 or private shareholders or individuals.

Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3) unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an 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 private interests.

In the case of Community Education Foundation v. Commissioner, T.C. Memo. 2016-223, it was determined that petitioner, Community Education Foundation, no longer qualified for exemption from Federal income tax under IRC § 501(a) because it did not meet the operational test requirements for an IRC § 501(c)(3) organization. Specifically, the organization in the case over time did not meaningful organize or allocate revenue to any of its purported activities for which it had been granted exemption. It admitted to a significant period of inactivity and failed to demonstrate that it engaged in activities furthering exempt purposes described in IRC § 501(c)(3). For an entity to qualify as a church under IRC section 501(c)(3), the IRS applies the minimum operational requirements described in American Guidance Foundation. Inc, v. U.S.. 490 F. Supp. 304 (D.D.C. 1980). The IRS uses a combination of these characteristics, together with facts and circumstances, to determine whether an organization is considered a church for federal tax purposes. These characteristics include:

• Distinct legal existence
• Recognized creed and form of worship
• Definite and distinct ecclesiastical government
• Formal code of doctrine and discipline
• Distinct religious history
• Membership not associated with any other church or denomination
• Organization of ordained ministers
• Ordained ministers selected after completing prescribed courses of study
• Literature of its own
• Established places of worship
• Regular congregations
• Regular religious services
• Sunday schools for the religious instruction of the young
• Schools for the preparation of its members

In cases where a church demonstrates that the organization is not organized and operated exclusively for religious purposes because of private benefit or inurement of net earnings, courts have held that the organization was not organized and operated exclusively for religious purposes, regardless of whether it is engaged in any significant religious activities. See Unitary Mission Church of Long Island v. Commissioner, 84 T.C. 36 (1980), The Southern Church of Universal Brotherhood Assembled. Inc, v. Commissioner, 74 T.C. 89 (1980), Basic Bible Church v. Commissioner, 74 T.C. 72 (1980), People of God Community v. Commissioner, 75 T.C. 127 (1980).

Additionally, there are numerous court memorandum decisions where IRC section 170 deductions were disallowed on same basis – that the church was not organized and operated exclusively for religious purposes because of inurement or private benefit. See Manson v. Commissioner, T.C.M. 1980-315, Abney v. Commissioner, T.C.Memo. 1980 27. Pusch v. Commissioner, T.C.Memo. 1980-4.

When an organization operates for the benefit of private interests, such as designated individuals, the creator or his family, or persons directly or indirectly controlled by such private interests, the organization, by definition, does not operate exclusively for exempt purposes. Prohibited benefits may include an advantage, profit, fruit, privilege, gain or interest. Am. Campaign Acad, v. Commissioner, 92 T.C. 1053, 1065-66 (1989). Where an individual or small group has exclusive control over the management of the organization’s funds and is the principal recipient of the distributions of the organization, prohibited inurement is strongly suggested. See Church of Eternal Life & Liberty v. Commissioner, 86 T.C. 916, 927 (1986); See also Basic Bible Church v. Commissioner, supra at 857; Church of Transfiguring Spirit v. Commissioner, 76 T.C. 1, 7 (1981); Parker v. Commissioner, 365 F.2d 792 (8,h Cir. 1966). IRC section 4958(c)(1)(A) - the term “excess benefit transaction” means any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit.

Section 4958(f)(1) defines a disqualified person as any person who was in a position to exercise substantial influence over the affairs of the organization and includes a member of the family of such individual.

The regulations under Code section 501(c)(3), at Regulation section 1.501(c)(3)-1(f)(ii), instruct the Service to consider a variety of factors to determine whether revocation is appropriate when section 4958 excise taxes may also apply:

(A) The size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;

(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes;

(C) Whether the organization has been involved in multiple excess benefit transactions with one or more persons;

(D) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and

(E) Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6) and Regulation section 53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction.

Regulation section 1.501(c)(3)-1(f)(iv), Example 3, supposes that an organization’s founder caused organization to divert significant portions of the organization’s funds to pay personal expenses, which reduces the funds available to conduct exempt activity, over the course of multiple years. The size and scope of the transactions is significant in relation to the size and scope of organization’s activities. The board of trustees never authorized the organization to pay the founder’s personal expenses and takes no action to seek repayment or to terminate the founder’s involvement with the organization. The founder claims that the payments represent loans, but no contemporaneous documentation exists, and no payments of principal or interest were ever made to the organization. Based on the factors above, the regulation contemplates that not only does the diversion of funds constitute an excess benefit transaction under section 4958, but the prohibition against inurement has been violated and the organization no longer qualifies as an organization described in section 501(c)(3).

Government’s Position:

The organization has failed to meet the operational test described in Treasury Regulation Section 1.501(c)(3)-1(c)(1), above.

As stated in Treasury Regulation Section 1.501 (c)(3)-1(c)(1), “an organization will be regarded as operated

exclusively for one or more exempt purposes only if it engages primarily in activities which 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."

All evidence reviewed during the course of the church inquiry and church examination indicates that **** has not performed any tax-exempt purpose activities in decades, if ever. Like the organization in the Community Education Foundation case, **** has had a significant period ofinactivity and failed to

demonstrate that it engaged in activities furthering exempt purposes described in IRC § 501(c)(3).

To qualify for tax-exemption as a church, an organization should meet some combination of the fourteen

factors described in the American Guidance Foundation case cited above. There is no evidence that **** meets any of these factors during the tax year under examination. During the year under examination, **** didn’t even have any funds in its bank account, so no activities could have been carried on.

All evidence indicates that **** was always operated for the private interests of its deceased founder

rather than the public, contrary to Treas. Reg. § 1.501(c)(3)-l(d)(1)(ii). During the years when **** was operational, it was controlled exclusively by the ____; there was no board oversight, independent or

otherwise, and there is insufficient evidence to show that any exempt purpose activities were conducted

during these years.—In addition, there is evidence that **** engaged in an excess benefit transaction with disqualified persons when it transferred the ____ property to _____ in ___.

In court documents, ___ claimed that she and ___ paid for the ____ property with their personal funds, some of which was earned by ____. However, several documents reviewed during the course of the NCTE, and referenced above, indicate that ___ operated as an affiliate of **** and that ___ even used **** Employer Identification Number. However, regardless of the source of the funds used to purchase the ____ property, it is indisputable that this property was placed in the name of ****, which was exempt under IRC section 501(c)(3) at the time. Consequently, the ____ property was an asset of **** that could not be relinquished without sufficient consideration. The transfer of the ___ property from **** to the ____, without sufficient consideration, constituted inurement and was sufficient grounds to revoke **** tax-exemption without considering whether **** had been conducting exempt purpose activities (as explained above). Even though the Quitclaim Deed indicates that the ___. Property was transferred to the ___ for consideration of $___ to ****.

Based on the above analysis of the facts, **** does not continue to qualify for exemption under IRC Section 501(c)(3). Its exempt status should be revoked effective ____.

Conclusion:

For the reasons stated above, **** tax exemption under IRC section 501(c)(3) will be revoked effective ___.