IRS revokes a nonprofit's section 501(c)(3) exemption for bingo operations

Plain-English summary

The IRS revoked a nonprofit organization's exemption under IRC § 501(c)(3) after finding that its primary activity was operating bingo games. The IRS concluded that the bingo activity was not an exempt purpose and was more than an insubstantial part of the organization's operations. Contributions were no longer deductible, and the organization was required to file Form 1120 for the affected and later tax years. The determination also explained the organization's rights to protest and seek declaratory judgment review.

Ruling snapshot

• Question: Did the nonprofit continue to operate exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 502, 170, 6104(c), and 7428(b)(2); Treas. Reg. § 1.501(c)(3)-1(a)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND GOVERNMENT ENTITIES October 18, 2012
DIVISION
Person to Contact:
Release Number: 201241009 Badge Number:
Release Date: 10/12/2012 Contact Telephone Number:
UIL Code: 501.03-00 Contact Address:
LEGEND Employer Identification Number:

ORG — Organization name
XX — Date Address — address

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

The revocation of your exempt status was made for the following reason(s):

Your primary activity and purpose during 20XX has consisted of the operation of bingo games.
These activities, in and of themselves, do not further an exempt purpose and comprise more
than an insubstantial amount of your activities during 20XX. Accordingly, you have
demonstrated that you are not operated exclusively for exempt purposes as described in Internal
Revenue Code section 501(c)(3). See Treas. Reg. section 1.501(c)(3)-1(a).

Contributions to your organization are no longer deductible under section 170 of the Internal
Revenue Code, effective July 1, 20XX.

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 August 31, 20XX, and for all the tax
years thereafter in accordance with instructions of the return.

• 2 -

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 in one of these three courts must be filed before the
91st day after the date that 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 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 United States Tax Court
at the following address:

Please understand that filing a petition for a declaratory judgment under IRC section 7428 will
not delay the processing of subsequent income tax returns and assessment of any taxes due.

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
the Taxpayer Advocate assistance. If you prefer, you may contact your local Taxpayer Advocate
at:

Taxpayer Advocate assistance cannot be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically
correct tax determination, nor extend the time fixed by law that you have to file a petition in
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.

This letter should be kept within your permanent records.

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
Tax Exempt and Government Entities Division

Exempt Organizations: Examinations

55 N. Robinson MC 4900 OKC

Oklahoma City, OK 73102

Date: December 7, 2011 Taxpayer Identification Number:
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 (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.

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

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

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

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

Schedule number or exhibit

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

Name of taxpayer Tax identification Number Year/Period ended
ORG 20XX08
EIN

LEGEND
ORG - Organization name XX - Date Address - address City - city State -
state Game - game CO-1, CO-2 & Co-3 - 1%, 2% & 3% COMPANIES
Issues:

1. Whether ORG did operate exclusively for exempt purposes

described within Internal Revenue Code section 501(c)(3) for the year under exam.

a. Whether ORG did operate for the primary purpose of
carrying on a trade or business for profit.

b. Whether more than an insubstantial part of ORG
activities are in furtherance of a non-exempt purpose?

Facts:

ORG (“ORG”) was incorporated under the laws of the State of State as a nonprofit corporation on January
6, 19XX. In a determination letter dated February 23, 19XX (“ORG”) the Service determined (“ORG”) to be
exempt from Federal income tax as an organization described in section 501(c)(3) of the Internal Revenue
Code.

In its Articles of Incorporation, (“ORG”) stated the purposes for which the corporation is organized are:

1. To increase public understanding of substance abuse and chemical dependency, its nature,
   control and remedy.

2. To establish and maintain centers for the collection, formulation and dissemination of
   information bearing on problems of substance abuse and chemical dependency.

3. To support clinics for the medical and psychiatric diagnosis and treatment of chemically
   dependent individuals, for research in substance abuse and dependency, and for the
   training of staff and such other interested persons as its resources may permit.

4. To promote the creation of hospital and related facilities for the treatment of victims of
   chemical dependency.

5. To conserve the resources of the community by improved application of such resources to
   the problems of chemical dependency.

6. To accept, receive and acquire funds, stocks, securities and property by donations,
   bequests, devises, or otherwise, and to use, hold, invest, re-invest, convert, sell, transfer,
   mortgage, pledge and dispose of any and all funds, stocks, securities and properties so
   accepted, received or acquired for the furtherance or accomplishment of the purposes of this
   corporation.

7. To do all acts and exercise all powers and assume all obligations necessary or incident to
   the purposes of said corporation.

