IRS revokes exempt status after an organization failed to meet reporting requirements

Plain-English summary

The IRS revoked an organization's § 501(c)(3) exemption, effective January 1 of the redacted year. The organization did not establish that it operated exclusively for exempt purposes and failed to respond to repeated requests for records and information. The IRS concluded that the organization failed to meet the reporting and recordkeeping requirements under IRC §§ 6001 and 6033. Contributions were no longer deductible under § 170, and the organization was required to file Form 1120 returns.

Ruling snapshot

• Question: Did the organization meet the reporting and recordkeeping requirements necessary to continue its § 501(c)(3) exemption?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(3), 170, 6001, 6033, 6104(c), 7428, and 6110(k)(3); Rev. Rul. 59-95.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
th TE/GE EO Examinations

Vos Ys 1100 Commerce Street 501.03-00
, Dallas, TX 75424 |

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201049044
Release Date: 12/10/10

Legend
ORG = Organization name xx = Date

Date: August 19, 2010

Address = address

Person to Contact:

ORG Identification Number:

ADDRESS Contact Telephone Number:
In Reply Refer to: TE/GE Review Staff
EIN:

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:

You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of I.R.C. section 501(c) (3). You have failed to produce documents or otherwise 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 I.R.C. § 6001, 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

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 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 Claim 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,

Tel: 404-338-8099, or write :

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,

Douglas H. Shulman
Commissioner
By

Nanette M. Downing
Director, EO Examinations
Enclosures:
Publication 892
Publication 1546
Notice 437

Ce:

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE Examinations
: 801 Tom Martin Drive Room 263
TAK EXEMPT AND Birmingham, AL 35211

GOVERNMENT ENTITIES
DIVISION

November 5, 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

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 B. Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

| Schedule number or exhibit

Form 886-A

ei fide) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number | Year/Period ended 12/31/20XX

ORG 12/31/20XX
12/31/20XX
12/3 1/20XX

LEGEND

ORG = Organization name XX = Date FOUNDER = founder

Issue:

Whether ORG qualifies for exemption under Section 501(c)(3) of the Internal Revenue Code.

Facts:

On July 31, 20XX ORG applied for exemption by completing the form 1023 application. On the 1023 application it states that the activities of ORG includes providing supervised, safe, constructive, positive environment that seeks to dispel the latch-key scenario while giving parents a sense of comfort when they are at work and managing family affairs. The ORG also promotes the child’s physical development, fine motor and gross motor skills, helps the child to become socially competent to relate both to adults and his/hers peers, encourage emotional growth and control and provide opportunity for learning and development of the child’s skills, and provide basic support and encouragement. The 1023 applications stated that ORG will be community based by staying aware of, and responsive to the needs of the community and utilizing resources within the community to help provide meaningful services.

On February 6, 20XX ORG was granted exemption under section 501(c)(3) of the code as a public charity. ORG was issued a determination letter and the letter stated that ORG was considered a public charity and the advance ruling period ends December 31, 20XX. The letter also stated if the ORG do not meet the public support requirements during the advance ruling period, we will classify them as a private foundation for future periods. The determination letter also states that if we classify ORG as a private foundation, we will treat them as a private foundation from the beginning date for purposes of section 507(d) and 4940.

This information was also discussed with FOUNDER the founder of the organization during the examination and additional correspondence was issued to FOUNDER requesting the delinquent form 990PF’s. The organization did not respond to our request.

Law:

Form 886-A (1-1994) Catalog Number 20810W Page publish no.irs gow Department of the Treasury-Internal Revenue Service

“Borm 886-A ' Schedule number or exhibit —

(Rev. January 1994) EXPLANATIONS OF ITEMS

Tax Identification Number | Year/Pertod ended
12/3 1/20KX
ORG 12/3 1/20XX
12/3 1/20XX
12/3 1/20KX

~ Name of taxpayer

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)(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. § 1.6001-1(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 ail 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 § 1.6033-1(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 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

Form 886-A (1-1994) Catalog Number 20810W Page publish no. irs gov Department of the Treasury-Internal Revenue Service

Form 886-A | Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number | Year/Period ended 12/31/20KX ORG | 12/31/20XX 12/3 1/20KX 12/3 1/20XX

|
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.

