IRS retroactively revokes an organization's section 501(c)(3) exemption for unsupported foreign activities

Plain-English summary

The IRS revoked an organization's section 501(c)(3) exemption, effective from the redacted date on which it was founded. The organization said it trained volunteers and helped children abroad, but it could not document the training, its charitable activities, or the charitable purpose of numerous expenses. The IRS also found that the organization did not disclose its intended foreign operations or actual method of operation when it applied for exemption. The organization agreed to the proposed retroactive revocation. The IRS concluded that the organization failed the operational test and that retroactive relief under section 7805(b) was unavailable because the application did not accurately describe the planned activities.

Ruling snapshot

• Question: Did the organization operate for an exempt purpose, and was retroactive revocation warranted under section 7805(b)(3)?
• Outcome: Revocation, applied retroactively
• Key authorities: IRC §§ 501(c)(3), 509(a), 7428, and 7805(b)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), and 1.501(c)(3)-1(d)(1)(ii); Rev. Proc. 98-1.

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO EXAMINATIONS
1100 COMMERCE ST. MAIL STOP 4920 DAL 501.03-00
DALLAS, TEXAS 75242

DIVISION

Date: 2/14/2013

Release Number: 201322042
Release Date: 5/31/2013

LEGEND Taxpayer Identification Number:
ORG - Organization name Person to Contact:
XX - Date Address - address Employee Identification Number:
Contact Numbers:
(Phone)
ORG (Fax)
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 8, 20XX is hereby revoked and you are no longer exempt under section 501(a) of
the Code effective June 29, 20XX.

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

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.

Contributions to your organization are no longer deductible.

You are required to file income tax returns on Form 1120. If you have not already filed these
returns and the examiner has not provided you instructions for converting your previously filed
Forms 990-N (electronic postcard) to Forms 1120, you should file these income tax returns with
the appropriate Service Center for the tax years ending December 31, 20XX and for all tax
years thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed should
a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

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 or complaint in one of these courts must be filed
before the 91st day after the date 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 and the
appropriate forms 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 courts at the following addresses:

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
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 in the heading of this letter.
Sincerely yours,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues
Form 6018, Consent to Proposed Action - Section 7428

Return envelope

Tax Exempt and Government Entities Division Taxpayer Identification Number:
2525 Capitol Street #217
Fresno, CA 93721-2227

Department of the Treasury Date:
Internal Revenue Service July 5, 2012
IRS

Form:

Tax year(s) ended:

ORG
ADDRESS Person to contact / ID number:

Contact numbers:
Manager's name / ID number:

Manager's contact number:

Response due date:

Certified Mail - Return Receipt Requested
Dear

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue
Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action - Section
7428, and return it to the contact person at the address listed above (unless you have already provided us a
signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in
section 501(c)(3).

After we issue the final revocation letter, we’ll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final
revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a
declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status

If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s)
shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone conference with the
supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

IRS Appeals office by submitting a written request to the contact person at the address listed above within 30
calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations
division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the
applicable law, and arguments in support of your position. For specific information needed for a valid protest,
please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status,
and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes
information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation
referred to in Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please
contact the individual identified on the first page of this letter if you are considering requesting technical
advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt
Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a substitute for
established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally
correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court.
They can, however, see that a tax matter that hasn't 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:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

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:

Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 6-2012)
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 _ 20XX12 & 20XX12
LEGEND

ORG - Organization name XX - Date Country - country President -
president Secretary - secretary Treasurer - treasurer Secretary-1 -
Secretary Treasurer-1 - Treasurer

Issues

Issue 1 - Does ORG continue to qualify for exemption under Internal Revenue Code
section 501(c)(3)?

Issue 2 - Is retroactive revocation of ORG warranted under Code section 7805(b)(3)?

Facts

ORG (EO) was founded as an association by PRESIDENT and TREASURER on June
29, 20XX. Article I of the Articles of Association show the organization’s name as ORG.
Article II states in part:

Said organization is exclusively for charitable, religious, educational, and/or
scientific purposes, including, for such purposes, the making of distributions to
organizations that qualify as exempt organization under section 501(c)(3) of any
future federal tax code.

The EO submitted Form 1023, Application for Recognition of Exemption Under Section
501(c)(3) of the Internal Revenue Code, to the Internal Revenue Service (IRS) on

April 29, 20XX. Form 1023 listed PRESIDENT as President, Secretary as Secretary, and
TREASURER as Treasurer.

