By Deborah M. Beers, Esq.
Buchanan Ingersoll & Rooney, Washington, DC
PLR 201430014, released on July
25, 2014, in connection with a
denial of exemption under §501(c)(3) illustrates, on a set of
bizarre facts, the requirements for exemption as a "charitable"
and/or "educational" organization, as well as the limits of private
inurement and legislative activity.
"Taxpayer" was formed in State D to
protect "… the human rights
of defenseless victims from involuntary microwave and M attack,
organized stalking, or direct mind control attack of its various
forms, and to compensate such targets from … the associated damage
or death resulting from such sightings." "M attacks" were described
as "electronic radio or microwave transmissions from governmental
agencies and others who are working on projects that manipulate or
control human behavior."
State D was chosen as the
state of incorporation (even though
Taxpayer operated in State G) because of State D's "… advantageous
tax strategies for business owners and entrepreneurs and also
corporate veil protection for business." Prior to Taxpayer's
incorporation, its founder ("Founder") exhausted his personal
investments paying expenses for equipment, supplies, consulting
services and start-up costs.
To combat M weapons, Taxpayer represented that it will:
Taxpayer's website solicits
donations for the specific purpose
of influencing proposed legislation that was written by Founder.
The proposed legislation would prohibit or regulate the use of M
weapons on the public, subject violators to fines and imprisonment
and provide for restitution for the victims of M attacks. Taxpayer,
on its website, urges the public to contact members of the U.S.
Congress to express support for the legislation's enactment.
The proposed legislation would establish a trust fund, to be
operated by Taxpayer, to provide additional compensation to the
victims of M attacks. However, Taxpayer did not provide a detailed
description of the proposed operations of the trust or describe the
process by which Taxpayer would verify claims or insure unbiased
selection of eligible victims. Taxpayer has, however, identified
Founder as one of the victims of M attacks who would be eligible
for additional compensation mandated by the legislation.
Taxpayer's balance sheet shows more than $40,000 in
consisting principally of expenses paid by Founder prior to
Taxpayer's incorporation. Taxpayer plans to reimburse Founder
approximately $35,000 of those expenses after a paid
consultant/fundraiser has procured grants to Taxpayer. All such
grants will be used in the following priority:
Taxpayer also states that "anonymous donations,
gifts, or benevolence not so specified can be used for a private
inurement refund up to but not over $50,000." Any income left over
will be used to make expenditures to influence legislation.
The Internal Revenue Service
determined that Taxpayer was not
entitled to exemption under §501(c)(3). Section 501(c)(3) provides
that certain organizations are exempt from Federal income tax if
they are:organized and 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, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting, to influence
legislation . . ., and which does not participate in, or intervene
in (including the publishing or distributing of statements), any
political campaign on behalf of (or in opposition to) any candidate
for public office. (Emphasis supplied.)
payer failed to be operated for charitable
201430014 focuses on the "operational" test. While,
"providing aid to relieve human suffering caused by a natural or
civil disaster or an emergency hardship is charity in its most
basic form,"1 Taxpayer's
victims fund was determined not to be "operated" in a charitable
manner for the following reasons: The fund has not been
established. [There is] no application form, defined selection
criteria, selection committee or other information which
demonstrates an unbiased selection. However, you have determined
that [Founder] would be eligible for compensation. You have also
failed to establish the development and use of anti M weapons or
the implementation of counter attacks accomplishes charitable
purposes as defined in section 501(c)(3) of the Code and of the
regulations as you provided no specific information on how either
activity will be accomplished.
payer failed to be operated for educational
also determined that Taxpayer failed to establish that
its activities - consisting principally of a website - are
educational. The website states, in pertinent part: "This website
is an open effort for the protection of the human rights of
defenseless victims from involuntary microwave and M attack,
organized stalking or direct mind control attack of its various
forms and to compensate such targets from the associated
The website also requests readers "to contact their
representatives and senators to recommend legislative change,
includes a blog page and solicits contributions for acquisition or
leasing of test equipment."
Applicable Treasury regulations2 define term
also state that: "An organization may be
educational even though it advocates a particular position or
viewpoint so long as it presents a sufficiently full and fair
exposition of the pertinent facts as to permit an individual or the
public to form an independent opinion or conclusion."3
Rev. Proc. 86-43, 1986-2 C.B. 729, cited in the PLR, identifies
the factors that are indicative that the method used by the
organization to advocate its viewpoints or positions is
not educational, as follows:
Tested under this
standard, the IRS concluded that none of
Taxpayer's activities are educational. Indeed, while one might have
some sympathy with the intent to compensate the victims of "mind
control," the fact that the scientific basis for the purported
existence of "M attacks" appears to be about on a par with the
scientific evidence supporting the existence of , e.g., Sharknados,
seems to have doomed Taxpayer's application.
Taxpayer operates for the benefit of private
Better Business Bureau of Washington, D.C., Inc. v.
