Tax Relief Blog
In a Private Letter Ruling, IRS has determined that an organization does not qualify for Code Sec. 501(c)(3) exempt status because, among other things, the organization’s articles of incorporation don’t limit its purposes to one or more exempt purposes and expressly empower it to engage in business activities under state law.
IRC Code Sec. 501(c)(3) provides an exemption from federal income tax to organizations organized and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to the benefit of any private shareholder or individual.
IRS Reg. §1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization, the organization must be both organized and operated exclusively for one or more purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt.
IRS Reg. §1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more exempt purposes only if its organizing document limits the purposes of such organization to one or more exempt purposes and does not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.
IRS Reg. §1.501(c)(3)-1(c)(1) provides that an organization is regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more exempt purposes specified in Code Sec. 501(c)(3). An organization is not so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
IRS Reg. §1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.
IRS Reg. §1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest.
A taxpayer was formed as a general stock corporation. Its articles of incorporation state that it was formed for the purpose of engaging in any lawful act or activity for which a corporation may be organized under state law and that it is authorized to issue shares of stock.
The taxpayer’s sole employee and board member is V, an individual.
The taxpayer is a residential real estate broker. V is a real estate agent.
The taxpayer advertises their services through direct marketing, referrals, telemarketing, and advertising. They say that sellers enjoy a full-service brokerage with a market-leading real estate firm.
Taxpayer promotes the use of the Multiple Listing Service (“MLS”) and publications to buy or sell homes. It targets consumers, employees, and retirees to promote the sales of their homes.
Taxpayer plans to use government money to create a training/apprentice program. V will work inside the community creating a need for the real estate apprentice program which will allow training, advancement, and community development, which lessens the burdens of government.
Does the taxpayer qualify for exemption under Code Sec. 501(c)(3)?
The taxpayer does not qualify for exemption under Code Sec. 501(c)(3).
To meet the requirements of Code Sec. 501(c)(3), an organization must satisfy both the organizational and operational tests as described in Reg. §1.501(c)(3)-1(a)(1). The taxpayer was formed as a for-profit corporation with stock and it conducts substantial non-exempt real estate activities. As a result, it satisfies neither the organizational nor the operational test.
It does not meet the provisions of Reg. §1.501(c)(3)-1(b)(1)(i) because its articles of incorporation are those of a for-profit entity with stock and they lack a purpose clause limiting its activities to those described in Code Sec. 501(c)(3).
It is not operated exclusively for an exempt purpose as described in Reg. §1.501(c)(3)-1(c)(1) because the taxpayer is engaged in substantial non-exempt activities. Specifically, it provides real estate services for a fee identical to those provided by other for-profit real estate agencies.
To meet the requirements of Reg. §1.501(c)(3)-1(c)(2) and Reg. §1.501(c)(3)-1(d)(1)(ii), a taxpayer must serve a public interest rather than a private interest. The taxpayer is operating for the private interests of V. For example, it intends to get grants to help get V’s real estate business off the ground.
The taxpayer has a significant non-exempt purpose of selling real estate, which is not incidental to any educational or charitable purpose, which precludes it from exemption.
