Determination 1029033: IRS revoked a dormant organization’s exemption after it failed to establish ongoing exempt operations

Plain-English summary

The IRS revoked the organization’s exemption under IRC § 501(c)(3), effective January 1 of the redacted year. The organization failed to produce records establishing that it operated exclusively for exempt purposes and failed to respond to repeated requests to examine its receipts, expenditures, and activities. The organization also stated that its activities were over, so it did not meet the operational requirements for continued exemption. Contributions were no longer deductible under IRC § 170, and the organization was required to file Form 1120 returns. The determination also discusses the recordkeeping and annual-return requirements of IRC §§ 6001 and 6033 and the declaratory-judgment procedures of IRC § 7428.

Ruling snapshot

• Question: Did the organization establish that it continued to operate exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 6001, 6033, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c)(2) and 1.501(c)(3)-1(d)(1)(ii)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL

1100 Commerce St. 501.03-00 |

Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: April 14, 2010

Release Number: 201029033
Release Date: 7/23/10

LEGEND

ORG = Organization name

XX = Date Address = address

Taxpayer Identification Number:
Person to Contact:

Employee Identification Number:
Employee Telephone Number:
ORG (Phone)

ADDRESS (Fax)

LAST DATE TO FILE A PETITION
IN TAX COURT: July 13, 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 February 2005
is hereby revoked and you are no longer exempt under section 501(a) of the Code effective
January 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 sections 6001 and 6033(a)(1) of
the Code and Rev. Rul. 59-95, 1959-1 C.B. 627.

You failed to operate as an organization described under section 501(c)(3) of the Code. You did
provide information stating that the activities of your organization are over. As such, you fail to
meet the operational requirements for continued exemption under section 501(c)(3).

Contributions to your organization are no longer deductible under IRC §170 after January 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 December 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:

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

Sincerely,

Nanette M. Downing
Acting Director, EO Examinations

Enclosures:
Publication 892

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

January 11, 2010

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.

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 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, EO Examinations

Enclosures:

Publication 892/3498
Form 886-A Explanation
Form 6018 Consent

Letter 3618 (04-2002)
Catalog Number 34809F

Foun 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/ Period Ended
ORG also known as
ORG 12-31-20XX
LEGEND
ORG = Organization name Xx = Date Address = address City = city
State = state County = county website = website number = number
CO-1 & Co-2 = 1%" & 2"% COMPANIES DIR-1 & DIR-2 = 1°%* & 2°° DIRECTORS

A-1 = °' RA

Al ¢

Issue:
Whether the ORG, also known as ORG qualifies for exemption under Section 501(c)(3) of the
Internal Revenue Code.

Facts:

The ORG ( the EO) is an organization recognized under IRC 501(c)(3) and170(b)(1)(A)(vi). The ruling
date is February of 20XX. The filing requirements are the forms 990 and 941.

The agent secured a copy of the Form 1023 Application for Recognition of Exemption from the IRS
Determination Unit. The detailed description of the activities and purpose reads:
ORG is involved in the following activities of educating business people with sound Christian Principles.
(by) 1. Assisting in the publication and distribution of Christian literature...

2. Teaching ---conduct conferences & seminars to more effectively teach biblical business
   principles.....

On the Form 1023, the EO stated that sources of financial support would be contributions, and charging
fees for seminars. The form also states that the organization is not a private foundation, because it will
receive a substantial part of its’ support in the form of contributions from publicly supported
organizations, from governmental units, or from the general public.

The exempt purpose as stated on the form 990 for the period ending December 31, 20XX, is to establish a
website to educate people in the area of business ethics, management, marketing, and financial principles.
The 20XX form 990 is the first form 990 the EO filed.

The EO filed the form 990 for the period ending December 31, 20XX. The exempt organization
requested an extension to file for the period ending December 31, 20XX. The extended date to file is
November 15, 20XX, but the EO did not file the return. The form 990 for the period ending December
31, 20XX is not filed.

