Written determination 1245027: IRS revokes an organization's tax exemption

Plain-English summary

The IRS revoked an organization's exemption under section 501(c)(3), effective January 1 of the redacted year. The organization operated an apartment complex and reported rental income as its only activity, rather than carrying out charitable activities. It also failed to maintain financial and operational records sufficient for the IRS to verify its income, expenditures, and exempt activities. Contributions were no longer deductible, and the organization was required to file Form 1120 returns.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3) despite inactivity and inadequate records?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 170, 6001, 6033, 6104, 7428, and 6110; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6001-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE 501.03-00
1100 Commerce Street
Dallas, TX 75242
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Date: July 12, 2012
Release Number: 201245027
Release Date: 11/9/2012
LEGEND Person to Contact:
ORG - Organization name Badge Number:
XX-Date Address - address Contact Telephone Number:
Contact Address:
Employer Identification Number:
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 September 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):

You are not operated exclusively for an exempt purpose as required by Internal Revenue Code
section 501(c)(3). You are not and have not been engaged primarily in activities which
accomplish one or more exempt purposes. You are not a charitable organization within the
meaning of Treasury Regulation 1.501(c)(3)-1(d); rather, your activities further a substantial
nonexempt commercial purpose and serve private rather than public interests.

Contributions to your organization are no longer deductible under section 170 of the Internal
Revenue Code, effective January 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 December 31, 20XX and for all the tax
years thereafter in accordance with instructions of the return.

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

2
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

230 S. Dearborn

Chicago, IL, 60604

Date: 11/30/2011 Taxpayer Identification Number:
LEGEND Form:
ORG - Organization name Tax Year(s) Ended:
XX-Date Address-address Person to Contact/ID Number:
Contact Numbers:
Telephone:
ORG Fax:
ADDRESS

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
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.

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

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

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31,
20XX
LEGEND
ORG - Organization name XX - Date Address - address City - city State -
state
Issues

1. Whether ORG, Incorporated continues to qualify as a tax exempt organization under
   Internal Revenue Code Section 501(c)(3) due to inactivity?

2. Whether ORG, Incorporated continues to qualify as a tax exempt organization under
   Internal Revenue Code Section 501(c)(3) due to failure to maintain adequate
   documentation as described under Internal Revenue Code Sections 6001 and 6033?

Facts

ORG, Incorporated is a tax exempt organization under Internal Revenue Code Section 501(c) (3).
ORG was incorporated in the State of State on November 13, 19XX. Your organization owns and
operates a facility located at Address, City, State. Your facility consists of two buildings and 32
total units which are available for rent. It was identified that renting of the units in the facility was
the only activity which was conducted by the organization.

Your purpose as stated during the initial interview was to “work with underprivileged Country
children and seniors, and provide low cost housing.”

You reported revenues on the Forms 990 for the tax years ending December 31, 20XX and
December 31, 20XX of $ and $, respectively. During the examination it was noted that all
revenues were generated from rental income received. The operation and maintenance of an
apartment complex is your only activity and is not a qualifying activity for the furtherance of
Internal Revenue Code Section 501(c)(3) purposes. You stated that your organization no longer
actively conducted charitable activities.

You were unable to provide financial documentation which would allow the Internal Revenue
Service to accurately reconcile the income and expenditures which were reported on the Form

990. You were unable to provide the Internal Revenue Service with documentation related to
     charitable activities conducted for the furtherance of Internal Revenue Code Section 501(c)(3)
     purposes.

Law

Internal Revenue Code section 501(c)(3) exempts from Federal income tax: corporations, and
any community chest, fund, or foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national
or international amateur sports competition (but only if no part of its activities involve the provision
of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of

Form 886-A (1-1994) Catalog Number 20810W Page_1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A

EXPLANATIONS OF ITEMS

Schedule number or exhibit

(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31,

20XX

the net earnings of which inures to the benefit of any private shareholder or individual, no
substantial part of the activities of which is carrying on propaganda, or otherwise attempting to
influence legislation (except as otherwise provided in subsection (h)), and which does not
participate in, or intervene in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public office.

Treasury Regulation section 1.501(c)(3)-1(a)(1) 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.

Treasury Regulation section 1.501(c)(3)-1(b)(1) states that an organization is organized
exclusively for one or more exempt purposes only if its articles of organization (a) limit the
purposes of such organization to one or more exempt purposes and (b) do not expressly
empower the organization to engage, otherwise than as an insubstantial part of its
activities, in activities which in themselves are not in furtherance of one or more exempt
purposes.