United States,4 the Supreme Court
held that the presence of "a single non-exempt purpose, if
substantial in nature," will destroy a claim for exemption
regardless of the number or importance of truly exempt
To be charitable,
an organization must serve a public rather
than a private interest. The private benefit restriction is not
limited to benefits provided to insiders. Rather, the restriction
applies to benefits provided to any individual, whether or not the
individual is in a position to control or influence the
organization. "The private benefit restriction operates against all
parties who receive a benefit not accorded the public as a
A substantial part of the grants to Taxpayer that
solicited by its for-profit fundraising consultant will be used to
reimburse Founder's personal expenses. Therefore, like the
organization in Better Business Bureau, a substantial part
of Taxpayer's activities will benefit the private interests of
Founder. Further (and somewhat incredibly), the IRS states that
"[Taxpayer has] failed to establish that [Founder] or
others - i.e., non-insiders - will not privately benefit
from [Taxpayer's] development and use of anti M weapons." Thus,
Taxpayer serves a substantial nonexempt purpose.
4. Taxpayer is an "action" organization.
§1.501(c)(3)-1(c)(3)(1) provides that an organization is
not operated "exclusively" for one or more exempt purposes if it is
an "action" organization as defined in subdivisions (ii), (iii), or
(iv) of this subparagraph.
An organization is an "action" organization if a
part"6 of its activities
is attempting to influence legislation by propaganda or
otherwise.7 For this purpose,
an organization will be regarding as attempting to influence
legislation if the organization:
Since Taxpayer has a primary
objective of enacting legislation,
Taxpayer is an "action" organization disqualified for exemption
under §501(c)(3). Taxpayer also fails to meet the "operational"
test because its lobbying activities are more than insubstantial.
[Taxpayer's] entire operation is dependent on the passage of …
5. No exemption under §501(c)(4).
The IRS also briefly considered whether Taxpayer could qualify
as a tax exempt social welfare organization under §501(c)(4) (as
section that has lately been much in the news). However, the
prohibition on private inurement applies to 501(c)(4) social
welfare organizations to the same extent that it applies to
§501(c)(3) organizations. Therefore, the payment of Founder's
personal expenses as well as payments to Founder through the victim
trust fund result in inurement to Founder that bars exemption under
the new streamlined procedures for small organizations to
apply, using Form 1023-EZ,9 for tax-exempt
status under §501(c)(3) been in effect, it is likely that the
organization described in PLR 201430014 would have sailed through
the exemption process with little or no scrutiny. A "small"
organization is eligible to use From 1023-EZ if its assets are
valued at $250,000 or less, and it has annual gross receipts of
$50,000 or less.
Critics of the new "streamlined" exemption process have noted
that it is likely to promote fraud by sham exempt organizations.
For example, the National Association of State Charity Officials
said in an April 30, 2014 letter, that:State charity regulators
uniformly oppose a Form 1023-EZ, noting that such a form would make
it easier for `scam' charities to obtain Section 501(c)(3) status.
They also believe that there is no way at the outset to justify a
rationale of exempting small charities from the Form 1023 filing
burden, because all applicants, other than perhaps private
foundations, begin their existence as small organizations. As one
state charity regulator noted: `The application process should be
the same for everyone - no one knows how large and successful a
particular organization or cause may be at its earliest beginnings,
even if they pledge to 'stay small.'
It is estimated that most "streamlined"
applications will not
receive even cursory review. For this reason, the National Council
of Nonprofits, the largest network of charitable nonprofits in the
country, also opposes the new form. However, resource constraints
dictate that such organizations will find the road to tax exemption
much easier for the foreseeable future.
information, in the Tax Management Portfolios, see
Author(s), 450 T.M., Tax-Exempt Organizations: Organizational
Requirements, 451 T.M., Tax-Exempt Organizations:
Operational Requirements, and in Tax Practice Series, see
¶6510, Charitable Organizations.
6 A §501(c)(3) organization may make an election,
under §501(h), to limit its lobbying expenditures to a statutorily
approved amount, in lieu of the "substantial part" test set forth
above. Section 501(h) provides a sliding scale of permissible
lobbying expenditures for electing §501(c)(3) organizations.
Expenditures above the thresholds are subject to a 25% excise tax,
and exemption is lost because of lobbying activities only if
lobbying expenditures "normally" exceed 150% of the
thresholds. In general, these expenditures are limited to 20%
of the first $500,000 of expenditures for exempt purposes, plus 15%
of the next $500,000, 10% of the next $500,000, and 5% of any
exempt purpose expenditures over $1,500,000. The total amount
expended in any one year may not exceed $1,000,000, and further
limits are placed on attempts to influence the general public -
i.e., "grass roots lobbying." Taxpayer represented that it made or
intends to make the §501(h) election.
9 See IRS Form 1023-EZ,
"Streamlined Application for Recognition of Exemption Under
Section 501(c)(3) of the Internal Revenue Code;" Rev. Proc.
2014-9, 2014-2 I.R.B. 281; Rev. Proc. 2014-40; 2014-30 IRB 229.
Rev. Proc. 2014-40 is effective July 1, 2014, and amplifies Rev.
Proc. 2014-4, Rev. Proc. 2014-5, Rev. Proc. 2014-9, Rev. Proc.
2014-10, and Rev. Proc. 2014-11 and supplements Rev. Proc. 2014-8.
See also REG-110948-14, 79 Fed. Reg. 37697-37698
(July 1, 2014).
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