IRS determination 200822043: Charity loses exemption after failing to provide records

Plain-English summary

The IRS asked an exempt organization for its financial books and records for an examination, but the organization did not respond. Without the records, the IRS said it could not verify that the organization continued to operate for exempt purposes or met its reporting duties under §§ 6001 and 6033. It revoked recognition of the organization's § 501(c)(3) exemption retroactively to January 1 of a redacted year. The final letter said contributions were no longer deductible under § 170 and directed the organization to file corporate income tax returns. The attached examination report and proposed revocation letter explain the request for records and the chance to appeal.

Ruling snapshot

• Question: Could the organization retain exempt status without providing requested financial records?
• Outcome: Exemption revoked retroactively to January 1 of a redacted year.
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.6001-1 and 1.6033-2.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES UIL: 501.03-01

DIVISION January 28, 2008

XX = Date
Release Number: 200822043

Release Date: 5/30/08 Person to Contact:
Legend
Identification Number:

Org= Organization name Contact Telephone Number: . -
In Reply Refer to: TE/GE Review Staff
EIN:

Org

LAST DATE FOR FILING A PETITION
Address

WITH THE TAX COURT: April 28, 20XX

Certified Mail- Return Receipt Requested
Dear

This is a Final Adverse Determination as to your exempt status under section 501(c)(3) of the Internal Revenue Code. Recognition of your exemption from Federal income tax as an organization described in Internal Revenue Code section 501(c)(3) is retroactively revoked to January 1, 20XX, because you have not established that you are operated exclusively for exempt purposes.

IRC section 501(c)(3) exempts from taxation organization which are organized and operated exclusively for religious, charitable or educational purposes, no part of the net earning of which inure to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which do not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office.

Section 1.6001-1(a) of the regulations in conjunction with section 1.6001-1(c) provides that every organization exempt from tax under section 501(a) of the Code must keep such permanent books or records to allow the Service to establish whether the taxpayer is liable for any tax liability. In addition to the general recordkeeping rules. organizations exempt from taxation under section 501 (a) must also maintain the records required by section 6033 of the Code.

Your exempt status is being revoked because you have failed to demonstrate that you are operating exclusively for a recognized exempt purpose under IRC section 501(c)(3). Your exempt status is also being revoked because you have failed to meet the requirements of IRC section 6033 and the Regulations thereunder requiring all 501(c)(3) organizations to furnish such additional information as may be required by the Internal Revenue Service for ht purpose of inquiring into your tax exempt status.

=
We are revoking your exemption from Federal income tax as an organization described in section 501(c)(3) of the Internal Revenue Code effective January 1, 20XX.

Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code. 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 December 31, 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 and ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer Advocate from the site where the tax deficiency was determined by calling or 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 | EXPLANATION OF ITEMS | Schedule Number or Exhibit: (Rev. Jan. 1994)

Name of Taxpayer Tax Identification Number: Year/Period Ended:

_ORG December 31, 20XX _

LEGEND

ORG = Organization name xX = Date
ISSUE

Whether ORG qualifies for exemption under §501(c)(3) of the Internal Revenue Code

FACTS

Exhibit A provides copies of the Internal Revenue Service correspondence requesting that ORG provide access to its financial books and records for the tax period ended December 31, 20XX. ORG failed to respond to the Internal Revenue Service correspondence.

LAW

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

Section 6033(a)(1) of the Code provides, except as provided in section 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.

Section 1.6001-1(a) of the regulations in conjunction with section 1.6001-1(c) provides that every organization exempt from tax under section 501 (a) of the Code and subject to the tax imposed by section 511 on its unrelated business income must keep such permanent books or accounts or records, including inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters required to be shown by such person in any return of such tax. Such organization shall also keep such books and records as are required to substantiate the information required by section 6033.

Section 1.6001-1(e) of the regulations 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, and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law.

Form 886-A (1-1994) Page 1 of 3 Department of Treasury-Internal Revenue Service

Form 886-A EXPLANATION OF ITEMS | Schedule Number or Exhibit:

(Rev. Jan. 1994) ;

Name of Taxpayer: | Tax Identification Number: Year/Period Ended:

ORG : December 31, 20XX _
LEGEND ; - ——
ORG = Organization name XX = Date

Section 1.6033-2(i)(2) of the regulations provides that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code, section 6033, and chapter 42 of subtitle D of the Code.

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 section 6033 of the Code 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 sections 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.

TAXPAYER’S POSITION
Taxpayer's position has not been provided.
GOVERNMENT’S POSITION

ORG has failed to provide information to support the activities and operations of the organization for the year ended December 31, 20XX. ORG failed to establish it is observing the conditions required for continuation of exempt status. The organization was advised of the consequences of failing to provide information on several occasions, as well as given an adequate opportunity to provide the requested information. As a result of the failure to provide information necessary to verify and substantiate compliance as an IRC § 501(c)(3) recognized organization, we have determined that ORG no longer qualifies as an exempt public charity described in IRC § 501(c)(3).

“Form 886-A (1-1994) _ Page 2 of 3 Department of Treasury-Internal Revenue Service

Form 886-A | EXPLANATION OF ITEMS Schedule Number or Exhibit: (Rev. Jan. 1994)

Name of Taxpayer: | Tax Identification Number: Year/Period Ended:

ORG ee - 7 December 31, 20XX
LEGEND

ORG = Organization name XX = Date

We propose a revocation of your exempt status under § 501(c)(3) of the Internal Revenue Code effective January 1, 20XX.

CONCLUSION

It is the IRS's position that the ORG failed to meet the reporting requirements under sections 6001 and 6033 to be recognized as exempt from federal income tax under §501(c)(3) of the Internal Revenue Code. Accordingly, the organization's exempt status is revoked effective January 1, 20XX.

A closing conference was offered, however not held, since the organization has

not made contact with the Service. For all tax periods after January 1, 20XX, should the revocation be upheld, ORG. is required to file Form 1120.

Form 886-A (1-1994) Page 3 of 3 Department of Treasury-Internal Revenue Service |

DEPARTMENT OF THE TREASURY
Internal Revenue Service
5990 West Creek Road
SE:T:EO:MA:7927
TAX EXEMPT AND Independence, OH 44131-9630

GOVERNMENT ENTITIES
DIVISION

Taxpayer Identification Number:

ORG
ADDRESS Form:
990

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