Other 1318015: IRS proposes revoking a volunteer fire organization’s exemption

Plain-English summary

The IRS proposed revoking an organization’s exemption under section 501(c)(4). The organization was formed to provide volunteer fire and emergency services, but the IRS found almost no documented exempt-purpose activity, inadequate books and records, and little meaningful coordination with governmental units. The examination also concerned aircraft, vehicles, and other equipment acquired by the organization, including equipment associated with the organization’s principal contributor. The IRS concluded that the organization did not meet the operational test and proposed revocation effective January 1, 20XX.

Ruling snapshot

• Question: Whether the organization should retain its exemption under section 501(c)(4).
• Outcome: Revocation proposed.
• Key authorities: IRC §§ 501(c)(4), 6001, 6033; Treas. Reg. §§ 1.501(c)(4)-1, 1.501(c)(4)-2(i), 1.501(c)(3)-1(d)(2), 1.501(c)(3)-1(d)(3)(b), 1.6001-1(c); Rev. Rul. 74-361; Rev. Rul. 85-2.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
1100 Commerce Street, MC4915:DAL
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

June 9, 2009

Taxpayer Identification Number:
Number: 201318015

Release Date: 5/3/2013 Form:
Tax Year(s) Ended:
ORG
ADDRESS Person to Contact/ID Number:
UIL: 501.04-00 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,

Sunita Lough
Director, Exempt Organizations, Exam

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

Form 886-A. Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12-20XX12-
20XX12
LEGEND
ORG - Organization name XX - Date State - state County - county
RA-1 & RA-2 - 1st & 2nd RA CO-1 through CO-4 - 1st through 4th COMPANIES

Issue:

Should the above named organization retain their exemption under Section 501(c)(4)
of the Internal Revenue Code?

Facts:

ORG organized on January 22, 19XX and filed as a non-profit corporation with the
State of State on January 26, 19XX under the name of ORG. The stated purpose of the
organization in this original filing was to provide volunteer fire or other emergency
service within the County county area. On May 22, 20XX, the organization filed
amended Articles of Incorporation with the state changing its official name to ORG, Inc.
The ORG charter was forfeited March 23, 20XX due to failure to file reports and pay
the necessary fee. It was reinstated May 22, 20XX.

The organization filed an application for exemption under I.R.C. Section 501(c)(4) in
February of 19XX. Exemption letter 948 was issued on June 10, 19XX under section
501(c)(4).

From an interview with RA-1, it was determined that the organization has carried out
almost no exempt-purpose activities since its original organization in 19XX.

The organization does not maintain books and records. Its only record of receipts was
a checking account with only nominal activity each year. The organization did not
produce any other documentation to substantiate its activities or financial transactions.
RA-1 stated that the government seized records and that all records in connection with
the ORG were in the government's custody.

I contacted the CO-4 office and all records that they seized were made available to me
for inspection. No flight records were found in the boxes searched. Flight times for each
of the aircraft as required by FAA were not maintained. No pilot logs as required by the
FAA were maintained and therefore were not in the searched records. Records were
found maintained by the CO-1 for the airplane showing hours of use of the airplane and
for each of its two engines. There was only one entry in the logs after the plane was
purchased by ORG. It indicated that the airplane was flown 47 hours since its purchase
from the CO-1 and the time of the entry. There were no logs for any of the three
helicopters after their purchase by the ORG. There were substantial logs maintained by
the owners prior to the ORG. Only three of the helicopters were considered air worthy
and would have had time of flight information.

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12-20XX12-
20XX12

From 19XX through 20XX, the organization purchased or received through donations
over $[redacted] dollars worth of equipment. Most of the equipment was purchased from the CO-

2. The equipment purchased not only included several helicopters and an airplane, but
   also included various other equipment to work on the above aircraft including related
   spare parts. Purchase invoices of helicopters and other equipment by ORG from the
   CO-2 were obtained along with copies of State Certificate of Title for a Truck in 20XX
   indicating mileage of 102,990, a Truck in 20XX (no mileage reading) and a Truck in
   20XX (no mileage reading). ORG did not have any records to substantiate usage of any
   of these vehicles.

RA-1 filed Form AP-170-2 (State Application for Prepaid Liquefied Gas Tax Decal) on
behalf of the ORG on April 23, 20XX. The decal application indicates that a 19XX
vehicle for the period 0704 was driven 9,999 miles in State and taxes of $[redacted] were paid
with the form. The $[redacted] was paid from the ORG account. No records of the business use of
the vehicle were made available and RA-1 indicated that none existed.