Form 886-A (1-1994) Catalog Number 20810W —Page__1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX08
EIN

Reported Financial Information on Form 990 20XX08

Part III Gaming.
(a) Game (b) Pull tabs/instant (c) Other gaming (d) Total gaming
Game/progressive (add col. (a)
Game through col. (c))

1. Gross Revenue
2. Cash Prizes
3. Noncash prizes
4. Rent/facility costs
5. Other direct expenses
6. Volunteer labor X No X No

Direct expense summary. Add lines 2 through 5 in column (d)

Net gaming income summary. Combine line 1, column (d), and line 7

Non Exempt Activity Description

The address shown on Form 990 return is Address, City, State. This is the location of CO-1 where GAME
is played.

(“ORG”) did not perform any exempt activities for the year of audit. (“ORG”) did make a contribution in the
amount of $ to CO-2 for Addictive and Other Diseases and a $ contribution to CO-3 of City. (“ORG”)’s sole
activity was GAME. Total gross revenue was $ of which $ is Instant GAME. Instant GAME is reported on
Form 990-T as unrelated income subject to the Unrelated Business Income Tax. (“ORG”) did file Form
990-T for tax year ending August 31, 20XX reporting its unrelated business activity. (“ORG”) did not
receive any contributions or grants for the year of exam. All GAME activity was conducted with paid
workers.

Note: State of State requires GAME licensed holders to make contributions to charities in order to:
maintain their license.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX08
EIN

Law:

Section 501(a) of the Internal Revenue Code provides that an organization described in section 501(c)(3) is
exempt from income tax.

Section 501(c)(3) of the Code exempts from federal income tax corporations organized and operated
exclusively for charitable, educational, and other purposes, provided that no part of the net earnings inure
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), 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.

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 that 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. The existence of
a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause
failure of the operational test. Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945).

IRC § 502. Feeder organizations

(a) General rule.--An organization operated for the primary purpose of carrying on a trade or business for
profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to
one or more organizations exempt from taxation under section 501.

(b) Special rule.--For purposes of this section, the term “trade or business” shall not include--

(2) any trade or business in which substantially all the work in carrying on such trade or
business is performed for the organization without compensation, or

Revenue Ruling 61-170, 1961-2 CB 112 ruled 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.

Revenue Ruling 70-4, 1970-1 CB 126 ruled that Section 501(c)(3) of the Code provides for the exemption
from Federal income tax of organizations organized and operated exclusively for educational purposes.
Section 1.501(c)(3)-1(c)(1) of the Income Tax 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). An organization will not
be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

In Better Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S. 279 (1945), the Supreme
Court held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the
exemption regardless of the number or importance of truly exempt purposes. The Court found that the

Form 886-A (1-1994) Catalog Number 20810W Page _ 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX08
EIN

trade association had an “underlying commercial motive” that distinguished its educational program from
that carried out by a university.

Taxpayer’s Position:
Taxpayer has not stated their final position at the time of this report.
Government’s Position:

It is the Government's position that (“ORG”) is not operated as an organization described in section
501(c)(3) of the Internal Revenue Code. The address shown on Form 990 return (Address, City, State) is
CO-1 where GAME is played. (“ORG”)'s sole activity is GAME. GAME is not an exempt activity. In Better
Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court held
that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly exempt purposes. Fifty Five percent (%) of (“ORG”)’s
Gross Revenue is from Pull tabs/instant Game. Instant GAME is a trade or business for profit and is an
unrelated exempt activity. (“ORG”) did not receive any contribution or grants for the year of exam. All
GAME activity was conducted with paid workers. IRC 502 specifically provides that an organization
operated for the primary purpose of carrying on a trade or business for profit shall not be exempt under 501
on the ground that all of its profits are payable to organizations which do qualify under IRC 501.

Note: Examination revealed no exempt activity what so ever in year of exam.
Conclusion:

(“ORG”) is not operating exclusively for purposes specified in IRC 501(C)(3) and is not exempt from income
tax under section 501, effective September 1, 20XX. In order to be treated as a 501(c)(3) the exempt
organization must in operation perform an exempt activity related to its exempt purpose. This organization
during the year of exam performed no exempt activity and fails the operation test. Therefore; we propose
revocation.

If you agree to the proposed revocation, please sign form 6018, and mail back to the person listed in the
attached letter, within 30 days of receipt of this letter. If you do not agree to the proposed revocation
please refer to the letter and attached publications for the appeals process, or contact the person listed in
the letter.

If this proposed revocation is upheld, Form 1120 U.S. Corporation Income Tax Return should be filed for
tax years ending beyond the date of revocation.

Form 886-A (1-1994) Catalog Number 20810W Page_4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service