Revocations and Rejections

March 13, 2012

Summary

Among this week's release of private letter rulings were four rejection letters, numbered consecutively PLRs 201210041 through 201210044.

Extended Summary

1. PLR 201210041

The Service rejected the application for Section 501(c)(3) status of an organization that was to be the successor in interest to a portion of a for-profit medical practice. The doctor and support staff would be paid for their services. Citing Rev. Rul. 72-369 and Rev. Rul. 76-441, the Service determined that:

the organization was not organized for a charitable purpose;
it instead had a substantial non-exempt, commercial purpose; and
its earnings would inure to the private benefit of the doctor.

The organization did not protest the adverse determination.

2. PLR 201210042

The Service rejected the application for Section 501(c)(3) status of an organization proposing to distribute copyrighted educational materials to local "clubs" that would be organized for the purpose of meeting to study and discuss these materials. The cost of the materials would be paid by funds raised by the individual members of the local "clubs," from their own pockets or through paid sponsorships.

The copyrights were owned by an entity controlled by an individual lawyer, who would be a non-voting director of the organization, but would be paid a salary as its chief executive officer. The Service determined that the proposed manner of operation would provide a substantial private benefit to the lawyer and his for-profit publishing entity. The organization did not protest the adverse determination.

3. PLR 201210043

The Service rejected the application for Section 501(c)(3) status of an organization proposing to operate an art gallery and to provide a venue for regional artists to display, promote, and sell their work.

"Associate" members would display and sell their work at the gallery, while "active" members would also contribute their time and work to the operation of the gallery. A third category of "supporting" members would have no voting rights. "Founding" members would have the privilege of displaying their work without a jury process. The gallery would receive a 20% commission on work sold by associate or active members, and a 40% commission on work sold by non-members.

Citing Rev. Rul. 71-395, the Service determined that this was essentially a commercial operation, providing private benefit to the artists. The organization did not protest the adverse determination.

4. PLR 201210044

The Service rejected the application for Section 501(c)(3) status of an organization proposing to provide residential solar energy systems to low to middle-class income households in a particular county.

Each installation would remain the property of the organization, and would be removed if the residence were sold to a purchaser who did not meet the income qualification, or if the financial circumstances of the existing resident changed. Overproduction to the grid would be sold to the electric utility, and the proceeds used to purchase additional solar systems.

Citing Rev. Rul. 70-585, the Service ruled that it was unable to determine from the information provided that the proposed activity would "alleviate poverty," because:

it was unclear that the eligible households would be limited to a charitable class;
any benefit from the program would primarily benefit the selected households, rather than the community at large; and
the environmental benefit would be "indirect and tangential."

The organization did not protest the adverse determination.

CPC Commentary

Editors' Note: Nearly every week, as part of its release of private letter rulings, the IRS issues copies of rulings rejecting applications for exempt status or revoking existing exemptions, often as many as a dozen of such rulings per week.

In the past, we limited our coverage to the handful of questionable revocations and rejections, contained controversial reasoning, or served as cautionary examples. Starting in the summer of 2010, we began posting a list of the week's rejections and revocations on Tuesdays, with brief summaries.

We will continue to provide short summaries, but will also explore in more detail the occasional ruling of unusual interest.