Treasury Regulation 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 Regulation Section 1.501 (c)(3)-1(c)(2) states, in part, that an organization is not
operated exclusively for one or more exempt purposes if its net earnings inure in while or in part to
the benefit of private shareholders or individuals.

Treasury Regulation section 1.501(c)(3)-1(d)(1)(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,

(d) Testing for public safety,

(e) Literary,

(f) Educational, or

(g) Prevention of cruelty to children or animals.

Treasury Regulation section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized
or operated exclusively for one or more of the purposes specified in subdivision (i) of this
subparagraph unless it serves a public rather than a private interest.

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

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31,

20XX

Section 6001 of the Code provides that every person liable for any tax imposed by the Code, or for
the collection thereof, shall keep adequate records as the Secretary of the Treasury or his
delegate may from time to time prescribe.

Section 6033(a)(1) of the Code provides, except as provided in section 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.

Section 1.6001-1(a) of the Regulations in conjunction with section 1.6001-1(c) provides that every
organization exempt from tax under section 501(a) of the Code and subject to the tax imposed by
section 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 section 6033.

Section 1.6001-1(e) of the Regulations 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.

In accordance with the above cited provisions of the Internal Revenue Code and Treasury
Regulations under sections 6001 and 6033, organizations recognized as exempt from federal
income tax must meet certain reporting requirements. These requirements relate to the filing of
a complete and accurate annual information (and other required federal tax forms) and the
retention of records sufficient to determine whether such entity is operated for the purposes for
which it was granted tax-exempt status and to determine its liability for any unrelated business
income tax.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the United States Supreme
Court held that for an organization to qualify for tax exempt status, the organization must be
exclusively devoted to an exempt purpose and the presence of a single nonexempt purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly
exempt purposes.

Rev. Rul. 59-95, 19XX-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 section 6033 of the Code and the regulations which implement it,
may result in the termination of the exempt status of an organization previously held exempt, on

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

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended
December 31,

20XX

the grounds that the organization has not established that it is observing the conditions required
for the continuation of exempt status.

In accordance with the above cited provisions of the Code and regulations under IRC Sections
6001 and 6003, organizations recognized as exempt from federal income tax must meet certain
reporting requirements. These requirements relate to the filing of a complete and accurate annual
information return (and other required federal tax forms) and the retention of records sufficient to
determine whether such entity is operated for the purposes for which it was granted tax-exempt
status and determine its liability for any unrelated business income tax.

Governments Position

As stated in Treasury Regulation Section 1.501(c)(3)-1(c)(1), “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).”

The organization does not accomplish any exempt purposes and therefore is found not to be
operating exclusively exempt purposes.

Further, in Better Business Bureau of Washington D.C., Inc. v. United States, 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. In this instance, the
organization is not accomplishing any exempt purpose and therefore is not operating exclusively
for the furtherance of exempt purposes.

The IRC 501(c) (3) tax exempt status of ORG (the “Organization”) should be revoked because it is
not operated exclusively for tax exempt purposes. An organization described in section 501(c)(3)
must establish that no more than an insubstantial part of its activities is not in furtherance of an
exempt purpose. Treas. Regs.1.501(c)(3)-1(c)(1). The operation of an apartment complex is not a
qualifying tax exempt activity for the furtherance of IRC 501(c) (3) purposes.

Additionally, the organization also failed to comply with the recordkeeping requirements which are
defined in IRC Sections 6001 and 6033. Your failure to maintain such records did not enable the
Service to ascertain your sources of income and expenditures and business purposes, therefore
your tax exemption should be revoked.

Taxpayer’s Position

TBD
Conclusion

Accordingly, ORG status as an organization described under section 501(c)(3) should be revoked,
effective January 1, 20XX, because it did not operate exclusively for exempt purposes. All of the

Form 886-A (1-1994) Catalog Number 20810W — Page_4 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 EIN December 31,
20XX

organizations revenues were generated from unrelated business activities and the organization
failed to meet the organization and operational tests. Contributions to your organization are no
longer deductible under Section 170 of the Internal Revenue Code.

Further, the Organization failed to comply with IRC 6001 and 6033 and has not established that it
is observing the conditions required for the continuation of exempt status. Form 1120 U.S.
Corporate Income Tax Return should be filed for tax years ending December 31, 20XX through
December 31, 20XX.

Note: If you are planning to appeal the proposed revocation, please refer to Publication 892 which is
enclosed. Appeal should contain statement of facts declared true under penalties of perjury. Please
refer to Publication 892, page 3 for example of statement signed under penalties of perjury.

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service