Determination 201007075: 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 test and no longer qualified 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), 6001, 6033, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.600-1, and 1.6033-2; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations

1100 Commerce Street
Dallas, TX 75424
TAX EXEMPT AND
GOVERNMENT ENTITIES Date: October 30, 2009
DIVISION

Release Number:201007075 . _

{X= DATE ADDRESS = ADDRESS
Release Date: 2/19/10 i
UIL Code: 501.03-00 Person to Contact:
ORG Identification Number:
ADDRESS In Reply Refer to: TE/GE Review Staff
EIN

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: January 28, 201XX

CERTIFIED MAIL — Return Receipt Requested

Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the Code is hereby revoked effective January 1, 20XN.

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.

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, Tel: or write :

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.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely yours,

Douglas H. Shulman
Commissioner
By

Sunita Lough
Director, EO Examinations
Enclosures:
Publication 892
Publication 1546
Notice 437
Ce:

Internal Revenue Service Department of the Treasury

Taxpayer Identification Number:

Date: 11/25/09

Form:

Tax Year(s) Ended:
ORG

ADDRESS 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,

Renee B. Wells
Acting Director, E.O. Examinations.

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

5 886-A Schedule number or exhibit

om EXPLANATION OF ITEMS

(. January 1994)

Name of taxpayer : ORG Tax Identification Number Year/Period ended
December 31, 20XX

LEGEND
Revenue Agent = Revenue Agent

ORG - Organization name XX = Date

ISSUE:
Whether ORG, exemption under Section 501(c)(3) of the Internal Revenue Code should be revoked due
to their failure to establish the right to maintain such exemption.

FACTS:

ORG, was granted tax-exempt status under section 501(c)(3) of the Internal Revenue Code, as of January
19XX. During the course of the examination numerous attempts were made to contact the organization by
mail and telephone. The purpose the examination was to determine if any of the members are receiving
any form of excess benefits and whether the operational activities of the organization were in accordance
with the guidelines governing organizations exempted under Section 501(c)(3) of the Internal Revenue
Code. A review of the 990 Information Return discloses this organization total revenue for the year ended

December 31, 20XX was §.

A chronology sequence of events are listed as follows:

June 14, 20XX, Revenue Agent mailed the appointment Letter 3611 to the address noted on the
record for ORG, requesting an examination date of there operational and financial activities.

February 7, 20XX, a second appointment Letter 3611 was mailed to the address noted on record
due to the organization’s inability to respond to the letter mailed June 14, 20XX.

February 29, 20XX, the Form 4759 was mailed to the local area Postmaster requesting help in
verifying whether the address for this organization is correct.

August 14, 20XX. a certified appointment Letter 3611 was mailed to the address noted on record
requesting for an examination. In addition, a certified Form 4759 was mailed to the local area
Postmaster requesting for help in verifying whether the address for this organization is correct.
Note: The certified appointment Letter 3611 was return to the Internal Revenue Service,
stamped “ Unable to Forward, Return to Sender”. The Form 4759 was also return to the Internal
Revenue Service indicating that the organization “Moved, Left, no Forwarding Address”.

During the course of the examination several telephone calls were made to the number noted on

record. Per the agent attempts, we were informed by the local operator that
, were not listed at the number on record.

October 1, 20XX, Revenue Agent mailed certified Letter 3618 to the address noted on
record for ORG.
November 3, 20XX the certified Letter 3618 was return stamped “Not Deliverable As Addressed

/ Unable to Forward”

Form 886-A (1-1994)

Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(. January 1994)

Name of taxpayer : ORG Tax Identification Number Year/Period ended
| December 31, 20XX

LAW:

Section 501(c)(3) of the Code provides for exemption of organizations organized and operated exclusively
for charitable purposes and that no part of the earnings of which inures to the benefit of private
shareholders or individuals.

Section 6033 of the Internal Revenue Code of 1954 provides that every organization exempted from
taxation under Section 501(a) of the Code shall file an annual return, stating specifically the items of gross
income of gross income, receipts, and disbursements, and shall keep such records, render under oath such
other 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.

Section 1.6033-2(h)(2) of the Federal Income Tax Regulations require that every organization which has
established its rights to exemption from tax shall submit such additional information as may be required
by the Internal Revenue Service to further inquire into its exempt status.

Section 1.600-1(c) of the Federal Income Tax Regulations states in part, every organization exempt from
tax under Section 501(a) shall keep such permanent books of account records, including inventories, as
are sufficient to show specifically the items of gross income, receipts and disbursements. Such
organizations shall keep such books and records as required to substantiate the information required by
Section 6033.

