Adverse Rulings From The IRS Exempt Organizations Division. How Can Your Organization Learn From Others' Mistakes?

• Published date: 11 July 2022
• Subject Matter: Tax, Income Tax, Tax Authorities
• Law Firm: Freeman Law
• Author: Cory Halliburton

On July 1, 2022, the IRS, Director of Exempt Organizations issued an array of final adverse determinations with respect to organizations seeking exemption under 26 U.S.C. sections 501(c)(3), 501(c)(4), and 501(c)(7). In these Private Letter Rulings, the IRS Exempt Organizations Division denied tax-exempt status to the organizations. A common theme runs through all the Rulings: The organization applying or under review for tax exemption failed the organization test and/or the operational test applicable to the requirements for the exemption sought.

Private Letter Rulings are not binding on any taxpayer except the taxpayer to whom the Ruling is directed. But, the Rulings are instructive and give an idea of the organizational and operational criteria that the IRS Exempt Organizations Division needs or wants to see in order to grant tax exemption. Due care should be taken with applications for tax exemption. The exemption, if available, is a privilege, not a right, and the IRS is not shy to deny that privilege when appropriate based on the organization or operations of the applying entity.

For additional information on legal and tax issues facing tax-exempt and nonprofit organizations, search this Freeman Law Insights blog for topics such as:

Three-Part blog on Tax Exemption and Unrelated Business Income Rules

Can Nonprofits Fundraise for Other Nonprofits?

What is a Section 509(a)(3) Supporting Organization?

Representing Texas Nonprofit Corporations

Below is a Freeman Law Insights Summary of those recent IRS Private Letter Rulings:

PLR 202226011
Organization Type: 501(c)(3)	26 U.S.C. ' 501(c)(3): organized and operated exclusively for charitable, religious, educational, etc purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual Treas. Reg. ' 1.501(c)(3)-1: an organization must be both organized and operated primarily for one or more of the purposes specified in section 501(c)(3). If an organization fails to meet either the organizational test or the operational test, it is not exempt. Purposes: (a) Religious, (b) Charitable, (c) Scientific, (d) Testing for public safety, (e) Literary, (f) Educational, or (g) Prevention of cruelty to children or animals.
Adverse Determination	Does not qualify for tax exemption under section 501(c)(3) Failed organizational and operational tests of section 501(c)(3). Contributions to the organization are not deductible under section 170.
Notable Deficiencies in Organization or Operations	Failed to meet the public support test of section 509(a)(2) of the Code, which generally requires that 33 1/3% of support come from the public or governmental sources or other sources specifically listed Public support is measured using a 5-year computation period that includes the current and four prior tax years (including short years). Primary source of income were funds contributed by its closely affiliated organization exempt under section 501(c)(6) of the Code and dental premiums by "non-qualified persons." Assets were not dedicated to an exempt purpose, and more than an insubstantial part of the organization's activities were not in furtherance of an exempt purpose. Failed the operational test. The organization was formed solely to provide benefits to specific members of the related 501(c)(6) organization and other related individuals. Thus, the organization was formed to serve private, not public interests.
PLR 202226012
Organization Type: 501(c)(7)	26 U.S.C. ' 501(c)(7): provides for exemption for clubs organized for pleasure, recreation, and other non-profitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which

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