Foundation’s Tax-Exempt Status Properly Revoked (Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc., DC D.C.)

The IRS properly revoked the tax-exempt status of an educational foundation because it was operated solely to benefit a decedent’s family. The foundation’s only funding came from the decedent’s estate and it gave educational grants only to the decedent’s descendants. Thus, the foundation was operated in a manner that inured to the benefit of a single family, which precluded the foundation from qualifying for tax-exempt status.

The foundation’s argument that it was expressly organized to potentially benefit all Hungarian immigrant descendants and that there was no basis to apply the private benefit doctrine because the four scholarship recipients met the criteria to receive scholarship awards was flawed. Even if the foundation’s stated purpose was a charitable purpose, the foundation failed to operate in a manner that did not inure to the benefit of only one family. Prohibited inurement may occur even if a charitable beneficiary is a member of a larger class that would otherwise qualify the organization for tax-exempt status. Moreover, the foundation failed to offer any authority suggesting that the five-year period used to determine whether a Code Sec. 501(c)(3) organization qualifies as a public charity had any bearing on the timing of an IRS revocation audit.

Further, the IRS did not abuse its discretion by revoking the foundation’s tax-exempt status retroactively. The foundation operated in a manner materially different from that originally represented. In its application, the foundation represented that it would (1) list the scholarship program on various Internet websites, and (2) advertise the program in two general circulation newspapers. However, the foundation failed to conduct any advertising campaign and only contacted the websites after the IRS began its audit of the foundation’s activities. Moreover, the foundation misrepresented the process by which grant recipients were chosen. Finally, the foundation was not entitled to stay the proceedings because certain individuals who sought to intervene had filed an appeal over the IRS’s use of a privileged document in its revocation determination. There were sufficient facts available to find for the IRS and, even if the individuals were successful in intervening, the resolution would be the same.

Related decision at DC D.C. 2014-1 ustc ¶50,240.

Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc., DC D.C., 2015-2 ustc ¶50,365

Other References:

Code Sec. 7428

CCH Reference – 2015FED ¶41,723.14

CCH Reference – 2015FED ¶41,723.26

Tax Research Consultant

CCH Reference – TRC EXEMPT: 3,100

 

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Wolters Kluwer Tax and Accounting

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