The form 990 for 20XX is assigned to the filed for audit. The agent subsequently requested controls for
the form 990 for the period ending December 31, 20XX, and prepared a substitute for return for the period

ending December 31, 20XX.

There is no phone listing for the exempt organization at the address in City, State.

Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Prosar S86A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX

On October 16, 20XX, the agent opened the audit for the form 990 by sending the letter 3611, Information
Document #1, and publication 1 to the last known physical address and post office box located in City,
State. The Post Office returned both letters as undeliverable.

On November 5, 20XX, the agent drove to the physical address on the return. The address is for an
abandoned factory. There is a sign on the property that advertises a web site at ORG.com.

City County, State court records show the property in City is titled to ORG, a State Corporation.

The State of State corporate web site indicates ORG filed an amendment to the Articles of Incorporation
with the Secretary of the State of State, to change the corporate name to ORG.

The ORG web site promotes itself as a corporation described under IRC 501(C)(#), and encourages
viewers to donate their commercial real estate to ORG. The web site goes on to explain the financial
benefits of donating certain commercial properties to ORG. The web site provides examples of how
successful prior “561” donations have been for specific corporations, using ORG’s “RIM Exchange
Program”.

From the web site ORG.com:

“In order for the 561 Exchange to work. three criteria must be met — He right buyer, the right seller
and the right property. The program then uses the combination of the three appraisal methods

as outlined by the IRS in Publication 561 of the tax code to determine the Fair Market Value of the
property — the replacement cost approach. the income approach and the market approach. Once the
value is established, the seller conveys the title to ORG and receives the cash from the tax benefit.
usually exceeding the cash benefit of selling it at list price.”

“Phe catch is that the 561 Exchange only carries a tax benefit to the owner of the property if the
company is profitable or expects to be profitable within the next 5 years. If the owner of the property
is an individual investor, the owner must pay a certain amount of income taxes in order to exceed the
cash benelit of selling tt at list price.”

~The second criteria is that it has to be the right property. The 561 Exchange typically only works on
industrial properties of a certain size. It does not apply to homes, apartments, condos, ete. If the
property is downtown a thriving metro area like City, State—it probably will not apply. However, if
the property is 50.000 sq. ft. or higher in a small rural area or economically sluggish city, then it will
probably work.”

“The third criteria is that it has to be the right buyer or recipient. Typically. a national 501(¢)3
organization that focuses on 561 Exchange properties. The leading organization that understands the
program and can give the most value to the property owner's is ORG. This was the same
organization that worked with Co-1 on the State property.”

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

Form S86A Department of the Treasury - Internal Revenue Service Schedule No. or
_ Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX

“Tt’s a win-win solution. The property owners win by disposing the property and getting a significant
cash benefit without the huge carrying costs incurred while it sits empty on the market. The local
community wins by helping entrepreneurs create more small business and jobs. The government
wins by the creation of more profitable tax paying businesses that use what could easily have been an
empty building.”

The site also includes tabs to take the viewer to twelve different pages relating to ORG. Under the
Company Profile tab, there 1s the following statement:

“We continue to build our endowment for our future school of business and current business
education programs. [n addition, our endowment funds other business educational organizations. as
well as partners with other organizations that help create jobs and start new businesses.”

The agent did not see any other reference to an educational exempt activity as outlined on the form 1023
or the exempt activity described on the form 990 for the period ending December 31, 20XX. There is also
no indication of any ongoing educational program.

The corporate address on the ORG web site is Address, City, State.

On November 6, 20XX, the agent sent a generic email to website, asking for one of the officers of the
corporation to contact the agent. website is a link off of www.ORG.com.

On November 7, the agent received an e-mailed reply from Website. The reply simply stated:

“Yes, my name is DIR-1 and I am an officer of ORG. How can I help you?”

The agent sent a second email to the above address, asking for the corporate address and phone number.
Agent sent letter 3611, Information Document Request #1, and Publication | to the City, State address
setting up an audit appointment for December 8, 20XX in City, State.

