Determination 1037031: IRS revoked a section 501(c)(3) organization's exemption

Plain-English summary

The IRS issued a final adverse determination revoking a section 501(c)(3) organization's exemption effective August 1 of a redacted year. The organization failed to produce documents and respond to repeated IRS requests concerning its receipts, expenditures, activities, and required filings. The examination report says the organization sold artwork created by its president through an online storefront, while the organization retained rights and received portions of sale or rental proceeds. The IRS concluded that the available records did not establish operation exclusively for exempt purposes and did not satisfy the recordkeeping requirements under IRC §§ 6001 and 6033. The release includes the final revocation letter, a proposed revocation letter, and the examination report.

Ruling snapshot

• Question: Did the organization operate exclusively for exempt purposes and satisfy the required recordkeeping rules?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 6001, 6033, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c), 1.6001-1(a), 1.6001-1(c), 1.6001-1(e), and 1.6033-1(h)(2)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

501.03-00

Date: June 16, 2010

Taxpayer Identification Number:
Person to Contact:

Release Number: 201037031 Employee Identification Number:
Release Date: 9/17/10 Employee Telephone Number:
LEGEND (Phone)

(Fax)

ORG = Organization name
XX = Date Address = address

ORG
ADDRESS

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 May 19XX is
hereby revoked and you are no longer exempt under section 501(a) of the Code effective August 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.

Contributions to your organization are no longer deductible under IRC §170 after August 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 July 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, 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 contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892

DEPARTMENT OF THE TREASURY
“4 Internal Revenue Service
) TEGE: EO Examinations

NS REE
aed 1100 Commerce Street
TAX EXEMPT AND
GOVERNMENT ENTITIES Dallas TX 75242
DIVISION

January 25, 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,

Nanette M. Downing
Acting Director, EO Examinations

Enclosures:
Publications 892; 3498
Form 6018, Form 886
Report Of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit 1
Explanation of Items

Name of Taxpayer: Year/Period Ended

ORG 20XX07; 20XX07;

EIN: 20XX07; 20XX07

LEGEND

ORG = Organization name XX = Date Address = address City = City
State = state President = president DIR-1 = 1°° DIRECTOR

ISSUE

Whether an organization’s exempt status under Internal Revenue Code § 501(c)(3) should
be revoked because it has failed to provide books, records and other documents in
accordance with Internal Revenue Code § 6001 and Treasury Regulations §1.6001-1(e).

FACTS

The case was assigned to the field on February 26, 20XX based on an outside referral.
ORG did not file Form 990 in fiscal years 20XX; 20XX; 20XX and 20XX although research
confirms the EO received revenues in excess of $ in each of these fiscal tax periods.

In March 20XX website research identifies the ORG as sellers of artworks created by
President. As shown on President’s EBay website, the EO is listed as the organization
where payment for artwork should be made. Additionally the EO terms and conditions of
sale of the artwork include:

e This work is original.

e This work is certified to be free from all defects due to faulty craftsmanship or faulty
materials for a period of twelve month from date of sale. If flaws shall appear during
this time, repairs shall be made by us.

e Copyright of the work is held by the ORG.

e Resale of transfer of work requires that the ORG be informed of the new owner and
the price of the sale. Should the price be more than $ over the original price stated
herein, according to State and State state law, 10% of amount over the original price
shall be given to artist by seller. These terms only apply to sales made in the states of
State and State.

e The ORG shall have the right to photograph, scan, or through any other means of
media reproduce the piece, if necessary, for publicity or reproduction purposes. You
are only buying the original, not the reproduction rights.

e The ORG shall have the right to include the artwork in retrospective shows
indefinitely, upon 60 days notice. We will pay for any necessary shipping or
insurance costs for participation in retrospective shows.

e If artwork is rented out by purchaser, ORG shall receive 25% of rental income.

e Artwork can not be exhibited in public without written approval of the ORG.

The above information supports the Internal Revenue Service's decision to request additional
information from the ORG to determine if the EO had a filing requirement and if unrelated
business income existed in the audited period. If filing requirements existed, it was TEGE
division's responsibility to secure the required delinquent returns.

