Determination 1150033: IRS revoked a charitable organization's tax-exempt status

Plain-English summary

The IRS revoked a charitable organization's tax-exempt status under section 501(c)(3). The organization did not respond to repeated requests to inspect its books and records. Bank records obtained by summons also showed that most distributed charitable funds went to one individual, with additional payments to the organization's president and treasurer. The IRS concluded that the organization had not shown that it operated for public rather than private interests and revoked its exemption effective June 1, 20XX. Contributions were no longer deductible, and the organization was required to file Form 1120 returns.

Ruling snapshot

• Question: Should the organization's tax-exempt status be revoked because it failed to provide records and appeared to operate for private interests?
• Outcome: revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 6001, 6033, 6104(c), 7428, and 7602(a); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(ii), 1.6001-1, and 1.6033-1(h)(2).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
625 Fulton Street, Room 503
Brooklyn, NY 11201

TAX EXEMPT AND

GOVERNMENT ENTITIES

DIVISION September 20, 2011

Number: 201150033 UIL: 9999.98-00
Release Date: 12/16/2011

LEGEND
ORG - Organization name
XX - Date Address - address

Taxpayer Identification Number:
Person to Contact:
Identification Number:

ORG Contact Telephone Number:

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 December 24, 20XX is hereby revoked and you are no longer exempt
under section 501(a) of the Code effective June 1, 20XX.

You have failed 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 as required by
I.R.C. sections 6001 and 6033(a)(1).

Contributions to your organization are no longer deductible under IRC §170.

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 May 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.

2

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
these 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:

We will notify the appropriate State Officials of this action, as required by Code section
6104(c). You should contact your State officials if you have any questions about how
this final determination may affect your State responsibilities and requirements.

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

Enclosure:
Publication 892

Letter 3607(04-2002)
Catalog Number: 34198J

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TEGE EO Examinations
1100 Commerce St., Mail Code 4900DAL
Dallas, TX 75242

GOVERNMENT ENTITIES
DIVISION

April 7, 2011

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 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit A
Name of Taxpayer Year/Period Ended
ORG May 30, 20XX
EIN: EIN
LEGEND
ORG - Organization name XX - Date State - state President - president
Secretary - secretary Treasurer - treasurer CO-1 - 1ST COMPANY RA-1 & RA-2

• 1ST & 2ND RA
  ISSUE

1. Whether the tax-exempt status of ORG should be revoked based on the Organization's failure to
   respond to the Government’s request to examine the books and records.

2. Whether the tax-exempt status of ORG should be revoked based on private benefit and inurement
   issues revealed through the Government’s receipt of summoned bank documents.

BACKGROUND

ORG is recognized as a 501(c)(3) tax-exempt organization, and is a non-profit corporation under the
laws of the State of State. According to its Articles of Incorporation, the primary purpose of the
organization is “to otherwise assist and fund household help for the poor and needy in distress who
cannot manage their households because of their personal and family problems”. The Officers of ORG
include President, President, Secretary, Secretary, and Treasurer, Treasurer. In its history, the
Organization filed Forms 990-N (e-Postcard) for tax periods ending May 30, 20XX, May 30, 20XX and
May 30, 20XX. Tax year ending May 30, 20XX was the year under examination.

FACTS

ISSUE # 1

We are proposing revocation of the Organization’s exempt status based on the following facts:

The Organization failed to respond to the following requests to examine the books and records:

• 2/17/20XX - Examination letter, IDR # 1, Publication 1, sample Power of Attorney, and Governance
Questionnaire sent via regular mail to the Organization’s on-file address. The Organization did not
respond to this mailing as requested.

• 3/5/20XX - Cover letter, Examination letter, IDR # 1, Publication 1, sample Power of Attorney and
Governance Questionnaire sent via Certified Mail to the Organization’s on-file address. The
Government received the returned package back stamped “unclaimed”.

• 4/1/20XX - Cover letter, Examination letter, IDR # 1, Publication 1, sample Power of Attorney and
Governance Questionnaire sent via Certified Mail to the President’s home address. The Government
received the returned package back stamped “unclaimed”.

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit A
Name of Taxpayer Year/Period Ended
ORG May 30, 20XX

EIN: EIN

• 6/17/20XX - IDR # 2 requesting a listing of all of the Organization’s foreign and domestic bank
accounts sent via Certified Mail to the on-file address. The Government received the returned
package back stamped “unclaimed”.

• 2/3/20XX - Noticee copy of summons issued to CO-1 sent via Certified Mail to the on-file address.
The Government received the signed return receipt, which indicated that the Organization’s
President, President received the package at the same on-file address utilized in the past.

The Agent submitted Postal Tracers to the United States Post Office to verify that the addresses utilized
were current. The tracers revealed that the addresses used in the above-mentioned contact attempts,
were current and correct as both the Organization and the Officer were receiving mail at these
addresses on 11/16/20XX. Neither address consisted of a Post Office Box.

ISSUE # 2

We are proposing revocation of the Organization’s exempt status based on the following facts:

Bank documents secured via summons revealed that the majority of the total charitable funds distributed
by the Organization (81%) went to an individual, RA-1 aka RA-1. In addition, 9% of the funds distributed
by the Organization went to the President, President and Treasurer who we presume to be a relative.

