IRS determination 200511024: IRS proposes revoking a social welfare group's exemption

Plain-English summary

An examination report recommended revoking a group's exemption under IRC § 501(c)(4). The IRS found that the group repeatedly used its bank accounts to receive and transfer money unrelated to social welfare, while its exempt activities dwindled. It also said the group had not supplied records documenting the transactions and its exempt activities. The group's representative called the deposits mistakes and said the funds were not the group's, but the IRS rejected that explanation based on bank records. The accompanying letter offered an appeal and explained that a final letter would follow if the group accepted the findings; if it did not respond within 30 days, the letter would become final. The public copy does not establish whether a later appeal occurred.

Ruling snapshot

• Question: Should the group's section 501(c)(4) exemption be revoked for nonexempt activity and inadequate records?
• Outcome: Proposed revocation, subject to the appeal and response process described in the letter.
• Key authorities: IRC §§ 501(c)(4), 6001, 6033; Treas. Reg. §§ 1.501(c)(4)-1(a)(2), 1.6001-1.

Full text (IRS public release)

200511024

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

October 27, 2004

Taxpayer Identification Number:

Form:
990

Exempt Organization Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

CERTIFIED MAIL —- RETURN RECEIPT REQUESTED

Dear
We have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed

Publication 3498, The Examination Process, explains how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the Appeals Office and they will contact you. For your convenience, an envelope is enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals conference, or if you do not request an Appeals conference, you may file suit in United States Tax Court, the United States Court of Federal Claims, or United States District Court, after satisfying procedural and jurisdictional requirements as described in Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801 V

200511024

You may also request that we refer this matter for technical advice as explained in Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a determination letter is issued to you based on technical advice, no further administrative appeal is available to you within the IRS on the issue that was the subject of the technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed Adverse Action. We will then send you a final letter modifying or revoking exempt status. If we do not hear from you within 30 days from the date of this letter, we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final. In that event, you will be required to file Federal income tax returns for the tax period(s) shown above. File these returns with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

You 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 matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

Taxpayer Advocate

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

200511024

Sincerely,

R.C. Johnson
Director EO Examinations

Letter 3610 (04-2002)
Catalog Number 34801V

200511024

Tax Years ended:
Legend:

X = organization

S = state

R = taxpayer representative
P = president of X

T= for profit owned by P
V = tourism organization

C = unrelated club

Issues:
Did the X engage a substantial non-exempt activity, causing the organization to lose its exemption under Internal Revenue Code section 501 (c)(4)?

Did the X fail to meet the record keeping requirements for an organization exempt under Internal Revenue Code section 501(c)(4), as stated in IRC section 6033(a)(1) and Income Tax Regulation (Reg.) section 1.6001-12

Facts:

X was incorporated as a non-profit corporation in the state of S on June 30, 1995. X was granted tax-exempt status under Internal Revenue Code section 501(c)(4) in a letter dated May 23, 1997. As of a , these rulings were still in effect, and had not been revoked or modified.

Per the articles of incorporation of X, the purposes of the organization were to provide “ _, and any and all promotion of Unites States second amendment rights.

X has not filed any Forms 990 or 990-EZ from its inception through the most recently completed tax year, the year ended

On , an examination of the records of the X for the tax years ended was conducted with the

organizations attorney, R . During that interview, R made the following statements, which he represented as those of the president of X.

• During the periods under examination, deposits were erroneously made to the accounts of X. These amounts were not the funds of the X, and should not have been deposited into the accounts of the EO.

R stated that this statement was supported by the fact that the funds did not remain in the accounts of X.

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the actual receipts of the organization were under the Form 990 filing requirements. (currently )

° For the period under examination the president of X was the sole individual responsible for the record-keeping of X. P was also the sole individual responsible for the bank accounts of X.

Notes of the above interview were shared with R and P via a letter dated November 28, 2003. That letter also included a request for any clarification or corrections. To date, no modifications of any of R’s statements have been received.

During the initial examination R provided the bank statements of X for the 1999 and 2000 calendar years, as well as minimal receipts and other supporting documents for the organization for 1999 and 2000.

After the initial examination, records verifying the source and destination of all funds flowing through X accounts for the examination periods, as well as supporting records of the activities of the organization for the years were requested.

No additional records have been provided for: tax year transactions. To date, the organization has failed to provide any records for the year. Records for the tax. year were requested in the initial examination letter, an information document request left with the taxpayer on ; , and again in a follow-up request on : To date, none of the requested records have been provided.

As a result of the taxpayers’ failure to timely provide records in a related matter, the Internal Revenue Service issued bank summonses for the accounts of X. In response to _ those summonses, records for 2 accounts were provided by Bank.

Records provided were for Account # 1, titled X
Account #2, titled X.

A review of the two bank accounts of the X showed the following transactions within the accounts of X for which no supporting documents have been provided. The summary information lists the transaction dates, deposit or withdrawal, the type of funds or withdrawal method, check numbers and the amounts as applicable. Transactions involving bank interest payments and documented expenditures of the organization have been excluded.

