IRS revokes exemption from an inactive charitable organization

Plain-English summary

The IRS revoked an organization's recognition as exempt under IRC § 501(c)(3). The organization had been inactive during the examination years and reported no planned operations or financial activity. Its prior activity involved gaming and transfers among related organizations, and the IRS concluded that it was not operating exclusively for exempt purposes. Contributions were no longer deductible after the redacted effective date, and the organization was required to file Form 1120 returns.

Ruling snapshot

• Question: Did the inactive organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501, 6104, 6110, and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.501(a)-1; Rev. Proc. 84-46

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.

| 501.03-00

Dallas, Texas 75242

Date: September 27, 2010

Release Number: 201101024
Release Date: 1/7/11

LEGEND

ORG - Organization name

XX - Date Address = address

Taxpayer Identification Number:
Person to Contact:

Employee Identification Number:
Employee Telephone Number:
(Phone)

ADDRESS

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. Our favorable determination letter to you dated June 3, 19XX 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 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 did provide information stating that your organization
has been inactive during the exam years and that there have been no operations or financial
activities conducted or planned. As such, you fail to meet the operational requirements for
continued exemption under section 501(c)(3).

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 1120. These returns should be filed with the
appropriate Service Center for the tax year ending December 31, 20XX, and for all tax years

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

Internal Revenue Service Department of the Treasury
230 S. Dearborn Street

MC 4923 CHI, Room 1700
Chicago, IL 60604-1505

Taxpayer Identification Number:

Date: October 21, 2009

Form:

ORG
ADDRESS

Tax Year(s) Ended:
Person to Contacv/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 (Rev. 11-2003)
Catalog Number: 34809F

If we do not hear from you within 30 days from the date of this lletter, 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 lletter, 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, [Hf 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 of EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

Deparment of the Treasury = Intermal Revenue Service Schedule No. or

born 886A
Explanation of Items Exhibit
“Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
12/31/20XX
12/31/20XX
LEGEND
ORG - Organization name XX - Date Address - address City - city
State - state CEO - CEO CO-1, CO-2, CO-3 & CO-4 187 QND) 3RD g 4TH
COMPANIES
ISSUE

Whether or not this organization is operating exclusively for any charitable, educational, or
scientific reason under IRC section 501(c)(3).

FACTS

A, Organizational Information:

Articles of Incorporation & Amendments:

The organization was originally incorporated on February 11, 19XX as the CO-1 under the
Nonprofit Corporation Act of the District of Columbia. The corporation was organized
exclusively to receive, administer and expend funds for the following charitable and educational
purposes:

to develop. conduct and administer educational and charitable programs directed toward
the prevention and cure of substance abuse;

to engage in other lawful charitable and educational activity as determined by its board of
directors;

to assist other charitable and educational organizations in the conduct of similar
activities:

to establish in the main office or elsewhere all departments and activities necessary to

carry out the purposes of the corporation; and

y toenvage in any and all lawful activities incidental to the foregoing purposes except as
restricted herein:

On July 13, 19XX and January 20, 19XX, the original articles of incorporation were amended to
change the name and the purpose, respectively. The name was changed to ORG and the purpose
was changed as follows:

y toraise funds for distribution to charitable organizations engaged in causes for improving
child safety and wildlife and environmental protection;

~ to engage directly in activities beneficial to child safety and wildlife and environmental
protection;

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

Page: -1-

a 886A | Department of the Preasury - Internal Revenue Service Schedule INIGWOE
Explanation of Items Exhibit
Year/Period Ended
12/31/20XX
12/31/20XNX
12/31/20XX_

Name of Taxpayer
ORG

~ to establish in the main office or elsewhere all departments and activities necessary to
carry out the purposes of the Corporation; and

7 to engage in any and all lawful activities incidental to the foregoing purposes except as
restricted herein.

Exemption:
Exemption was granted on June 3, 19XX as an organization described in Internal Revenue Code
(IRC) section 501(¢)(3) and 170(b)(1)(A)(v1).

