Determination 1045030: private foundation exemption is revoked for missing records and filings

Plain-English summary

The IRS revoked a private foundation's tax-exempt status under section 501(c)(3), effective from a redacted date. The examination found that the organization repeatedly failed to file Form 990-PF and did not provide requested books, records, canceled checks, and other information. The IRS therefore could not establish that the foundation operated exclusively for exempt purposes or that its funds were not used for private benefit, and it concluded that checks were issued for the benefit of a trustee. The determination states that the organization must file Form 1041 and related returns for the affected and later periods.

Ruling snapshot

• Question: Did the foundation continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501, 509, 6001, 6033, 7428, and 7491; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6001-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1 * : 3 TEGE EO Examinations Mail Stop 4920 DAL
RES 4100 Commerce St.
Dallas, Texas 75242 501.03-00

Date: August 4, 2010

Release Number 201045030 Taxpayer Identification Number:

Release Date: 11/12/10 Person to Contact:
Employee Identification Number:

LEGEND
ORG = Organization name Employee Telephone Number:
XX = Date Address = address Phone)

(Fax)

LAST DATE TO FILE A PETITION
ORG
ADDRESS

IN TAX COURT: November 2, 20XX

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 January 2,
20XX is hereby revoked and you are no longer exempt under section 501(a) of the Code effective

January 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.
Since no documentation was provided to show the checks issued by you were issued for
charitable purposes, we would conclude that, in fact, the checks were issued for the benefit of the

Trustee, resulting in inurement.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

You are required to file income tax returns on Form 1041, These returns should be filed with the
appropriate Service Center for the tax year ending December 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

DEPARTMENT OF THE TREASURY
Internal Revenue Service
2 / 550 Main Street, Room 6417
a Cincinnati, OH 45202-3222
TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION

[illegible]

November 30, 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.

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

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

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

Name of Taxpayer Year/ Period Ended
ORG December 31, 20XX

December 31, 20XX
December 31, 20XX

LEGEND
ORG = Organization name XX = Date Address = address City = city
State = state CEO = CEO DIR-1 = 1st DIR CO-1, CO-2, CO-3, CO-4,

CO-5 & CO-6 = 1st, 2nd, 3rd, 4th, 5th & 6th COMPANIES

ISSUES:

1. Whether ORG operated exclusively for exempt purposes as described within IRC section 501(c)(3):

a Whether ORG should continue to qualify for exemption since it has refused to file
Form 990-PF for tax years ending December 31, 20XX, 20XX, and 20XX.

b Whether ORG engaged primarily in activities which accomplish an exempt purpose?

c Whether more than an insubstantial part of ORG’s activities were in furtherance of non-exempt
purposes?

d Whether any part of ORG's net earnings inured to the benefit of any private shareholder or

individual, including CEO
Whether ORG failed to keep adequate books and records or other documentation as required
under section 6001 and 6033.

e

FACTS:

Background

An examination of ORG was conducted by the Secretary's representative for the taxable periods ending
December 31, 20XX, 20XX and 20XX respectively

ORG was established pursuant to the Trust Agreement between CEO, Founder and CEO and DIR-1 as
the Trustees, on July 13, 20XX

Article II of the Trust Agreement states ORG is created exclusively for charitable, religious, scientific,
literary, and educational purposes, including, for such purposes, the making of distributions to
organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code.

Article IV of the Trust Agreement states in part (a) The principal and income of all property received and
accepted by the Trustees to be administered under the Trust Agreement shall be held in trust by them,
and the Trustees may make payments or distributions from income or principal, or both, to or for the
benefit of such one or more organizations that qualify as exempt organizations under section 501(c)(3)...
(c) No part of the net earnings of ORG shall inure or be payable to or for the benefit of any private
individual

ORG was recognized as exempt from federal income tax, on January 2, 20XX, under section 501(a) of
the Code by reason of being described in section 501(c)(3) of the Code and further described as a private
foundation as defined in section 509(a) of the Code

The application for exemption, Form 1023, included a statement in Part Il, Activities and Operational
Information as follows: The ORG will make grants to other 501(c)(3) organizations classified as public
charities for religious, educational, scientific, and literary purposes. The ORG will develop operating
procedures to assure that it adheres to the rules of IRC sections 4941, 4942, 4943, 4944, and 4945 as
applicable to private foundations. ORG has never filed a form 990PF.

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 Exhibit
Explanation of Items
Year/Period Ended
December 31, 20XX
December 31, 20XX
December 31, 20XX

“Name of Taxpayer
ORG

Requests for information

The Secretary's requests for records and the taxpayer's responses are listed below.