Form 1023 provided a narrative description of the EO’s activities and stated:

The organization is involved in training people for working in the community as
volunteers.

People will be trained in the care and education of children on a full-time basis.

The major project is scheduled to begin operations in early 20XX. The project is
currently housed in a private home and will be overseen by the Executive Director
and the Board of Directors.

During the application process the IRS requested detailed information about the EO’s
intended operations in a letter dated June 3, 20XX and asked the EO where the activities

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 1 of 5

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

Name of Taxpayer: Year/Period Ended:
ORG 20XX12 & 20XX12

were to be conducted. In its response dated July 20, 20XX the EO makes no mention
that it plans to conduct any of its activities outside of the United States.

The IRS issued a Determination Letter dated September 8, 20XX. The Determination
Letter recognized the EO as an organization exempt from Federal income tax under
Internal Revenue Code (Code) section 501(c)(3). The Determination Letter also
recognized the EO as a public charity as described in Code section 170(b)(1)(A)(vi).

During the interview portion of the examination PRESIDENT (President) stated that the
EO’s primary exempt purpose is to train volunteers in Country to teach them how to help
orphans. The EO accomplishes its goal by sending the President to visit different
countries. The President said she has visited Country, Country, Country, Country,
Country, Country, Country, Country, Country, Country, and Country to feed orphans
since 20XX. The President could not provide any details of the training provided to
volunteers. The examination revealed that the EO did not incur any type of training
expenses and training material does not exist.

The President stated that the major project that was scheduled to begin in early 20XX
referred to the EO’s inception and start up operations.

The President did not know why there was not mention on Form 1023 or subsequent
correspondence of the EO’s intention to carry on activities outside of the United States.
The examination revealed the President signed Form 1023 and the letter dated

July 20, 20XX. The examination also revealed that the EO carries on all its activities
outside of the United States.

The EO is operated from the President’s residence and an office in Country Country.
The EO’s Board of Directors is comprised of two other individuals; Secretary-1 is the
Secretary, and Treasurer-1 is the Treasurer. Secretary-1 and Treasurer-1 reside in
Country. The office in Country is rented year round and according to the President is
used by the Secretary and Treasurer to carry out EO business, but the President could
not provide support to show what business that was. The President stated that she
travels to Country at least twice a year and stays for two or three months at a time.

In 20XX the President made two trips, one to Country and the other to Country, to
provide assistance to orphans. The President visited Country from June 22nd to August
2nd. She met the Secretary and the Treasurer and together provided the assistance to
orphans. The President stated that because the Secretary and the Treasurer live in
Country, they know first hand where the orphans congregate. The three traveled to a
shelter, the shelter does not have a name, located next to a market called . The
orphans congregate at the rear of the market because the market throws out spoiled

Form 886-A Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 2 of 5

Department of the Treasury - Internal Revenue Service

Explanation of Items

Form 886A Schedule No. or Exhibit

Name of Taxpayer: Year/Period Ended:
ORG 20XX12 & 20XX12

food in a dumpster. The orphans scavenge for food in the dumpster and on that
particular day about 100 orphans loitered the immediate area. The three officers spoke
to the children, some adults, and determined that the children needed food. The
President took a taxi from the market to a nearby warehouse to purchase food to feed
100 orphans. She purchased chicken, rice, bread, cream corn, and water and returned
to the shelter. At the shelter the officers cut the chicken and provide each child a piece
of chicken to cook. The children used a discarded grill to cook the food themselves.
Once all the children were fed the officers left the site. The total cost for this type of
event to feed 100 children, is approximately $ to $. The President said that they
provided approximately 35 similar meals during her visit.

The President visited Country from June 2nd to June 9th. The President said she saw
something on television about an earthquake or a severe storm that struck Country and
decided to provide assistance to the affected children. The President's coworker
provided contact information for a person who lived in Country. The President contacted
President, the President did not recall President's the last name, and began to discuss
the needs of children impacted by the earthquake or the storm. The President flew to
Country, met President, and began to visit the areas affected by the earthquake or storm
to determine what assistance to provide to the children. The President purchased books,
crayons, pencils, and soccer balls for the children. She said she spent approximately $
to $ on the donated items. President was not connected to a relief organization but
operated a day care center. During the President's visit her lodging and meals were paid
by the EO.

