Determination 201045025: organization loses exemption after failing to establish continued qualification

Plain-English summary

The IRS revoked the organization's section 501(c)(3) exemption effective January 1 of a redacted year. The organization did not provide records or respond to repeated requests needed to determine whether it operated exclusively for exempt purposes. The attached examination report states that the organization failed to file required information returns and did not permit an examination of its books and records. The organization was required to file Form 1120 and could no longer claim deductions for contributions under section 170.

Ruling snapshot

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

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

501.03-00

Release Number: 201045025
Release Date: 11/12/10
Date: 8/17/10

LEGEND

ORG = Organization name XX = Date
ORG . Person to Contact:
ADDRESS Identification Number:
Contact Telephone Number:
In Reply Refer to:
EIN:
LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:
Dear

This is a Final Adverse Determination as to your exempt status under section 501(c)(3) of the Internal Revenue Code.

Our adverse determination was made for the following reasons:

You have failed to produce documents to establish that you are operated exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3), and that no part of your net earnings inure 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 and have failed to file information returns as required by I.R.C. section 6001,

6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

Based upon the above, we are revoking your organization's exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code effective January 1,

20XX.

Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code.

-2-

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 December 31, 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 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 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 1-877-777-4778 and ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer Advocate from the site where the tax deficiency was determined by calling (410) 962-9065, or writing to: Internal Revenue Service, Taxpayer Advocates Office, 31 Hopkins Plaza, Rm 940, Baltimore, MD, 21201. 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 this action, as required by section 6104(c) of the Internal Revenue Code.

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

Sincerely yours,

Nanette M. Downing
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce St.

TAX EXEMPT AND
GOVERNMENT ENTITIES Dallas, Texas 75242
DIVISION

[illegible]

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,

Sunita Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

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

Name of Taxpayer

ORG December 31,
20XX
LEGEND
ORG = Organization name XX = Date EMP-1 = 1st EMP
Issue:

Whether the organization should continue to qualify for exemption under Internal Revenue Code section 501(c)(3).

Facts:

Despite multiple attempts via correspondence, the organization failed to comply with the request to schedule an appointment for examination of the organization's books and records.

The organization was selected for examination for the period ending December 31, 20XX. The initial contact letter and information document request was sent to the organization on March 4, 20XX. The organization did not respond by the requested due date, and on April 14, 20XX, the initial contact letter was sent again certified mail, return receipt requested. The return receipt was signed for by EMP-1 and received in the Internal Revenue Service office on April 20, 20XX. Due to no response, in the letter dated May 19, 20XX, the organization was informed that failure to comply with the request to begin the examination by June 10, 20XX could result in revocation of the organization’s exempt status. The correspondence was returned to the Internal Revenue Service office as unclaimed on June 12, 20XX.

To date, no appointment has been scheduled for the examination of the organization’s books and records.

Law:

Section 501(c)(3) of the Internal Revenue Code, describes corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

Section 6001 of the Internal Revenue Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.

Form 886-Acrev 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
Year/Period Ended

Name of Taxpayer

ORG December 31,
20XX

Section 1.501(c)(3)-1(a) of the Federal Tax Regulations describes organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.

Federal Tax Regulation §1.501(c)(3)-1(a)(1) details 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.

Federal Tax Regulation §1.501(c)(3)-1(a)(2) define the term “exempt purpose or purposes”, as used in this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section.

The organizational test is detailed in §1.501(c)(3)-1(b)(1)(i). An organization is organized exclusively for one or more exempt purposes only if its articles of organization (referred to in this section as its “articles”) as defined in subparagraph (2) of this paragraph:

(a) Limit the purposes of such organization to one or more exempt purposes; and

(b ) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

Federal Tax Regulation §1.501(c)(3)-1(a)(1) states “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. (2) The term ‘exempt purpose or purposes’, as used in this section means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section.”

Federal Tax Regulation §1.6001-1(c) states that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033.

Federal Tax Regulations § 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

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

Page: -2-

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

Name of Taxpayer

ORG December 31,
20XX

Federal Tax Regulations section §1.6033-2(i)(2) states every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code, section 6033, and chapter 42 of subtitle D of the Code.

