Determination 201007074: IRS revokes an organization's exemption after it failed to provide records for examination

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(3) after the organization failed to provide documents and records needed to examine its receipts, expenditures, and activities. The final adverse determination states that the organization did not establish that it was operated exclusively for exempt purposes or that its earnings did not inure to private individuals. Contributions were no longer deductible under IRC § 170, and the organization was required to file Form 1120 for the affected periods. The examination report concluded that the organization failed the operational and reporting requirements for tax-exempt status.

Ruling snapshot

• Question: Did the organization establish that it continued to satisfy the operational and recordkeeping requirements for exemption under IRC § 501(c)(3)?
• Outcome: Revocation, exemption terminated
• Key authorities: IRC §§ 170, 501(c)(3), 511, 6001, 6033, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE - EO Mandatory Review
1100 Commerce Street, MC 4920-DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201007074

Release Date: 2/19/10

Date: October 27, 2009

UIL Code: 501.03-00

LEGEND

ORG - ORGANIZATION NAME XX = DATE
ADDRESS = ADDRESS

Employer Identification Number:
Person to Contact:
Identification Number:
Contact Telephone Number:
In Reply Refer To:
TE/GE Review Staff
LAST DAY FOR FILING A
PETITION WITH COURTS:
January 25, 20XX

ORG
ADDRESS

CERTIFIED MAIL — Return Receipt Requested

Dear

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

Our adverse determination was made for the following reasons:

Organizations described in I.R.C. § 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 or otherwise 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 I.R.C. §§ 6001, 6033(a)(1), and Rev. Rul.
59-95, 1959-1 C.B. 627.

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 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 Internal Revenue Campus for the year ending
December 31, 20XX and for all years thereafter.

52

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 exempt status was determined by calling, faxing or
writing to: Internal Revenue Service, Taxpayer Advocates Office.

Taxpayer Advocate assistance cannot be used as a substitute for established IRS
procedures, formal appeals process, 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.

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

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
Mail Stop 1112, PO Box 12307
Ogden, UT 84412

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

ORG DATE OF THIS NOTICE:

ADDRESS
CONTACT PERSON/ID NUMBER:

CONTACT TELEPHONE NUMBERS:

Toll Free
Long Distance

Fax

Employer Identification Number:
Tax Period(s):
Form(s):

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

(IRC) 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 34809ZF

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 IRC 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 IRC.

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.

Telephone Number ( ___) Hours

Sincerely,

Vicki L. Hansen
Acting Director, EO Examinations

Enclosures:

Publication 892

Publication 3498

Form 886-A, Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809ZF

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG  FEIN# December 31,
20XX
LEGEND
ORG = Organization name XX = Date BM = Board Member

Date of Notice: November 5, 20XX

Issues:
Whether the organization continues to qualify for exemption from Federal income tax under
Section 501(c)(3) of the Internal Revenue Code.

Facts:
The ORG failed to respond to the Internal Revenue Service attempts to obtain information to
perform an examination of form 990 for the above mentioned tax period. Correspondence
for the examination was as follows:

On November 08, 20XX the organization was sent a compliance letter requesting the Form
990 for 20XX tax period. The organization failed to respond.

On July 22, 20XX an attempt was made by the officer to contact the organization by
telephone at number a message was left. The organization failed to respond.

On July 22, 20XX Letter # 4055 requesting information concerning the examination of the
organizations December 31, 20XX tax year and a completed return request was sent. The
organization failed to respond.

On July 29, 20XX another attempt was made to contact the organization by telephone at
number a message was left. The organization failed to respond.

On September 19, 20XX Letter 1477 follow-up letter requesting a response to original letter
was sent certified # number, BM (officer on record) signed the receipt on September 23,
20XX. The organization failed to respond.

On October 17, 20XX another attempt was made to contact the organization by telephone at
number a message was left. The organization failed to respond.

Law:
Internal Revenue Code (IRC) §1.61-1 of the regulations provides that gross income means all
income from whatever source derived, unless excluded by law. Gross income includes income
realized in any form, whether in money, property, or services. Income may be realized,
therefore, in the form of services, meals, accommodations, stock, or other property, as well as
cash.

IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11 on
the unrelated business taxable income of certain tax-exempt organizations, including those
described in section 501(c)(3).

IRC §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.

IRC §1.6001-1(e) of the regulations states that the books or records required by this section
shall be kept at all time 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 rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG FEIN# December 31,
20XX

IRC §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.

Federal Tax Regulations (FTR) §1.6033-1(h)(2) of the regulations 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 section 6033.

FTR §1.501(c)(3)-1(a)(1) of the regulations 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 §501(c)(3) of the Code provides that an organization organized and operated exclusively
for charitable or educational purposes is exempt from Federal income tax, provided no part of
its net earnings inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded
as "operated exclusively" for one or more exempt purposes described in section 501(c)(3) of
the Code if more than an insubstantial part of its activities is not in furtherance of a 501(c)(3)
purpose. Accordingly, the organization does not qualify for exemption under section 501(c)(3)
of the Code.

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 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.

Organizations Position

The organization has failed to respond at all attempts to contact them. In addition they have
failed to file all required returns.

Governments Position

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

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG  FEIN# December 31,
20XX

was granted tax-exempt status and to determine its liability for any unrelated business
income tax.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall
submit additional information for the purpose on enabling the Internal Revenue Service to
inquire further into its exempt status. Using the rationale that was developed in Revenue
Ruling 59-95, the Organization’s failure to provide requested information should result in the
termination of exempt status.

Conclusion:
It is the government's position that the organization 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.

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-