Determination 1122022: IRS revokes exemption for an organization operating unrelated businesses

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(3) because its primary activities were operating a bill-paying center, a small grocery store, and a bait shop. The IRS found that these activities were not accomplishing an exempt purpose and generated substantially all of the organization's income. The organization was required to file Form 1120 returns, and contributions were no longer deductible. The attached examination report also concluded that the organization operated primarily for unrelated purposes and did not qualify for continued exemption.

Ruling snapshot

• Question: Did the organization's operation of three unrelated businesses satisfy the requirements for continued exemption under IRC § 501(c)(3)?
• Outcome: Revocation.
• Key authorities: IRC §§ 501, 6001, 6033, 6104, 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: March 7, 2011

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:

Release Number: 201122022
Release Date: 6/3/2011

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

CERTIFIED MAIL
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 May 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):

Your primary activities include the operation of a bill paying center, a small
grocery store, and a bait shop, which are activities not accomplishing an
exempt purpose. In addition, substantially all your income is generated from
these three activities. I.R.C. § 501(c)(3) requires organizations to operate
exclusively for an exempt purpose, which includes having a primary activity
accomplishing exempt purposes. See Treas. Reg. § 1.501(c)(3)-1(a).
Section 501(c)(3) precludes Federal income tax exemption if more than an
insubstantial part of an organization’s activities is not in furtherance of an

exempt purpose. See Treas. Reg. § 1.501(c)(3)-1(c)(1). As such, you are
not an organization described in section 501(c)(3).

Contributions to your organization are no longer deductible.

You are required to file income tax returns on Form 1120. If you have not
already filed these returns and the examiner has not provided you instructions for
converting your previously filed Form(s) 990-EZ to Form(s) 1120, you should file
these income tax returns with the appropriate Service Center for the tax year[s]
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, you may file an action for declaratory
judgment under the provisions of section 7428 of the Code in one of the following
three venues: United States Tax Court, the United States Court of Federal
Claims, or the United States District Court for the District of Columbia. A petition
or complaint in one of these three courts must be filed before the 91st day after
the date this determination was mailed to you if you wish to seek review of our
determination. Please contact the clerk of the respective court for rules and the
appropriate forms regarding filing petitions for declaratory judgment by referring
to the enclosed Publication 892. Please note that the United States Tax Court is
the only one of these courts where a declaratory judgment action can be pursued
without the services of a lawyer. You may write to the courts at the following
addresses:

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 6018, Consent to Proposed Adverse Action

Internal Revenue Service Department of the Treasury
TE/GE, EO EXAMINATION

1100 Commerce Street
Dallas, TX 75242

Taxpayer Identification Number:
Date: March 7, 2011

Form:

ORG

Tax Year(s) Ended:
ADDRESS

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 is necessary.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed
Action - Section 7428. If you have already given us a signed Form 6018, you need not repeat this
process. 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.

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,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

Form 886-A Schedule number or
(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit
Name of taxpayer Tax Identification Year/Period ended
Number
ORG 20XX12
EIN
LEGEND
ORG = Organization name XX = Date CO-1, CO-2 & CO-3 = 1st, 2nd &
3rd COMPANIES

ISSUES

Whether the tax-exempt status of an organization that operates a CO-3, CO-2,
and bill paying office should be revoked?

BRIEF EXPLANATION OF FACTS

The subject organization is recognized as a section 501(c)(3) tax-exempt
organization. According to its articles of incorporation, the primary purpose of the
organization is to help mobilize and utilize resources to promote economic
development, to stimulate and provide services, assistance, and training to
develop employment opportunities, and to provide educational services.

The organization’s expenses to carry on their primary purposes were $ in
20XX. The remaining $ in expenses were for the unrelated businesses.

The organization's unrelated businesses included:

« CO-1 which is a bill paying center for the local residents and
receives a payment from the phone and electric company for
every payment they receive.

• CO-2 is a small grocery store.

: CO-3 sells bait and other fishing products near the local lake.

The total income from the unrelated businesses was $ in 20XX. The total
income from the tax exempt donations to the organization was $ in 20XX.

LAW

Issue 1.

Section 501(c)(3) of the Code exempts from federal income tax
organizations organized and operated exclusively for charitable, educational, and
other exempt purposes, provided that no part of the organization's net earnings

inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be
exempt as an organization described in section 501(c)(3) of the Code, the

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

Form 886-A (Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer 7 Tax Identification | Year/Period ended
Number

ORG 20XX12
EIN | _

organization must be one that is both organized and operated exclusively for one
or more of the purposes specified in that section.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization
will not be regarded as operated exclusively for exempt purposes if more than an
insubstantial part of its activities is not in furtherance of exempt purposes.

The presence of a single substantial nonexempt purpose can destroy the
exemption regardless of the number or importance of exempt purposes. Better
Bus. Bureau v. United States, 326 U.S. 279. 283, 90 L. Ed. 67, 66 S. Ct. 112
(1945): Am. Campaign Acad. v. Commissioner, 92 T.C. 1053, 1065 (1989); see
also Old Dominion Box Co., Inc. v. United States, 477 F.2d 340 (4th Cir. 1973),
cert. denied, 413 U.S. 910 (1973) (‘operating for the benefit of private parties who
are not members of a charitable class constitutes a substantial nonexempt
purpose”). When an organization operates for the benefit of private interests,
such as designated individuals, the creator or his family, or persons directly or
indirectly controlled by such private interests, the organization by definition does
not operate exclusively for exempt purposes. Am. Campaign Acad. v.
Commissioner, supra at 1065-1066.

TAXPAYER’S POSITION

The taxpayer agrees with the findings that this organization should be
revoked. They will be completing 1120 corporate tax returns in the future.

GOVERNMENT’S POSITION

The organizations tax exempt status should be revoked as of 1/1/20XX.
Based on the facts of the examination, the organization does not qualify for
exemption since the majority of its operations are for unrelated purposes.

Total Income

Related income

Unrelated income

Total Expenses

Related expenses

Unrelated expenses

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
(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit
Name of taxpayer Tax Identification Year/Period ended
Number
ORG 20XX12
EIN

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will
not be regarded as operated exclusively for exempt purposes if more than an
insubstantial part of its activities is not in furtherance of exempt purposes.

CONCLUSION

Based on the foregoing reasons, the organization does not qualify for
exemption under section 501(c)(3) and its tax exempt status should be revoked.

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