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Tuesday February 7, 2023

Private Letter Ruling

IRS Revokes Foundation's Exempt Status

GiftLaw Note:
Foundation applied for exempt status under Sec. 501(c)(3). It was originally formed under Sec. 501(c)(7) and later requested recognition under Sec. 501(c)(3) by filing Form 1023. Foundation was originally formed for the preservation and memorialization of historical and architecturally significant buildings and structures. Foundation issues grants to help finance the preservation of the historical buildings. Foundation's two principal activities are: (1) review proposals and fund projects to preserve the historic building, and (2) raise funds to support these preservation projects. Foundation's Board of Directors are responsible for issuing grants and determining which buildings and structures to preserve. When a project is approved, Foundation will fund all or a portion of the project. Foundation's operations focused on the renovations of one particular building that is owned and occupied by a related social club and used primarily by its members. Numerous events are held at this building, where its attendees are comprised of primarily members and member-guests. Members of the public cannot attend such events or be offered tours of the building unless they are guests of members.

An organization may be exempt from federal income tax under Sec. 501(c)(3) if it is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational proposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. Also, no part of its net earnings may inure to the benefit of a private individual. Under Reg. 1.501(c)(3)-1(a)(1), the organization must be both organized and operated exclusively for one or more exempt purposes. Under Reg. 1.501(c)(3)-1(c)(1), an organization is operated exclusively for an exempt purpose if it engages primarily in activities that accomplish one or more exempt purposes. If more than an insubstantial part of its activities is not in furtherance of an exempt purpose, it will fail the operational test. Here, the Service determined that Foundation is not operated exclusively for an exempt purpose as it is maintaining a building for the private interests of a social club and its members rather than the public. Therefore, because Foundation's operations have inured to the benefits of its insiders, tax-exempt status was revoked.
PLR 202149015 IRS Revokes Foundation's Exempt Status


(1) Does the (hereafter'the Foundation") qualify for exemption under Internal Revenue Code (IRO) § 501(c)(3)?

(2) If the Foundation doesn't qualify for exempt status, what is the effective date of revocation?


The is a corporation located at , , that effective December 1?, 20XX was recognized as exempt under IRC § 501(c)(3) as further described under IRC § 170(b)(1)(A)« 1 he Foundation is located at the same address as ths (hereafter 'the *). The was recognized as exempt under IRC §501 (c)(7) in August 19XX. The Foundation's books and records are maintained by the accounting department, the Foundation's books and records are included in the books and records, and the Foundation is included as part of the external audit.

Foundation Application Form 1023 and Organization

Form 1023, Application tor Recognition of Exemption under § 501(c)(3) of the Internal Revenue code, received by the IRS on May 15, 20XX. The Form 1023 was signed by on May 3'20XX.

In Part I of the Form 1023, Line 11, the Foundation was incorporated on December 12, 20XX, In Pari V of the Form 1023, the original Board of Directors were:

Name Title Mailing Address Director / President Director /Vice President Director / Secretary The Form 1023 was analyzed. Below is a summary of the relevant parts of this analysis:

• In Part VI. Line 1b, the Foundation would provide goods, services or funds to organizations and the Foundation provided an attached explanatory summary.
• That summary states that the Foundation will provide grants to the for the purpose of preserving the historic building and to provide funds for the preservation of other historic buildings in the future.
• In Part VIII, Line 13a, the Foundation indicated that it would make grants, loans or other distributions to organizations, that the Foundation would have a contract with each of those organizations, and that the Foundation required a grant proposal. The Foundation provided an attached explanatory summary.
• That summary states that the Foundation will operate with the principle purpose of preserving ths historical and architecturally significant building and other similar structures. Grants will be made to the to preserve and protect the Building. There may be foundation grants of similar nature in the future
• In Part VIII, Line 15, The Foundation stated that the has the authority to appoint the Foundation's Board of Directors The will apply for grants for the preservation of the building. The officers of the will be elected by the Foundation Board and will work with of in maintaining its independence.

Included with the Form 1023 was a copy of the Articles of Incorporation. These articles were analyzed. Article Four states hi relevant part, that the Foundation Is organized and operated with particular focus on the building occupied by the and the downtown Area.

