IRS determination 1050035: Exemption revoked after organization failed to provide examination records

Plain-English summary

The IRS revoked an organization’s exemption under IRC § 501(c)(3) after it repeatedly failed to provide records and information needed for an examination. The organization did not schedule an examination of its books and records, did not respond to repeated correspondence, and had not filed required information returns. Because the IRS could not determine whether the organization’s activities remained consistent with its exempt status, it concluded that the organization failed the operational test. The organization was required to file Form 1120 returns, and contributions to it were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Did the organization establish that it continued to satisfy the operational and recordkeeping requirements for exemption under IRC § 501(c)(3)?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(c)(3), 6001, 6033, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1.

Full text (IRS public release)

Number: 201050035
Release Date: 12/17/2010 501.03-00

LEGEND
ORG = Organization name XX = Date

Date: August 17, 2010

ORG . Person to Contact:

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

, or writing to: Internal Revenue Service,

. 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
4100 Commerce St.

TAX EXEMPT AND
GOVERNMENT ENTITIES Dallas, Texas 75242

DIVISION

August 17, 2010

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 Treasury - 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 = 1%* 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-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 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-A rev.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
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-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-