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Saturday April 25, 2015

Private Letter Ruling

Org Helping Unemployed Denied Exemption

GiftLaw Note:
Org was formed as a Sec. 501(c)(3) organization for the purpose of helping the unemployed get jobs. Org’s founder and president is also a licensed counselor offering counseling on a wide-range of issues such as sexual issues, eating disorders, anxiety and depression. Org’s founder also operates a consulting firm where he collaborates with companies and organizations on conflict resolution and employee personal development. Although Org initially received exempt status, the issue before the IRS was whether Org continued to qualify as exempt under Sec. 501(c)(3).

Sec. 501(c)(3) organizations must be organized and operated exclusively for one or more exempt purposes with no part of their net earnings inuring to the benefit of any private shareholder or individual. An organization is regarded as operated exclusively for an exempt purpose only if it engages primarily in one or more exempt purposes. Sec. 1.501(c)(3)-1(c)(1). Here, the IRS noted that providing services to the unemployed is considered a charitable purpose within the meaning of Sec. 1.501(c)(3)-1(d)(2). However, the IRS’s review of Org’s activities indicated that it has either discontinued serving the unemployed or that it only minimally engages in that activity. While Org provides other meaningful services to people struggling with addictions and other mental health issues, the IRS determined that Org does not operate exclusively for these activities. The IRS found that Org’s primary activity in recent years was providing general mental health counseling. Because of the broad nature of those services, the IRS held that they did not serve a defined charitable class under Sec. 1.501(c)(3)-1(d)(2). Finally, the Service found that Org’s founder was able to use Org as a way to promote his consulting firm, which was focused on helping for-profit corporations. Therefore, the IRS revoked Org’s exempt status.
PLR 201515034 Org Helping Unemployed Denied Exemption
4/10/2015 (11/21/2014)

Dear * * *

* * *

ISSUE


Does * * *, continue to qualify as an exempt organizations described in section 501(c)(3) of the Internal Revenue Code?

FACTS


* * * was formed on December 17, 19XX in the State of * * * as a nonprofit corporation.

* * * applied for tax exempt status from the Internal Revenue Service on February 12, 19XX by filing Form 1023, Application for Recognition of Exempt Under Section 501(c)(3) of the Internal Revenue Code.

Form 1023 states that, "The organization was formed to help the unemployed. Through a series of lectures and training and prayer the attendees with be helped in the areas of personal self esteem, guidance in preparation for job interviews and all areas of personal conduct and grooming etc."

* * * received a favorable determination on April 23, 19XX as exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code.

* * *, founder and president of * * *, is listed in * * *, * * * listing states:

"I have been a counselor since 19XX. I completed my * * * in counseling from * * * in 19XX and my * * * in counseling from the * * * in 19XX. I am ordained as a * * * through the * * *. I am a * * * with * * *. I specialize in sexual issues, eating disorders, anxiety, grief, depression, anger, interventions, and ADD/ADHD, also offering group psychotherapy. I provide therapy for all adults, children, and adolescents. I have extensive experience in executive coaching for individuals wanting specific coaching to advance their career.

"I founded * * * in 19XX as a Christian alternative to traditional counseling. We offer services to both Christians and non-Christians of all ages and ethnic backgrounds."

* * * website, * * *, lists * * * mission statements as:

"Our purpose is to provide genuine, caring, client-centered, directive, professional, Christian mental health counseling, which includes psychological assessment, training, and consultations to individuals, couples, families, and groups at a fair market value, in a manner that is glorifying to God.

* * * continues to be a viable non-profit ministry meeting the psychological and educational needs for the entire state of * * *."

* * * website also has information about Seminars & Speaking Engagements. This web page states:

"* * * spends considerable time in corporate circles addressing issues like conflict resolution, human resource planning, and strategic coaching."

"Through his consulting firm, * * *, * * * has spent the past 25 years collaborating with companies and organizations to effectively manage strategic change, positive conflict resolution, and employee personal development. * * * goal is to see your objectives accomplished and maximized; to meet that goal, we employ industry tenured professionals who are dedicated to seeing your plans succeed, whatever they are."

