Determination 200850044: the report quotes the inurement rules, then revokes on recordkeeping

Plain-English summary

A final revocation letter from EO Examination in Brooklyn, dated September 9, 2008, pulling a youth club's exemption retroactively to March 1 of the redacted year. The club was chartered by resolution of a federally recognized tribe, incorporated as a state non-profit, and run by directors every one of whom was appointed by the tribal council, with the tribe's Department of Education keeping its books. It had been granted exemption on an advance ruling as a publicly supported organization under section 509(a)(1) and section 170(b)(1)(A)(vi).

The examination never became an examination. The tribe told the examiner the club had ceased operations in October of the redacted year and that there was therefore nothing to examine. From that point the Service asked only for dissolution paperwork: a letter on 26 June, a follow-up on 26 January, and a final request on 26 April. The chief financial officer phoned to discuss the dissolution and sent nothing. The club had filed no information return since inception and filed no final return when it dissolved itself.

What makes the file worth reading is the gap between the law the report recites and the ground it actually uses. The Law section quotes the organizational and operational tests, the inurement bar at Treas. Reg. 1.501(c)(3)-1(c)(2), the private-interest rule at 1.501(c)(3)-1(d)(1)(i), and the trade-or-business rule at 1.501(c)(3)-1(e) with its cross-reference to section 513. None of it is used. The Government's Position and the Conclusion rest entirely on sections 6001 and 6033 and on Rev. Rul. 59-95, and no finding of inurement, private benefit, or unrelated business is ever made. The one holding is that the club never established it was observing the conditions for continued exemption. The Taxpayer's Position section reads, in full, that the taxpayer has no stated position.

The petition deadline shows how little the redaction hides. The letter is dated September 9, 2008 and sets the last date for filing a pleading at December 8 of a redacted year, which is exactly ninety days later. The two sibling revocations released the same day, 0850043 and 0850042, do the same to the day. Where a full letter date survives, blanking the year out of the deadline conceals nothing.

The index row labels this one an Employee Benefit Organization. That is the generic label for the UILC code, not a description of a tribal youth club, and the index value is kept here as released.

The scan needed five corrections, each disclosed: a misread of the form revision line as (Rey. January 19XX), a space broken into publish.no.irs. gov, IRC See. 501(c)(3) for IRC Sec., a lost word space in file a petition ina, and the Brooklyn ZIP printed as 11261. On the last, fifty-three other documents in this corpus print 11201 for this same Fulton Street office and none print 11261, so the digit is treated as a misread.

Flagged and left alone: the quotation of Treas. Reg. 1.501(c)(3)-1(d)(1)(i) that reads an organization is nor organized or operated exclusively; a sentence missing its noun, No additional has been received; the lost ordinals in the legend and in before the gi" day; two shredded Form 886-A masthead bands; the stray bullet glyph on the teen-parent program; and the signature block reading Director, E.O. Examination against the Director, EO Examinations used elsewhere in the same file. The Brooklyn template tells the reader to call too-free for the Taxpayer Advocate where the enclosed Denver letter prints toll-free 1-877-777-4778, so that line is left as released too.

The enclosed proposed letter came from a different office, 1244 Speer Blvd in Denver, dated March 20, 2008 and signed by Marsha Ramirez; the final letter is Brooklyn's and signed by Vicki L. Hansen.

Ruling snapshot

• Question: Should a tribal youth club that had already ceased operations keep its exemption when it filed no information returns and produced no record of its dissolution?
• Outcome: Exemption revoked retroactively to March 1 of the redacted year, contributions no longer deductible under section 170, state officials notified under section 6104(c).
• Key authorities: Sections 501(c)(3), 6001, and 6033; Treas. Reg. 1.6001-1 and 1.6033-1(h)(2); Rev. Rul. 59-95, 1959-1 C.B. 627.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
625 Fulton Street, Room 503

Brooklyn, NY 11201
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Release Number: 200850044
Release Date: 12/12/08
LEGEND UIL:501.03-01
ORG = Organization name XX = Date Address = address
Date: September 9, 2008
ORG Taxpayer Identification Number:
ADDRESS Person to Contact:

Identification Number
Contact Telephone Number:

LAST DATE FOR FILING A PLEADING WITH THE TAX COURT, THE CLAIMS
COURT, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
COLUMBIA: December 8, 20XX.

