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Sunday January 24, 2021

Private Letter Ruling

Organization's Exempt Status Denied

GiftLaw Note:
Organization filed a Form 1023-EZ for exemption under Sec. 501(c)(3). Organization's Articles of Incorporation state it is organized in part to share family history, stories, information and sociality. Organization's significant activity consists of an annual gathering for sociality and celebration of shared heritage, including learning and teaching about common ancestors and historical family ties. An amendment to the Articles of Incorporation state that in addition to its purpose statement in the original Articles, Organization is organized exclusively for "genealogical, chartable, educational purposes." Each year, Organization's president selects a charity to be the recipient of the annual charitable service project. Membership is open to direct descendants of Y, if the individual has attained a certain age. Membership dues are collected. Organization stated that upon dissolution, its assets would be distributed for genealogical educational charitable purposes.

To be exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for charitable, religious or educational purposes and no part of the earnings of which inures to the benefit of any private shareholder or individual. Under Reg. 1.501(c)(3)-1(a)(1), if an organization fails to meet either the organizational test or operational test, it is not exempt. Regulation 1.501(c)(3)-1(c)(1) states that an organization is organized exclusively for one or more exempt purposes only if it is engaged primarily in activities that accomplish one or more of its exempt purposes. The organization must serve a public rather than a private interest and must not be established for the benefit of the individuals who created the organization, according to Reg. 1.501(c)(3)-1(d)(1)(h). In Benjamin Price Genealogical Association v. Internal Revenue Service, the Tax Court held that an organization formed to preserve the genealogy of an individual served the private interests of its members. Here, the Service determined that Organization failed both the organizational and operational tests, because Organization operates to provide social and genealogical benefits to members of a particular family. Therefore, Organization is not exempt from federal income taxes under Sec. 501(c)(3).
PLR 202102009 Organization's Exempt Status Denied

1/15/2021 (10/20/2020)

Dear * * *:

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

Issues


Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts


You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. You attested on Form 1023-EZ that you are organized and operated exclusively to further charitable and educational purposes. You also attested that you have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3).

Your Form 1023-EZ states that your most significant activity is that you gather yearly for sociality and celebration of your heritage, as you learn/teach about your common ancestors and historical family ties. You perform a yearly service project to benefit the needy and contribute to the less fortunate.

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations. You were formed as a corporation on W in the state of X. Your Articles of Incorporation state that your purpose is to "share family history, stories, information and sociality" and to "provide yearly charity/service project." The amendment to your organizing document provides that in addition to the purpose statement in the original Articles, that you are organized exclusively for "genealogical, chartable, educational purposes" including such purposes, the making of distributions to organization that qualify as exemption organizations under IRC Section 501(c)(3). Upon dissolution, any remaining assets would be irrevocably dedicated to genealogical educational charitable purposes. Additionally, your Articles contain a provision that states that notwithstanding any other provision of this document, you shall not carry on any other activities not permitted to be carried on (a) by any organization exempt from federal income tax under Section 501(c)(3), or (b) by an organization, contributions to which are deductible under Section 170(c)(2).

Your Constitution and Bylaws lists your purposes as:

a) To provide an opportunity for all members to meet together once a year.

b) To promote social relationships and closer acquaintanceship among members.

c) To foster and encourage appreciation for our great heritage and strive for further knowledge concerning your ancestor and his wives.

d) To contribute to a charitable service project.

You want your family members to be informed about their history. You maintain a website with information concerning family events and genealogy. Your website indicates that you strive to connect your extended family by organizing opportunities to meet once a year and to foster an appreciation of your heritage. You gather annually for a luncheon at which family stories, sociality, music presentations, and information on family history are shared. Games and crafts are provided for youth in attendance.

The primary participants in your activities are direct * * * descendants of Y. Membership is open to all direct * * * descendants over the age of Z years old.

Each year your president selects a charitable organization to be the recipient of the annual service project. Monetary donations or in-kind donations are made. The service project is be completed on the day of the annual luncheon. In the past you have collected baby items for a homeless shelter and collected canned food items for a foodbank. Future plans include the provision of scholarships to descendants of Y for educational and charitable purposes.

You receive income from membership dues and donations. Your expenses include bereavement flowers, website, postage, rent, speakers, music, supplies, catering, and luncheon supplies such as cups, plates, etc.

Law


IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net earnings may inure 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.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized and operated exclusively for one or more exempt purposes of organization:

(a) Limit the purpose of such organization to one or more exempt purposes; and

(b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities that in themselves are not in furtherance of one or more exempt purpose.

Treas. Reg. Sec. 1.501(c)(3)-1(b)(1)(iv) provides that in no case an organization shall be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in Section 501(c)(3).

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in IRC 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(h) states that an organization is not organized or operated exclusively for exempt purposes 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(iii), Example 1, provides an illustration of when an organization serves a private interest, rather than a public interest:

(i) O is an educational organization the purpose of which is to study history and immigration. O's educational activities include sponsoring lectures and publishing a journal. The focus of O's historical studies is the genealogy of one family, tracing the descent of its present members. O actively solicits for membership only individuals who are members of that one family. O's research is directed toward publishing a history of that family that will document the pedigrees of family members. A major objective of O's research is to identify and locate living descendants of that family to enable those descendants to become acquainted with each other.

