Julius Schaller was a Hungarian-American immigrant was a wealthy grocery store owner who had acquired substantial assets that exceeded the threshold for paying estate taxes. In order to avoid the tax burden, he established a special scholarship foundation for Hungarian immigrants who pursue performing arts. He named it the Educational Assistance Foundation for Descendants of Hungarian Immigrants in the Performing Arts. Estate planning attorneys often create such organizations for wealthy individuals. However, it must be a legitimate nonprofit organization.
The foundation was established as a nonprofit organization and granted tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. But there was a catch. The foundation was a rouse. It hardly advertised the scholarship, and during the first two years of operation, the scholarships were only awarded to his heirs – specifically a nephew, niece, and another member of the family. This is a problem.
The IRS does not take kindly to those who set up fake organizations under the guise of providing a legitimate scholarship or philanthropic service to the public. As such, the IRS revoked the foundation’s nonprofit status, and litigation ensued.