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Tuesday November 21, 2017

Private Letter Ruling

Apartment Renting Organization's Exemption Revoked

GiftLaw Note:
Org was recognized as a tax-exempt organization under Sec. 501(c)(3). Org's organizational documents stated its purposes as promoting democracy, fostering and promoting education among young people, assisting those in need and promoting brotherhood among all people. For a period of years, Org's only activity was renting its facility as an apartment to the general public and paying mortgage expenses. Org plans to begin several programs in the near future, including producing a newspaper and website, teaching traditional dancing, establishing a tutoring program, establishing philanthropic programs, donating to non-profit agencies and conducting lectures.

To be tax-exempt under Sec. 501(c)(3), an organization must be operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes with no part of net earnings inuring to the benefit of a private shareholder or individual. Reg. 1.501(c)(3)-1(a)(1) requires an organization to be both organized and operated exclusively for one or more exempt purpose. Under Reg. 1.501(c)(3)-1(c)(1), an organization will fail the operational test if more than an insubstantial part of its activities are not in furtherance of an exempt purpose. The Service cited Better Business Bureau of Washington D.C., Inc. v. United States, which held that the presence of a single non-exempt purpose, if substantial in nature, will lead to the loss of exempt status. Here, the Service held that renting apartments to the general public is not an exempt activity. Therefore, the Service determined that Org was not operating exclusively for exempt purposes and revoked its exempt status.
PLR 201716048 Apartment Renting Organization's Exemption Revoked

Dear * * *:

* * *

ISSUE


Whether * * * (* * *) qualifies for exemption under Section 501(c)(3) of the Internal Revenue Code.

FACTS


* * * was granted exemption from Federal income tax under Internal Revenue Code section 501(a) of the Internal Revenue Code as an organization described in section 501(c)(3). According to its organizational documents, its primary purpose is to "promote democracy in the United States of America and the * * *. To foster and promote education among our young people To assist those who are in need. To promote brotherhood among all people."

* * * only activity observed from the audit years (12/31/20* * * and 12/31/20* * *) forward has been the renting of its facility as an apartment house to the general public and paying the related mortgage expense. The tenants were not and are not of a charitable class.

LAW


IRC Section 501(c)(3) provides tax exemption for corporations and foundations that are operated exclusively for religious, charitable, scientific, testing for public safety, 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) states that in order to be exempt as an organization described in § 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) states that 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 § 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) assigns the burden of proof to an applicant organization to show that it serves a public rather than a private interest and specifically 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) of the Code in its generally accepted legal sense and includes the relief of the poor and distressed or of the under privileged as well as the advancement of education.

Revenue Ruling 77-366, 1977-2, C.B. 192 provides that a nonprofit organization that arranges and conducts winter-time ocean cruises during which activities to further religious and education purposes are provided in addition to extensive social and recreational activities is not operated exclusively for exempt purposes and does not qualify for exemption under section 501(c)(3).

In Better Business Bureau of Washington D.C., Inc, v. United States, 326 U.S. 279 (1945), the Supreme Court held that the presence of a single non-exempt purposes, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes.

TAXPAYER'S POSITION


The taxpayer expressed intended near future programs in a letter dated May 12, 20* * *. Near future programs include:
producing a newspaper and creating an internet website connecting all members, contributors and people at large,
teaching * * * traditional dancing,
establishing a tutoring program,
establishing philanthropic programs,
donating to different Not-for-profit agencies, and
having lectures.

GOVERNMENT'S POSITION


As stated in Treasury Regulation Section 1.501(c)(3)-1(c)(1),"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)." Renting apartments to members of the general public who are not of a charitable class is not an exempt activity.

In Revenue Ruling 77-366 the organization accomplished both charitable and noncharitable purposes but lost its exemption because it was not operating exclusively for exempt purposes. In this case, does not accomplish any exempt purposes and therefore is found not operating exclusively for exempt purposes.

Further, in Better Business Bureau of Washington D.C., Inc, v. United States, the Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. Again, does not accomplish any exempt purposes and therefore is not operating exclusively for exempt purposes.

CONCLUSION


Based on our review of all facts and circumstances and the legislative support referenced above, we have concluded that * * * is not an organization described in section 501(c)(3) of the Code because it is not operated exclusively for one or more exempt purposes set forth in section 501(c)(3) of the Code.

Accordingly, the organization's exempt status is revoked effective January 1, 20* * *

Form 1120 returns should be filed for the tax periods ending on or after January 1, 20* * *.

Published April 28, 2017
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