(ii) O's educational activities primarily serve the private interests of members of a single family rather than a public interest. Therefore, O is operated for the benefit of private interests in violation of the restriction on private benefit in paragraph (d)(1)(ii) of this section. Based on these facts and circumstances, O is not operated exclusively for exempt purposes and, therefore, is not described in Section 501(c)(3).

Revenue Ruling 71-580, 1971-2 C.B. 235, describes an organization formed by members of a particular family to compile genealogy research in order to perform religious ordinances of the religious denomination to which the family members belonged. It qualified for recognition of exemption under IRC Section 501(c)(3).

Rev. Rul. 80-301, 1980-2 C.B.180, describes an organization that had a membership open to all persons in a particular geographic area and provided instruction in genealogical research techniques. The organization qualified for exemption as an educational organization.

Rev. Rul. 80-302, 1980-2 C.B. 182, describes an organization formed to locate, acquire, restore and preserve all available genealogical records of a particular family. Membership was limited to lineal or legal descendants. The organization did not qualify for exemption. The activities served the private interests of its members.

In Better Business Bureau of Washington, D.C., Inc, v. United States, 326 U.S. 279 (1945), the Court held that the presence of a single non-exempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of statutorily exempt purposes.

The Callaway Family Association, Inc, v. Commissioner, 71 T.C. 340 (1978), held that a family association formed as a nonprofit organization to study immigration to and migration within the United States by focusing on its own family history and genealogy does not qualify for exemption under IRC Section 501(c)(3). The association's activities included researching the genealogy of its members for the ultimate purpose of publishing a family history. The court stated that the association's family genealogical activities were not insubstantial and were not in furtherance of an exempt purpose. Rather, they served the private interests of the members.

In Benjamin Price Genealogical Association v. Internal Revenue Service, 79-1 U.S.T.C. P9361 (D.D.C. 1979), the Court held that an organization formed to disseminate information on, and to preserve documents relating to, the genealogy of Benjamin Price did not qualify for exemption under IRC Section 501(c)(3) because it was created and operated primarily for the benefit of the private interests of its members rather than exclusively for educational purposes.

Application of law


As explained in Treas. Reg. Section 1.501(c)(3)-1(a)(1), to be exempt as an organization described in IRC Section 501(c)(3), you must be both organized and operated exclusively for one or more of the purposes specified in such section. You have failed to meet both requirements, as explained below.

Your organizing document does not limit your purposes to exclusively IRC Section 501(c)(3) purposes. As a result, you do not meet the requirement of Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). Your articles state your purpose, in part, is share family history, stories, information and sociality. The amendment to your Articles did not remove that purpose but added to it that you are organized exclusively for "genealogical, chartable, educational purposes." You cannot be considered to be organized exclusively for one or more exempt purposes if the purposes stated in your articles of incorporation are broader than the purposes specified in Section 501(c)(3), as prohibited by Treas. Reg. Sec. 1.501(c)(3)-1(b)(1)(iv). Although you have a notwithstanding clause, that cannot cure your non-exempt statement of purpose, since the specific purposes named are inherently incompatible with Section 501(c)(3) purposes.

You do not meet the operational test of IRC Section 501(c)(3) because you are not operating exclusively for exempt purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You do not meet the provisions of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are operating for the private interests of your family members rather than the general public. Any benefit to the general public through your service project is merely incidental to the private benefit accruing to family members.

You are very similar to Treas. Reg. Section 1.501(c)(3)-1(d)(1)(iii), Example 1, because your genealogy activities primarily serve the private interests of members of a single family rather than a public interest.

You are not like the organization described in Rev. Rul. 71-580 because your activities are not conducted to fulfill a religious ordinance. Rather, your stated purpose is to conduct genealogical research for your family so that you can celebrate your heritage and share sociality with your extended family.

Unlike the organization described in Rev. Rul. 80-301, you only perform genealogical research for your family members, and not the general public. You are like the organization described in Rev. Rul. 80-302 because your research is only related to * * *.

Similar to the organization described in The Callaway Family Association, Inc, and Benjamin Price Genealogical Association, you are not exempt because you are formed for the benefit of members of a particular family and you focus on your own genealogy and social purposes with limited charitable benefit. Therefore, you are operated for the private interests of your family members and do not qualify for exemption under IRC Section 501(c)(3).

Although you do conduct some charitable activities, you do not qualify for exemption under IRC Section 501(c)(3) because your social activities and genealogical research further a substantial non-exempt, private purpose as explained in Better Business Bureau of Washington, D.C., Inc.

Conclusion


Based on the information provided, you do not qualify for exemption because you neither organized nor operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3). You fail the organizational test because your organizing document does not limit your purposes to those described in Section 501(c)(3). You also fail the operational test because you further a substantial non-exempt purpose by conducting social and genealogical activities for the members of a particular family, which furthers private interests. Therefore, you do not qualify for exemption under Section 501(c)(3).

If you agree


If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements.

If you don't agree


You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include:
  • Your name, address, employer identification number (EIN), and a daytime phone number
  • A statement of the facts, law, and arguments supporting your position
  • A statement indicating whether you are requesting an Appeals Office conference
  • The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative
  • The following declaration:
    For an officer, director, trustee, or other official who is authorized to sign for the organization:
    Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete.
Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney.

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

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

Where to send your protest


Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail:

Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter.

Contacting the Taxpayer Advocate Service


The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Published January 22, 2021
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