Other 1327012: IRS revokes exemption after a housing organization ceased operations

Plain-English summary

The IRS revoked an organization’s exemption under section 501(c)(3) after finding that it had been inactive for several years and had no planned operations or financial activities. The organization had been formed to provide housing and assistance for low-income and needy people. Its representative said that a lawsuit had stopped its exempt activities and that mortgage proceeds and expenses had been run through a president’s business account. The organization agreed to the proposed revocation, and the IRS made the revocation effective January 1, 20XX.

Ruling snapshot

• Question: Did the organization continue to satisfy the operational requirements for exemption under section 501(c)(3) after ceasing its housing activities?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 503, 6033, 6104(c), 7428, and 7805(b); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(i), and 1.6033-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO EXAMINATIONS
1100 COMMERCE ST. MAIL STOP 4920 DAL
TAX EXEMPT AND

GOVERNMENT ENTITIES DALLAS, TEXAS 75242
DIVISION 501-03.00

DATE: October 3, 2012

Release Number: 201327012
Release Date: 7/5/2013

LEGEND Taxpayer Identification Number:

ORG — Organization name Person to Contact:

XX — Date Address - address Employee Identification Number:
Contact Numbers:

ORG (Phone)

ADDRESS (Fax)

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 October
19, 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:

Courtesy of our examination of your activities and financial records for the years ending
December 31, 20XX, through December 31, 20XX, we have determined that your organization
has been inactive since 20XX, and that there have been no operations or financial activities
conducted or planned. As such, you fail to meet the operational requirements for continued
exemption under IRC 501(c)(3). (Treasury Regulation 1.501(c)(3)-1(c))

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
Form(s) 990 to Form(s) 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 three 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

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE EO Examinations

1100 Commerce Street
Dallas, TX 75242
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: June 4, 2009

ORG Taxpayer Identification Number:
ADDRESS Form:
Tax Year(s) Ended
Person to Contact/ID Number:
Contact Numbers:

Telephone:
Fax:
Manager’s Name/ID Number:
Manager’s Contact Number:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear :

We propose to revoke our recognition of your exempt status as an organization described in
section 501(c)(3) of the Internal Revenue Code (Code). We enclose our report of
examination explaining why we are proposing this action.

If you accept our proposal, please sign and return the enclosed Form 6018, Consent to
Proposed Action - Section 7428, unless you have already provided us a signed Form 6018.
We will issue a final revocation letter determining you are not an organization described in
section 501(c)(3). After the issuance of the final revocation letter we will publish an
announcement that you have been deleted from the cumulative list of organizations
contributions to which are deductible under section 170 of the Code. If you do not respond to
this proposal, we will similarly issue a final revocation letter. Failing to respond to this
proposal may adversely impact your legal standing to seek a declaratory judgment because you
may be deemed to have failed to exhaust administrative remedies.

If you do not agree with our proposed revocation and wish to protest our proposed revocation
to the Appeals Office of the Internal Revenue Service, then 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. This written request is called a protest. For your protest to be valid it needs to
contain certain specific information which generally includes a statement of the facts, the
applicable law, and arguments in support of your position. For the specific information
needed for a valid protest, please refer to page 6 of the enclosed Publication 3498, The
Examination Process, and page 2 of the enclosed Publication 892, Exempt Organizations

Appeal Procedures for Unagreed Issues. These documents also explain how to appeal an
IRS proposed action.

If you do submit a valid protest, then 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 and Publication 892 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. Please note that
Fast Tract Mediation Services referred to in Publication 3498, generally do not apply after
issuance of this letter.

You may also request that we refer this matter for Technical Advice as explained in
Publication 892 and an annual revenue procedure. 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 EO
Rulings and Agreements function, then no further administrative appeal will be available to
you within the IRS on the matter.

If you agreed with the proposed revocation or if you receive a final revocation letter, you will
be required to file Federal income tax returns for the tax period(s) shown above. File these
returns with the Ogden Service Center within 30 days of the date you agreed with the
revocation or the date of your final revocation letter, whichever is sooner, unless a request for
extension of time is granted. File returns for later tax years with the appropriate service
center indicated in the instructions for those returns.

We will notify the appropriate state officials of the revocation in accordance with section
6104(c) of the Code. Currently, only certain states are eligible to receive notification of
proposed revocation actions. You can call the person at the heading of this letter to find out
if your State is eligible to receive a notice of revocation of your tax-exempt status.

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX -
12/31/20XX
LEGEND
ORG - Organization name Date - XX State - state County - county
President - president

ISSUE:

Whether ORG, continues to qualify for exemption as an organization described in the
Internal Revenue code (IRC) Section 501(c)(3) because of no operation or activity
since 20XX which includes the year of examination.