B. Operational Information:
The organization’s Form 990 for the year ending 12/31/20XX and 20XX was examined to
ascertain if the entily was still operating for tax-exempt purposes. Sources and uses of revenue

were reviewed to determine actual activities conducted by this organization.

/. Sources of Revenues:

Prior to the exam years, the organization’s primary activity was the conduct of gaming activities.
During the exam years, the organization did not conduct any activity. It received funds
transferred [rom related organizations (See Exhibit A) but did not conduct any activity to solicit
the funds. The funds were transferred under the direct order of CEO (CEO.) who was
founder/creator, key employee. officer, board of director member or Chief Executive Officer
(CEO).

Per an interview of CEO., it was stated that there is no future activities planned for this
organization.

2. Uses of Funds:

For the examination years. the funds of the organization where used primarily to pay for legal
fees and insurance. Some of the legal fees were paid with respect to a lawsuit filed by the
charitable division of the Attorney General office of the State of State. That lawsuit claimed that
this organization and ils principals (See Exhibit B ) made false statements and filed false returns
to the State of State. The lawsuit was settled with prejudice in 20XX and held this organization
along with CO-2, CO-3 and CO-4 severally and jointly liable for the payment of $ administrative
fine.

Department of the Treasury - Internal Revenue Service

Page: -2-

Form 886-A (Rev.4-68)

S86A Department or the Treasury ~ Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
OO _ : Year/Period Ended
12/31/20XX
12/31/20XX
12/31/20XX

Name of Tax payer
ORG

Insurance payments were made with respect to blanket liability coverage and other areas
unrelated to the organization operations (i.e. auto).

3. Governing Body —Tenuous (No Indenendent Board)

The organization has listed officers responsible for overseeing operations (See Exhibit C).
Nevertheless. all books and records of the organization are maintained out of the offices of
Address. City, State under the direct control of CEO. founder/creator.

LAW

Internal Revenue Code section 501(¢)(3) provides for the exemption from Federal income
tax of corporations organized and operated exclusively for religious, charitable, literary,
scientific, and educational purposes; no part of the net earnings of which inures to any private
shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the income Tax Regulations provides that in order to
qualify for exemption an organization must be both organized and operated exclusively
for one or more exempt purposes. failure to meet either the organizational or operational
test will disqualify an organization from exemption under section 501(c)(3).

Treasury Regulations section 1.501(c)(3)-1(c)(1) states 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.

Treasury Regulations section 1.501(c)(3)-1(d)(i) provides that an organization may be exempt
as an organization described in section 501(c)(3) if it is organized and operated exclusively for
one or more of the following purposes:

(a) Religious,

(b) Charitable,

(c) Scientific,

(dl) Testing for public safety,

(e) Literary,

(7) Educational, or

(g) Prevention of cruelty to children or animals

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

Page: -3-

“Haun 886A i Department of the Treasuny - Internal Revenue Service Schedule SG, GE
oo Explanation of Items Exhibit

Name of Taxpayer i - Year/Period Ended

(ORG 12/31/20XNX

12/31/20NN

12/31/20NN

Treasury Regulations section 1.501(c)(3)-1(d)(1)(iii) Since each of the purposes specified in
subdivision (i) of this subparagraph is an exempt purpose in itself, an organization may be
exempt if it is organized and operated exclusively for any one or more of such purposes. If, in
fact. an organization is organized and operated exclusively for an exempt purpose or purposes,
exemption will be granted to such an organization regardless of the purpose or purposes specified
in its application for exemption. For example. ifan organization claims exemption on the ground
that itis “educational”, exemption will not be denied if. in fact, it is “charitable”.