Included with the Form 1023 was a copy of the bylaws. These bylaws were analyzed. Below is a summary of the relevant portions of these bylaws;

• In § the affairs and business of the Foundation shall be managed by a Board of Directors. This board shall have at least 0 directors and no more than 0 directors. The directors are appointed by the Board of Governors of the . The directors must be members of the
• In § of the bylaws, part , the Foundation may (but is not obligated to) conduct educational programs and tours of the , for which a fee no greater than necessary to defray event expenses may be charged.
• In § of the bylaws, part , any action tn furtherance of the purposes set forth in these Articles that relates to the exterior and interior structural architecture of the building occupied by the , shall betaken only after consultation with"and the approval of—the appropriate officials of the (or lacks jurisdiction, then after the consultation with—and approval of—officials of any other organization that is an authority on the preservation of the architecture of the building and the area)

Narrative Description of Activities

Attached to the Form 1023 was a narrative description of activities labeled as Part IV. This narrative was analyzed. Below is a summary of the relevant parts of that analysis:

• On Page 1,the building has been fisted on the by the as of April 16,20XX. All work on the exterior of the building must be reviewed and approved by the of the , pursuant to standards established for the
• The building (also called *the Building") is located in downtown on public streets with its architecture visible to the public There are numerous events held at the Building during the year to which non-members of the general public are invited to attend. During the past months, the estimates that more than 0 nonmembers attended such events In the Building and had the opportunity to enjoy the interior architecture of the Building
• On Page 3, in the first full paragraph, any proposed preservation or repair projects by the Foundation must be first reviewed and approved by of (hereafter * *). No projects shall be undertaken by the Foundation unless approved by . All projects ©hall be pursuant to a contract between tte Foundation, the and
• The Foundation intends to conduct two principle activities: (i) review proposals and fund projects to preserve the historic building, and (»} raise funds to support these preservation projects, The will identify preservation projects needed by the Building and submit proposals to the Foundation, If the project is approved, the Foundation will fund all or a portion of the project The Foundation expects to spend 0% of ite time engaged in this activity. Tlie otter U% of the time will be spent in fund raising activities.

Argument for Foundation Exemption and Agreement

Attached to the Form 1023 Is a letter from dated May 15,20XX and signed by that summarizes the legal argument for why the Foundation should be exempt under IRC § 501 (c)(3). The legal argument is summarized below:

• Organizations that preserve one particular structure or several structures in a historically significant area have both been recognized as exempt (Revenue Ruling 86-49,1986-1 OK243; Revenue Ruling 75-470,1975-2 C.B. 207).
• In order to ensure that all Foundation activities and expenditures advance its exempt purpose, the Foundation and the have executed a contract with to review and approve all preservation activities and expenditures.

Included with the Form 1023was the agreement dated April 19,20XX between , the and the Foundation. The following is a summary of that agreement:

• agrees to review any project Involving tte Building ttet Is proposed to be undertaken by th© Foundation.
• shall evaluate the proposals against the Secretary of the Interiors Rehabilitation Stands for Preservation Projects, however may approve a proposal even if it does not comply in all respects with such standards.
• The Foundation shall not undertake any project unless certifies that the projectwork is important to the historic preservation of the Building.
• The Foundation need not comply in all respects to all standards in every situation.
• The Foundation will reimburse at the market rate for architectural reviews by a principle architect in the , area plus a percentage for overhead.
• The Foundation agrees to prepare a ba saline report of the existing conditions of the exterior and interior structures of the Building
• The duration of the agreement is years from the date of the agreement execution. This agreement will automatically renew for subsequent terms of years unless notice is given In writing by one of the three parties,
• The agreement can be terminated with a 90 day written notice by any of the three parties.

Because of the references to the of , the website for of was analyzed. The information from ths website is summarized below
• is a entity organized in 19XX and incorporated as a non-profit in 19XX
• is a membership organization with over 0 members that is the primary advocate for the preservation of the region's historic structures
• advocates the use of historic tax credits to fund historic preservation
• On its website, does not claim to be an exempt organization described in IRC § 501(c)(3)
Form 990 Summary The Form 990, Return ofOrganization Exempt From Income Tax, for the years ended 8/31/20XX and 8/31/20XX were analyzed. Both years are, in relevant part, summarized below:

Initial Interview and Tour

On May 2, 20XX the was toured and an initial interview was performed. Those attending the interview were (Chief Finance Officer), (Prior CFO) and (examiner).

When examiner arrived for the interview, examiner didn't get more than a few feet inside the building before the staff stopped examiner. Non-members cannot wander freely around. At the time of the interview, according to , the Foundation preserves historic structures, principally the balding. The Foundation doesn't own the building and there are no façade conservation easements on the building The approves all projects earned out by the Foundation.