On November 11, 20XX the agent received an email reply from Website.
DIR-1 advised the agent he could send mail to:
Address, City, State

DIR-1 gave a contact number :number. The agent called the number and left a message to call back. The
call was answered by a voice mail, identifying DIR-1. The agent left a voice message requesting contact.

On November 12, 20XX the agent sent the letter 3611, Information Document Request #1 and Publication
1 to the City, State address. In addition, the agent sent a certified letter to City, State address. The letter
requested contact and advised the exempt organization of Treasury Regulation § 1.6033-1(h)(2) regarding
revocation. A receipt of delivery was received on December 8, 20XX for the City, State mailing. The
signature on the receipt is illegible.

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

Farah 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX

On November 19, 20XX, the agent received a phone message that DIR-1 returned the agent’s phone
inquiry. No other information was left for the agent.

On November 24, 20XX the agent received a postal tracer indicating the City address mail was being
forwarded to: Address, City, State

The agent tried to call DIR-1 again. The message went to voice mail again, and the agent left a
message stating if DIR-1 called back and did not get agent, to leave a time when he will answer the
phone, or give the agent a name and phone number of another officer.

On November 25", 20XX, after no response from officer DIR-1, the agent sent a letter to the City, State
address requesting contact and advised the exempt organization of Treasury Regulation § 1.6033-1(h)(2)
regarding revocation.

On December 1, 20XX, the agent sent IDR#3 to the City, State and the City, State addresses. IDR#3
explained the agent’s efforts to date, the reason for the location of the audit, and revocation information in
Revenue Ruling 59-95.

No one from the exempt organization appeared or called at the audit appointment scheduled for December
8" 20XX,

The exempt organization lists multiple properties on its’ web site as having been successful “561
Transfers”. The properties are located in various states, mostly east of the River. Two properties are
located relatively near the agent’s post of duty: one in City, State, and one in City, State. The agent
contacted the auditor’s office in City, State, and verified that the property was originally transferred to
ORG t/k/a/ The ORG in September of 20XX. On November 9, 20XX, that property was then transferred
to a non-exempt entity, ORG whose address is Address, City, State. Zip. The deed was signed by the
CLEO/President of the ORG f/k/a ORG, DIR-1. The Certificate of Formation for ORG name DIR-1 and
DIR-2 as managers of the LLC.

The agent called the County Recorder’s Office in City, State. The property was donated to the EO by
. The clerk pulled up the deed in book 57, page 2945 and read it the agent.
This property was transferred from ORG aka ORG, to ORG, not an exempt organization.

On December 10, the agent sent Information Document Request #4 to the City State and City, State
addresses. IDR#4 demanded an explanation as to why exempt property was transferred to Limited
Liability Companies.

‘\ record search at the State of State’s corporate records webpage showed one non-profit corporation
named ORG. In addition, there are 16 with the name ORG Holding
Company or ORG Property.

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

Roem 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX

On January 6, 20XX, the agent summoned the State of State to provide copies of ten different Certificates
of Formation in regards to the ORG Properties Limited Liability Companies.

A review of the Certificates of Formation showed that none of the Limited Liability Companies qualified
as an entity described under IRC 501(c)(2). All the Certificates of Formation name DIR-1 and DIR-2 as
managers of the LLC.

On February 2, 20XX the agent spoke to former corporate office DIR-2. DIR-2 is no longer a corporate
officer or employee. He indicated the DIR-1 would contact the agent.

The agent completed a form 886-A to propose the IRC 4945 penalty on DIR-1. The form 886-A was
mailed February 4, 20XX with a letter demanding correction under IRC 4958(f)(6).

On February 5, 20XX the agent received a voice mail message that DIR-1 called.

DIR-1 stated that he wanted to set up a phone conference with the agent, himself, and his legal counsel.
The agent then tried to contact the taxpayer several times without success. The agent prepared the form
872 and letter 3600. The group manager authorized the letter and it was mailed February 6, 20XX.