Treasury Regulations section 1.501(c)(3)-1(d)(2) Charitable defined. —The term “charitable” is
used in section 501(c)(3) in its generally accepted legal sense and ts, therefore, not to be
construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt
purposes which may fall within the broad outlines of “charity” as developed by judicial
decisions. Such term includes: Relief of the poor and distressed or of the underprivileged;
advancement of religion: advancement of education or science; erection or maintenance of public
buildings. monuments. or works: lessening of the burdens of Government, and promotion of
social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen
neighborhood tensions: (ii) to eliminate prejudice and discrimination; (iii) to defend human and
civil rights secured by law: or Gv) to combat community deterioration and juvenile delinquency.
Ihe fact that an organization which is organized and operated for the relief of indigent persons
may receive voluntary contributions from the persons intended to be relieved will not necessarily
prevent such organization from being exempt as an organization organized and operated
exclusively for charitable purposes. The fact that an organization, in carrying out its primary
purpose. advocates social or civic changes or presents opinion on controversial issues with the
intention of molding public opinion or creating public sentiment to an acceptance of its views
does not preclude such organization from qualifying under section 501(c)(3) so long as it Is not
an “action” organization of any one of the types described in paragraph (c)(3) of this section.

Rev, Rul. 67-149, 1967-1 C.B. 133 provides that an organization is exempt under section
501(c)(3) of the Code where it was formed for the purpose of providing financial assistance to
several different types of organizations themselves exempt under section 501(c)(3) even though it
carried On no operations other than to receive contributions and incidental investment income
and to make distributions to the exempt organizations at periodic intervals.

ARGUMENT

The ORG was originally created to administer educational and charitable programs, It later
changed its purpose to raise funds and make contributions to other charitable organizations.
During the audit years, this organization did not actually conduct any specific activities to

(UO A - =, .
Form 886-Actes 4-68) Department of the Treasury - Internal Revenue Service

Page: -4-

orm 986A Po Depariment ot the Preastiy ~ Internal Revenue Service T Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer - Year/Period Ended
ORG 12/31/20XX
| 12/31/20XX
12/31/20XX

distribute funds. In fact. it only received funds transferred from a related entity and made
contributions to other related entities. All of the donor and donee entities are controlled by CEO.

CEO. has stated that there is no intention to continue activities with respect to this organization.

In accordance with Section 1.501(c)(3)-1(a)(1) of the income Tax Regulations, an organization
must be both organized and operated exclusively for one or more exempt purposes. Failure to
meet either the organizational or operational test will disqualify an organization from
exemption under section 501(c)(3). This organization is not operated for exempt purposes,
because it is not operating at all.

If evidence clearly indicates that the organization never will resume operating for an exempt
purpose. as required by_1.501(c)(3)-I(c)(1), its exempt status should be revoked pursuant to
Proc. 84-46, 1984-1 C.B. 541.

TAXPAYER’S POSITION

Taxpayer has not officially advocated a position but acknowledges that the organization is
inactive and that there are no plans for future activity.

GOVERNMENT’S POSITION

Based upon the regulations and Code, we hold that your organization is not operated exclusively
for any charitable. educational, or scientific purpose, thereby defeating the retention of
exemption.

Therefore, we have concluded that you do not qualify for exemption from Federal income tax as
an organization described in section 501(c)(3) of the Code.

Revocation of your exempt status will be effective as of January 1, 20XX. In accordance with
this determination. you are required to file Federal income tax returns on Form 1120.
Contributions to your organization are no longer deductible by donors under section 170(c)(2) of
the Code.

In accordance with the provisions of section 6104(c) of the Code a copy of this letter will be sent
to the appropriate State officials.

Form 886-2 A (Rev.4-68 Department of the T reasury - Internal Revenue Service
( ) I
Page: -5-

Form 886A Deparument of the Freasury = Internal Revenue Service Schedule No: or
7 Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20NX
12/31/20XX
12/31/20XX

On December 2. 20XX. the D.C. Circuit ruled that the Service will disclose our denials and
revocations under section 6110 effective August 1. 20XX. Tax Analysts v. IRS, 350 F.3d 100
(D.C. Cir. 20XX)

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

Page: -6-