There are no public tours provided to the public. The principle people seeing the interior of the building are the members and their guests. At the time of the tour, one large room was carrying out an activity sponsored by a member. That member had several guests that were attending a lecture. The staff made sure that those guests could only use the room and the bathrooms. The rest of the facilities and building were not open to the guests to use.

Information Document and Request

On June 6, 20XX the 1RS examiner asked for the following information:
• Minutes of meetings for the fiscal years ended B/31/20XX and 8/31/20XX
• The Chart of Accounts for the fiscal years ended 8/31/20XX
• A copy of the account summaries and accounting worksheets used that connects the books and records to the Form 990 returns
• An explanation of any allocated expenses for overhead
• A copy of tile contract
• Substantiation that non-members attended events in the building for the fiscal year ended 8/31Z20XX that includes—but is not limited to*what these events were, how many attended, the purposes of the events and if these individuals were guests of a member or members
• Substantiation that demonstrates that the Foundation is carrying out charitable activities

The response dated August 16, 20XXwas analyzed. The response consists of a cover feller from Tlw summary of this letter Is given below

• Foundation board minutes for August 31, 20XX and August 31, 20XX is inducted
• Foundation chart of accounts
• Reconciliation of the books and records to the Form 990
• $0 of the Foundations' directors' expenses are allocated percent of the director's compensation
• Certification that the building is listed in the ; agreement. This certification provides, in large part, the basis for the IRS approving the Foundation's application for tax-exemption under IRC § 501 (c)(3),
• The purpose of the agreement is for to review any project involving the building to determine whether the project, or aspects of it, are for historic preservation of the building.
• With regards to IDR Item #6, it is important to note that the public benefit and purpose for exemption, generally speaking Is not due to the public use of the building but is due to the maintenance, restoration and overall ability of the Foundation to preserve the building so that the public can view the architectural significance of the building.
• A tetter from s the attorneys who handled the original Form 1023 application for the Foundation. The memorandum clearly identifies the basis for which the IRS awarded the Foundation its tax-exemption.

Each portion the response was analyzed. In the October 18, 20XX minute. The relevant parts of the minute and CFO report is summarized below:

• The loan will be fully dispersed in 0 to 0 days and will have a principle balance of $0
• The principle and interest payments will be $0 per month or 90 per year • The loan is a 0-year loan with a fixed interest rate of 0%
• When the Foundation makes disbursements to , it is accounted for in the program services line, ft doesn't get capitalized on the or the Foundation's books. This is typical of 601(c)(3).
• There are four avenues for fund-raising: (1) annual events such as the and the (2) annual giving and one-time gifts; (3) reaching out to corporations who are not members; (4) planned giving
• The planning meeting determines what is done at the
• The Foundation ensures that Foundation money is spent on preservation initiatives for tlw downtown clubhouse
• When the Board approved the project, the understanding was that the Foundation would carry the obligation for the note to fund the project & Tlie project knocked out $0 in Infrastructure that had been looming for many years. There is a comprehensive 1st (hat is being updated consistently
• How can the Foundation raise additional funds to allow for more progress to be made? A suggestion was to have a Foundation director sit on the planning committee
• How can the Foundation help the event? Put Hie word out and encourage sponsorships.

The November 29, 20XX minute is summarized below:

• The main sources of revenue have been the a event every other year and the program
• We count on $0 to $0 from the
• The main focus is to raise funds to pay forthe project, which was $0
• The debt service Is $0 per year for this project
• The loaned the funds to the Foundation for the project
• The expense relates to the HVAC loan from the

The Chart of Accounts shows the following accounts:

• Account Note Payable - HVAC at $0
• Account shows $0 retained earnings
• Account shows interest expense of $0
• Account shows charitable donations of $0

The Trial Balance is cross referenced to Parts VIII, IX and X of the Form 990 for the fiscal year ended 8/31/20XX.

The (in) , has been listed in the (on) April 16,20XX. The agreement between of , the and the Foundation is the same agreement that was attached to the Form 1023.

Because of the reference in the minutes to the event, the website was analyzed. In relevant part, the event is for members and their guests to gather for an elegant evening of entertainment, food, drink, socializing, and bidding on auction items in support of the three foundations: the Foundation, the Foundation and the Foundation.

The consists of 0 business, professional and civic leaders and their families. The has 0 * " that carry out a variety of activities and invite guests to participate with the members and their families in their activities. The hosts an annual commemoration banquet and invites non-membens to this activity.

