IRS revokes inactive organization's section 501(c)(3) exemption

Plain-English summary

The IRS revoked an organization's tax-exempt status under IRC § 501(c)(3). An examination found that the organization had been inactive for several years, had conducted no operations or financial activities, and had never opened a bank account. The IRS concluded that the organization no longer met the operational requirements for exemption and made the revocation effective January 1 of the specified year. The determination also required the organization to file Form 1120 returns for the specified tax years and later years.

Ruling snapshot

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

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO EXAMINATIONS 501.03-00
1100 COMMERCE ST. MAIL STOP 4920 DAL
TAX EXEMPT AND
GOVERNMENT ENTITIES DALLAS, TEXAS 75242

DIVISION

Date: March 22, 2011

Number: 201124029
Release Date: 6/17/2011

LEGEND

Taxpayer Identification Number:

ORG = Organization name
Person to Contact:

XX = Date
Address = address
Employee Identification number:
Contact Numbers:

ORG (Phone)

ADDRESS (Fax)

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 October 4, 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:

As a result of our examination of your activities and financial records for the year ending December 31, 20XX, we have determined that your organization has been inactive for several prior 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 IRC 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 Forms 990 to Forms 1120, you should file these income tax returns with the appropriate Service Center for the tax years 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

1

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 yours,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues Form 6018, Consent to Proposed Action - Section 7428

Return envelope

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examination
1100 Commerce Street

TAX EXEMPT AND
GOVERNMENT ENTITIES Dallas, Texas 75242

DIVISION

September 27, 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,

Nanette M. Downing
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, EIN 20XX

LEGEND
ORG = Organization name
XX = Date

ISSUE

Whether ORG continues to qualify for exemption as an organization described within Internal Revenue Code 501(c)(3) due to inactivity for several years including the year of examination.

FACTS

This organization is presently recognized as a section 501(c)(3) tax-exempt organization and established as a nonprofit corporation on December 20XX. According to its articles of organization, the primary purpose of the organization is to conduct scientific researches and to educate the public about the environment.

As a result of our examination of your activities and financial records for the year ending December 31, 20XX it was determined that your organization has been inactive for several years and that there have been no operations or financial activities conducted. The organization has never opened a bank account. As such, ORG, fails to meet the operational requirements for continued exemption under IRC 501(c)(3).

LAW

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 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 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).

Rev. Rul. 59-95, 1959-1 C.B. 627, provides that the failure of an organization to provide requested information about its financial status and operations may result in revocation of its exempt status on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status.

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, EIN 20XX

TAXPAYER'S POSITION

The taxpayer declared that the organization has no operational activities during the exam process. No financial records existed and never opened bank account for the organization due to

lack of funds and donations.

GOVERNMENT'S POSITION

Based on the facts of the examination, the organization does not qualify for exemption since it is no longer conducting any activities.

CONCLUSION

The organization does not qualify for exemption under section 501(c)(3) and its tax exempt status should be revoked effective January 1, 20XX. Contributions to your organization are no

longer deductible under section 170 of the Internal Revenue Code.

Form 886-A (rev. 4-68)

Department of the Treasury - Internal Revenue Service

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