LAW
ISSUE # 1

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.

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 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.

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.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit A
Name of Taxpayer Year/Period Ended
ORG May 30, 20XX

EIN: EIN

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 established that it is
observing the conditions required for the continuation of exempt status.

7602(a) AUTHORITY TO SUMMON, ETC.--

For the purpose of ascertaining the correctness of any return, making a return where none has been
made, determining the liability of any person for any internal revenue tax or the liability at law or in equity
of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such
liability, the Secretary is authorized--

7602(a)(1) To examine any books, papers, records, or other data, which may be relevant or
material to such inquiry.

In accordance with the above-cited provisions of the Code and regulations, organizations recognized
as exempt from federal income tax must meet certain operational and reporting requirements. The
above requirements relate to the retention of records sufficient to determine whether the organization
is operated for the purposes for which it was granted tax-exempt status, and its obligation to submit to
the examination of such records for verification purposes.

ISSUE # 2

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 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.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit A
Name of Taxpayer Year/Period Ended
ORG May 30, 20XX

EIN: EIN

Section 1.501(c)(3)-1(d)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a private
interest. Thus, it is necessary for an organization to establish that it is not organized or operated for the
benefit of private interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests.

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 F2d. 340 (4th Cir. 1973), cert. denied,
413 US 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, and John Marshall Law
School v. United States, 228 Ct. Cl. 902 (1981).

In accordance with the above-cited provisions of the Code and regulations, organizations recognized
as exempt from federal income tax must meet certain operational and reporting requirements. The
above requirements relate to the operation of public charities for 501(c)(3) purposes in the public
interest.

GOVERNMENT’S POSITION

ISSUE # 1

We propose revocation of the Organization’s exempt status based on the Organization’s refusal to
respond to multiple requests to examine the books and records. The Government attempted contact on
five separate occasions. While Postal Tracers issued by the United States Post Office confirmed that
the on-file addresses of both the Organization and the President were correct, nearly all attempts at
sending Certified Mail to the Organization and President were unsuccessful as the Government received
three of the four Certified Mail packages back stamped “unclaimed”.

The final Certified Mail package, which consisted of the Noticee copy of the summons issued to CO-1 to
obtain the bank records, constituted the only Certified Mail piece for which the Government received a
signed receipt. The Government’s receipt of the signed acknowledgement confirmed that previous
mailings to the on-file address of the Organization were in fact, sent to the correct address. The return
of the previous “unclaimed” mailings to the Government indicated that the President had refused to claim
them.

ISSUE # 2

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit A
Name of Taxpayer Year/Period Ended
ORG May 30, 20XX

EIN: EIN

We propose revocation of the Organization’s exempt status based on private benefit and inurement
revealed through the receipt of summoned bank documents. The bank documents evidenced that the
Organization primarily operated for private rather than public purposes.

FIG. 1.0 CHECKING ACCOUNT ACTIVITY

The following table (Fig. 1.0) details the Organization’s checking account activity from June 1, 20XX
through May 30, 20XX. The average monthly balance in the account was only $. For the entire period,
as the Organization deposited its charitable contributions, it promptly distributed the income in a series of
payments primarily to one individual.

Fig. 1.0
TABLE DELETED

FIG. 2.0 CHECKS ISSUED FROM 6/1/20XX — 5/30/20XX

The following table (Fig. 2.0) details the Organization’s total expenses from June 1, 20XX through May
30, 20XX. The Organization distributed the majority of its income for the year to one individual. The
checks identified the payee as RA-1, while the signatures on the check backs reflected the name of the
depositor as RA-1. The President, President, issued check # = on November 13, 20XX, payable to
himself for $. On January 8, 20XX, the President issued check # payable to Treasurer for $. Due
to the Organization’s failure to respond to the Examiner, the Government presumes Treasurer to be a
relative of the President, President. In addition, the President issued checks to two other individuals, the
payments of which totaled $. Congregation CO-2 appears to be a church.

Fig. 2.0
TABLE DELETED

The Organization utilized 2% of its total income from charitable contributions for exempt purposes,
through its contribution to what appears to be a church. The Government was unable to question the
reasons behind the issuance of checks to the individuals due to the taxpayer’s refusal to respond to the
Examiner. It appears that more than an insubstantial part of the Organization’s activities was not in
furtherance of exempt purposes, and did not primarily serve a public interest as required for exemption
under IRC section 501(c)(3).

CONCLUSION:

It is the Government’s position that the Organization is no longer eligible for exemption from federal
income tax under IRC § 501(c)(3) due to its failure to respond to the Examiner’s multiple requests to
examine its books and records, and due to its failure to serve public rather than private interests.

Accordingly, the organization's exempt status is revoked effective June 1, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit A
Name of Taxpayer Year/Period Ended
ORG May 30, 20XX
EIN: EIN

In the year under review, the Organization's income did not include grants or income from any source
other than charitable contributions, which would negate the requirement for the Organization to file

converted Forms 1120.

Form 886A (Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -6-