IRS revokes an organization's exemption and changes its foundation classification

Plain-English summary

The IRS revoked the organization’s section 501(c)(3) exemption because it did not provide the books and records needed to establish continued qualification. The examination also found that the organization had not established its entitlement to public charity status under section 509(a)(2), so its status was modified to that of a private foundation under section 509(a). The IRS stated that no records were provided to support the organization’s activities, finances, or public support. The revocation and classification change were made effective on the stated date.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption and public charity status?
• Outcome: Revocation, with reclassification as a private foundation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 509(a), 509(a)(2), 6001, 6033, 6104, and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.509(a)-3T, 1.6001-1, and 1.6033-2

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street 501.03-00
Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION Date: August 16, 2012

Number: 201252020
Release Date: 12/28/2012

LEGEND
ORG - Organization name Person to Contact:
XX - Date Address - address Badge Number:
Contact Telephone Number:
Contact Address:
ORG Employer Identification 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 October30, 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 have failed to produce documents 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. Also, you have failed to keep adequate books and records as required by
IRC section 6001 and the regulations there under. In our letters dated June 1, 20XX,
June 29, 20XX, July 29, 20XX and December 13, 20XX, we requested information
necessary to conduct an examination of your Form 990 for the year ended December
31, 2009. We have not received the requested information.

Section 1.6033-2(h)(2) of the Income Tax Regulations provides, in part, that every
organization which is exempt from tax, shall submit such additional information as may
be required by the Internal Revenue Service for the purpose of inquiring into its exempt
status. You have not provided the requested information.

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 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:EO:7922

31 Hopkins Plaza, Room 1400

Baltimore, Maryland 21201

Date: December 21, 2011 Taxpayer Identification Number:
Form:
LEGEND Tax Year(s) Ended:
ORG -— Organization name Person to Contact/ID Number:
XX — Date Address - address Contact Numbers:
Telephone:
Fax:
ORG
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

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

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 Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG (ORG) EIN DECEMBER 31, 20XX
LEGEND
ORG - Organization name EIN - EIN XX - date Address - address
City - city State - state Country - country DIR-1 - 1st DIR
CO-1 - 1st COMPANY TA-1, RA-2 & RA-3 - 1st, 2nd & 3rd RA
ISSUES:

1. Whether ORG is entitled to continued recognition of exempt status in
   accordance with §501(c)(3) of the Internal Revenue Code (Code)?

2. Whether the private foundation status of ORG should be modified from that
   described in §509(a)(2) to a private foundation described in §509(a) of the
   Code?

FACTS:

On June 1, 20XX the Service attempted to notify ORG that an examination of its 20XX
Form 990 was commencing. The examining agent called the indicated individual, DIR-
1 (DIR-1) the indicated executive director, and left a message at the telephone number
listed on the filed 20XX Form 990. There were no other officers, directors, or trustees
indicated on the filed return. The examining agent then attempted to contact ORG via
the telephone number listed on the organization's website and a telephone number
obtained from ACCURINT. These telephone numbers were not in service. Directory
assistance was contacted in an effort to ascertain an alternative contact telephone
number for ORG and no telephone number was revealed.

An initial appointment letter dated June 1, 20XX was mailed to the address indicated on
the filed Form 990 for 20XX which requested the taxpayer to confirm the appointment
scheduled for June 27, 20XX. This letter was not returned to the Service and the
taxpayer did not otherwise contact the Service.

On June 27, 20XX the examining agent contacted the lessee of the property owned by
DIR-1, the address listed on the filed Form 990 for 20XX, RA-1 (RA-1). RA-1 advised
the Service that she moved into the Address house in July 20XX. RA-1 further advised
that she had never had face to face contact with DIR-1 as her lease was with CO-1 in
City, State. RA-1 concluded by advising that any mail delivered to the house is sent to
RA-2 (RA-2) at CO-1.

On June 28, 20XX the examining agent contacted RA-2 of CO-1 in City, State. RA-2
advised that she had never met face to face with DIR-1 and that all transactions were
facilitated through an associate of DIR-1 by the name of RA-3. Contact information was
provided to RA-2 to provide to RA-3.

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

Page 1 of 7

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

Name of Taxpayer Year/Period Ended
ORG (ORG) EIN DECEMBER 31, 20XX

On June 29, 20XX a second examination letter was certified mailed to a Address
indicated on ACCURINT as an address for DIR-1. This certified letter was received
back by the Service as undeliverable.

On July 29, 20XX a third examination letter was sent to the D.C. address of the
organization as indicated on ORG’s website. There was no response to this letter and
the letter was not returned to the Service.

On August 22, 20XX an email was received from DIR-1, presumably as a result from
the contact information provided to RA-2. “My name is DIR-1, Executive Director of the
ORG (ORG). I understand that you are trying to reach me. This is my email. Hope to
hear from you soon. Best regards, DIR-1”.