December 14, 20XX, a cover letter and Information Document Request, (IDR # 1) was sent to Address,
City, State, the address of record according to Internal Revenue Service records. This letter was returned
“Not Deliverable as Addressed Unable to Forward”. IDR # 1 requested among other things:

• Form 990-PF for tax period ending December 31, 20XX

• Governing Instruments, i.e. bylaws, code of regulations to verify the exempt purpose,
  proscription against inurement, and provision on dissolution.

• Advance approval letter from the I.R.S. regarding grant-making procedures plus grant files to
  learn what grant making procedures are utilized by the organization and the purpose for which
  grants are made and whether funds were used for such purposes

• Minute Books of recorded meetings of officers, directors, and trustees to determine whether the
  organization has sufficient and adequate internal controls, and business operations conducted by
  the organization

• Financial records: such as chart of accounts, general ledger, trial balance, cash disbursements
  journal, bank statements, cancelled checks, etc., to determine whether items of expense were
  fair and reasonable to the organization

January 12, 20XX, a cover letter and a copy of IDR # 1 was sent to Address, City State, the address
provided on Form 1023, Application for Recognition of Exemption. No reply was received.

February 20, 20XX, a cover letter and a copy of IDR # 1 were sent to Address, City, State, the address
provided on ORG's bank statement. No reply was received

April 4, 20XX, a fax reply was received from Trustee, CEO, indicating he had received the Secretary's
request, but none of the requested information was provided.

April 25, 20XX, a cover letter, IDR #2, and Analysis of Bank Statements from 20XX and 20XX was faxed
to CEO at on April 25, 20XX. No reply was received. IDR # 2 requested:

• An explanation of Deposits and withdrawals as they relate to the Private Foundation.
• If any funds were distributed to other charitable organizations, provide verification of the
  distributions
• List any property which was transferred to the Foundation, pursuant to the Trust Agreement

entered into on July 13, 20XX

July 27, 20XX, a cover letter, IDR #2, and Analysis of Bank Statements from 20XX and 20XX was sent to
Address, City, State. No reply was received

September 28, 20XX - A fax reply was received from Trustee, CEO stating he has tried on a continuous
basis to get a word from his tax provider and he had not had any contact. None of the requested
information from IDR # 2 was provided.

October 11, 20XX, a fax was sent to CEO at requesting a response to IDR # 2.
February 1, 20XX, IDR # 3, copies of cancelled checks and a list of all transactions occurring in 20XX and

20XX from account # were sent to Address, City, State. IDR #3 requested among other things:

• Explain the

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

Page: -2-

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

Name of Taxpayer Year/ Period Ended
ORG December 31, 20XX
December 31, 20XX
December 31, 20XX

expenditures and how these contributed to your exempt purpose. Please be very specific, since many of
the expenditures appear to be for personal use. For example, the truck payments to CO-1, CO-2 and CO-
é

• Statement from CO-4 and CO-5 verifying the purpose of the checks made on 1/25/04 to CO-5 of
  % and 12/9/03 to CO-6 of 33

• Title of the truck showing the Foundation as owner. You stated the truck was sold. Please
  provide the details of the sale of the truck and what was done with the funds from the sale.

• Form 990-PF for tax periods ending December 31, 20XX and December 31, 20XX.

February 27, 20XX, a reply was received substantiating the contribution of $ made to CO-5. This was the
only information received

On January 18, 20XX a summons of records pertaining to ORG's was issued to bank used by ORG,
requesting all books, papers, records, and memoranda in your custody, possession or control for all
account transactions, and dealings with, for or on behalf of ORG for the periods January 1, 20XX through
December 31, 20XX for checking account # #. The information received revealed CEO and DIR-1 are
authorized to sign checks. Only one signature is required for checks. All canceled checks for 20XX and
20XX were signed by CEO. The account was closed on December 29, 20XX. See Exhibit # 1 for an
itemized list of all transactions occurring in 20XX and 20XX.

LAW:

Exemption under I.R.C. Section 501(c)(3)

Section 501(c)(3) of the Internal Revenue Code (IRC) exempts from federal income tax organizations that
are both organized and operated exclusively for one or more of the exempt purposes specified in section
501(c)(3). An organization that fails to meet either the organizational or the operational test is not exempt
Treas. Reg. § 1.501(c)(3)-1(a)(1)

For IRC § 501(c)(3), exempt purposes include religious, charitable, scientific, testing for public safety,
literary, educational, and prevention of cruelty to children or animals. Treas. Reg. § 1.501(c)(3)-1(d)(1).

