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Wednesday October 17, 2018

Private Letter Ruling

Change in Org's Activities Leads to Revocation of Exempt Status

GiftLaw Note:
Center was formed as a Sec. 501(c)(3) public charity. Center's original purpose was to provide improved and advanced education programs to educational centers, institutions and agencies and to receive and administer financial support, assistance and grants to new or ongoing educational programs. However, on Form 990, Center reported that its current activities also include transportation services to special need students on behalf of local school districts and other human service agencies, management and implementation of technology networks and systems and continuing education programs for professionals. Additionally, Center leases buildings to educational organizations. Center argues that its school transportation and technology activities fulfill a charitable purpose by lessening the burden of government by preserving government resources.

Under Sec. 501(c)(3), in order for an organization to be exempt from tax it must be organized and operated exclusively for an exempt purpose. An organization is not operated exclusively for an exempt purpose if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Under Rev. Rul. 85-2, two tests must be met in order to determine that an organization's activities lessen the burden of government and, thus, qualify for an exempt status under Sec. 501(c)(3). First, there must be an objective manifestation by a government unit that the organization's activities constitute a burden of government and, second, the organization's activities must actually lessen that burden. Here, Center failed to show an objective manifestation that the transportation services constitute a burden of the government. The Service found that the relationship between Center and the school districts is commercial in nature since Center is contracting services with the school districts rather than lessening a government burden. The Service noted that Center's activities do not differ from those of taxable corporations that provide transportation and technology services. Thus, because Center failed the operational test by operating in a commercial manner rather than for charitable purposes, the Service found that Center no longer meets the requirements described under 501(c)(3) and that its exemption must be revoked.
Dear * * *:

This is a final adverse determination regarding your exempt status under section 501(c)(3)of the Internal Revenue Code (the "Code"). It is determined that you do not qualify as exempt from Federal income tax under section 501(c)(3) of the Code effective July 1, 2012.
Our revocation was made for the following reason(s):

A primarily performs activities which are substantially commercial in nature. A does not meet the operational test under Code section 501(c)(3) as it conducts activities which have characteristics of a trade or business. Thus, the organization is not operated exclusively for one or more exempt purposes as set forth in section 501(c)(3) of the Code.

Contributions to your organization are not deductible under section 170 of the Code.

You are required to file Federal income tax returns on Forms 1120. File your return with the appropriate Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and information please visit

If you were a private foundation as of the effective date of the adverse determination, you are considered to be taxable private foundation until you terminate your private foundation status under section 507 of the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th Day of the fifth month after the end of your annual accounting period.

Processing of income tax returns and assessments of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Code.

We will make this letter and the proposed adverse determination letter available for public inspection under Code section 6110 after deleting certain identifying information. We have provided to you, in a separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication 892.

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States Court. The Taxpayer Advocate can however, see that a tax matters that may not have been resolved through normal channels get prompt and proper handling. If you want Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit for more information.

If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely Yours,
Joseph K. Phegley
Appeals Team Manager
Publication 892 and/or 556

Published October 20, 2017
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