IRS determination 200822032: Late returns and unpaid payroll taxes accompany exemption revocation

Plain-English summary

An exempt organization’s state nonprofit corporate status had been revoked. It repeatedly filed Form 990 and employment tax returns late and had not paid required employment taxes. The IRS examiner concluded that the organization failed the organizational test for § 501(c)(3) and did not comply with the reporting and recordkeeping conditions for continued exemption. The IRS revoked its exemption retroactively to October 1 of a redacted year. The report said paying the employment taxes later would not change the organizational test finding, and the final letter directed the organization to file Form 1120 for later years.

Ruling snapshot

• Question: Did the organization still qualify under § 501(c)(3) after losing state nonprofit status and repeatedly failing to meet tax filing and payment requirements?
• Outcome: Exemption revoked retroactively to October 1 of a redacted year.
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1(b), 1.6001-1(e), and 1.6033-1(h)(2); Rev. Rul. 59-95.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

January 31, 2008
Release Number: 200822032
Release Date: 5/30/08
Legend
Org = Organization name
XX = Date
Address = Address

Org
Address

Person to Contact:
Identification Number:
Contact Telephone Number:
In Reply Refer to: TE/GE Review Staff
EIN:
UIL: 501.03-01

CERTIFIED MAIL-RETURN RECEIPT REQUESTED

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: April 30, 20XX

Dear

This is a Final Adverse Determination as to your exempt status under section 501(c)(3) of the Internal Revenue Code.

Our adverse determination was made for the following reasons:

Exemption from income tax is a matter of legislative grace and taxpayers have the burden of establishing their entitlement to exemptions. Section 6033 requires organizations exempt from tax to keep such records and render such statements as are required by such rules and regulations as the Secretary may prescribe. Treasury Regulations section 1.6033-2 (h)(2) requires organizations exempt from tax to submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into the organization’s exempt status.

Based upon the above, we are revoking your organization's exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code retroactively to October 1, 20XX.

Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code.

-2-

You are required to file Federal income tax returns on Form 1120. These returns should be filed with the appropriate Service Center for the year ending September 30, 20XX, and for all years thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory judgment in the United States Tax Court, the United States Claim Court or the District Court of the United States for the District of Columbia before the 91st day after the date this determination was mailed to you. Contact the clerk of the appropriate court for the rules for initiating suits for declaratory judgment.

You also have the right to contact the office of the Taxpayer Advocate. However, you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers. You can call Taxpayer Advocate assistance. Or you can contact the Taxpayer Advocate from the site where the tax deficiency was determined by writing to: Internal Revenue Service, Taxpayer Advocates Office. Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determinations, nor extend the time fixed by law that you have to file a petition in the United States Tax 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.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely yours,

Marsha A. Ramirez
Director, EO Examinations

Form 886-A EXPLANATIONS OF ITEMS Schedule number or exhibit (Rev. January 19XX) Name of taxpayer Tax Identification Number Year/Period ended ORG LEGEND ORG = Organization name XX = Date CO-1 = 1st company Secretary = Secretary XYZ = State

ISSUE:

Whether ORG (ORG), Incorporated qualifies for exemption under Section 501(c)(3) of the Internal Revenue Code.

FACTS:

The CO-1 (CO-1) recognized ORG articles of incorporation conformed to law per the provisions of the XYZ nonprofit corporation act and issued them a Certificate on Incorporation on March 14, 19XX (CO-1 number ).

The Internal Revenue Service issued ORG a determination letter dated September 5, 19XX which granted them exemption from Federal income tax under section 501(a) of the Internal Revenue Code as an organization described in section 501(c)(3)

ORG non-profit corporate status has been revoked by the XYZ Regulatory Commission due to being inactive and beyond appeal period effective June 17, 20XX.

ORG has repeatedly failed to file a timely annual information return Form 990 (Return of Organization Exempt from Income Tax) for fiscal years ended September 30, 20XX, 20XX, 20XX and 20XX.

Delinquent ORG forms 990 were subsequently secured by the IRS as follows:

**Date ORG Form 990
Fiscal year ended __ received by the IRS

09/30/20XX 11/07/20XX
09/30/20XX 04/11/20XX
09/30/20XX 04/11/20XX
09/30/20XX 11/07/20XX

** Penalties and interest for late filing have not been paid.

Above returns required to be filed four and one-half months after the end of the fiscal year. Forms 990 were signed by Secretary, Secretary (corporate officer), of ORG.