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Bank Checking Account #2, X,°_j calendar year deposits. Deposit Date Amount Deposit Item 02/09/1998 Cash 02/18/1998 Cash 02/23/1998 Cash 03/02/1998 | Cash 03/03/1998 Cash 03/09/1998 F Cash 03/16/1998 | Cash 03/17/1998 Cash 03/23/1998 Cash 03/23/1998 Cash 03/24/1998 Cash 03/30/1998 Cash 03/31/1998 Cash 04/06/1998 Cash 04/08/1998 Cash 04/13/1998 Cash 04/14/1998 Cash 04/20/1998 Cash 04/22/1998 Cash 04/27/1998 Cash 04/29/1998 Cash 04/30/1998 j Cash 05/04/1998 Cash 05/06/1998 ; Cash 05/08/1998 | Cash 05/11/1998 Money order Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check 05/18/1998 Cash 07/21/1998 Check 08/05/1998 Check 08/10/1998 Check

The total deposits into this account for totaled jn including 26 separate cash deposits of Additionally, the specific payee on all of the checks and money

orders was the X.

The total of all deposits into this account for the

period were meaning that 99.72 percent of deposits into the account for the period were appear to be non-exempt income. Additionally, none of the income for the period has been documented as exempt source income.

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Bank Preferred Checking, Account #1, X Client Trust Account, calendar year deposits. Deposit Date Amount Deposit Item 05/07/1998 Cashiers Check 05/11/1998 Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check Cashiers Check 05/18/1998 Cash 05/19/1998 Cash 05/20/1998 Cash 05/26/1998 Cashiers Check 06/01/1998 Cashiers Check 06/08/1998 | Cashiers Check 06/15/1998 Cashiers Check 06/22/1998 Cash Check Cashiers Check
| Cashiers Check
| 06/29/1998 Cashiers Check
| 07/07/1998 Cashiers Check
| 07/13/1998 Cashiers Check
| 07/21/1998 Cashiers Check
08/10/1998 Cashiers Check
10/16/1998 Check

The total deposits into this account for totaled including 4 separate cash deposits of Again, the specific payee on all of the checks and money orders deposited into this account was the X.

The total of all deposits into this account for the . ; period —_— After eliminating interest paid and the initial deposit

into this account from the other X account, 100 percent of deposits into the account for the period were undocumented, non-exempt income.

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Bank Checking Account #2, X _ calendar year Withdrawals.

‘Check Date |Number| Amount | Payee Notation
11/12/97 102 P Reimb supplies
11/17/97 110 Dept. of Commerce & Consumer Affairs| Annual Reg | 02/25/98 Debit | 02/27/98 5 Bank —_ 03/03/98 106 Dept. of Commerce & Consumer Affairs Annual Fee 03/13/98 T3 Bank 03/19/98 107 Bank 03/30/98 Debit 04/03/98 108 Bank 04/17/98 Bank 04/29/98 Debit 05/01/98 101 Bank re 05/08/98 103 Bank re 05/22/98 104 Bank re 07/21/98 105 Cash Refunds 07/24/98 106 Cash Refunds 07/28/98 107 Cash Refunds 07/29/98 108 Cash Refunds 07/31/98 109 Cash Refunds 08/03/98 110 Cash 08/05/98 111 Cash Refunds | 08/07/98 112 Bank Reimb 08/10/98 113 Cash Refunds 08/18/98 114 Cash Refunds 08/21/98 116 Inc Reimb

These transactions included . in 9 cash withdrawals by P and in ‘

payments to P and his company. Although records have been requested, none of these transactions have been documented.

| Bank Preferred Checking, Account #1, X Client Trust Account, calendar year withdrawals.

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Check Date |Number| Amount Payee Notation
05/07/98 1 Bank
05/14/98 Bank |
05/12/98 3 Limited Partnership from
05/22/98 101 Bank a |
05/29/98 102 Bank re:
06/22/98 104 Bank
06/15/98 103 Escrow |
07/09/98 105 Bank
07/17/98 106 Escrow Deposit
07/20/98 107 Bank
08/03/98 108 Limited Partnership Re: Cr Line
08/05/98 109 X For refunds
08/10/98 110 X Refunds
08/14/98 111 Bank re
08/21/98 112 Cash re: |
08/31/98 113 Inc services
09/08/98 114 Inc services
09/10/98 115 Bank re: refund
09/21/98 116 Inc
09/29/98 117 Inc
10/07/98 118 Inc Re

No supporting documents were provided for any of the above expenditures, including paid to F , a for profit entity owned by P.

For the tax year ended December 31 the income and expenditures from both accounts was minimal.

For account number # 2, the organization had total income of one deposit from V. For the same period, account withdrawals from this account totaled

including paid to local and __ paid to the S for annual registration fees. For account number # 1, the organization had total income of , Including a one time deposit of from a C for and from a V. For

the same period, account withdrawals from this account totaled including paid to cash.

