The IRS properly revoked an organization’s tax-exempt status. The organization was organized primarily to increase public awareness of the legal system. However, its CEO used the organization to engage in the unauthorized practice of law. In addition, most of the organization’s income inured to the benefit of the CEO.
Generally, corporations organized and operated exclusively for exempt purposes may be granted a tax exemption. Some exempt purposes are: charitable, educational and prevention of cruelty to children or animals. In addition, the organization must show that no part of its net earnings inure to the benefit of any private shareholder or individual. In order to be tax exempt, an organization must be both organized and operated exclusively for an exempt purpose.
Tax-Exempt Status Revoked
A corporation is organized exclusively for one or more exempt purposes when its articles of organization:
(1) limit the organization’s purpose to one or more of those specified in Code Sec. 501(c)(3); and
(2) do not allow the organization to engage, except in an insubstantial way, in activities that do not further that purpose.
An organization is operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of those purposes. An organization is not operated exclusively for an exempt purpose if more than an insubstantial part of its activities do not further its exempt purposes. If an organization is engaged in a single activity directed at achieving various purposes, some of which are not exempt and some of which are, the organization will fail the operational test when the nonexempt purpose is more than insubstantial. In addition, an organization is not organized or operated exclusively for an exempt purpose unless it serves the public, rather than a private interest.
Organizational and Operational Tests
The organization did not engage primarily in the activities described in its articles of incorporation and its bylaws. Moreover, the net earnings of the organization inured to the benefit of its CEO. Finally, more than an insubstantial part of the organization’s activities furthered nonexempt, private purposes. Therefore, the organization failed to establish that the IRS’s adverse determination letter was an error.
Related case at J. Farr, 115 TCM 1003, Dec. 61,104(M), TC Memo. 2018-2.
Association for Honest Attorneys, TC Memo. 2018-41, Dec. 61,149(M)