Dear

This is a final determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code (IRC). Recognition of your exemption from Federal income tax
as an organization described in Internal Revenue Code section 501(c)(3) is retroactively
revoked to March 1, 20XX because it is determined that you have not established that
you are observing the conditions required for the continuation of an exempt status.

IRC 501(c)(3) exempts from taxation organizations which are organized and operated
exclusively for charitable or educational purposes, no part of the net earnings 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.

IRC 6033 provides that every organization, except as provided therein, exempt from
taxation under section 501(a) of the Code shall file an annual return, stating specifically
the items of gross income, receipts, and disbursements, and shall keep such records,
render under oath such statements, make such other returns and comply with such
rules and regulations as the Secretary of the Treasury or his delegate may from time to
time prescribe.

Revenue Ruling 59-95, 1959-1 CB 627 held that failure or inability to file the required
information return or otherwise to comply with the provision 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 an
exempt status.

In accordance with IRC 6033 and Revenue Ruling 59-95, we have determined that the
organization has not established that it is observing the conditions required for
continuation of 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 March 1, 20XX.
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 in court, you must file a pleading seeking a
declaratory judgment in the United States Tax Court, the United States Court of Federal
Claims, or the United States District Court for the District of Columbia before the gi"
day after the date this final determination was mailed to you. Please contact the clerk
of the appropriate court for rules regarding filing pleadings for declaratory judgments
and refer to the enclosed Publication 892. You may write to these courts at the
following addresses:

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 too-free and ask for Taxpayer Advocate Assistance. If you prefer, you may
contact your local Taxpayer Advocate at: Internal Revenue Service, telephone number.

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,

Vicki L. Hansen
Acting Director, EO Examinations

Enclosure:
Publication 892

Form 886-A Schedule number or exhibit

(Rev. January 19XX) EXPLANATIONS OF ITEMS

ORG Tax Identification Number | Year/Period ended
20XX02

LEGEND

ORG = Organization name XX = Date XYZ = State CFO = CFO Cco-1

thru co-4 = 18, 2™¢, 3°¢ & 4*? COMPANIES
Issue:

Whether the tax-Exempt status of an organization exempt under §§501(a), as a 501(c)(3) which
operates a CO-1, whose mission is to promote and guide the health, social, educational, and
character of the members of the club should be revoked?

Facts:

The ORG — CO-1 was chartered under resolution 01-XX, by the ORG on 21 January 19XX. Its
Charter was signed and accepted on 9 April 19XX. The organization was incorporated under the
laws of XYZ as a non-profit corporation on 19 November 19XX. In its advance ruling letter
dated 10 January 20XX, the organization was held to be exempt from federal income tax as an
IRC §501(c)(3), with an advance ruling foundation status under IRC §509(a)(1) —
170(b)(1)(A)(vi). Indicating that contributions to the organization are tax deductible and the
organization is primarily supported by contributions, gifts, and grants from the general public.

The organization’s primary purpose, as stated in its application for exemption (Form 1023) is to
operate a CO-1 at the CO-2, to augment and support current after school efforts. The
organization intended to organize activities under the following categories:
o Sports & Recreation: Hiking, Basketball, Volleyball, Track/Field, etc
o Camp Programs: Summer Leadership Camps, Drug Education Camps, etc
o Community/Youth Service: Youth would identify and implement activities within the six
villages, such as litter control, upgrading facilities, etc.
o Mentoring /Training: Efforts based at the middle school and in the six villages
o Drop-In Center: All six villages have recreation centers and serve as “Safe Havens” and
the focal points for after school events for the entire village.
o Jobs, Career & Planning: Career Fairs for the community, tribal JTPA program assists
with training resume preparation, school to work projects were planned.
© Support programs for teen parents: a task force of teen parents coordinates all the
activities, parent discussions in schools that discuss safe sex and abstinence, etc.
o Student support services: Teen court is being developed, in-school suspension at the CO-

3.

Under the technical requirements section of its application for exemption, the organization
indicated it’s directors serve as members of the governing body by reason of being a public
official and or appointment by a public official. All the directors are appointed by the tribal
council of the ORG, a federally recognized CO-4. In addition, the organization is responsive to
the ORG Tribal Government, as such the organization will report to the tribal council, and the
Department of Education will provide accounting services for the organization.

