June 25, 2019

By Gregory S. Dowell

To gain the designation as a public charity that is exempt under Internal Revenue Code Section 501(c)(3), tax-exempt organizations must pay attention to the need to benefit the general public, rather than just a few individuals. 501(c)(3) organizations are those organizations that are exempt from Federal income tax because they are organized and operated exclusively for charitable, religious, or educational purposes. To qualify, none of the organization’s earnings can inure to the benefit of a private shareholder or individual.

In a Private Letter Ruling (PLR 201923026) recently released, the IRS denied exempt status to an organization that it deemed was serving only a select few individuals, rather than the general public.  In this case, an organization was formed to host a fundraiser for five orphaned siblings. These five siblings were orphaned when their parents died within one year of each other. The intent was that the fundraiser would raise enough resources to help offset some of the living expenses of the children. An exempt organization was formed, with the underlying organizational document limiting its purpose to the exempt purposes found under Internal Revenue Code Section 501(c)(3). On the application form seeking exempt status that was prepared and submitted to the IRS, the organization specifically stated that it would not further non-exempt purposes, such as those that are conducted for the benefit of private individuals.

In its review, the IRS concluded that the organization was formed to benefit the five orphans exclusively, rather than the general public. Given the facts in this case, it was relatively easy for the IRS to note the obvious, which was that the beneficiaries were all from the same family and were predetermined. Accordingly, the IRS deemed that the organization was formed and operated to serve only private, rather than public, purposes. The IRS denied the application for exempt status that was filed.

While this private letter ruling relates to a relatively small organization that was making an application to be exempt, existing and larger organizations would be wise to understand the fundamental principal involved, which is that the organization can not be in the business of benefiting only specific individuals. Failure to do so could put the organization’s tax-exempt status in jeopardy.