On February 12, 20XX DIR-1 called and left message, requesting a phone conference with agent. DIR-1
left a new phone number to contact him.

Agent was back in office 03-03-20XX. DIR-1 had left two new messages. He advised the agent that he
would sign the form 872, extending the assessment statute for the year ending December 31, 20XX. He
also expressed his confidence that everything will be fine after the agent looks at the books and records.
Agent called DIR-1 back, and left his pager number in order to facilitate contact .

On 03-05-XX the agent spoke to DIR-1. DIR-1 advised the agent that the City, State address is an UPS
office. and the suite number is the mail box number at the UPS office. There is no physical location for the
corporation. DIR-1 stated that he was currently the only employee of the corporation. All of the other
employees are laid off. He is working out of his house and looking for a new job.

The records for the year ending December 31, 20XX are in storage. He stated that he was not aware that
the transfers of the charitable assets over to the Limited Liability Companies would create a problem. He
relied on the advice of an in-house attorney. DIR-1 stated that he received no personal benefit related to
the transfer. He made the transfers to protect the individual assets. In addition, there is a potential
environmental issues on some of the properties, and he wanted limit any potential legal issues by placing
the properties in the Limited Liability Companies. The agent demanded correction. DIR-1 stated that he
would immediately correct the problem. The agent requested a copy of the form 990 for the period ending
December 31, 20XX. DIR-1 stated that remembered signing that return. He has a copy and he would mail
the copy to the agent.

Form 886-A(rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

espns 886A Department of the [reasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX

The agent issued Information Document Request #6 demanding records of disbursements, loan
agreements, appraisals for property on the return for the period ending December 31, 20X, and proof of
correction.

In response to Information Document Request #6, DIR-1 sent a CD that contained part of the records
demanded on the Information Document Requests. On 04-17-XX the agent sent Information Document
Request #7, itemizing what was on the CD, and asking questions concerning the exempt organization’s
current activity.

On 04-20-20XX, DIR-1 called to update agent. DIR-1 stated that the agent did not understand the
situation at the exempt organization. There are no companies waiting to donate any more properties. The
activities of ORG are over. Due to the tightening loan market, he cannot borrow any more money to use as
operating capital. The lenders are foreclosing on some of the properties. When and if the foreclosed
properties go to sale, he does not expect the sale amounts to pay the loans in full. He is working with a
501(c)(3) organization, RA-1 at Co-2, which will take over the unencumbered properties.

On 04-24-20XX, the agent called and received DIR-1’s voice mail. The agent left a message asking if
DIR-1 could get all of the corporate records in one spot, so the agent could look at them.

On 05-08-20XX, DIR-1 called back and advised the agent that all the paper records of corporation have
either been tossed or lost. He stated that he had the records on a hard drive. The agent requested the hard
drive.

The transfer of the commercial property to the other 501(c)(c) organization has not gone through, but is
expected to be finalized on 06-02-20XX. DIR-1 stated that he wants to terminate the exempt organization.

The agent prepared and mailed IDR #8, notifying the organization that the years ending December 31,
20XX and December 31, 20XX are open for audit. The agent included three issue-focused items on the
Information Document Request for 20XX and 20XX, and again requested the disbursement journal for
the year ending December 31, 20XX.

The exempt organization has not supplied any additional information. The agent received one last voice
mail asking for information in regards to the agent closing the exempt organization through revocation.

The reported donation value and number of properties donated to the exempt organization are:

Year | Amount Number of Properties
20XX 7 — | Ss
20XX | $
20XX | $ ee
_20KX $

Form 886-Aciev 4-68) Department of the Treasury - Internal Revenue Service

Page: -6-

[even 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX
Total. $$ 7 22 |

The EO reflected property donations as Contributions on the form 990 for 20XX, and as Direct Public
Support on the forms 990 for 20XX and 20XX. The returns do not reflect any cash contributions or cash

from public support.