On August 31, 20XX the examining agent responded to the email received from DIR-1,
“Good morning DIR-1, I require a telephone number in order to speak with you
concerning a tax exempt organization. I have sent an examination letter for that
organization which has been ignored. A responsible officer from ORG must contact me
in order to commence with this examination. Thank you for making contact with me, my
telephone number is #.”

On September 2, 20XX DIR-1 responded, “Thank you for your message. We would
appreciate some information regarding the proposed examination of ORG. In a
previous email, you referred to a letter that you sent regarding the proposed
examination. We never received that letter and could not have ignored it as your email
suggested. We would appreciate it if you would forward that letter to this email so we
would know how best to assist you to carry out the examination. Be rest assured of our
fullest cooperation in this matter. Hope to hear from you soon. Sincerely, DIR-1”. That
same day the examining agent replied to DIR-1’s email “I am attaching the appointment
letter as you requested. Yet again, I require the name, telephone number, and address
of a responsible US officer, director, or trustee in order to commence with this
examination.”

The examining agent again forwarded his September 2, 20XX response to DIR-1 on
September 7, 20XX.

On September 8, 20XX the examining agent again forwarded the September 2, 20XX
response and added “DIR-1, Yet again, I require the name, telephone number, and
address of a responsible US officer, director, or trustee in order to commence with this
examination. Where is the office location for the organization in DC? The address
indicated on your website does not appear to be correct.”

On September 9, 20XX the examining agent again forwarded the September 2, 20XX
response and added “DIR-1 I have not received a response from you?”

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page 2 of 7

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

Name of Taxpayer Year/Period Ended
ORG (ORG) EIN DECEMBER 31, 20XX

On September 10, 20XX DIR-1 responded “As I indicated in my previous email, I am
currently in Country. I am the responsible officer for the organization in the US. Since I
reviewed your email, I have initiated efforts to travel to the US so that I can be available
for the examination. May I ask for a little time to enable me undertake that trip. Thank
you for your understanding. Best regards, DIR-1”.

On September 12, 20XX the examining agent responded to DIR-1, “I understand,
however, while you are making your plans you may respond to the following:

(1) What is the official U.S. Address for the organization?

(2) Identify all officers, directors, trustees, and key employees of the organization?

(3) Provide the home address and telephone number for the individuals identified in
item (3) above?

(4) Identify the individual(s) who maintained the books and records for 20XX?

(5) Identify the individual(s) who have the 20XX books and records in their possession?
(6) Identify the present physical location of the books and records for the organization?
(7) Are you a U.S. citizen?

(8) If you are not a U.S. citizen, what is your U.S. tax status?

Thank you for your response DIR-1 and your prompt attention to this matter.”
This email was again forwarded to DIR-1 on September 21st and 28th, 20XX.

On September 29, 20XX DIR-1 responded “I have been traveling and just returned to
station. I will provide the requested information by tomorrow. Thank you. DIR-1.”

No further communications have been received from DIR-1 or ORG and no books or
records have been provided in connection herewith.

LAW:

An organization will not be classified as a private foundation under §509(a) of the Code
if it is an organization described in §170(b)(1)(A)(vi) or §509(a)(2).

Section §501(c)(3) of the Code provides for exemption of organizations organized and
operated exclusively for charitable purposes, and no part of the net earnings of which
inures to the benefit of any private shareholder or individual.

An organization is described in §509(a)(2) of the Code which:

(A) normally receives more than one-third of its support in each taxable year
from any combination of:

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page 3 of 7

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

Name of Taxpayer Year/Period Ended
ORG (ORG) EIN DECEMBER 31, 20XX

(i) gifts, grants, contributions, or membership fees, and

(ii) gross receipts from admissions, sales of merchandise,
performance of services, or furnishing of facilities, in an activity
which is not an unrelated trade or business.

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, render such
statements, make such returns, and comply with such rules and regulation as the
Secretary of the Treasury or his delegate may from time to time prescribe. Whenever in
the judgment of the Secretary it is necessary, he may require any person, by notice
served upon such person or by regulations, to make such returns, render such
statements, or keep such records, as the Secretary deems sufficient to show whether
or not such person is liable for tax under this title.

Section §6033(a)(1) of the Code provides, except as provided in §6033(a)(2), every
organization exempt from tax under §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.

Treas. Reg. §1.501(c)(3)-1(a)(1) describes the organizational and operational tests of
§501(c)(3) and stipulates that to be an organization described in §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.