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, Account #1, X calendar year
deposits.
Deposit Date ; Amount Deposit Payor
Item
05/19/00 Check
Cashiers
Check
06/01/00 Currency Possible wire transfer
08/11/00 Check Limited Partnership
| Check Limited Partners
As summarized above, during the calendar year in deposits were made into this account, including reported as cash on the bank statement.

Again, all checks and cashiers checks were specifically written to the X.

, Account #1, X: . 7 . calendar year
withdrawals.
Check Check
Date Number Amount Payee

05/19/00 126 (remarks indicate wire transfer)

06/02/00 127 (remarks indicate wire transfer)

08/11/00 128 Cash — (Remarks indicate Wire)
Law:

IRC 501(c)(4) provides for the exemption of (A) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

(B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.

Section 1.501(c)(4)-1(a)(2) of the Income Tax Regulations provides that an organization

is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the

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community. An organization embraced within this section is one that is operated primarily for the purpose of bringing about civic betterments and social improvements.

IRC section 6001 states: “Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the secretary it is necessary, he may require any person, by notice served upon such person or regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.”

IRC section 6033(a)(1) states: “IN GENERAL.—Except as provided in paragraph (2), every organization exempt from taxation under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe; except that, in the discretion of the Secretary, any organization described in section 401(a) may be relieved from stating in its return any information which is reported in returns filed by the employer which established such organization.

Regulation 1.6001-1 requires an exempt organization to keep permanent books and records sufficient to show specific items of gross income, receipts, and disbursements and to substantiate the information required by section 6033.

Reg. Section 1.6001-1(a) provides for the keeping of records by an organization. It states: “In general. Except as provided in paragraph (b) of this section, any person subject to tax under subtitle A of the Code (including a qualified State individual income tax which is treated pursuant to section 6361(a) as if it were imposed by chapter 1 of subtitle A), or any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information.”

Reg. Section 1.6033 —2(i)(2) provides that an organization exempted from filing an annual return under IRC section 6033 is not relieved of other record keeping requirements.

In Church of Gospel Ministry, Inc. v. United States, Civil Action No. 85-1527,

U. S. District Court for the District of Columbia, 640 F. Supp. 96; 1986 U.S. Dist. LEXIS 24782; 86-2 U.S. Tax Cas. (CCH) P9497; 58 A.F.T.R.2d (RIA) 5232, May 30, 1986, Decided, the revocation of a church was upheld where the organizations’ failure to maintain adequate records prevented it from meeting its burden of showing that it was operated exclusively for charitable purposes, and that its assets did not inure to the benefit of its officers.

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Government Position:

It is the position of the government that X has engaged in a substantial non-exempt purpose, the funneling of money not intended for exempt purposes through the accounts of the X, and is therefore not primarily engaged in promoting in some way the common good and general welfare of the people of the community as provided in IRC section 501(c)(4) and the regulations there under.

Statements made by the organizations attorney, R, that deposits and withdrawals flowing through the X accounts were simple errors, are not supported by the facts in this case. This is illustrated by the bank statements secured by the Internal Revenue Service via summons. The statements for the X account number 2 at Bank, for example, show 29 separate deposits, and accompanying withdrawals. Of these deposits, 26 were for cash, totaling Of the remaining deposits, all checks and money orders were specifically made payable to the X. Obviously, the intent in this case was to use the accounts of the X as a transfer point for funds which never had any exempt purpose.

In comparison, per the X attorney, R, the exempt receipts of the organization were minimal. Per R’s own statements, they were under the 990EZ filing threshold. Additionally, the limited records reviewed during the examination showed exempt expenditures of less than annually, and these expenditures remain suspect since no exempt purpose has been shown for many of the items paid to P and his companies.

Additionally, it is the position of the government that X has failed to meet the record- keeping requirements outlined in IRC sections 6001 and 6033 and Reg. Section 1.6001-1.

As part of an examination of the exempt activities of X, the Service requested that the organization provide the books of accounts and other records required under IRC Section 6033 and Reg. Section 1.6001-1 for the tax years ended

in order to verify the gross income, deductions and

exempt activities of the organization.

In response to these requests, X has made available source documents of minimal expenditures made by the exempt organization during the examination period. However, no documentation has been provided to document the purposes of the large sums of money transferred through the accounts of the

Taxpayers Position:

To date, the only position provided by the taxpayer has been the statements made by the attorney during the initial examination. The statements indicated that the large transactions documented in this report were, in fact, not the funds of the EO. The attorney further states that the deposit of these funds into the accounts of the EO were simple erroneous transactions. Additional taxpayers response is being solicited with this report.

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Conclusions:

X has been used for a substantial non-exempt purpose. Its sole remaining officer, P has used accounts in the name of the organization to collect and transfer funds used for non- exempt purposes. These transactions were engaged in purposely, and occurred repeatedly over a period of years.

These transactions occurred even as the exempt activities of the exempt organization were reduced and eventually stopped.

The exempt status of the X should be revoked effective the year the substantial non- exempt activities began, the tax year ended

X has also failed to provide required documentation supporting exempt activities for the
; . tax years. The exempt status of the X should be revoked effective the first day of the first year of such failure, the tax year ended

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