According to (see Attachment One) 11VAC stands for Healing, Ventilation and Air Conditioning, It's a whole system with the sole purpose of making the indoor environment comfortable.

and Foundation Promissory Notes

The promissory note between the and (see Attachment Two) was analyzed. The terms of the note are summarized below:
• This is a commercial note between the and with a principle amount of $0
• The date of the note is June 12, 20XX, the interest rate is 0% and the maturity date Is June 12, 20XX
• Article Two, ths promises to pay the amounts advanced up to the maximum principle balance of $0
• Article Seven: the agrees to make 0 payments of $0 beginning on February 12, 20XX with payments thereafter due on the 12th of each month and the unpaid principle and interest due on June 12, 20XX
• Article Nine: the loan purpose Is to pay forzerò component projects st the downtown clubhouse
• Article Ten: the pledged its fine arts collection as collateral
• Article Nineteen: obligation to pay the loan is Independent of any obligation of any other person who has agreed to pay the loan
• Article Twenty: the note cannot be amended unless made in writing between and « Article Twenty-Seven: , Chief Finance Officer, signed the note on behalf of th
On the same date as lite loan between and the was completed, the loaned the money to the Foundation (see Attachment Three). The terms of the note are summarized below:
• The principle amount of the loan Is $0
• The interest rate is 0% with a maturity date of June 12, 20XX
• Article Five states that during phase 1 of the loan, 7 payments of accrued interest will be made beginning July 12,20XX, thereafter there are 0 payments of $0 beginning on February 12, 20XX with the final payment being due on June 12,20XX
• Article Seven states that the purpose of the loan is to provide funds for zero component projects at the downtown clubhouse
• Article Seventeen: , President, signed the note on behalf of the


Organizations organized substantially for pleasure, recreation, and other non-profitable purposes, or to support such purposes, are exempt under IRC §501(c)(7) lhe exemption of social clubs is based on the logic of alowing members to pool their funds for recreational purposes, rather than for a compelling public benefit. Congress granted exemption so that these membership pools would not be taxed twice (at the member level and at the organizational level) (see Portland Golf Club v C.I.R. 497 U.S. 154,110 S. Ct. 2780 (1990)).

Exempt function income means the gross income paid by members of the organization, their dependents and guests goods, facilities or services In furtherance of the purposes constituting the basis for exemption of Uw organfeation (IRC Section 512(a)(3)(B)). The term 'unrelated business taxable Income" refers to gross income derived from any trade or business unrelated to the purposes for which the organization is exempt (IRC Section 512(a)(1)). With regards to unrelated business taxable income, there are special rules applicable to organizations described in IRC Section 501(c)(7) (IRC Section 512(a)(3)(A)).

Rev. Proc. 71-17, 1971-1 C.B, 683, sets forth guidelines for determining the effect gross receipts derived from use of a social club's facilities by the general public have on the club's exemption from federal income tax under section 501 (c)(7) of the Code. The procedure defines the term "general public,* as persons other than members of a club or their dependents or guests.

Exemption under IRC § 501(c)(3) is provided for organizations that are organ feed and operated exclusively for charitable, religious and educational purposes with no part of the net earnings inuring to the benefit of any private shareholder or individual (IRC § 501 (c)(3)). Inurement is benefit to an individual member of the organization (Treasury Reg. Section 1.501 (c)(3)-1 (e)(1)). The prohibition against inurement is absolute; the organization loses its tax-exempt status If even a small percentage of income inures to a private individual (Church of Scientology of California v C1R, 823 F.2d 1310 (1987)). An organization's net earnings may inure to the benefit of private individuals in ways oilier than by the actual distribution of dividends or payment of excessive salaries. The payment of expenses and expenditures on behalf of a private person is also prohibited Inurement (Founding Church of Scientology v United States, 412 F.2d 1197, 188 Ct CL 490).

Charitable purposes are: Religious, Charitable, Scientific, Testing for Public Safety, Literary, Educational or prevention of cruelty to children or animals (Treasury Reg. § 1.501(c)(3)- 1(d)(1)(i). The term 'charitable" as used in IRC § 501(c)(3) is used in its generally accepted legal sense (Treasury Reg. § 1.501(c)(3}-1(d)(2)). The Historic Preservation Act of 1966 (16. U.S.C. §s 461,470) provides that it is a national policy to preserve the public use of historic sites, buildings and objects of national significance for the inspiration and benefit of the people of the United States.

