IRS Revokes Charity’s Tax Exemption Because of Private Inurement

In a recent private letter ruling, the U.S. Internal Revenue Service revoked the tax exemption of a public charity because its assets and income inured to the benefit of the organization’s president and his spouse. PLR 201122023. The IRS based its revocation of exempt status on the prohibition in Internal Revenue Code Section 501(c)(3) against inurement of the net earnings of a charity to the benefit of any private shareholder or individual, and on Reg. 1.501(c)(3)-1(d)(1)(ii), which provides that a 501(c)(3) organization must 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.” The Service also cited statutory and regulatory provisions requiring tax-exempt entities to maintain records sufficient to show whether the organization is liable for any tax.

As described by the IRS, the organization in PLR 201122023 allowed its president to make cash withdrawals and to make checks payable to cash from the organization’s checking account. When questioned by the IRS, the president did produce any receipts or records to show the payments and withdrawals were made for the benefit of the charity. The president also wrote checks from the organization’s checking account to his wife, purportedly for her services as a “program coordinator.” However, the payments occurred at times when the IRS determined the organization did not engage in any exempt activities, and the organization produced no evidence to show what services the president’s wife had rendered the organization. The president further used the charity’s funds to pay for personal expenses, including his personal cell phone bill. He also paid unspecified and undocumented “professional fees.” The IRS concluded that there was “little question that President and his wife received personal benefit from” use of the charity’s funds. The alleged diversion of charitable funds to private purposes was made possible by the fact that the organization did “not have an independent oversight board,” and the president was “in complete control of the organization and its expenditures.”

In addition to the organization’s inability to establish that expenditures of charitable funds were for exempt purposes, the IRS faulted the fact that financial information provided by the organization on its Form 990-EZ “was clearly wrong and by significant amounts.” The ruling indicates that the organization “never provided an explanation of the differences between the amounts of cash balances and revenues shown on the books and the amounts shown in the records.”

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