Determination 201007073: IRS revokes an organization's exemption after it failed to file returns and maintain qualifying activities

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(3) after an examination found that it had not conducted tax-exempt activities, had not filed required Form 990 returns, and had failed to provide complete books and records. The organization agreed to a voluntary revocation effective April 1, 20XX. The final determination states that contributions were no longer deductible under IRC § 170 after that date and that the organization had to file Form 1120 returns.

Ruling snapshot

• Question: Did the organization establish that it continued to meet the operational, recordkeeping, and filing requirements for exemption under IRC § 501(c)(3)?
• Outcome: Revocation, exemption terminated
• Key authorities: IRC §§ 170, 501(c)(3), 6001, 6033, and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6038A-3; Rev. Rul. 59-95

Full text (IRS public release)

TEGE EC Examinations Mail Stop 4820 DAL
1100 Commerce St.
Dallas, Texas 75242

Date: November 25, 2009

Release Number: 201007073
Release Date: 2/19/10
UIL Code: 501.03-00

Taxpayer Identification Number:
ORG = ORGANIZATION NAME XX = DATE

ADDRESS = ADDRESS Person to Contact:
Employee Identification Number:

Employee Telephone Number:

ORG
ADDRESS

LAST DATE TO FILE A PETITION
IN TAX COURT: February 23, 20XX

CERTIFIED MAIL —- RETURN RECEIPT

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code (the Code). Our favorable determination letter to you dated October 19,
19XX is hereby revoked and you are no longer exempt under section 501(a) of the Code effective

April 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized
and operated exclusively for exempt purposes. You have failed to produce documents to
establish that you are operated exclusively for exempt purposes and that no part of your net
earnings inures to the benefit of private shareholders or individuals. You failed to respond to
repeated reasonable requests to allow the Internal Revenue Service to examine your records
regarding your receipts, expenditures, or activities as required by IRC 6001, 6033(a)(1) and Rev.

Rul. 59-95, 1959-1 C.B. 627.

Contributions to your organization are no longer deductible under IRC §170 after April 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be filed with the
appropriate Service Center for the tax year ending March 31, 20XX, and for all tax years thereafter
in accordance with the instructions of the return.

Processing of income tax returns and assessments 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 Claims Court, 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. 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, and ask for Taxpayer Advocate Assistance. If
you prefer, you may contact your local Taxpayer Advocate at:

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

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,

Sunita Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 1546

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO Examinations: Grp 7810
625 Fulton Street, 5th Floor

Brooklyn, NY 11201

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: July 28, 2009
Taxpayer Identification Number:
ORG Form:
ADDRESS Tax Year(s) Ended:

Contact Person / 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, please sign and return the enclosed Form 6018, Consent to
Proposed Action - Section 7428. If you have already given us a signed Form 6018,
you need not repeat this process. 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.

In lieu of Letter 3618

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.

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,

Sunita B. Lough,
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

In lieu of Letter 3618

Form 886-A Schedule number or exhibit

((Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number | Year/Period ended

ORG March 31, 20XX through
March 31, 20XX

LEGEND

ORG = ORGANIZATION NAME XX = DATE STATE = STATE

Issue:

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

Facts:

An examination of ORG for the tax period ending March 31, 20XX, was initiated as the result
of a referral report indicating the organization had failed to file Form 990 information returns
since 19XX and was collecting consulting fees for services performed by one of its
employees.

ORG was granted tax exempt status under section 501(c)(3) of the Internal Revenue Code (the
Code) on October 19, 19XX and classified as a publicly supported organization described in
sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code. The organization’s purpose as set forth in
its articles of incorporation is: “to promote development by owners, landlords and tenants of
rehabilitation of deteriorating or abandoned tenement housing and to advise and assist in
implementing programs relating to such rehabilitation.”

During the examination we verified that ORG had not filed a Form 990 return since the tax
period ending March 31, 19XX and that the organization is still listed as an active domestic Not-
For-Profit Corporation in the State of State. Despite numerous information document requests
submitted to the organization during the examination, the organization failed to provide complete
books and records for our review. We also learned that the organization did not maintain an
accounting system during the examination period. For the purpose of the examination, the power
of attorney prepared financial reports using source documents such as bank statements and
cancelled checks which were requested from various financial institutions during the course of
our examination. As a result, ORG was able to file delinquent 990 returns for the periods ending
March 31, 20XX and March 31, 20XX.

Based on our examination, we have determined the following:

1. ORG has not conducted tax exempt activities since the fiscal year ending 3/3 1/20XX.

2. Subsequent to the fiscal year ending 3/31/20XX, ORG sole source of support was derived
from management and consulting fees.

3. Subsequent to the fiscal year ending 3/31/20XX, ORG received no public support.

Form 886-A

Form 886-A | Schedule number or exhibit
(Revs January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number | Year/Period ended

ORG | March 31, 20XX through

| March 31, 20XX

4. ORG failed to file Form 990’s for all tax periods subsequent to the year ending
3/31/20XX.,

The organization has agreed to a voluntary revocation of its tax exempt status as of April 1,
20XX.

Law:

Treasury Regulation 1.501(c)(3)-1(a)(1)_states that 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.

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 1.6038A-3(a) (1) states a reporting corporation must keep the permanent
books of account or records as required by section 6001 that are sufficient to establish the
correctness of the federal income tax return of the corporation, including information,
documents, or records to the extent they may be relevant to determine the correct U.S. tax
treatment of transactions with related parties. Such records must be permanent, accurate and
complete and must clearly establish income, deductions and credits. This requirement includes
records of the reporting corporation, as well as to records of any foreign related party that may be
relevant to determine the correct U.S. tax treatment or transactions between the reporting
corporation and foreign related parties.

Taxpayer’s Position

ORG has agreed to revocation of the organization’s tax-exempt status as of April 1, 20XX.

Government’s Position

Form 886-A

Form 886-A-A | Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
|
Name of taxpayer Tax Identification Number | Year/Period ended
ORG March 31, 20XX through

| March 31, 20XX

Treasury Regulation 1.501(c)(3)-1(a)(1) states that 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. Treasury regulation 1.6038A-3(a) (1)
states a reporting corporation must keep the permanent books of account or records as required
by section 6001 that are sufficient to establish the correctness of the federal income tax return of
the corporation, as well as to records of any foreign related party that may be relevant to
determine the correct U.S. tax treatment or transactions between the reporting corporation and
foreign related parties.

It is the government’s position that ORG does not qualify for exemption under Section 501(c)(3)
of the Code because the organization does not pass the operational test as stated in Treasury
Regulation 1.501(c)(3)-1(a) (1), does not maintain records in compliance with Treasury
Regulation 1.6038A-3(a) (1), and has failed to file returns, Form 990, for years ending March 31,
20XX through 20XX.

Conclusion:

It is the IRS's position that ORG has failed to demonstrate that it is conducting 501(c)(3)
activities and operating in compliance with Treasury Regulation 1.501(c)(3)-1(a)(1) and has
failed to meet the reporting requirements under IRC §§ 6001 and 6033. Accordingly, the
organization does not qualify for exemption under Section 501(c)(3) of the Code.

We therefore propose revocation of the organization’s tax exempt status effective April 1, 20XX.

Form 1120 returns should be filed for the tax periods ending after March 31, 20XX.

Form 886-A