Determination 1040024: IRS revoked an organization’s section 501(c)(3) exemption after finding a commercial purpose

Plain-English summary

The IRS revoked an organization’s federal income tax exemption under IRC § 501(c)(3), effective January 1, 20XX. The organization had been recognized as tax-exempt but operated and described itself as a for-profit business providing in-home care services to senior citizens and their families. It told the IRS that it had not operated in a not-for-profit manner, had received no gifts or grants, and had performed no charitable services. The IRS concluded that the organization was not operated exclusively for an exempt purpose, and contributions to it were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Did the organization qualify for exemption under IRC § 501(c)(3) while operating as a for-profit in-home care business?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), and 1.501(c)(3)-1(d)(1)(ii)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street 501.03-00
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: June 21, 2010

DIVISION
Person to Contact:

Number: 201040024
Release Date: 10/8/2010

LEGEND Badge Number:
ORG = Organization name Contact Telephone Number:
XX = Date Address = address Contact Address:

Employer Identification Number:

ORG
ADDRESS

CERTIFIED MAIL
Dear

This is a final notice of adverse determination that your exempt status under section
501(c) (3) of the Internal Revenue Code is revoked. Recognition of your exemption under
Internal Revenue Code section 501(c)(3) is revoked effective January 1, 20XX the following
reason(s):

You are not organized and operated exclusively for an exempt purpose as required by Internal
Revenue Code section 501(c)(3). You are not and have not been engaged primarily in activities
which accomplish one or more exempt purposes. You are not a charitable organization within
the meaning of Treasury Regulation 1.501(c)(3)-1(d); rather, your activities further a substantial
nonexempt commercial purpose and serve private rather than public interests.

Contributions to your organization are no longer deductible effective January 1, 20XX.

Since your exempt status has been revoked, you are required to file Form 1120, U.S.
Corporation Income Tax Return, for all years beginning on or after January 1, 20XX.

Income tax returns for subsequent years are to be filed with the appropriate Service Center
identified in the instructions for those returns.

It is further determined that your failure to file a written appeal constitutes a failure to exhaust
your available administrative remedies. However, 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 Claims Court, or the district court of the United States for the District of Columbia
before the (ninety-first) 91st day after the date that this determination was mailed to you.
Contact the clerk of the appropriate court for rules for initiating suits for declaratory judgment.
To secure a petition form, write to the following address:

Please understand that filing a petition for a declaratory judgment under IRC section 7428 will
not delay the processing of subsequent income tax returns and assessment of any taxes due.

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 you tax information and can help you get answers. You can call 1-877-777-4778,
and ask for the Taxpayer Advocate assistance or you can contact the Advocate from the site
where this issue was determined by writing to:

Taxpayer Advocate assistance cannot be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically
correct tax determination, nor extend the time fixed by law that you have to file a petition in
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.

This letter should be kept within your permanent records.

If you have any questions, please contact the person whose name and telephone number are
shown above.

Sincerely,

Nanette M. Downing
Director, EO Examinations

~ Enclosures:
Publication 892

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examination
1100 Commerce Street
Dallas, Texas 75242

GOVERNMENT ENTITIES
DIVISION

November 6, 2009

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.

lf 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
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
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
EIN December 31,
20XX
LEGEND
ORG = Organization name XX = Date City = city Manager = manager
CO-1 = 1st COMPANY
ISSUE

Whether ORG — ORG (The organization) qualifies for exemption as an organization described
within Internal Revenue Code 501(c)(3).

FACTS

ORG — ORG (The organization) is presently recognized under section 501(c)(3) as a tax-
exempt organization and was granted tax exempt status as a nonprofit corporation in November
20XX. However, the organization has operated and considered itself to be a for-profit
organization. ORG — ORG is an initiative of CO-1 (CO-1). The organization purpose is to
provide senior citizens and their families with personal in home care services. The
organization’s services include personal concierge services, personal care and personal business.
The organization has timely filed form 1120 for all tax years since their incorporation. During
the year under examination, the organization reported collecting $ in gross sales. Per, statement
3 of form 1120 indicates that CO-1 holds of the voting stock in ORG — ORG.

On November 20, 20XX the taxpayer’s representative called the IRS and requested the 1023
application to be withdrawn from consideration. The taxpayer’s representative followed up the
verbal request with a written request. On November 26, 20XX the Internal Revenue Service
approved the application granting exemption to the organization. On December 4, 20XX, the
taxpayer representative spoke with Manager (Determination Group Manger). The Taxpayer
representative explained the situation to Manager, who was receptive to the taxpayer’s problem.
As a result of the conversation with Manager, a referral initiated our examination of the
organization’s activities to resolve the issue.

In written correspondence dated June 12, 20XX, the taxpayer indicated the organization has
never operated its business in a not-for-profit manner. The response further explained that the
organization did not receive any gift, grant or contributions, nor perform any charitable services.
CO-1 (CO-1), an exempt organization working with the organization provided support to pay for
application fee for federal tax exemption. When the organization decided to withdraw its
application, CO-1 ceased providing any support to the organization.

The organization has never operated in an exclusively charitable manner, which is inconsistent

with section 501(c)(3). As such, ORG- ORG fails to meet the operational requirements for
continued exemption under IRC 501(c)(3).

LAW

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

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
EIN December 31,
20XX

Internal Revenue Code Section 501(c)(3) provides for tax exemption to organizations
organized and operated exclusively for charitable purposes and no part of the net earning
which inures to the benefit of any individual.

Regulation section 1.501(c)(3)-1(a)(1), Organizational and operational tests, provides that in
order to be exempt as an organization described in section 501(c)(3), an organization must be
both organized and operated exclusively for one or more of the purposes specified in such
section. If an organization fails to meet either the organizational test or the operational test, it is
not exempt.

Regulation 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
which accomplish one or more of such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Regulation section 1.501(c)(3)-1(d)(1)(ii) provides an organization is not organized or
operated exclusively for one or more exempt purposes 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 the creator or his family, shareholders of the organization, or persons controlled, directly
or indirectly, by such private interests.

TAXPAYER'S POSITION

Taxpayer did not provide written position. However, an agreed signed form 6018 was secured
from taxpayer.

GOVERNMENT'S POSITION

Based on the facts of the examination, you do not qualify for exemption since you are operated
for the primary purpose of carrying on a trade or business and is not operated exclusively for one
or more purposes under section 501(c)(3).

CONCLUSION

The organization does not qualify for exemption under section 501(c)(3) and its tax exempt
status should be revoked effective January 1, 20XX. No contributions to your organization are
deductible under section 170 of the Internal Revenue Code.

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

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