ORG repeatedly failed to file a timely quarterly employment tax return Form 941 (Employer’s

Quarterly Federal Tax Return) for each quarter of calendar years 20XX, 20XX, 20XX and 20XX and repeatedly failed to deposit required employment taxes:

Form 886-A (1-19XX) Catalog Number 20810W Page ___ publish.no.irs.gov Department of the Treasury-Internal Revenue Service 1

Form 886-A EXPLANATIONS OF ITEMS Schedule number or exhibit (Rev. January 19XX) Name of taxpayer Tax Identification Number Year/Period ended ORG LEGEND ORG = Organization name XX = Date CO-1 = 1st company Secretary = Secretary XYZ = State

Delinquent ORG forms 941 were subsequently secured by the IRS as follows:

• Date ORG quarterly forms

Calendar year ended 941 received by the IRS **Tax Due
12/31/20XX 04/11/20XX $
12/31/20XX 06/14/20XX
12/31/20XX 06/14/20XX
12/31/20XX 06/14/20XX

Forms 941 were signed by Secretary, Secretary (corporate officer), of ORG.

• Above quarterly returns required to be filed by the last day of the month following the end
  of each quarter.

** Employment taxes per IRC sections 3101, 3111 and 3402 have NOT been paid. Interest and penalties for failure to file required tax returns and failure also have NOT been paid.

LAW:

Treasury Regulation 1.501(c)(3)-1. Organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals

(a) Organizational and operational tests
(1) In order to be exempt as an organization described in section 501(c)(3), an organization must

be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is

not exempt.

(2) The term “exempt purpose or purposes”, as used in this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section.

(b) Organizational test

(1) In general

Form 886-A (1-19XX) Catalog Number 20810W Page ___ publish.no.irs.gov Department of the Treasury-Internal Revenue Service 2

Form 886-A EXPLANATIONS OF ITEMS Schedule number or exhibit (Rev. January 19XX) Name of taxpayer Tax Identification Number Year/Period ended ORG LEGEND ORG = Organization name XX = Date CO-1 = 1st company Secretary = Secretary XYZ = State

(i) An organization is organized exclusively for one or more exempt purposes only if its articles of organization (referred to in this section as its “articles”) as defined in subparagraph (2) of this paragraph:

(a) Limit the purposes of such organization to one or more exempt purposes; and

(b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt

purposes.

(ii) In meeting the organizational test, the organization's purposes, as stated in its articles, may be as broad as, or more specific than, the purposes stated in section 501(c)(3). Therefore, an organization which, by the terms of its articles, is formed ‘for literary and scientific purposes within the meaning of section 501(c)(3) of the Code shall, if it otherwise meets the requirements in this paragraph, be considered to have met the organizational test. Similarly, articles stating that the organization is created solely “to receive contributions and pay them over to organizations which are described in section 501(c)(3) and exempt from taxation under section 501(a)” are sufficient for purposes of the organizational test. Moreover, it is sufficient if the articles set forth the purpose of the organization to be the operation of a school for adult education and describe in detail the manner of the operation of such school, In addition, if the articles state that the organization is formed for “charitable purposes”, such articles ordinarily shall be sufficient for purposes of the organizational test (see subparagraph (5) of this paragraph for rules relating to construction of terms).

(iii) An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in section 501(c)(3). Thus, an organization that is empowered by its articles “to engage in a manufacturing business”, or “‘to engage in the operation of a social club” does not meet the organizational test regardless of the fact that its articles may state that such organization is created “for charitable purposes within the meaning of section 501(c)(3) of the Code.”

(iv) In no case shall an organization be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in section 501(c)(3). The fact that the actual operations of such an organization have been exclusively in furtherance of one or more exempt purposes shall not be sufficient to permit the organization to meet the organizational test. Similarly, such an organization will not meet the organizational test as a result of statements or

Form 886-A (1-19XX) Catalog Number 20810W Page ___ publish.no.irs.gov Department of the Treasury-Internal Revenue Service 3

Form 886-A EXPLANATIONS OF ITEMS Schedule number or exhibit (Rev. January 19XX) Name of taxpayer Tax Identification Number Year/Period ended ORG LEGEND ORG = Organization name XX = Date CO-1 = 1st company Secretary = Secretary XYZ = State

other evidence that the members thereof intend to operate only in furtherance of one or more exempt purposes.

(v) An organization must, in order to establish its exemption, submit a detailed statement of its proposed activities with and as a part of its application for exemption (see paragraph (b) of
§1.501(a)-1).

(2) Articles of organization. —For purposes of this section, the term “articles of organization” or “articles” include the trust instrument, the corporate charter, the articles of association, or any other written instrument by which an organization is created.

(3) Authorization of legislative or political activities. —An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it —

(i) To devote more than an insubstantial part of its activities to attempting to influence legislation by propaganda or otherwise; or

(ii) Directly or indirectly to participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office; or

(iii) To have objectives and to engage in activities which characterize it as an “action” organization as defined in paragraph (c)(3) of this section.

