IRS revokes charity after improper dissolution distributions

Plain-English summary

A charity whose main activity was conducting bingo games for senior citizens dissolved under state law and stopped operating. Its governing documents required its assets to go to § 501(c)(3) organizations upon dissolution, but it distributed 72% of its remaining assets to recipients that were not exempt under that section. The IRS concluded that the charity failed the organizational and operational requirements for exemption and revoked its status effective January 1 of a redacted year. The organization agreed to the revocation. Because it reported no revenue, expenses, or loss for the examined year, and the stated carryback eliminated prior-year tax, the agent did not require a corporate return or tax payment for the reported amounts.

Ruling snapshot

• Question: Could the dissolved charity terminate with the IRS after distributing most of its remaining assets outside § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 170, 6104(c), and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

UIL 501.03-00
DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
March 16, 2010
Release Number: 201451034 Person to Contact:
Release Date: 12/19/2014 Identification Number:

Contact Telephone Number:
In Reply Refer to:
EIN:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: June 15, 2010

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the code is hereby revoked effective January 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations described in I.R.C. section 501(c)(3) and exempt under
section 501(a) must be organized and operated exclusively for an exempt
purpose. You have ceased operating as an exempt organization and
providing any activities of any kind. also

is not a charitable organization within the meaning of Treasury
Regulations section 1.501(c)(3)-1(d). You have not established that you
have operated exclusively for an exempt purpose.

You failed to meet the requirements of IRC section 501(c)(3) and Treas. Reg. section 1.501
(c)(3) -1(d) in that you failed to establish that you were operated exclusively for an exempt
purpose.

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.
These returns should be filed with the appropriate Service Center for the year ending
December 31, 20XX, and for all years thereafter.

UIL 501.03-00

• 2 -

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 in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District
Court of the United States for the District of Columbia before the 91st day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment.

You also have the right to contact the office of the Taxpayer Advocate. However, you
should first contact the person whose name and telephone number are shown above since
this person can access your tax information and can help you get answers. You can call 1-
877-777-4778 and ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer
Advocate from the site where the tax deficiency was determined by calling: Or you can
contact the Taxpayer Advocate nearest you by calling, or writing to:

Local Taxpayer Advocate

Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determinations, nor extend the time fixed by law that you have to file
a petition in the United States Tax 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.

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, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely yours,

Nanette M. Downing
Acting, Director
EO Examinations

UIL 501.03-00

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

December 22, 2009

Taxpayer Identification Number:

Form:
990
Tax Year(s) Ended:
December 31, 20XX
Person to Contact/ID Number:

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

UIL 501.03-00

2

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:

IRS/ Taxpayer Advocate

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
Acting Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit
1

Name of taxpayer Tax Identification Number Year/Period ended

12/31/20XX

ISSUE: THE ORGANIZATION DISSOLVED WITH THE STATE AND DISTRIBUTED ITS ASSETS TO
ORGANIZATIONS THAT ARE EXEMPT UNDER IRC SECTION 501(C)(3) AND OTHER SECTIONS. IS
THE ORGANIZATION ABLE TO TERMINATE WITH THE INTERNAL REVENUE SERVICE?

FACTS:

• The organization was granted exemption in 20XX under IRC Section 501(c)(3).

• The organization's primary activity was the conducting of bingo games for senior citizens. This was the
  organization's primary and exclusive activity.

• This was brought to the organization's attention during an audit and they took the steps to willingly
  dissolve with the state and to terminate with the Service.

• The organization distributed its remaining assets to the homeowners association that its members
  belong to, the local PBA, to the local volunteer fire department, to a couple of hospitals and to a first aid
  squad.

• 72% of the organization's assets were distributed to organizations that are not exempt under IRC
  Section 501(c)(3) and 28% of their total assets were distributed to organizations that are exempt under
  IRC Section 501(c)(3).

• The organization's organizing documents state that upon dissolution that the organization's assets are to
  be distributed to organizations exempt under IRC Section 501(c)(3).

• The organization reported $0 in revenue and $0 in expenses for the year ended December 31, 20XX.
  This results in a tax owed of $0.

• Since the organization reported a loss of $0 in losses in the year ended 12/31/20XX and the NOL
  carryback would eliminate all of taxes owed in the prior year, the agent accepts the signing of the Form
  6018 with no requirement for the organization to file Form 1120 or to pay income taxes on the amounts
  reported in the year ending December 31, 20XX.

LAW:

Internal Revenue Code §501(c)(3) exempts from federal income tax corporations, and any community chest,
fund, or foundation, 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.

Federal Regulations §1.501(c)(3)-1(a)(1) 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.

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish no irs gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit
1

Name of taxpayer Tax Identification Number Year/Period ended

12/31/20XX

Federal Regulations §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.

Federal Regulations §1.501(c)(3)-1(a)(4) provide that an organization is not organized exclusively for one or
more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes,
or to the Federal government, or to a State or local government, for a public purpose, or would be distributed
by a court to another organization to be used in such manner as in the judgment of the court will best
accomplish the general purposes for which the dissolved organization was organized. However, an organization
does not meet the organizational test if its articles or the law of the State in which it was created provide that its
assets would, upon dissolution, be distributed to its members or shareholders.

GOVERNMENT'S POSITION:

The organization distributed some of the assets to organizations that are not exempt under IRC Section
501(c)(3). This is a requirement for all organizations that would like to be exempt under IRC Section 501(c)(3).
The organization failed to meet this requirement that is outlined in their organizing documents and as a result
failed to continue to qualify for exemption.

TAXPAYER'S POSITION:

The organization's officials were not aware that donating the assets to other organizations would have any
consequences. They were under the impression that they just had to donate the assets to an exempt
organization. The organization has ceased operations and will agree to the revocation as a matter of procedure
since they have already dissolved with the state.

CONCLUSION:

The organization failed to operate in a manner that is required of a 501(c)(3) organization when they decided to
dissolve when they donated the organization's remaining assets to organization's that are not exempt under IRC
Section 501(c)(3). The organization is therefore subject to revocation and the organization agrees to sign Form
6018 to show that they are amenable to revocation. Since the organization reported a loss of $0 in losses in the
year ended 12/31/20XX and the NOL carryback would eliminate all of taxes owed in the prior year, the agent
accepts the signing of the Form 6018 with no requirement for the organization to file Form 1120 or to pay
income taxes on the amounts reported in the year ending December 31, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish no irs gov Department of the Treasury-Internal Revenue Service