Revenue Ruling 59-95, 1959-1 C.B. 627, describes an organization previously recognized as exempt.
When requested a financial statement of its operations, the organization was unable to do so due its
incomplete records. The Service concluded that failure or inability to file the required information return
or otherwise to comply with Section 6033 of the Code and its implementing regulations may result in
termination of its exempt status, on the grounds that the organization has not established that it is
observing the conditions required for the continuation of its exempt status.

Section 1.61-1 (a) of the Federal Income Tax Regulations states 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 in cash.

The Dual Test: Organized and Operated:

IRC 501(c)(3) requires an organization to be both “organized” and “operated” exclusively for one or more
IRC 501(c)(3) purposes. If the organization fails either organizational test or the operational test, it is not
exempt. Reg. 1.501(c)(3)-1(a)(1). Church of Visible Intelligence That Governs The Universe. v.U.S.4 Cl.
Ct. 55.

The organizational test concerns the organization’s articles of organization or comparable governing
document. The operational test concerns the organization’s activities. A deficiency in an organization’s
governing document cannot be cured by the organization’s actual operations. Likewise, an organization

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

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS
(. January 1994)

Name of taxpayer : ORG Tax Identification Number Year/Period ended
December 31, 20XX

whose activities are not within the statute will not qualify for exemption by virtue of a well written
charter. Reg. 1.501(c)(3)-1(b)(1)(iv).

Operational Test:

1. Section 1.501(c)(3)-1(d)(i) defines appropriate exempt purposes. An organization may be exempt as
an organization described in section 501(c)(3) if it is organized and operated exclusively for one or
more of the following purposes:

- religious

- charitable

- scientific

- testing for public safety

- literary

- educational

- fostering national or international sports competition (but only if no part of its activities
involve the provision of athletic facilities or equipment)

- prevention of cruelty to children or animals.

2. Reg. 1.501(c)(3)-1(c)(1) provide that an organization is operated exclusively for charitable purposes
only if engages primarily in activities that accomplish those purposes in (1)above. It is not so operated
if more than an insubstantial part of its activities do not further those purpose

Burden of Proof:

The court in Church of Spiritual Technology v. United States, 510 U.S. 870, 114 S.Ct. 197 (Mem)

U.S., 1993, cited a long line of authority holding that the applicant bears the burden of showing it is
entitled to exemption. In Harding Hospital, Inc. v. United States. 505 F.2d 1068, 1071 (6" Cir. 1974)’
the court stated that “[1]income tax exemption must be strictly construed, with any doubts to be resolved
in favor of the taxing entity. Consequently, determinations of the Commissioner are presumed correct.”

Similarly, the court cited Welch v. Helvering, 190 U.S. 111, 115 (1933), and modem cases following its
structure that “[P]laintiff thus bears the burden of proving its entitlement to an exemption.”

The Tax Court has consistently stated that a statute creating an exemption must be strictly construed and

any doubt must be resolved in favor of the taxing power. Harding Hospital. Inc. v. united States of
America, 505 F2d. 1068, 34 A.F.T.R.2d 74-6174, 74-2 USTC.

Taxpayer’s Position:

As of the date of this letter ORG, has not responded to our attempts to conduct an examination of their
financial and operational activities.

Government Position:

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

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(.. January 1994)

Name of taxpayer : ORG Tax Identification Number Year/Period ended
December 31, 20XX

Since we have been unable to locate ORG, they have failed to furnish the information necessary to
conduct an examination of its financial and operational activities which in turn is used to determine there
continuing qualification for tax exempt status. Organizations seeking to obtain or maintain tax exempt
status under section 501(c)(3) of the IRC must meet two basic tests. These organizations must be both
organized and operated for 501(c)(3) purposes which ORG failed to demonstrate.

Conclusion:

Based on the above we have determined that your organization has failed the operational test under
section 501(c)(3) of the Internal Revenue Code. Therefore, ORG, no longer qualifies for tax exempt
status, effective January 1, 20XX. This is the first day of the tax period in which the organization fails to
qualify for exemption under IRC 501(c)(3) of the Code. Also, as of January 1, 20XX contributions are no
longer deductible as charitable contributions. In addition, ORG will be required to file 1120, U.S.
Corporation Income Tax Return Form 1120 for all periods subsequent to December 31, 20XX.

CC

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