IRS proposes revocation of an organization's Section 501(c)(3) status

Plain-English summary

The IRS proposed revoking an organization's tax-exempt status under Section 501(c)(3). The examination found that the organization used a related for-profit entity to handle its day-to-day activities under a reciprocal services agreement, but had not disclosed that arrangement in its Form 1023 application. The IRS concluded that the organization had not shown it was organized and operated exclusively for exempt purposes. This letter was a proposed action and gave the organization 30 days to consent or protest; it was not itself the final revocation letter.

Ruling snapshot

• Question: Did the organization remain organized and operated exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation proposed. The organization was given an opportunity to consent or protest.
• Key authorities: IRC §§ 170, 501(c)(3), and 7428; Treas. Reg. § 1.501(c)(3)-1(a)(1)

Full text (IRS public release)

Internal Revenue Service

Tax Exempt and Government Entities Division
Exempt Organizations: Examinations

2 Metro Tech Center

100 Myrtle Avenue, 6th Floor

Brooklyn, NY 11201

501-3.00

Release Number: 201349024
Release Date: 12/6/2013
ORG

ADDRESS

Certified Mail — Return Receipt Requested
Dear

Why you ar: receiving this letter

Department of the Treasury

Hand Delivered

Date: March 4, 2013

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

Telephone:

Fax:
Manager’s name/ID number:
Manager’s contact number:
Response due date:

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

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

may file a protest with the 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:

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

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

Form 886A Department of the Treasury - Internal Revenue Service | Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Perlod Ended
_- . . “and

Facts:

According to Form 1023, Application For Recognition of Exemption, the purpose or purposes
for which this corporation was formed as set forth in the certificate of incorporation are as
follows “to help promote public awareness of art and a variety of artistic expressive mediums; to
enhance the public’s appreciation of art; and to provide the public with a greater understanding
of contemporary artistic trends and artistic mechanics’.

During the course of the examination, it was determined that the organization used a related

for-profit __ _ . . , to handle their day to day activities under a
reciprocal services agreement. The agreement states in part “that would collect ticket
sales for all events and that ‘ shall have full control over the selection, production and

promotion of the events...” ,

never stated in their Form 1023 application that they had an
agreement with a related for-profit organization to conduct all of their activities. The
organization has not shown that it is organized and operating for tax exempt purposes.

Law:

Section 501(c)(3) of the Internal Revenue Code 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.

Treasury Regulation 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization
described in section 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.

Government's Position:

It is the government's position that the tax exempt status of “under
Section 501(c)(3) of the Internal Revenue Code should be revoked for failure to operate for the
purposes for which it was granted tax exempt status.

Conclusion

The tax exempt status of ‘under Section 501(c)(3) of the Internal
Revenue Code should be revoked because the organization has not established that it is
observing conditions required for the continuation of exempt status.

The proposed effective date of revocation is January 1, ‘the first day of the tax year under
examination.

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

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