Determination 1037032: IRS revoked a defunct 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 January 1 of a redacted year. The organization had gone out of business, received no income, and served no ongoing charitable purpose. It also failed to keep required records and file annual information returns. The attached report says the organization had been dormant for several years, had no assets or employees, and never filed Form 990 during its existence. The IRS required Form 1120 filing and stated that contributions were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Did the defunct organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 170, 6001, 6033, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.6001-1(a), 1.6001-1(c), 1.6001-1(e), and 1.6033-2(i)(2)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

lian INTERNAL REVENUE SERVICE
ey TE/GE: EO Examination 501.03-00

1100 Commerce
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION Date: June 9, 2010

Release Number: 201037032
Release Date: 9/17/10

LEGEND Employer Identification Number:
ORG = Organization name Person to Contact/ID Number:
XX = Date Address = address Contact Numbers:

Voice:
ORG Fax:
ADDRESS

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: September 7, 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 January 1, 20XX.

Our adverse determination was made for the following reasons:

Internal Revenue Code Section 6001 requires organizations exempt from
tax to keep such records and render such statements as are required by
such rules and regulations as the Secretary may prescribe. Treasury
Regulations section 1.6033-2 (h)(2) requires organizations exempt from
tax to submit such additional information as may be required by the
Internal Revenue Service for the purpose of inquiring into the
organization’s exempt status.

You failed to keep the required records and you did not file annual
information returns.

Your organization has gone out of business. No income is being received
and no charitable purpose is being served.

You failed to meet the requirements of IRC section 501(c)(3) and Treas. Reg. section
1.501 (c)(3) -1(d) in that you failed to establish that you were operated exclusively for
an exempt purpose.

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.

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 of declaratory
judgment in the United States Tax Court, the United States Claims 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
rules for initiating suits for declaratory judgment. You may write to the Tax Court at the
following address:

You also have the right to contact the office of the Taxpayer Advocate. You can call 1-
877-777-4778 and ask for Taxpayer Advocate assistance. Or you can contact the
Taxpayer Advocate office located nearest you by calling (504) 558-3001 or by writing
to:

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 or 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 this action, as required by section
6104(c) of the Internal Revenue Code.

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

Thank you for your cooperation.
Sincerely yours,

Nanette M. Downing
Director, EO Examinations

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division

MS:4957:DAL:DC

1100 Commerce St.

Dallas, TX 75242

Date: December 1, 2009

ORG Taxpayer Identification Number:
Form:
ADDRESS Tax Year(s) Ended:

December 31, 20XX
Person to Contact/ID Number:
Contact Telephone Number:

CERTIFIED MAIL - RETURN RECEIPT Contact Fax Number:
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 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.

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

Letter 3618 (Rev 11/2003)
Catalog Number 34809F

2

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:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev 11/2003)
Catalog Number 34809F

Form 886-A : Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Year/ Period Ended

Name of Taxpayer

ORG 20XX12
LEGEND
ORG = Organization name XX = Date President = president DIR-1l =

1" Director

Issue under Consideration

Should the tax-exempt status of ORG (“ORG”) as granted by Internal Revenue Code
section 501(c)(3) be revoked?

Facts

ORG was granted tax exemption under Internal Revenue Code section 501(c)(3) as a
charitable organization under IRC 509(a)(2) from a letter from the Internal Revenue
Service dated July 21,20XX.

The Articles of Incorporation for the organization state that it is organized exclusively for
charitable, educational, religious or scientific purposes within the meaning of Section
501(c)(3) of the IRC. The primary purpose is to educate, promote, and assist in
obtaining government or any other benefits to assist citizens over the age of fifty or
handicapped citizens of any age.

The co-founder of the organization reports that it owns no assets, has declared
bankruptcy and has been dormant for several years. He further reports that the
organization has no employees and does not maintain a place of business. It has
never filed a form 990 during its six years of existence.

Agent has repeatedly attempted to contact the organization and finally succeeded in
obtaining a return phone call from one of the co-founders, President. President reports
that from the inception of the organization, they were unable to attract sufficient funds
to pursue their exempt purpose and that efforts to do so have ceased. There are no
employees or volunteers, no fund raising efforts and no beneficiaries of this
organization. The organization has not provided Articles of Dissolution.

This office corresponded with President and DIR-1 regarding the proposed audit of the
subject organization. In response to the phone conversation with Revenue Agent,
President was advised in a letter dated May 20, 20XX to write to this office to indicate
his plans to either voluntarily terminate the existence of the organization or to be subject
to Revocation of the exempt status of the organization. A copy of the May 20, 20XX
letter is attached for your review.

As of December 2, 20XX, this office has not received any communication on this
matter. As the organization has taken no steps to voluntarily terminate its existence,
this office is proceeding with revocation of the organization’s tax exemption. If the
revocation of ORG is sustained, it would then be required to file forms 1120 as of the

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

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

Name of Taxpayer Year/Period Ended
ORG 20XX12

date of revocation. Taxable revenues to be reported on form 1120 would include
revenues from bingo during 20XX in the amount of $ as reported to this office by the
State of

Law and Argument

Section 501(c)(3) of the Code provides for the exemption from federal income tax of
organizations organized and operated exclusively for religious, charitable, or
educational purposes so long as no part of the organization’s net earnings inures to the
benefit of any private shareholder or individual. If an organization fails to meet either the
organizational test or the operational test, it is not exempt.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations provides that in order to be
exempt as an organization described in section 501(c)(3) of the Code, an organization
must be both organized and operated exclusively for one or more of the purposes
specified in such section.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be
regarded as “operated exclusively” for one or more exempt purposes only if it engages
primarily in activities which accomplish one or more of such exempt purposes specified
in section 501(c)(3) of the Code. An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of any exempt purposes.

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)(3), 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.

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

Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12

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. § 1.6033-2(i)(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.

Government’s Position

Based upon the above stated facts, the organization is no longer a viable entity. No
income is being received and no charitable purpose is being served by the organization;
therefore, the organization no longer meets the requirements of Internal Revenue Code
section 501(c)(3) and Income Tax Regulations 1.501(c)(3)-1(c)(1). ORG Director DIR-1
was informed in Agent's letter of May 20, 20XX (attached) of the necessary steps to
dissolve the organization; however this office has not received this information.

Organization’s Position

President spoke with Agent upon receipt of the May 20 letter and related the failure of
the organization to attract sufficient funds to pursue the organization’s mission. It
appears that from his perspective, the organization has already failed and gone out of
existence.

Conclusion

Based upon the information noted above, it is proposed that the exempt status of the
organization be revoked as of January 1, 20XX.

All remaining assets of an organization exempt under Internal Revenue Code section
501(c)(3) are required to be distributed to another public charity per Income Tax
Regulation 1.501(c)(3)-1(b)(4). If no net assets remain, proof of insolvency should be
provided.

If revocation is sustained, then ORG would be required to file form 1120 for each year
beginning on the date of revocation. Bingo revenues as well as any other revenue
earned during each year would be reported and taxed on form 1120.

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

Page: -3-