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

Form 886-A Schedule number or exhibit
(Rev. January 19XX) EXPLANATIONS OF ITEMS
ORG Tax Identification Number | Year/Period ended

20XX02

CO-4s (CO-4) was contacted in June to advise that an examination of the organization would be
conducted. Discussion between the Organization and the CO-4 representative indicated that the
organization’s CO-1 was no longer in existence, it ceased operations in October 20XX, and as
such there is no need for an examination of the organization.

As such, a letter was sent to the organization on 26 June 20XX, indicating that in order to
properly terminate the organization that documents entailing the dissolution of the organization
would need to be provided. CFO, the organization’s CFO contacted the examiner to discuss the
dissolution of the organization; however, no additional documentation was submitted to the IRS.
Through attempts to contact the organization through CO-4, and telephone, a follow-up letter
was sent to the organization on 26 January 20XX. No Response was received by the required
due date. As Such CO-4 was notified, and through additional interaction, telephone calls were
held between the organization and the examiner. However, no additional information was
provided to the examiner.

A final letter was sent to the organization on 26 April 20XX, requesting that additional
information be provided to properly dissolve the organization. No additional has been received
by the examiner.

The organization has failed to file information returns to the service since its inception in 20XX.
In addition, the organization did not file a final return when it dissolved itself in 20XX.

Law:

IRC Sec. 501(c)(3) allows for the exemption from Federal income tax an organization that is:
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”

Treasury Regulation §1.501(c)(3)-1(a) provides, in general:

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.”

Treasury Regulation §1.501(c)(3)-1(c)(1) provides,

An organization will be regarded as “operated exclusively” for one or more exempt purposes
only if it engages primarily in activities which accomplish one or more of such exempt purposes
specified in section 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Treasury Regulation §1.501(c)(3)-1(c)(2) provides,

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

Form 886-A Schedule number or exhibit
(ate ATT G TERS, EXPLANATIONS OF ITEMS
ORG Tax Identification Number | Year/Period ended

20XX02

That the operational test is not satisfied where any parts of the organization’s earnings inure to
the benefit of private shareholders or individuals, and where the organization serves a private
rather than public interest.

Treasury Regulation §1.501(c)(3)-1(d)(1)(i) provides:
That an organization is nor organized or operated exclusively for one or more of the purposes
specified in IRC §501(c)(3) unless it serves a public rather than a private interest.

Treasury Regulation §1.501(c)(3)-1(e) provides, in general:

An organization may meet the requirements of section 501(c)(3) although it operates a trade
or business as a substantial part of its activities, if the operation of such trade or business is
in furtherance of the organization's exempt purpose or purposes and if the organization is not
organized or operated for the primary purpose of carrying on an unrelated trade or business,
as defined in section 513.”

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.

Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides:

that every organization exempt from tax under IRC § 501(a) and subject to the tax imposed by
IRC § 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 IRC § 6033.

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

Treas. Reg § 1.6033-1(h)(2) provides:

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

Form 886-A Schedule number or exhibit
(EIR EET E229) EXPLANATIONS OF ITEMS
ORG Tax Identification Number | Year/Period ended

20XX02

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.

Rev. Rul. 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.

Governments Position:

Contact with the organization has been attempted multiple times; each attempt to contact the
organization has not persuaded the organization, or its tribal government to provide the
necessary documents needed in the determination of the organization’s continued 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.
The organization has not filed a return since its inception, and request to provide information
to substantiate the organization’s ongoing exempt status have largely gone ignored.

Taxpayer’s Position:

The Taxpayer does not currently have a stated position.

Conclusion:

It is the IRS's position that the organization failed to meet the reporting requirements under
IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under

IRC § 501(c)(3). Accordingly, the organization's exempt status is revoked effective March 1,
20XX

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

Internal Revenue Service Department of the Treasury
Tax Exempt & Government Entities Division

1244 Speer Blvd, Suite 442
Denver, Colorado 80204

Taxpayer Identification Number:

Date: March 20, 2008

Form:

ORG
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 (Rev. 11-2003)
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 Ramirez
Director, E.O. Examination

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F