The terms used in subdivisions (i), (ii), and (iii) of this subparagraph shall have the meanings provided in paragraph (c)(3) of this section. An organization's articles will not violate the provisions of paragraph (b)(3)(i) of this section even though the organization's articles expressly empower it to make the election provided for in section 501(h) with respect to influencing legislation and, only if it so elects, to make lobbying or grass roots expenditures that do not normally exceed the ceiling amounts prescribed by section 501(h)(2)(B) and (D).

(4) Distribution of assets on dissolution. —An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal government, or to a State or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the

Form 886-A (1-19XX) Catalog Number 20810W Page ___ publish.no.irs.gov Department of the Treasury-Internal Revenue Service 4

Form 886-A EXPLANATIONS OF ITEMS Schedule number or exhibit (Rev. January 19XX) Name of taxpayer Tax Identification Number Year/Period ended ORG LEGEND ORG = Organization name XX = Date CO-1 = 1st company Secretary = Secretary XYZ = State

organizational test if its articles or the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders.

(5) Construction of terms. —-The law of the State in which an organization is created shall be controlling in construing the terms of its articles. However, any organization which contends that such terms have under State law a different meaning from their generally accepted meaning must establish such special meaning by clear and convincing reference to relevant court decisions, opinions of the State attorney-general, or other evidence of applicable State law.

(6) Applicability of the organizational test. —A determination by the Commissioner or a district director that an organization is described in section 501(c)(3) and exempt under section 501(a) will not be granted after July 26, 1959 (regardless of when the application is filed), unless such organization meets the organizational test prescribed by this paragraph. If, before July 27, 1959, an organization has been determined by the Commissioner or district director to be exempt as an organization described in section 501(c)(3) or in a corresponding provision of prior law and such determination has not been revoked before such date, the fact that such organization does not meet the organizational test prescribed by this paragraph shall not be a basis for revoking such determination. Accordingly, an organization which has been determined to be exempt before July 27, 1959, and which does not seek a new determination of exemption is not required to amend its articles of organization to conform to the rules of this paragraph, but any organization which seeks a determination of exemption after July 26, 1959, must have articles of organization which meet the rules of this paragraph. For the rules relating to whether an organization determined to be exempt before July 27, 1959, is organized exclusively for one or more exempt purposes, see 26 CFR (1939) 39.101(6)-1 (Regulation 118) as made applicable to the Code by Treasury Decision 6091, approved August 16, 1954 (19 F.R. 5167; C.B. 1954-2, 47).

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time prescribe.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt from tax 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 purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and 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.

Treasury Regulation 1.6001-1(e) states that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees,

Form 886-A (1-19XX) Catalog Number 20810W Page ___ publish.no.irs.gov Department of the Treasury-Internal Revenue Service 5

Form 886-A EXPLANATIONS OF ITEMS Schedule number or exhibit (Rev. January 19XX) Name of taxpayer Tax Identification Number Year/Period ended ORG LEGEND ORG = Organization name XX = Date CO-1 = 1st company Secretary = Secretary XYZ = State

and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law.

Treasury Regulation 1.6033-1(h)(2) provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and IRC § 6033.

Revenue Ruling 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of IRC § 6033 and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status.

In accordance with the above cited provisions of the Code and regulations under IRC §§ 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax.

Conclusion: It is the IRS's position that ORG failed to meet the organizational test requirements per Treasury Regulation 1.501(c)(3)-1(b). It is also the IRS’s position that ORG firmly established that they refused to comply with the conditions required for the continuation of their exempt status by repeatedly failing to file timely tax and information returns for years 20XX, 20XX, 20XX, 20XX and by refusing to deposit employment taxes withheld from employees and required employer social security and Medicare taxes for years 20XX, 20XX, 20XX and 20XX totaling $ excluding interest and penalties.

Even if all required employment taxes, interest and penalties are subsequently paid the organization’s status will still be revoked for failure to meet the organizational test. Accordingly, the organization's exempt status is revoked effective October 1, 20XX. Form 1120 (U. S. Corporate Income Tax Return) returns should be filed for the tax periods ending on or after September 30, 20XX. Please send a complete and accurate Form 1120 for fiscal years ended September 30, 20XX, 20XX, 20XX, 20XX and 20XX to the following address:

Form 886-A (1-19XX) Catalog Number 20810W Page ___ publish.no.irs.gov Department of the Treasury-Internal Revenue Service 6

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Taxpayer Identification Number:
ORG Form:
ADDRESS

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 revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office consideration within 30 days from the date of this letter to protest our decision. Your protest should include a statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues, explain 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.

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

Letter 3618 (04-2002)
Catalog Number 34809F

If we do not hear from you within 30 days from the date of this letter, we will process your case based on the recommendations shown in the report of examination. If you do not protest this proposed determination within 30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for the District of Columbia determines that the organization involved has exhausted its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter. We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the Code.

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:

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.

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F