The organization previously submitted to the CO-2, letters of which were in records seized by
the CO-4, a document as evidence of its community service, a one-page contract
between it and County to provide services for a year starting May 8, 20XX. The amount
provided in the contract is $[redacted]. Organization also submitted a letter it wrote to CO-3
Property Division on April 3, 20XX stating that the organization had received $[redacted] in 20XX
and $[redacted] in 20XX as proof of funding. The organization maintained a checking account;
however, the ORG only wrote a few checks each year. For the period, September 20XX
through May 7, 20XX there was only one deposit for services rendered. That deposit
was for $[redacted] in connection with a search conducted by the organization.

The organization has sold many of the parts and equipment including $[redacted] dollar worth to
RA-2 in June of 20XX. Additional items were sold for $[redacted] in January 20XX. No list of items
sold or sales invoices were prepared or maintained by the ORG.

The organization purchased a glider in July 20XX for $[redacted], made repairs (cost of repairs
was not indicated or substantiated) and sold the glider in 20XX for $[redacted] back to its
manufacturer as museum piece.

The organization has not documented any fire safety education or instruction for the
benefit of the public or community.

According to information obtained from the State of State, the ORG are not registered
with the State of State as a volunteer fire department.

When asked again about the aircraft and pilot logs, RA-1 stated that he was very bad

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12-20XX12-
20XX12

about recording the activity of the aircraft, but that he had only used them for exempt
purposes.

RA-1 using his name, his wife’s name and the name of his Schedule C business
currently has twenty-eight helicopters and airplanes. Many of the helicopters were of
the same type as he purchased through the ORG. The majority of the initial monies and
continuing funding for the ORG appears to be from donations by RA-1 to the ORG.

Law and Analysis:

IRC Section 501(c)(4), provides tax exemption for civic leagues or organizations not
organized for profit but operated exclusively for the promotion of social welfare and no
part of the net earnings of which are devoted exclusively to charitable, educational or
recreational purposes.

Treasury Regulation Section 1.501(c)(4)-1, states that in order to be exempt as an
organization described in IRC Section 501(c)(4), an organization must be both
organized and operated exclusively for social welfare.

Treasury Regulation Section 1.501(c)(4)-2(i), states that an organization will be
regarded as operated exclusively for social welfare if it is primarily engaged in
promoting in some way the common good and general welfare of the people of the
community. A “social welfare” organization will qualify for exemption as a charitable
organization if it falls within the definition of “charitable” as set forth in paragraph (d)(2)
of section 1.501(c)(3)-1

Treasury Regulation Section 1.501(c)(3)-1(d)(2), states in part that the term
"charitable" is used in the generally accepted legal sense and includes advancement of
education and lessening the burdens of government.

Treasury Regulation Section 1.501(c)(3)-1(d)(3)(b), states that the term "educational"
relates to the instruction of the public on subjects useful to the individual and beneficial
to the community.

Treasury Regulation Section 1.6001-1(c), states in part every organization exempt
under 501(a) shall keep permanent books of account or records, including inventories,
as are sufficient to show specifically the items of gross income, receipts and
disbursement. Such organizations shall also keep such books and records as are
required to substantiate the information required by section 6033.

Revenue Ruling 85-2, 1985-1 CB 178, indicates that a determination of whether an
organization is lessening the burdens of government requires consideration of whether

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12-20XX12-
20XX12

the organization's activities are activities that a governmental unit considers its burdens,
and whether such activities actually lessen such governmental burdens. A favorable
working relationship between the government and the organization is strong evidence
that the organization is actually lessening the burdens of government.

Taxpayers Position
They have only used the equipment for exempt purposes.

Government's Position:

The organization has failed to meet the operational test described in Treasury
Regulation Section 1.501(c)(4).

The organization was granted its favorable determination on the basis that it would
properly set up, equip and conduct charitable activities which lessen the burdens of
government and educate the public, as defined in Treasury Regulation Section
1.501(c)(3)-1(d)(2).

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 cannot substantiate any meaningful exempt-
purpose activities from its initial organization in 19XX to the present.

The organization's arrangements or working relationships with any governmental units
to provide any fire fighting or emergency services are minimal at best. The monies
allocated are almost nonexistent and actually were provided by the ORG or RA-1 to the
government entities. Therefore, it does not meet the requirements for exemption under
IRC 501(c)(4), as indicated in Revenue Rulings 74-361 and 85-2.

The organization failed to be recognized as a volunteer fire department in the State of
State.

The organization does not meet the required record keeping requirements set forth in
I.R.C. Section 6033 and is unable to produce adequate records to substantiate its
exempt-purpose activities.

Based on all facts and circumstances, it appears that this organization never operated
for charitable purposes and that only individuals have benefited.

Conclusions:

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

Form 886-A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or
Exhibit

Name of Taxpayer

ORG

Year/Period Ended

20XX12-20XX12-
20XX12

This organization does not meet the operational test under IRC Section 501(c)(4). As
a result, we are proposing revocation of its tax-exempt status, effective as of January 1,
20XX.

Form 886-A (rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -5-