Federal Tax Regulations section 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 Internal Revenue 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 Internal Revenue 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 Internal Revenue Code and Federal Tax 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

Conclusion:

Since the organization did not comply with the Internal Revenue Service’s request for examination, we can not determine whether their activities are consistent with their exempt status under Section 501(c)(3) of the Internal Revenue Code. It is the IRS's position that the organization failed to meet the operational test for an organization exempt under § 501(c)(3) of the Internal Revenue Code. Since the organization does not meet the requirements of Treasury Regulation 1.501(c)(3)-1, it is our position that their tax-exempt status be revoked. As an examination of the Form 990 for the period ending December 31, 20XX was not completed, accordingly, the organization's exempt status is revoked effective January 1, 20XX.

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

Page: -3-

Form 886-A Department of the Preasury - Internal Revenue Service Schedule No. or
. Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31,
_ 20XX
LEGEND
ORG = Organization name XX = Date EMP-1 = 1st EMP
Issue:

Whether the organization should continue to qualify for exemption under Internal Revenue Code section 501(c)(3)

Facts:

Despite multiple attempts via correspondence, the organization failed to comply with the request to schedule an appointment for examination of the organization’s books and records.

The organization was selected for examination for the period ending December 20XX. The initial contact letter and information document request was sent to the organization on March 20XX. The organization did not respond by the requested due date, and on April 20XX, the initial contact letter was sent again certified mail, return receipt requested. The return receipt was signed for by EMP-1 and received in the Internal Revenue Service office on April 20XX. Due to no response, in the letter dated May 20XX, the organization was informed that failure to comply with the request to begin the examination by June 20XX could result in revocation of the organization’s exempt status. The correspondence was returned to the Internal Revenue Service office as unclaimed on June 20XX.

To date, no appointment has been scheduled for the examination of the organization's books and records.

Law:

Section 501(c)(3) of the Internal Revenue Code, describes corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office

Section 6001 of the Internal Revenue Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.

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

Page: -1-

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

Section 1.501(c)(3)-1(a) of the Federal Tax Regulations describes organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.

Federal Tax Regulation §1.501(c)(3)-1(a)(1) details 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.

Federal Tax Regulation §1.501(c)(3)-1(a)(2) define the term “exempt purpose or purposes”, as used in this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section.

The organizational test is detailed in §1.501(c)(3)-1(b)(1)(i). An organization is organized exclusively for one or more exempt purposes only if its articles of organization (referred to in this section as its “articles”) as defined in subparagraph (2) of this paragraph:

(a) Limit the purposes of such organization to one or more exempt purposes; and

(b ) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes

Federal Tax Regulation §1.501(c)(3)-1(a)(1) states “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. (2) The term ‘exempt purpose or purposes’, as used in this section means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section.”

Federal Tax Regulation §1.6001-1(c) states that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033.

Federal Tax Regulations § 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.

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

Page: -2-

er 286A Department of the Preasury - Internal Revenue Service Schedule No. or
| Explanation of Items Exhibit
Name of Taxpayer Year/ Period Ended
ORG December 31,
20XX

Federal Tax Regulations section §1.6033-2(i)(2) states every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code, section 6033, and chapter 42 of subtitle D of the Code

Federal Tax Regulations section 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 internal Revenue 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 Internal Revenue 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 Internal Revenue Code and Federal Tax 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.

Conclusion:

Since the organization did not comply with the Internal Revenue Service’s request for examination, we can not determine whether their activities are consistent with their exempt status under Section 501(c)(3) of the Internal Revenue Code. It is the IRS's position that the organization failed to meet the operational test for an organization exempt under § 501(c)(3) of the Internal Revenue Code. Since the organization does not meet the requirements of Treasury Regulation 1.501(c)(3)-1, it is our position that their tax-exempt status be revoked. As an examination of the Form 990 for the period ending December 31, 20XX was not completed, accordingly, the organization's exempt status is revoked effective January 1, 20XX.

Form 886-Acres 4-68) Deparonent of the Treasury - Internal Revenue Service

Page: -3-