'Conservation Purpose1* means the preservation of an historically important area or a certified historic structure (IRC § 170(h)(4)(A)(iv)). A certified historic structure means any building, structure or land which is listed in the National Register (IRC § 170(h)(4)(C)). In order to be considered to be exclusively for conservation purposes, the interest must have written restriction(s) or written equitable servitude(s) that limits the use of the property (Belk vCIR, 140 T.C. No, 1 (2013) affd Belk v CIR, 774 F 3d 221 (2014)) and prohibits any change in the exterior of the building which is inconsistent with the historical character of tlw property (IRC §170(h)(4)(B)(H)(l)) perpetuity (IRC § 170(h)(5)). The organization enforcing these restrictions must have Ure resources to manage, and authority to enforce, tire restrictions (IRC § 170(h)(4)(B)(0)(H)).

A non-exempt entity that substantially benefits from the activities of the exempt organization, and exerts considerable control over the exempt organization and how the exempt organization carries out its activities means the exempt organization is being used ns an instrument to further the private benefit of the non-exempt and does not qualify as tax exempt (Est of Hawaii v Commissioner 71 T.C. 1067 (1979)).

An organization formed to promote an appreciation of history through the acquisition, restoration and preservation of buildings having special historical or architectural significance, and after the building is restored opening the structures for viewing ty the general public with its operations financed from admission fees to the restored buildings and from contributions from the public is educational and charitable within the meaning of IRC § 501(c)(3) because it Is operated like a museum (Revenue Ruling 75-470,1975-2 C.B. 207,1975).

An organization formed for the purpose of preserving the historic or architectural character of a community through the acquisition and occasional restoration of historically or architecturally significant properties, and subsequent disposition of those properties subject to restrictive covenants that generally restrict the use and enjoyment of the property granted in perpetuity by controlling its physical or visual aspects to such a degree that the organization has the right to bar any interior or exterior alterations without the consent of the organization is educational within the meaning of IRC § 501(c)(3). These restrictive covenants preserve the designated properties in their historical state for the benefit of the public, rather than merely ensuring their conformity to locally imposed standards. (Revenue Ruling 86-49,1986-1 C.B. 243).

An organization will not be regarded as exempt under IRC § 501(c)(3) if more than an insubstantial part of Its activities Is not in furtherance of an exempt purpose (Treasury Reg §1.501 (c)(3)-1(c)(1)). The purposes toward which an organization directs its activities, and not the nature of the activities themselves, determine whether the organization meets the operational test (B.S.W. Group Inc v Commissioner, 70 T.C. 352, 356-357 (1978)). The requisite purpose for tax-exempt status under IRC Section 501 (c)(3) does not simply consist of a charitable motive, but rather requires that the organization is operated to accomplish that purpose (Partners in Charity Inc v C.I.R., 141 T.C. No, 2 (2013)).

An organization is not organized and operated exclusively for one or more charitable purposes unless it serves a public rather than a private interest (Treasury Reg. § 1.501(c)(3)-! (d)(1)(H). An organization is not dedicated to one or more exempt purposes if its assets are not dedicated to an exempt purpose (Treasury Reg § 1,501 (c)(3)-!(b)(4)), An organization Is required to keep records, substantiate its activities and reflect those activities in its returns (IRC §§ 6001, 8033).

An organization's net earnings may inure to the benefit of private individuals in ways other than by the actual distribution of dividends or payment of excessive salaries (Founding Church of Scientology v United States, 188 Ct. CL 490, 412 F. 2d 1197 (1969)). Upon a conclusion that relevant facts reveal private benefit, the organization will not qualify as operating primarily for exempt purposes absent a showing that no more than an insubstantial part of its activities further the private interests or any other nonexempt purposes (see American Campaign Academy v C.I.R., 92 T.C. 1053, 1066 (1989)).

For purposes of determining tax-exempt status, factors indicating prohibited inurement and private benefit includes control by the founder over the entity's funds, assets and disbursements, use of entity moneys for personal expenses, and bans to the founder showing a ready private source of aredit (Treasury Reg. § 1.501 (o)(3> 1(d)(0)).

A nonprofit organization formed to dredge a navigable waterway fronting the properties of Its members does not qualify fortax exemption under IRC § 501(c)(3) because the waterway was little used by the general public, but its navigability greatly affected the value of the members* properties. The Court held that because the benefit to the general public was incidental and the organization was using its funds to foster private interests the organization was serving private interests and so was not charitable (Benedict Ginsberg v Commissioner (46 T.C. 47 (1966)).

