Determination 200840047: Inactive charity agrees to loss of exempt status

Plain-English summary

A public charity closed its facilities, stopped operating, received only a later payment on old invoices, and owned no assets. The IRS concluded that it no longer conducted activities accomplishing a Section 501(c)(3) purpose. The organization agreed with revocation. The final adverse determination revoked its exemption effective on a redacted date and ended the deductibility of contributions. The report and final letter contain different redacted effective-date references, so this summary does not infer the underlying dates.

Ruling snapshot

• Question: Should the organization's Section 501(c)(3) exemption continue after it ceased all operations?
• Outcome: Revocation. The organization agreed that its exemption should end.
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 509(a), 6104(c), 7428; Treas. Reg. §§ 1.501(a)-1, 1.501(c)(3)-1.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street
MS:4920:DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

UIL: 501.03-01
JUL 1 9 2008
Release Number: 200840047
Release Date: 10/3/08

Legend — Person to Contact:

ORG = Organization name Employee Identification Number:
Contact Numbers:

Telephone:

Fax:

XX = Date Address = address

ORG
ADDRESS

In Reply Refer to: TE/GE Review Staff
EIN:

LAST DATE FOR FILING A PLEADING WITH THE
TAX COURT, THE UNITED STATES COURT OF
FEDERAL CLAIMS, OR THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF
COLUMBIA:

CERTIFIED MAIL

Dear

This is a Final Adverse Determination Letter as to your exempt status under section 501(c)(3) of the Internal Revenue Code. Our favorable determination letter to you dated February 19XX is hereby revoked and you are no longer exempt under section 501 (a) of the Code effective December 1, 20XX.

Our adverse determination was made for the following reasons:
You failed to meet the requirements of IRC Section 501(c)(3) and Treas. Reg. Section 1.501 (c)(3) -1(a), (c), and (d) in that you ceased operations as of December 1, 20XX, and you have

failed to establish from December 1, : forward that you engaged in any activities which accomplish an exempt purpose.

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

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 under the declaratory judgment provisions of section

7428 of the Code, a petition to the United States Tax Court, the United States Court of Federal Claims, or the District Court of the United States for the District of Columbia must be filed before the 91st day after the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed Publication 892. You may write to the United States Tax Court at the following address:

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.

See the enclosed Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS, for Taxpayer Advocate telephone numbers and addresses.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of the Internal Revenue Code. You should contact your State Officials if you have any questions about how this final determination may affect your State responsibilities and requirements.

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

Enclosures:
Publication 892
Publication 1546

Form 886-A EXPLANATION OF ITEMS Schedule or

Exhibit No.
Name of Taxpayer Year Ended
ORG 6/30/20XX
LEGEND
ORG = Organization name XX = Date City = city XYZ = State
ISSUE:

Should the ORG’s tax exemption under 501(c)(3) of the Internal Revenue Code be revoked because it has not met the requirements of 501(c)(3).

FACTS:

ORG was recognized as a tax exempt organization under 501(c)(3) of the Code in February 19XX. It was physically located in City, XYZ. Its facilities were closed December 1, 20XX. The last payment received from the State of XYZ was March 15, 20XX as payment for old invoices. The organization did not own any assets. The Director, President leased computers, computer equipment and office furniture to the organization

LAW:

Internal Revenue Code Section 501(c)(3) exempts from Federal income tax Public Charities organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.”

IRC 501(c)(3) states, “Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures 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 (except as otherwise provided in subsection (h)), and which does not 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.”

Income Tax Regulation 1.501(c)(3)-1 states, “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 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.

Department of the Treasury - Internal Revenue Service Form 886-A

Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
ORG 6/30/20XX

(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 (qd) of this section.

(b) Organizational test

(1) In general

(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)

(iii)

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).

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.”

Department of the Treasury - Internal Revenue Service Form 886-A

Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No,
Name of Taxpayer Year Ended
ORG 6/30/20XX

(iv) Inno 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 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).

IRC section 509(a) For purposes of this title, the term “private foundation” means a domestic or foreign organization described in section 501(c)(3) other than —

509(a)(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); IRC section 170(b)(1)(A) Any charitable contribution to —

170(b)(1)(A)(@) a church or a convention or association of churches,

170(b)(1)(A) (ii) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on,

170(b)(1)(A)(iii) an organization the principal purpose or functions of which are the providing of medical or hospital care or medical education or medical research, if the organization is a hospital, or if the organization is a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and during the calendar year in which the contribution is made such organization is committed to spend such contributions for such research before January 1 of the fifth calendar year which begins after the date such contribution is made,

170(b)(1)(A)(iv) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public, and which is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or which is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions,

Department of the Treasury - Internal Revenue Service Form 886-A

Form 886-A EXPLANATION OF ITEMS Schedule or

Exhibit No.
Name of Taxpayer Year Ended
ORG 6/30/20XX

170(b)(1)(A)(Y) a governmental unit referred to in subsection (c)(1),

170(b)(1)(A)(vi)_ an organization referred to in subsection (c)(2) which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from the general public,

170(b)(1)(A)(vii) a private foundation described in subparagraph (E), or

170(b)(1)(A) (viii) an organization described in section 509(a)(2) or (3), shall be allowed to the extent

that the aggregate of such contributions does not exceed 50 percent of the taxpayer's contribution base for the taxable year.

GOVERNMENT POSITION:

The taxpayer’s exemption status should be revoked effective July 1, 20XX. Taxpayer’s Position:

The taxpayer is in agreement with the revocation.

Conclusion:

Beginning with the tax year ending June 30, 20XX, ORG qualifies for revocation since it stopped all operations on December 31, 20XX.

Department of the Treasury - Internal Revenue Service Form 886-A

DEPARTMENT OF THE TREASURY
Internal Revenue Service
1100 Commerce Street, M/C 4900
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Taxpayer Identification Number:

ORG
ADDRESS Form:

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.

lf 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. Ramires,
Director, E O Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F