IRS revoked an organization's section 501(c)(3) exemption after it ceased operations

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(3), effective June 30, 20XX. The organization had discontinued operations, entered liquidating bankruptcy, and filed a terminating Form 990-EZ. The examination report also states that the organization failed to file required Forms 990 and did not have sufficient records for the IRS to audit its activities and prepare a final return. The IRS cited the organization's failures under IRC §§ 6001 and 6033 and stated that contributions were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Should the organization's section 501(c)(3) exemption be revoked because it ceased operations and failed to meet reporting and recordkeeping requirements?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(c)(3), 6001, 6033, and 7428; Treas. Reg. §§ 1.6001-1(a), 1.6001-1(c), 1.6001-1(e), and 1.6033-1(h)(2); IRC § 6110(k)(3) not-precedent notice

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service

TE/GE EO Examinations 501.03-00

1100 Commerce Street

Dallas, TX 75424

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: 5/21/2010

Person to Contact:

Release Number: 201035030

Release Date: 9/3/10

LEGEND Identification Number:

ORG = Organization name In Reply Refer to: TE/GE Review Staff

XX = Date Address = address EIN:

ORG LAST DATE FOR FILING A PETITION
ADDRESS WITH THE TAX COURT: August 18, 20XX

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 June 30, 20XX.

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 discontinued your operations, undertaken a liquidating bankruptcy,
and filed a terminating Form 990 - EZ with the Internal Revenue Service
indicating it to be your final return. Under these circumstances, we are
revoking your exempt status effective at the conclusion of your termination
return because you no longer operate exclusively for exempt purposes.

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 July 1, 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: (206) 220-6037, 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.

We will notify the appropriate State Officials of the revocation in accordance with section
6104(c) of the Code. Currently, only certain states are eligible to receive notification. You
can call the person at the heading of this letter to find out if your State is eligible to receive a
notice of revocation of your tax-exempt status.

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

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 1546
Notice 437
Cc:

Internal Revenue Service Department of the Treasury
TE/GE Exempt Organizations Examinations

1220 SW Third Avenue M/S 0540
Portland, Oregon 97204

Taxpayer Identification Number:

Date: June 12, 2009

Form:

ORG

Tax Year(s) Ended:
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,

Sunita B. Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

Form 886A
Department of the Treasury - Internal Revenue Service
Schedule No. or
Explanation of Items
Exhibit
Name of Taxpayer
Year/Period Ended
ORG
20XX06, 20XX06

LEGEND
ORG = Organization name
XX = Date
State = state

Issue:

Should the exempt status of ORG be revoked for failure to abide by the reporting requirements
and recordkeeping requirements under Internal Revenue Code (IRC) section 6001 and 6033?

Facts:

1. The organization is named ORG (EO) and received exempt status under IRC section
   501(c)(3).

2. The fiscal year end for the EO is June 30th.

3. The EO provided inpatient counseling and detox services in the Tri-cities area of State.
4. During 20XX, the EO filed for bankruptcy protection and ceased operations.
5. There were no Forms 990 filed for the periods ending June 30, 20XX or June 30, 20XX.
6. A bankruptcy trustee was appointed by the court to wrap up the final disposition of the

EO's financial affairs and distribute any remaining assets according to the bylaws of the
EO.

7. According to the trustee, there is a general ledger available for the fiscal year 20XX06
   that was on a disk retained by the EO accountant, but there are few source documents
   available to audit for that period. There is nothing available for the period July 20XX
   through the close of the business in November 20XX which could be used to prepare a
   final return.

8. According to the State of State Corporation Division (SWCD), the license for the EO was
   due to be renewed in January of 20XX. The license was not renewed. The SWCD
   considers organizations to be administratively dissolved if the license is not renewed
   within one year of the due date.

Law:

Section 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.

Section 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.

Section 1.6001-1(a) of the regulations in conjunction with section 1.6001-1(c) provides that
every organization exempt from tax under section 501(a) of the Code and subject to the tax

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

Form 886A
Department of the Treasury - Internal Revenue Service
Schedule No. or
Explanation of Items
Exhibit
Name of Taxpayer
Year/Period Ended
ORG
20XX06, 20XX06

imposed by section 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 section 6033.

Section 1.6001-1(e) of the regulations 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.

Section 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.

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.

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

Taxpayers Position:
The taxpayer has not provided a position to this proposed action and, with this notification, will
be provided the opportunity to respond.

Government's Position:

1. Given the EO's failure to file required returns and it's failure to properly maintain records as
   required by the IRC, the exempt status of the EO should be revoked effective as of July 1, 20XX.

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