An organization that has educational aspects because of its dose relationship to education and training of apprentices is still not organized and operated exclusively for educational purposes because providing education Is not its primary purpose or function. The primary purpose or function was Improving working conditions of a group of laborers, and the educational aspects are incidental to that primary purpose (Revenue Ruling 59-6,1959-1 C.B. 121). An organization formed to organize, host, conduct and sponsor educational and other charitable activities in its facilities was found to not be exempt. While the organization carried out a few charitable and educational activities, these were incidental to its primary activities of operating a commercial conference center (Arlie Foundation v IRS, 283 F. Supp. 2d 58 (D.D.C. 2003)).

Because the chapter house also serves as a center for the social activities of its members and is not under an integral part of the college or under direct control of the college, a college ft ator nhy that maintains a chapter house fcx active members wltu are students of tire school is not exempt under IRC § 501 (c)(3) but to exempt under IRC § 501(c)(7) (Revenue Ruling 69- 573, 1969-2 C.B. 125).

A donation s a gift defined as a voluntary transfer of property to another without consideration (Seed v Commissioner, 57 T.C. 265,275 (1971)). If the amount of the donation does not exceed the benefit received by the donor then no charitable contribution has been made (DeJong v C.LR., 36 T.C. 896 (1961)). Payments for services received are not charitable donations (Hernandez v C.LR. 490 U.S. 680.109 S. Ct. 2136(1989)). By retaining control and deriving personal benefit from the transferred property, no gift has been made (Davis v C.LR,, 81 T.C. No. 49, 81 T.C. 806 (1983)), Organizations that facilitate tax avoidance schemes do not qualify for exemption under IRC §601 (c)(3) (Church of World Peace Inc. v Commissioner T.C, Memo 1994-87 (1994), aff'd 62 F.3d 337 (10* Cir. 1995)). In this case, the church used its taxexempt status to create a circular tax avoidance scheme. Individuals made tax-deductible donations to the church. The church returned the funds in the form of tax-free "housing allowances".

The presence of a single non-exempt purpose, if substantial in nature, will destroy Itre exemption regardless of the number or importance of truly exempt purposes (Better Business Bureau of Washington D.C. Inc. v United States, 326 U.S. 279, 283 (1945)).

An exemption ruling or determination letter may be revoked or modified retroactively if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented to the IRS (Treasury Reg. § 601.201(n)(6), see Partners in Charity v 0.1.R. (IBID)).

Taxpayer Position

The letter from dated August 15,20XX signed by provides the basis for the Foundation's argument that the Foundation qualifies for exemption under IRC § 501(c)(3) (see Attachment Four).The letter is summarized below.

• As set forth in the Form 1023, the Foundation's organizational and operational purposes are the preservation of the history and architecture of with particular focus on the building occupied by the (*the building*).
• The building is a designated city landmark that has been enjoyed by locals and tourists on a daily basis.
• As the driver crosses the , the building is the first building seen when using the bridge and traveling into
• The term charitable is used in its generally accepted legal sense (Treasury Reg. Section 1.501 (c)(3)-1(d)(2)).
• Through the National Historic preservation Act of 1966 (80 Stat 915,16 U.S.C. 470 et seq)("the act"), the preservation of historic buildings and education of the public about the historical and architectural significance of structures qualify as charitable and educational purposes (see Revenue Ruling 75-470, 1975-2 CB 207; Revenue Ruling 86-49, 1986-1 CB 243).
• The act declared it a national policy to preserve for public use historic sites, buildings and objects of national significance and authorized the Secretary of the Interior to contract with states, municipal subdivisions, businesses and individuals to restore, reconstruct, rehabilitate, preserve and maintain historic sites.
• Revenue Ruling 86-49 (IBID) involved an organization formed to preserve the historic and architectural character of its community through acquisition, occasional restoration and subsequent sate of the property with restrictive covenants on the property in order to preserve the historic or architectural significance of the properties.
• Revenue Ruling 75-470 (IBID) concluded that a non-profit formed to acquire, restore and preserve buildings having historic or architectural significance and to open such buildings for viewing by the general public qualifies the organization for exemption under IRC Section 501 (c)(3).
• Every year, there are some events held at the building which are attended by members of the public who are not members of the (such as the celebration for all in the area).
• Pursuant Io liie Act tta created and maintains tire The building has been In ' since April 16, 20XX.
• AH projects funded by the Foundation must be independently reviewed by the < must confirm that any Foundation proposed project is consistent with the Foundation's exempt purpose.
• The agreement between the Foundation, the and was included in the Information Document Response dated August 16,20XX.
• The agreement provides that projects funded by the Foundation will be limited tu preservation and rap^li of the building exterior, and to the interior to the extent necessary to preserve the building and its structural integrity.
• The Foundation has operated consistent with and in furtherance of its charitable purpose.
• The Foundation shepherded the building's application for recognition on the and has supported various projects to preserve and maintain the building.
• Various projects included wall and exterior wall repairs, roof replacements, lining roof drains, plumbing repairs and upgrades throughout the interior walls and repair of the main sewer drain and lateral sewer lines.
• The Foundation is currently doing fundraising to support a $0 exterior restoration project.
• These projects benefit the public by preserving the historic building.
• In their agreement, the and the Foundation have agreed with that if the building is ever sold or the is dissolved, the depreciated value of the preservation projects funded by the Foundation must be repaid by the to the Foundation so that such funds can be used for other IRC Section 501(c)(3) activities.