Treas. Reg. §1.509(a)-3T(c)(1) of the temporary regulations provides that support tests
set forth in §509(a)(2) are to be computed on the basis of the nature of the
organization’s normal sources of support. An organization will be considered as
normally receiving one third of its support from any combination of gifts, contributions,
membership fees, and gross receipts from permitted sources and not more than one
third of its support from items described in §509(a)(2)(B) for its current taxable year and
the taxable year immediately succeeding its current year, if, for the current taxable year
and the four taxable years immediately preceding the current taxable year, the
aggregate amount of the support received during the applicable period from gifts,
contributions, membership fees, and gross receipts from permitted sources is more
than one-third, and the aggregate amount of the support received from items described
in §509(a)(2)(B) is not more than one-third of the total support of the organization for
such five year period.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page 4 of 7

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

Name of Taxpayer Year/Period Ended
ORG (ORG) EIN DECEMBER 31, 20XX

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

Treas. Reg. §1.6033-2(i)(1) states that an organization which is exempt from taxation
under section 501(a) and is not required to file annually an information return required
by this section shall immediately notify in writing the district director for the internal
revenue district in which its principal office is located of any changes in its character,
operations, or purpose for which it was originally created.

Treas. Reg. §1.6033-2(i)(2) provides that every organization which is exempt from tax,
whether or not it is required to file an annual information return, shall submit such
additional information as may be required by the Internal Revenue Service for the
purpose of inquiring into its exempt status and to administer the provisions of
subchapter F (section 501 and the following), chapter 1 of the Code and §6033 of the
Code. Failure to comply with this request for information could result in the loss of tax
exempt status.

Tax exemption is a privilege, a matter of grace rather than right and taxpayers have the
burden of establishing entitlement thereto. Christian Echoes National Ministry, Inc. v.
United States of America, 470 F.2d 849.

Revenue Ruling 59-95, 1959-1 CB 627, states that an organization previously held
exempt from Federal income tax was requested to produce a financial statement as of
the end of the year and a statement of its operations during such year. However, its
records were so incomplete that it was unable to furnish such statements. Section 6033
of the Code of 1954 provides that every organization, except as provided therein,
exempt from taxation under §501(a) of the Code shall file an annual return, stating
specifically the items of gross income, receipts, and disbursements, and shall keep
such records, render under oath such statements, make such other returns and comply
with such rules and regulations-as the Secretary of the Treasury or his delegate may
from time to time prescribe. The failure or inability to file the required information return
or otherwise to comply with the provision of §6033 of the Code and the regulations
which implement it, may result in the termination of the exempt status of an

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

Page 5 of 7

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

Name of Taxpayer Year/Period Ended
ORG (ORG) EIN DECEMBER 31, 20XX

organization previously held exempt, on the grounds that the organization has not
established that it is observing the conditions required for the continuation of an exempt
status.

DISCUSSION:

The Service has attempted to commence its examination of ORG since June 1, 20XX.
ORG does not maintain a U.S. physical location and its sole officer resides outside of
the U.S. While its sole officer, DIR-1, has represented his intent to cooperate in this
examination he has not produced any books and records and has not communicated
with the Service since September 29, 20XX.

Tax exemption is a privilege, a matter of grace rather than right and taxpayers have the
burden of establishing entitlement thereto. See §§6001 and 6033 of the Code and
Christian Echoes National Ministry, Inc. v. United States of America.

As ORG has not met its burden in establishing its entitlement to continued recognition
of tax exempt status in accordance with §501(c)(3), such exemption is properly revoked
effective January 1, 20XX.

ORG maintains a similar burden in establishing its entitlement to a foundation status as
a public charity described in §509(a)(2).

Foundation status is computed based upon a five year moving computation. If public
charity status is achieved computationally for a specific five year period then such
entitlement to public charity status extends to the current fifth year and the succeeding
year. See Treas. Reg. §1.509(a)-3T(c)(1). Therefore, in order for ORG to preserve its
entitlement to public charity status it must establish that it was publicly supported for the
five year period ending with the 20XX year which would encompass the subsequent
year of 20XX which is the year under examination by the Service.

As ORG has not produced books and records to establish its entitlement to continued
recognition of public charity status for the five year period ending in 20XX it is classified
as a private foundation described in §509(a) as of January 1, 20XX.

TAXPAYER POSITION:

As ORG has not cooperated in the conduct of this examination by providing any books
and records, its position regarding the issues of revocation of its tax exempt status and
modification of its foundation status to that of a private foundation are unknown.

CONCLUSION:

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page 6 of 7

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer
ORG (ORG) EIN

Year/Period Ended
DECEMBER 31, 20XX

1. The tax exempt status of ORG is revoked effective January 1, 20XX as it
   failed to establish its entitlement to continued recognition of exempt status in
   accordance with §501(c)(3) of the Code

2. The private foundation status of ORG is modified to that of a private
   foundation described in §509(a) effective January 1, 20XX as it failed to
   establish its entitlement to continued recognition of public charity status
   described in §509(a)(2).

Form 886-A (Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page 7 of 7