* * * website also states the following information about executive coaching:

"Executive coaching is different from psychotherapy. It is working one on one, and groups with corporate executives on their need to improve areas, to be more effective, productive, and manage better.

"Areas such as:

Communication

Inner Personal Skills

Motivation

Conflict Resolution

Hiring/Firing

"Each person has unique needs and the coaching is customized. Contact our office for more in depth discussion on how this could help you and your business today."

LAW


Internal Revenue Code section 501(c)(3) provides exemption from Federal income tax for corporations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Treasury Regulation section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization described in 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.

Treasury Regulation section 1.501(c)(3)-1(c)(1) specifies the operational test for a 501(c)(3) organization. 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 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.

Treasury Regulation section 1.501(c)(3)-1(d)(1)(ii) clarifies the meaning of the term exempt purpose. An organization is not organized or operated exclusively for one or more exempt purpose unless it serves a public rather than a private interest. To meet this requirement 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.

Treasury Regulation section 1.501(c)(3)-1(d)(2) provides that the term "charitable" is used in section 501(c)(3) in its generally accepted legal sense. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; lessening of the burdnes of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (1) to lessen neighborhood tensions; (2) to eliminate prejudice and discrimination; (3) to defend human and civil rights secured by law; or (4) to combat community deterioration and juvenile delinquency.

TAXPAYER'S POSITION


* * * power of attorney, * * *, has indicated that * * * has reluctantly agreed that the organization should be operated as a for profit organization.

GOVERNMENT'S POSITION


* * * was initially formed to help the unemployed. Services to the unemployed are considered relief of the poor and distressed or of the underprivileged as outlined in Treas. Reg. 1.501(c)(3)-1(d)(2). It was on the merit of this activity that the organization was granted tax exempt status under section 501(c)(3) on April 23, 19XX. However, as of 20XX this activity has either been discontinued, or constitutes a very minimal activity of * * *.

The Internal Revenue Service, Service, recognizes that * * * does provide meaningful services to those struggling with addiction, including pornography, and those recovering from sexual abuse. However, it does not appear that * * * operates exclusively for these activities.

For the past several years, the principle activity of * * *, doing-business-as * * *, is to provide mental health counseling. As has been detailed in the Facts section of this report, these services entail a very broad range of mental health services and are provided to "Christians and non-Christians of all ages and ethnic backgrounds," and "individuals, couples, families, and groups at a fair market value."

Because of the broad nature of these services and the fact that they are provided to the general public, these activities do not meet the requisite charitable class that is necessary to be considered a charitable purpose as described in Treas. Reg. section 1.501(c)(3)-1(d)(2).

* * * does provide a "Christian alternative to traditional counseling," and the mental health counseling is provided "in a manner that is glorifying to God." However, * * * does not preach a specific religious doctrine. Providing mental health services using a Christian philosophy is not sufficient to be considered operating exclusively for religious purposes.

* * * is used to promote * * * consulting firm, * * *. This consulting appears to be focused on the increasing profitability of for profit corporations. This use of * * * to further the professional interest of the creator, * * *, is in violation of Treas. Reg. 1.501(c)(3)-1d(1)(ii).

Again, * * * does provide good services to those in need. However, because * * * is not operated exclusively for charitable purposes and is used to provide private benefits to * * *, * * * has failed to meet the operational test required by Treas. Reg. 1.501(c)(3)-1(c)(1). Since it has failed the operational test, it is not organized and operated exclusively for one or more purposes described in section 501(c)(3).

CONCLUSION


* * * is no longer described as an organization that is exempt from Federal income tax under section 501(c)(3). It is proposed that * * * tax exempt status be revoked as of January 1, 20XX and should pay Federal income tax from that date forward. The amount of Federal income tax that is due is $* * * for the tax period ended December 31, 20XX plus applicable interest. * * * tax is currently due for the tax periods ended December 31, 20XX and 20XX because of net operating losses incurred during these tax periods.

Also, since * * * tax exempt status has been revoked, it is now liable for Federal Unemployment Tax under section 3301. This tax will be computed in a separate report of examination.

Published April 17, 2015
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