Government Position:

In order to qualify for exemption under IRC § 501(c)(3), the Foundation must be operated exclusively for charitable purposes (IRC § 501(c)(3), Treasury Reg. § 1.501(c)(3)-! (d)(i)). The purposes toward which an organization operates determine whether the Foundation meets the operational test (B.S.W. Group v Commissioner (IBID)).

The Foundation's governing body is appointed by the governing body of the . The Foundation's governing body have to be members of the The Foundation is located at the same address as the , its activities are accounted for by the accounting department and its activities are included in the books and records.

While the Form 1023 asserts that the building is open for the public use of thousands of people and the letter dated August 15, 20XX asserts that use the club on , the Foundation did not provide any substantiation of this afieged use even when asked for it. At the time of the initial interview, the facilities are available for the members to use and invite guests to attend. The website states that non-members are invited to participate in activities. These non-members are quests of the and so are not members of the general public (IRC Section 512(a)(3)(B), IRC Section 512(a)(1), Rev. Proc. 71-17, W71-1 C.B. 683). Absent substantiation of the public use of the building (as required by IRC § 6001), Ute conclusion fe that there Is no public use of the building, Because ft is not open for public use, unlike the organization described fat Revenue Ruling 75-470 (IBID), the building fe not operated by the Foundation or anyone else like a museum.

The historic building owned by the is in the and so is a certified historic building as defined in IRC § 170(h)(4)(C), and the preservation thereof is a conservation purpose (IRC § 170(h)(4)(A)(iv)) rf there are written restrictive covenants (Revenue Ruling SB49 (BID), Belk v Commissioner (IBID)). At the time of the initial interview, ft was stated that them Is no fe^ada conservation easement on the building.

The Foundation asserts that the has some form of expenditure control, or an enforceable approval process that prevents the Foundation or the from doing routine maintenance, interior decoration or other improvements to the interior of the building. A review of that agreement shows that the doesn't have to comply with the Department of Interior's required preservation practices, and the Foundation doesn't have to abide by a decision made by the . These are not restrictions covenants. For that reason, this agreement is not substantiation of any written restrictions (as required by IRC § 6001 and Belk v CIR (BID)).

Because the and the Foundation can ignore the recommendations made by the even if there were restrictions, they are not granted in perpetuity (IRC Section 170(h)(5)), the doesn't have the written authority to enforce any restrictions that exists (IRC Section 170(h)(4)(B)(ll)(ll))t and the relationship between the and can be terminated with a 90 day notice (which is evidence of a lack of perpetuity of the implied restriction(s)). The below facts further illustrate this issue.

The borrowed funds from in order to pay for an HVAC system. On the same day, the Foundation boriuwed the same amount of funds from the , Tlie Foundation pays the same amount to the as the is responsible for paying to its creditor According to its books and records, the Foundation is paying for an HVAC system.

The Implementation of an HVAC system paid for by the Foundation effectively eliminates the argument that the agreement with disallows the Foundation from doing any improvements to the interior of the building. Obviously, this agreement has no effect on the activities of the Foundation.