Treas. Reg § 1.6033-3 states that in general, the foundation managers (as defined in section 4946(b)) of every organization (including a trust described in section 4947(a)(1)) which is (or is treated as) a private foundation (as defined in section 509) the assets of which are at least $5,000 at any time during a taxable year shall include the following information on its annual return in addition to that information required under § 1.6033-

2(a):

(1) An itemized statement of its securities and all other assets at the close of the year, showing both book and market value,

(2) An itemized list of all grants and contributions made or approved for future payment during the year, showing the amount of each such grant or contribution, the name and address of the recipient (other than a recipient who is not a disqualified person and who receives, from the foundation, grants to indigent or needy persons that, in the aggregate, do not exceed $1,000 during the year), any relationship between any individual recipient and the foundation's managers or substantial contributors, and a concise statement of the purpose of each such grant or contribution,

(3) The address of the principal office of the foundation and (if different) of the place where its books and records are maintained,

(4) The names and addresses of its foundation managers (within the meaning of section 4946(b)), that are substantial contributors (within the meaning of section 507(d)(2)) or that own 10 percent or more of the stock of any corporation of which the foundation owns 10 percent or more of the stock, or corresponding interests in partnerships or other entities, in which the foundation has a 10 percent or greater interest.

Form 886-A (1-1994) Catalog Number 20810W Page publish no.irs gov Department of the Treasury-Internal Revenue Service

| Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
‘Name of taxpayer ~ | Tax Identification Number | Year/Period ended 12/31/20XX ORG 12/31/20XX
| 12/3 1/20XX
12/31/20XX

For purposes of subparagraph (2) of this paragraph, the business address of an individual grant recipient or foundation manager may be used by the foundation in its annual return in lieu of the home address of such recipient or manager, and the term “relationship” shall include, but is not limited to, any case in which an individual recipient of a grant or contribution by a private foundation is (i) a member of the family (as defined in section 4946(d)) of a substantial contributor or foundation manager of such foundation, (ii) a partner of such substantial contributor or foundation manager, or (iii) an employee of such substantial contributor or foundation manager or of an organization which is effectively controlled (within the meaning of section 4946(a)(1)(H)(i) and the regulations thereunder), directly or indirectly, by one or more such substantial contributors or foundation managers.

Tres. Reg 1.6033-2(a)(2)(i) states that except as otherwise provided in this paragraph and paragraph (g) of this section, every organization exempt from taxation under section 501(a), and required to file a return under section 6033 and this section (including, for taxable years ending before December 31, 1972, private foundations, as defined in section 509(a)), other than an organization described in section 401(a) or 501(d), shall file its annual return on Form 990. For taxable years ending on or after December 31, 1972, every private foundation shall file Form 990-PF as its annual information return. For taxable years beginning after December 31, 1977, every section 501(c)(21) black lung trust shall file an annual information return on Form 990-BL or any other form prescribed by the Internal Revenue Service for that purpose.

Taxpayer’s position: Taxpayer was contacted to explain the outcome of the exam and to offer a managerial conference but there was no response from the taxpayer.

Conclusion: It is the IRS's position that the organization failed to meet the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Accordingly, the organization's exempt status is revoked effective the tax period beginning January 1, 20XX, the first year after the advance ruling period ends.

Form 1120 returns should be filed for the tax periods ending on or after12/31/20XX, 12/31/20XX, 12/31/20XX and 12/31/20XX..

Form 886-A (1-1994) Catalog Number 208 1UW Page publish no.irs gov Department of the Treasury-Internal Revenue Service