Determination 1309014: IRS revokes a title-holding corporation's section 501(c)(2) exemption

Plain-English summary

The IRS revoked a title-holding corporation's exemption under IRC § 501(c)(2). The corporation had been formed to own an office building, lease it to a state agency, and use the lease payments to service tax-exempt bonds. After the building was damaged, the tenants left, the corporation defaulted on the bonds, and the property was foreclosed and sold. The corporation then owned no property, collected no property income, and turned over no proceeds to an exempt organization. Because it no longer operated for the limited purpose required by § 501(c)(2), and it agreed to the proposed action, the IRS revoked its exemption effective January 1 of the redacted year.

Ruling snapshot

• Question: Did the corporation continue to qualify for exemption as a title-holding company under IRC § 501(c)(2)?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(a), 501(c), and 501(c)(2); Treas. Reg. § 1.501(c)(2)-1; Rev. Rul. 58-566.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE 501.02-00

1100 Commerce, MC 4920 DAL

Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201309014
Release Date: 3/1/2013

Date: October 19, 2012 Taxpayer Identification Number:

LEGEND Form:

ORG - Organization Name Tax Year(s) Ended:

XX - Date Address - address Person to Contact/ ID Number
Contact Numbers:
Phone:

ORG Fax:

ADDRESS

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear

In a determination letter dated April 5, 19XX, you were held to be exempt from Federal income tax
under section 501(c)(2) of the Internal Revenue Code (the Code).

Based on recent information received, we have determined you have not operated in accordance
with the provisions of section 501(c)(2) of the Code. Accordingly, your exemption from Federal
income tax is revoked effective January 1, 20XX. This is a final letter with regard to your exempt
status.

We previously provided you a report of examination explaining why we believe revocation of your
exempt status was necessary. At that time, we informed you of your right to contact the Taxpayer
Advocate, as well as your appeal rights. On August 22, 20XX you signed Form 6018-A, Consent to
Proposed Action, agreeing to the revocation of your exempt status under section 501(c)(2) of the
Code.

You are required to file Federal income tax returns for the tax period(s) shown above. If you have
not yet filed these returns, please file them with the within 60 days from the
date of this letter, unless a request for an extension of time is granted. File returns for later tax
years with the appropriate service center indicated in the instructions for those returns.

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 contact the person whose name and telephone number are
shown at the beginning of this letter.

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE, EO Examinations
1100 Commerce St.
TAX EXEMPT AND Dallas, TX 75242

GOVERNMENT ENTITIES
DIVISION

June 25, 2012

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 an
adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains 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.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

You may also request that we refer this matter for technical advice as explained in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a
determination letter is issued to you based on technical advice, no further administrative
appeal is available to you within the IRS on the issue that was the subject of the
technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter modifying or revoking
exempt status. If we do not hear from you within 30 days from the date of this letter, we
will process your case on the basis of the recommendations shown in the report of
examination and this letter will become final. In that event, you will be required to file
Federal income tax returns for the tax period(s) shown above. File these returns with
the [illegible] within 60 days from the date of this letter, unless a request for an extension
of time is granted. File returns for later tax years with the appropriate service center
indicated in the instructions for those returns.

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.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

Form 886A Department of the Treasury - Internal Revenue Service Exhibit 1
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
LEGEND
ORG - Organization name XX - Date Address - address City - city
State - state CO-1 & CO-2 - 1st & 2nd COMPANIES

Issue:

Whether ORG meets the requirements of Section 501(c)(2) of the Code?

Facts:

On December 15, 19XX, ORG (hereinafter “ORG”) applied for recognition as a tax-exempt
organization under section 501(c)(2) of the Code. On April 5, 19XX, based on the
information that ORG provided in its application for exemption and on the assumption that
ORG would operate in the manner represented in its application, ORG was recognized as a
tax-exempt organization as described in section 501(c)(2) of the Code.

An examination was conducted of ORG for tax year ended December 31, 20XX. A review of
ORG’s activities revealed that the organization owned no property and conducted no activities
for tax year ended December 31, 20XX.

ORG was formed as a title holding corporation. ORG’s purpose, when formed, was to own
certain real property to be leased to a governmental agency of the State of State. The lease
payments were to be used to pay the principal and interest on tax exempt bonds used to finance
the purchase of the real property. After retiring the bonds, the governmental agency had a
bargain purchase option to acquire the real property for $. ORG was formed as a tax-exempt
organization because a State government entity cannot mortgage its real property.

An office building was purchased and is located at the following address:
Address, City, State

Until 20XX, the building was leased to the State Department of Health and Rehabilitative
Services. During 20XX, the building was heavily damaged during Hurricane and any tenants
moved out.

ORG defaulted on the municipal bonds used to purchase the property and a Final Judgment of
Foreclosure was granted to The CO-1, as trustee. A judgment of $ was awarded to the
bondholders and the property was ordered sold at public auction. The property was subsequently
sold to CO-2.

ORG has owned no other real property since 20XX.

Law:

Section 501(c)(2) provides that Corporations organized for the exclusive purpose of holding
title to property, collecting income therefrom, and turning over the entire amount thereof, less

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

Page: -1-

a Form 886A Department of the Treasury - Internal Revenue Service Exhibit 1
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG 12/31 /20XX

expenses, to an organization which itself is exempt under Section 501(c), are exempt from
taxation.

Section 1.501(c)(2)-1 states that an organization cannot be exempt under section 501(c)(2) of the
Code if it engages in any business other than holding title to property and collecting income
therefrom.

Section 1.501(c)(2)-1(a) of the regulations states the limitation this way: "...a corporation

described in section 501(c)(2) cannot be exempt under section 501(a) if it engages in any
business other than that of holding title to property and collecting income therefrom."

Revenue Ruling 58-566, it was held that an organization organized to hold title to property for
exempt organizations which had purposes and powers outside the scope of those of a 501(c)(2)
organization was not exempt.

Government’s Position

ORG is not exempt under Section 501(c)(2) of the Code. ORG does not operate exclusively for
exempt purposes. ORG does not hold title to any property, does not collect income from any
property and does not turn over any proceeds to an organization which is itself exempt under
Section 501(c) of the Code. Therefore, ORG has no exempt purpose and its tax exempt status
should be revoked as of January 1, 20XX.

Taxpayer’s Position:
ORG agrees the facts as stated in this report and has submitted Form 6018-A signed by its
President.

Conclusion:
Based on the foregoing reasons, ORG does not qualify for exemption under section 501(c)(2) and
its tax exempt status should be revoked.

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