In conclusion, this agreement is not substantiation that any enforceable restrictive covenants in place in perpetuity by (or anyone else) to enforce restrictive covenants (see IRC §§ 6001). Because of these failures, the activities paid for by the funds obtained by the from are not considered to be activities carried out for a conservation purpose (Belk v Commissioner (IBID)). Without a conservation purpose, the Foundation is not operating like the organization described in Revenue Ruling 86-49 (IBID) wherein restrictive covenants were used to preserve and protect historic buildings

I hat the historic building can bo seen by the public is not enough to qualify the Foundation for exempt status, the Foundation's principle activity lias to consist of charitable purposes which, in this case, includes preserving the historic building for the public benefit (see National PreservationAct of 1966 (IBID), IRC § 501(c)(3), Treasury Reg. §§1.501(c)(3)-1(d)(1)(i)) and 1.501 (c)(3)-1 (o)(1); Revenue Ruling 59-6 (IBID) and Arise Foundation (IBID)).

The Form 1023 stated that would propose restoration projects to the Foundation for the Foundation to approve The Form 1023 states that this comprises an estimated 0% of the Foundation's activities. The other 0% of activities consisted In carrying out fundraising.

In the October 20XX minute, the planning committee decides what is done with the building. From this minute, it Is clear that the Foundation doesn't have a director that sits on that planning committee. The put up collateral and obtained a loan. These ban proceeds were then given to the Foundation as a loan to pay for the HVAC system.

There is no substantiation that the projects were provided to, or approved by, the Foundation. There is no substantiation that the Foundation obtained the funds, decided how those funds were to be used or had any part in the approval process that outlined the use of those funds (see IRC § 6001). While the loan amount was reported on the Foundation's Form 990 in the total liabilities, the HVAC asset value was not reported on the Foundation's Form 990 in the balance sheet.

The only conclusion that can be reached is that the Foundation does not own the HVAC system that it is paying for. While the HVAC system may not be seen by the members, these members certainly benefit more from the presence of the HVAC system in the building then does the general public (who has no access to the building). Because this activity serves a private interest more than a public interest, this activity is not a charitable activity (IRC § 501 (c)(3). Treasury Reg §1.501 (c)(3)-1 (d)(1 )(ii))

Payment for the HVAC means that the assets of the Foundation are not dedicated for a charitable purpose (in violation of Treasury Reg. §1.501 (c)(3)-1 (b)(4)). For thb reason, the Foundation does not qualify for exempt status (Treasury Reg. § 1.501 (c)(3M (b)(4)).

From the board minutes, the Foundation obtains from the a listing of repairs the desires to have completed and raises funds to pay for those repairs. It is dear that operationally the primary purpose ofthe Foundation is to support the in carrying out activities (see B.S.W. Group Inc v Commissioner (IBID), Partners in Charity v C.I.R. (IBID)). Operationally, the Foundation is an instrument of the that operates to further the noncharitable purposes of the (see Est of Hawaii v C.I.R. (IBID)).

Just because the is an exempt organization under IRC § 501 (c)(7) does not mean, or imply, that its activities are to benefit the public interest. The purpose for organizations like the being granted exemption was to preclude double taxation on the same money (see Portland Golf Club v C.l.R. (IBID)). While the is not prohibited from doing charitable activities directly or indirectly through the Foundation, the Foundation has to demonstrate that these activities are charitable activities that benefit the general public (IRC §§ 501(c)(3), 6001).

The Foundation is using donations (primarily from the members of the ) to support the exempt activities of the A donation is a gift defined as a voluntary transfer of property to another without consideration (Seed v Commissioner, 57 T.C. 265, 275 (1971)). If the amount of the donation does not exceed the benefit received by the donor then no charitable contribution has been made (DeJong v CJK, 36 T.C. 896


The Foundation portrayed and Implied in its Form 1023 that ft would operate independently and separate from the to carry out the charitable purpose of preserving the historic features and architecture of the building and other historic buildings in the downtown area. However, based on the facts of this case, operationally It is not distinguishable from the and the activities thereof.

For the reasons expressed in the government position, the Foundation materially misrepresented how it would operate and the purposes for which it would operate. The Foundation was organized and operated to further the exempt purposes of the and the members thereof to such an extent that the Foundation operationally is not separate from, or independent of, the

For this reason, the primary government position is that revocation of exempt status should be retroactively applied and be effective December 12,20XX (Tr easury Reg. § 601.201(d)(6)).

The alternative position is that Hie exempt status of lire (hsundation should be revoked effective the first day of the year under examination: September 1, 20XX.

Because the Foundation Is no longer an exempt organization, the organization needs to fife a Form 1120, U.S. Cvipotato hiuorue Tax Return* instead of a Form 990. Because there is no lax affect from the revocation, the Foundation will need to file the Form 1120 in subsequent time periods

Published March 25, 2022
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