Determination 1350045: IRS revokes exemption after an organization becomes inactive

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(3) after an examination found that it had not operated for several years and lacked sufficient funding to carry out the activities described in its application. The organization's representative agreed that it should no longer operate and consented to revocation. The IRS concluded that the organization failed the operational test under the section 501(c)(3) regulations, even though it had been properly organized. The revocation was effective January 1 of a redacted year, and the IRS stated that contributions were no longer deductible under § 170.

Ruling snapshot

• Question: Did the inactive organization continue to satisfy the operational test for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(c)(3), 509(a)(2), 6104(c), and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Transcriber's note: this document is a scan. Obvious OCR misreads were corrected by comparison with all seven official PDF page images. Redacted placeholders remain as published, and source wording and source errors are otherwise preserved.

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce Street 501.03-00
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION Date: March 19, 2013

Number: 201350045
Release Date: 12/13/2013

LEGEND Employer Identification Number:
ORG - Organization name Person to Contact/ID Number:
XX - Date Address - address Contact Numbers:

Telephone:
ORG Fax:
ADDRESS

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

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
dated April 20, 20XX 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 reasons:

ORG does not operate exclusively for charitable purposes as noted in
section 1.501(c)(3)-1(c)(1) of the regulations. This section provides 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). ORG
failed to meet the operational test described in Treasury Regulation
Section 1.501(c)(3)-1(c)(1).

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code. You are required to file Federal income tax returns on Form
1120. Those returns should be filed with the appropriate Service Center.

Processing of income tax returns and assessment 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 Claims Court or the District Court of
the United States 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 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 court 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 you have to file a petition in a United
States court. The Taxpayer Advocate can, however see a tax matter that may not have
been resolved through normal channels gets prompt and proper handling. You can call
1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

We will notify the appropriate State Officials of this action, as required by section
6104(c) of the Internal Revenue Code.

If you have any questions in regards to this matter please contact the person whose
name and telephone number are shown in the heading of this letter.

Thank you for your cooperation.

Sincerely yours,

Nanette M. Downing
Director, EO Examinations

Department of the Treasury Date:

Internal Revenue Service January 2, 2013
Tax Exempt and Government Entities Division Taxpayer Identification Number:
IRS 1100 Commerce Street, MC 4900-DAL

Dallas, TX 75242

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

Schedule number or exhibit

Form 886-A

sor eS cos EXPLANATION OF ITEMS

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

ORG EIN 12/31/20XX thru 12/31/20XX
LEGEND

ORG — Organization name XX-—Date EIN-EIN State—State CEO -CEO
issue:

Should the tax exempt status of ORG (“the Foundation”) be revoked as of January 1, 20XX, for failing
to comply with the operational test of the Internal Revenue Code (“Code”) Section 501(c)(3)?

Facts:

The Foundation was incorporated in the state of State on December 07, 20XX. The Foundation
stated its specific purposes on its Articles of Incorporation as:

“To educate, develop, and train the young individuals to appreciate and love music & art
through vocal instructions, as well as theatre techniques.”

The Bylaws, dated January 21, 20XX, stated the primary objectives and purposes as:

(a) “To enhance people’s lives by promoting the furtherance of education, through
music and arts, through its programs;

(b) to make charitable grants to other Section 501(c)(3) charitable organizations; and

(c) to conduct any other charitable or activities which would be qualified activities as
defined by section 501(c)(3) of the Internal Revenue Code.”

The Foundation filed a Form 1023, Application for Recognition of Exemption Under the Code Section
501(c)(3), with the IRS on April 14, 20XX. CEO was the Chief Executive Officer and the primary
contact person for the determination matters. She also signed the Form 1023. The Foundation
described its activity as:

“ORG is a State nonprofit public benefit corporation established to educate, train and
develop young individuals from ages 7 through 18 to appreciate and love music and art
through vocal instructions, as well as, theatre techniques.”

We granted tax exempt status under the Code Section 501(c)(3), as an entity described under the
Code Section 509(a)(2), on April 20, 20XX.

The assigned Internal Revenue Agent (“Agent”) initiated the examination of the Foundation’s
operation on November 7, 20XX, for the activities conducted during the year ended December 31,
20XX. The Foundation filed a Form 990N for this year and listed CEO as the President. The agent
contacted CEO, and she indicated that the Foundation did not receive sufficient funding to maintain
its operation. The Foundation had not been operational for a few years. The only record available for
the year ended December 31, 20XX would be the filing records related to the Form 990N.

Form 886-A (1-1994) Page 1 of 3 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

ORG EIN 12/31/20XX thru 12/31/20XX

CEO stated the Foundation would not be operational in the near future, and might never be
operational. The agent pointed out to CEO that, through the internet research, another name was
found associated with the foundation. The agent asked whether she knew anything about the US
Housing Corporation or US Housing Foundation. The agent’s concern was that someone might be
taking advantage of the Foundation. She understood our concern and agreed that we should revoke
the exempt status of the Foundation.

LAW

The Code Section 501(c)(3) exempts from federal income tax corporations organized and operated
exclusively for charitable, educational, and other purposes, provided that no part of the net earnings
inure to the benefit of any private shareholder or individual.

Treasure Regulations Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an
organization described in the Code 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.

Treasure Regulations Section 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 that accomplish one or more of such exempt purposes specified in the Code Section
501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is
not in furtherance of an exempt purpose. The existence of a substantial nonexempt purpose,
regardless of the number or importance of exempt purposes, will cause failure of the operational test.

Treasure Regulations Section 1.501(c)(3)-1(d)(1)(i) provides that an organization may be exempt as
an organization described in the Code Section 501(c)(3) if it is organized and operated exclusively for
one or more of the following purposes:

(a) Religious,

(b) Charitable

(c) Scientific,

(d) Testing for public safety,
(e) Literary

(f) Educational, or

(g) Prevention of cruelty to children or animals.

Treasure Regulations Section 1.501(c)(3)-1(d)(1)(ii) provides, in part, that the organization must
establish it is not organized or operated for the benefit of private interests, “such as designated

Form 886-A (1-1994) Page 2 of 3 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A EXPLANATION OF ITEMS
(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended
ORG EIN 12/31/20XX thru 12/31/20XX

individuals, the creator or his family, shareholders of the organization, or persons controlled, directly
or indirectly, by such private interests.”

Government's Position

For an organization to maintain its exempt status, it must meet the operational test under Treasury
Regulations Section 1.501(c)(3)-1(a)(1). The operational test generally requires that an organization
operates consistent with the requirements of the Code. Otherwise, the organization is not operated
exclusively for charitable purpose, and would lose tax-exempt status.

The Foundation was properly organized, and met the organizational test. The Foundation could not
maintain its operation as it described within the Form 1023, that was filed in April 20XX. Accordingly,
the Foundation could not meet the operational test. Therefore, the Foundation is not a charitable
organization within the meaning of Treasury Regulations Section 1.501(c)(3)-1(d). The Foundation
should no longer be granted tax-exempt status under the Code section 501(c)(3) and described under
the Code Section 509(a)(2).

Taxpayer’s Position

The Foundation agrees with the IRS position.
Conclusion:
The exempt status of the Foundation is revoked effective January 1, 20XX.

Forms 1120 should be filed for the tax periods ending December 31, 20XX, and all the subsequent
years, if applicable.

Form 886-A (1-1994) Page 3 of 3 Department of the Treasury-Internal Revenue Service