FACTS:

ORG was incorporated under the laws of the State of State as a non-profit
corporation on April 12, 19XX for the purpose of the following:

“To own, acquire, build, construct, alter, renovate, lease, rent, establish, organize,
maintain and operate residential housing for the low income families and other
persons in need of a place to live in County; to provide living accommodations for
such low income, needy and/or other indigent persons requiring same; to furnish
sleeping quarters, dining areas, reception rooms, recreation areas and other facilities
for the purpose of providing for the care and sustenance of the poor and the needy;
to equip, decorate and fit up such residential housing; to provide and supply any and
all necessary appurtenances that may be useful or convenient for the conduct of the
charitable purposes of this corporation; to secure and provide volunteers to offer aid,
assistance, advice and comfort to the poor and other needy individuals; to encourage
interest, awareness and activism in local and national political arenas with reference
to the plight of low income individuals and families; to provide financial aid and other
reasonable economic assistance for the ultimate benefit of the poor and the needy;
to initiate and promote civic and political programs beneficial to low income families
and others residing in County; to hold, conduct and organize meetings, discussions
and forums to consider community opinions on issues affecting the needs of low
income families and individuals in County; to aid, assist, cooperate, co-sponsor and
otherwise engage in concerted action with private and governmental agencies,
organizations and institutions on all programs designed, calculated and dedicated to
the improvement of life for the poor and the needy; to solicit, collect and otherwise
raise money for the charitable and benevolent purposes of this corporation and to
expend such monies for such purposes and generally to endeavor to improve and
advance the health, welfare and well-being of the poor and the needy by providing
adequate housing.”

On October 19, 19XX ORG was recognized to be exempt from Federal income tax
as an organization described in IRC Section 501(c)(3).

During telephone discussion on November 30, 20XX, the organization’s

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 12/31/20XX -
12/31/20XX

representative stated that the organization established in 19XX for the purpose to
provide housing to low income families in County, State. Due to a legal lawsuit,
that is still pending, the organization stopped serving all its exempt purposes and
activities since 20XX.

In letter dated November 8, 20XX, the organization’s representative wrote, “Due to
the lawsuit against the corporation and the fact that the corporation was, at the time,
ending its business because of the suit, it was determined that the income received by
the corporation and the expenses paid should be run thru an account not in the
corporate name. As such, the monthly mortgage proceeds and any expenses were
received and paid out through President business account. The only business receipt
belonging to ORG was the monthly mortgage payment which was retained by
President and treated as officer's compensation for that period.”

LAW:

IRC § 501(c)(3) exempts from federal income tax organizations which are 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 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.

Tax Reg. § 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an
organization described in 501(c)(3) if it is organized and operated exclusively for one
or more of the following purposes: religious, charitable, scientific, testing for public
safety, literary, educational, or prevention of cruelty to children or animals

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

Tax Reg. § 1.501(c)(3)-1(c)(1) of the regulations provides 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)

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 12/31/20XX -
12/31/20XX

Revenue Procedure 90-27, 1990-1 C.B. 514, (Apr. 30, 1990) states that a ruling or
determination letter recognizing exemption may be revoked or modified by (1) a notice
to the taxpayer to whom the ruling or determination letter originally was issued, (2)
enactment of legislation or ratification of a tax treaty, (3) a decision of the United States
Supreme Court, (4) issuance of temporary or final regulations, or (5) issuance of a
revenue ruling, revenue procedure, or other statement published in the Internal
Revenue Bulletin. The revocation or modification may be retroactive if the organization
omitted or misstated a material fact, operated in a manner materially different from that
originally represented, or, in the case of organizations to which section 503 applies,
engaged in a prohibited transaction with the purpose of diverting corpus or income of
the organization from its exempt purpose and such transaction involved a substantial
part of the corpus or income of such organization. Where there is a material change,
inconsistent with exemption, in the character, the purpose, or the method of operation
of an organization, revocation or modification will ordinarily take effect as of the date of
such material change. In cases where a ruling or determination letter was issued in
error or is no longer in accord with the holding of the Service, when section 7805(b)
relief is granted (see sections 15 and 18 of Rev. Proc. 90-4), retroactivity of the
revocation or modification ordinarily will be limited to a date not earlier than that on
which the original ruling or determination letter is modified or revoked.

Revenue Ruling 58-617, 1958-2 C.B. 260, (Jan. 01, 1958) Rulings and determinations
letters granting exemption from Federal income tax to an organization described in
section 501(a) of the Internal Revenue Code of 1954, to which contributions are
deductible by donors in computing their taxable income in the manner and to the extent
provided by section 170 of the Code, are effective only so long as there are no material
changes in the character of the organization, the purposes for which it was organized,
or its methods of operation. The District Director of Internal Revenue for the district in
which the organization is located must be advised immediately of any such changes in
order that a determination may be made as to the effect the changes may have upon the
exempt status of the organization. See generally sections 1.501(a)-1 and 1.6033-1
of the Income Tax Regulations. Failure to comply with this requirement may result in
serious consequences to the organization for the reason that the ruling or determination
letter holding the organization exempt may be revoked retroactively to the date of the
changes affecting its exempt status, depending upon the circumstances involved, and
subject to the limitations on retroactivity of revocation found in section 503 of the Code.

TAXPAYER’S POSITION:

The organization’s representative declared that the organization has no operational
or financial activities. Agent discussed revocation with the organization's
representative on December 22, 20XX and he agreed to the proposed revocation as
organization is no longer operating for an exempt purpose.

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 12/31/20XX -
12/31/20XX

GOVERNMENT'S POSITION AND CONCLUSION:

The Service position is that, the organization has been inactive for several years now
and that there have been no operations activities conducted. The sole financial
activity is from a mortgage payable to the organization from a previously sold
property. As such, ORG fails to meet the operational requirements to continue its
exemption status under IRC 501(c)(3). Therefore the effective date will be January
1, 20XX.

If you agree to this conclusion please sign the attached Forms.

If you disagree please submit a statement of your position.

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