The term “charitable” is used in section 501(c)(3) in its generally accepted legal sense, and should not be
limited by the separate enumeration in section 501(c)(3). The term includes relief of the poor or
underprivileged, advancement of religion, advancement of education or science, lessening of the burdens
of government, promotion of social welfare, lessening neighborhood tensions, and combating community
deterioration. Treas. Reg. § 1.501(c)(3)-1(d)(2).

The term "private foundation” is defined in IRC section 509(a). The term includes all organizations, foreign
and domestic, described in IRC section 501(c)(3), except the types of organizations set out in IRC
sections 509(a) (1), (2), (3), or (4). Thus if an organization is described in IRC section 501(c)(3), it is also a
private foundation unless it falls into one of four general categories of organizations excluded under IRC
sections 509(a)(1) through (4)

Operational test — An organization meets the operational test only if it engages primarily in activities which
accomplish one or more of the exempt purposes specified in IRC § 501(c)(3). An organization will not be
so regarded if more than an insubstantial part of its activities is not furtherance of an exempt purpose.
Treas. Reg. § 1.501(c)(3)-1(c)(1)

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

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

ORG December 31, 20XX
December 31, 20XX
December 31, 20XX

An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in
whole or in part to the benefit of private shareholders or individuals. Treas. Reg. § 1.501(c)(3)-1(c)(2).

An organization is not organized or operated exclusively for one or more exempt purposes unless it serves
a public rather than private interest. To meet this requirement, an organization must establish "that it is
not organized or operated for the benefit of private interest such as designated individuals, the creator or
his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests”

Rev. Rul 67-5, 1967-1 C.B. 123, describes a foundation controlled by an insider and operated to enable
the insider and his family to engage in financial activities beneficial to them and detrimental to the
foundation. The ruling holds that the foundation was operated for a substantial nonexempt purpose and
served the private interest of the insider and his family and thus not entitled to exemption under section
501(c)(3) of the Code

The existence of a substantial nonexempt purpose regardless of the number or importance of exempt
purposes will cause failure of the operational test. Better Business Bureau v. U.S., 326 U.S. 279 (1945)

Adequate Records and Filing Requirement

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

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

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.

IRC § 6033(a)(1) provides, except as provided in IRC § 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

Treas. Reg. § 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 IRC § 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

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

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

ORG December 31, 20XX
December 31, 20XX
December 31, 20XX

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 IRC § 6033
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 IRC §§ 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.

IRC § 7491(a) provides the burden shifts where taxpayer produces credible evidence.--

(1) General rule.--If, in any court proceeding, a taxpayer introduces credible evidence with respect to any
factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the
Secretary shall have the burden of proof with respect to such issue

(2) Limitations.--Paragraph (1) shall apply with respect to an issue only if--

(A) the taxpayer has complied with the requirements under this title to substantiate any item;

(B) the taxpayer has maintained all records required under this title and has cooperated with reasonable
requests by the Secretary for witnesses, information, documents, meetings, and interviews; and

(C) in the case of a partnership, corporation, or trust, the taxpayer is described in section 7430(c)(4)(A)(ii).

TAXPAYER’S POSITION:
The Taxpayer's position is unknown

GOVERNMENT’S POSITION:

CEO was founder, trustee, and signer on all the checks. He therefore controlled the organization. It is the
Service's position ORG failed to meet the reporting requirements under IRC § 6033, since it refused to file
Form 990-PF for tax years ending 20XX, 20XX, and 20XX. ORG also failed to keep adequate records as
required under IRC § 6001 and did not respond to reasonable attempts to secure information to determine
whether it qualified for exemption. Since no documentation was provided to show the checks were
issued for charitable purposes, we would conclude that, in fact, the checks were issued for the benefit of
the Trustee, CEO, resulting in inurement

Thus the conclusion reached is that the Foundation was operated primarily for private benefit and thus
had a substantial non-exempt purpose

CONCLUSION:

The tax exempt status of ORG is revoked effective January 1, 20XX, thereby making it a taxable private
foundation from that day forward. This Foundation is required to file Forms 1041, U.S. Income Tax Return
for Estates and Trusts as well as Form 990-PF. In addition it is required to file Form 4720, Return for
Certain Excise Taxes on Charities and Other Persons under Chapters 41 and 42 of the Internal Revenue
Code should ORG engage in activities giving rise to excise tax

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -5-