The EO does not work in conjunction with any other organization to provide the
assistance to the orphans. The President said the trips in 20XX are indicative of all the
trips she has taken. The President was asked to provide support to demonstrate that
the trips served a bona fide charitable purpose and were not a personal vacation but
she was unable.

The books and records show that the President is the EO’s only donor. The President
stated that other individuals have offered donations but she was unsure if accepting the
donations would be problematic to the EO and declined the offers.

The books and records show that the President is the only person making deposits,
writing, and signing checks. The books and records show numerous purchases that
appear to be of a personal nature. The President provided verbal explanation for the
purchases, but was unable to provide support to substantiate the charitable purpose of
the expenses.

Law:

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 3 of 5

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

Name of Taxpayer: Year/Period Ended:
ORG 20XX12 & 20XX12

Code section 501(c)(3) exempts from federal income tax organizations organized and
operated exclusively for charitable, educational, and other exempt purposes, provided
that no part of the organization's net earnings inures to the benefit of any private
shareholder or individual.

Code section 509(a) defines a private foundation as a domestic or foreign organization
described in Code section 501(c)(3) other than an organization described in Code
section 170(b)(1)(A)(vi), other than in clauses (vii) and (viii).

Code section 7805(b)(3) state in part that that any regulation may take effect or apply
retroactively to prevent abuse.

Treasury Regulations (Regulations) section 1.501(c)(3)-1(a)(1) provides that in order to
be exempt as an organization described in Code section 501(c)(3), the organization must
be one that is both organized and operated exclusively for one or more of the purposes
specified in that section.

Regulations section 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded
as operated exclusively for exempt purposes if more than an insubstantial part of its
activities is not in furtherance of exempt purposes.

Regulations section 1.501(c)(3)-1(d)(ii) provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather
than a private interest. Thus, it is necessary for an organization to establish that it is not
organized or operated for the benefit of private interests such as designated individuals,
the creator or his family, shareholders of the organization, or persons controlled, directly
or indirectly, by such private interests.

Regulation section 1.501(c)(3)-1(d)(1)(ii) provides that an organization must establish
that it serves a public rather than a private interest and that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator or
his family, shareholders of the organization, or persons controlled, directly or indirectly,
by such private interests.

Rev. Proc. 98-1, 1998-1 I.R.B. 7 provides that except in rare or unusual circumstances,
the revocation or modification of a letter ruling will not be applied retroactively to the
taxpayer for whom the letter ruling was issued or to a taxpayer whose tax liability was
directly involved in the letter ruling provided that: (1) there has been no misstatement or
omission of material facts; (2) the facts at the time of the transaction are not materially
different from the facts on which the letter ruling was based; (3) there has been no

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 4 of 5

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

Name of Taxpayer: Year/Period Ended:
ORG 20XX12 & 20XX12

change in the applicable law; (4) the letter ruling was originally issued for a proposed
transaction; and (5) the taxpayer directly involved in the letter ruling acted in good faith in
relying on the letter ruling, and revoking or modifying the letter ruling retroactively would be
to the taxpayer's detriment.

Taxpayer’s Position

After being informed of the operational requirements of an organization exempt under
Code section 501(c)(3) and the public support requirements of a public charity the
President agreed to the proposed retroactive revocation.

Government’s Position Conclusion

Issue 1 - The EO’s tax exempt status should be revoked because the EO did not
demonstrate that it is operated for an exempt purpose. The EO did not demonstrate that
it is carrying on the activities it proposed on Form 1023 and the EO was unable to
demonstrate that its current activities are charitable. The EO was unable to demonstrate
that the purchases furthered an exempt purpose and without corroborating support the
purchases must be considered to have served a personal benefit and constitute private
inurement to the President.

Issue 2 - The EO is not entitled to Code section 7805(b) relief because it did not provide
accurate description of its intended activities or method of operation. The retroactive
revocation is warranted because the EO never carried out its stated proposed activities.

The EO did not disclose the fact that it intended to operate outside of the United States
nor the actual method of operation. Operating outside of the United States is not
necessarily an issue, but if the IRS was advised of foreign operations it may have
triggered a solicitation of operational details to ensure oversight. If the EO provided an
accurate description of how it actually intended to operate tax exempt recognition would
have been denied.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 5 of 5