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

Page: -1-

Poin 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit 1
Explanation of Items

Name of Taxpayer: Year/Period Ended
ORG 20XX07; 20XX07;
EIN: 20XX07; 20XX07

On April 3, 20XX after making several telephone attempts for contact, letter 3611 our initial
appointment (when no prior telephone contact with taxpayer has been made) was prepared
and mailed certified on April 7, 20XX to the EO office address located at Address, City, State.
The updated address was secured through a public website named Accurint. The
appointment was scheduled for May 4, 20XX at 1:00PM. A return receipt was received on
April 24, 20XX signed and dated April 10, 20XX.

On May 4, 20XX | arrive at the address referenced above to meet with DIR-1 as outlined in
my initial appointment letter. The only organization located at this address was US Post
Office Inc a mail box service provider. The attendant on duty confirmed the address and said
this was the only entrance for that address. | also visited the agent for service of process
address at Address, City, State located nearby. There were no listings for DIR-1 or the EO at
that address.

Further research confirmed the ORG received approximately $ in revenue for the period
20XX-20XX resulting in a Form 990 filing requirement in fiscal tax periods 20XX, 20XX,
20XX, and 20XX. Contributions were made by a City non-profit. (See tax return copies in
file)

Additional research about the organization’s current location produced no additional
information.

The EO was notified by mail on June 18, 20XX that third party contacts would be employed.
On July 1, 20XX per IL.R.M. 4.11.57 a third party letter was mailed. The envelope was
returned unopened by the postal service to TEGE on August 14. 20XX.

On August 12, 20XX the post office box services manager was interviewed. The manager
stated “the ORG is a current client. The address given by the manager as Address, City,
State is the only address on file. The client pays their bill and picks up their mail. As long as
the client pays the bill, additional address information is not required.”

On September 1, 20XX a 90 day demand to file letter was prepared per IL.R.M. 4.75.22 and
mailed certified to DIR-1, executive director, ORG at Address, City, State. A signed return
receipt was received on September 10, 20XX. The receipt was signed by the manager of the
Postal Service on September 2, 20XX. Periodic telephone calls were made monthly to make
contact with the taxpayer without results. The 90 day period expired on December 1, 20XX.
To date DIR-1 nor the EO have not responded to our attempts to contact them.

LAW

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit 1
Explanation of Items

Name of Taxpayer: Year/Period Ended
ORG 20XX07; 20XX07;
EIN: 20XX07; 20XX07

Section 6001 of the Code provides that every person liable for any tax imposed by the
Code, or for the collection thereof, shall keep such records, render such returns, and comply
with such rules and regulations as the Secretary 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.

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

Treasury Regulation § 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.

Treasury Regulation § 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 section 6033.

Revenue Ruling 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.

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

Page: -3-

Form 886A Department of the Ue) - Internal Revenue Service Schedule No. or Exhibit 1
Explanation of Items

Name of Taxpayer: Year/Period Ended
ORG 20XX07; 20XX07;
EIN: 20XX07; 20XX07

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.

Treasury Regulation 1.501(c)(3)-1(d)(1)(ii) provides an organization is not organized or
operated exclusively for one or more of the purposes specified in subdivision (i) of this
subparagraph unless it serves a public rather than a private interest. Thus, to meet the
requirement of this subdivision, it is necessary for an organization to establish that it is not
organized or operated for the benefit of private interests such as designated individuals, the
creator or his family, shareholders of the organization, or persons controlled, directly or
indirectly, by such private interests.

CONCLUSION

Based on the facts presented above and no response from the taxpayer, it is the Internal
Revenue Service's position that the EO failed to meet the reporting requirements under IRC
§ 6001 and § 6033 and does not qualify as an organization exempted from federal income
tax under IRC § 501(c)(3). Accordingly, the proposed revocation of the ORG's tax exempt
status is effective beginning August 1, 20XX.

A Form 1120 U.S. Income Tax Return must be filed for fiscal tax years ending July 31, 20XX,
20XX, 20XX, and 20XX. Subsequent returns, if any, should be sent to the following mailing
address:

The effective date of the revocation will be the first day after the end of the 90-day period
(91st day).

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