Results of the rental activity are as follows:

Amount of
Donated Amount of Net
Rental Rental Rental
Year Real Property Income Expenses Income
20XX $
20XX $
20XX $

Commercial Property Maintenance Expense and Program Services Expenditure, as a Percentage of Total

Revenue:

' Amount Recorded Maintenance as Amount Spent | Program Service as a
as of Total Net Cost of a percentage of Ne Program Servi¢ Percentage of Total Reveni
_ Year | Donated Property Revenue Maintenance | Revenue
20XX | $ _ | 2.27% 0.00%
_ 20XX $ | 5.18% | 0.62%
20XX | S | 12.92% | 0.55%

Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945)

An organization to fall within exemption from taxation under the Social Security Act in favor
of educational institutions, must be devoted to educational purposes, exclusively and the
presence of a single noneducational purpose, if substantial in nature, will destroy the exemption
regardless of number or importance of truly educational purposes. 26 U.S.C.A. § 3121(b); Social
Security Act, § 811(b) (8), 42 U.S.C.A. § 1011(b) (8).

Form 886-Avrev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XN

Treas. Reg. section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in activities
that accomplish one or more of the exempt purposes specified in IRC section 501(c)(3).

If'an organization fatls to comply with any of these requirements, it will fail the operational test
and lose its IRC section 501(c)(3) exemption. (Harding Hospital, Inc. v. U.S., 505 F.2d 1068,
1072 (6th Cir. 1974)

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 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. 39-95, 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

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

ee 886A Department of the Treasury - Internal Revenue Service Schedule No. or
7 Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX

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.

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 lability for any unrelated business income tax.

Government’s Position:

The ORG a/k/a ORG does not qualify for exemption under IRC 501(c)(3) because the activities
are not exclusively educational. The primary activity of the organization from it’s inception in the
year 20XX, was the promotion of, acquisition of, and management of donated commercial
property. Currently, the mortgaged properties are in foreclosure. There is no other source of
donations to the exempt organization.

The two streams of cash coming into the organization were from loan proceeds and rental
income. Rental expenses exceeded rental income on all three returns presented by the
organization. Loan proceeds were used to pay current operating expenses and rental expenses in
excess of rental income. The EO spent less than one percent of the net revenue for Program
Services. The future financial existence of the organization depended on new loan proceeds to
cover past loan obligations.

When requesting exemption, ORG advised the Internal Revenue Service that its’ exempt
function was educational, and the sources of financial support would come from contributions
and fees for seminars. Soliciting contributions of abandon commercial real estate, and raising
operating capital through renting the abandon commercial real estate is not an activity described
under Internal Revenue Code Section 501(c)(3).

The promotion of the “561 Program”, accepting the donated property, then managing the donated
properties became the exclusive activity of the exempt organization.

The organization financed this activity by mortgaging the donated properties and using the loan
proceeds as operating capital. No other sources of donations were developed. The exempt
organization could no longer meet past loan obligations or current operating expenses when it
could no longer borrow funds. The secured lenders seized control of the mortgaged properties.
The exempt organization can no longer maintain the abandoned commercial nor pursue its’

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

(Reyaan 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG also known as
ORG 12-31-20XX

exempt purpose. The last officer of the exempt corporation, DIR-1, does not have the
wherewithal to properly terminate the organization.

ORG should file the form 1120, U.S. Corporation Income Tax Return for the years ending
December 31, 20XX and forward.

Taxpaver’s Position:

DIR-1 expressed his desire to properly terminate the organization. To date, he has not been able
to successfully accomplish this. He has also expressed interest in having the government revoke
the organization.

Conclusion

a/k/a/ ORG has failed to operate as organization described under
Internal Revenue Code 501(c)(3).

a/k/a ORG has 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 January 1, 20XX.

Form 1120 returns are required to be filed for the tax periods beginning January 1, 20XX and
thereafter.

Form 886-A ceev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-