Inactive pet-support charity loses exemption after changing purpose

Plain-English summary

A charity was recognized as exempt to help people with AIDS or HIV keep their pets by providing pet food and arranging pet-related care. The IRS found that it had conducted no consistent exempt activity, had only rarely filed returns, had no bank account or fundraising, and repeatedly produced meeting minutes showing no business. The organization later changed its name and described itself as a patient and caregiver collective offering an undisclosed product and helping terminally ill patients obtain a state license and access treatment. It did not provide the requested operational, financial, eligibility, or event records. The organization said its inactivity was temporary because its founder was ill. The IRS concluded that the organization either remained inactive or operated for a materially different purpose, failed the operational test, and lost its section 501(c)(3) exemption.

Ruling snapshot

• Question: Did the organization continue to qualify under IRC § 501(c)(3) despite prolonged inactivity and a material change from pet assistance to a different patient-support activity?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), and 7805(b); Treas. Reg. § 1.501(c)(3)-1(a); Rev. Proc. 90-27

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION December 10, 2014
Number: 201514014 Taxpayer Identification Number:

Release Date: 4/3/2015
Person to Contact:

Identification Number:

UIL: 501.03-00 Contact Telephone Number:

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 July 26, 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(s):

As a result of our examination for the tax year ended December 31, 20XX, it was
determined that either a) the organization has been inactive since 19XX and there have
been no regular financial activities or operations conducted or planned since that time,
or b) the organization has been operating but in a manner and for a purpose
significantly different from the manner of operation and purpose for which it was
granted exempt status.

Contributions to your organization are no longer deductible under IRC §170 after
January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the tax year 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 under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st Day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgments by referring to the enclosed Publication 892. You may write to
these courts at the following addresses:

United States Tax Court United States Court of Federal Claims
400 Second Street, NW 717 Madison Place, NW
Washington, D.C. 20217 Washington, D.C. 20005

United States District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, D.C. 20001

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:

Internal Revenue Service
Taxpayer Advocate

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

Sincerely,

Stephen A. Martin
Acting Director, EO Examinations

Enclosure:
Publication 892

Letter 3607(04-2002)
Catalog Number: 34198J

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division

Exempt Organizations: Examinations

15 New Sudbury Street, Room 875

Boston, MA 02203

Date:
March 04, 2014
Taxpayer Identification Number:

Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s name:

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.

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

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 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.

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Issue:
Whether or not the qualifies for exemption
under Section 501(c)(3).

Facts:

Article 2 Section 1 of the By-laws states

“The primary objective shall, through services and education, be to enable persons with
AIDS/HIV in the state of to keep their pets with them until no longer possible.”

The organization was granted exemption in July, 19XX. The original name of the
organization which was granted exemption was

According to the organization Articles of Incorporation, isa -based
community service organization. provide pet food to persons with AIDS/HIV, in
addition to organizing pet-related care. The organization was granted exemption under
509(a) (2) foundation status. An organization described in Internal Revenue Code 509(a)
(2) is one that typically derives most of its gross receipts from an activity related to its
exempt function. A copy of the organization’s original application, Form 1023, including
all attachments and correspondence, was sent to the organization. The Agent also sent
to the organization a copy of the organization’s original Articles of Incorporation and
Bylaws.

During the examination of the organization, the Agent was able to identify the following
issues:

Issue 1:

Since its inception in 19XX through the present (20XX), the organization has not
conducted any activity on a consistent basis or any other activity in furtherance of its
exempt purpose.

According to internal research, the organization has only filed one return (Form 990) in
the years since its inception. This was in calendar year 19XX, __ years after it was
granted exemption. It was not until years later that the organization filed another
document with the Internal Revenue Service. The document that was filed is not
considered a return by the Internal Revenue Service. Instead, this document (990-N) is
used to maintain an organization’s exempt status and to maintain correct contact
information. It is also for those organizations that have gross receipts under $50,000
(for the tax year 20).

During the examination of tax year20XX, the Agent sent several Information Document
Requests (IDRs). These IDRs were issued with specific requests about the organization
and its operations. A total of eight IDRs were sent certified mail and were received by

the organization. Contact with the organization’s current Executive Director
was established.

The Agent requested that the organization provide copies of its Articles of
Incorporation, Bylaws, IRS Determination Letter, and Application for exempt status. The
organization was unable to provide any such documents. The Agent was able to
internally request the original administrative file for

EIN # , Now currently known as

In Information Document Request #4 (dated May 5, 20XX) the Agent requested copies
of newsletters and other literature produced during the exam year (or any year). The
Agent also requested any information to indicate the organization was operational, a
list of the organization’s activities, a statement of how the organization was able to
carry on those activities, a description of the job that each board member or employee
was required to perform, a statement of where the organization got its funds to
operate, and a statement of from what premises the organization operates (ie. private
residence, rental property, member of the organization’s property, etc...). Also
requested was documentation showing the name change from

to . To date, the Agent has not received any of the
information listed above.

The Agent sent a certified letter to the organization. The certified letter was signed for
and received on July 13, 20XX by . The certified letter contained
Information Document Request #5 (IDR-5) and contained a response date of July 29,
20XX. The Agent requested the following information: How does the organization
advertise its services for pet care? What type of care does the organization provide
(feeding, walking, medical, financial, etc...Please describe)? Who in the organization
provides the care? Are the care providing individuals volunteers or employees? How
many individuals - volunteers or employees — does the organization have that engage in
this endeavor? How often is the care provided? Does the organization charge fees for
the care provided? In what area of does the organization provide the care (certain
blocks, area, entire state of etc... please describe) Provide bank statements to
show that the organization is providing financial benefits and/or receiving donations. To
date, the Agent has not received any of the requested information.

Response from

claimed that he sent the Agent all the information that was available to
him. This included the annual meeting minutes dated March 5, 20XX. Review of the
organization minutes showed that the organization had no business and no new
business to discuss. These minutes were signed by three of the board members. A
review of these minutes showed the Agent that the organization was not conducting
any activities in regard to its exempt purpose. The Agent sent out several certified

letters to the organization with detailed IDRs, which contained specific questions on the
organization’s operations. also provided the board member minutes for the
tax years 20XX and 20XX. These minutes also reflected that there was no business and
no new business in these years.

A letter sent by to the Agent dated April 04, 20XX stated the following:

‘This is our response to your request for information on our organization. For the years
20XX through 20XX we have not had any financials due to the fact we had no bank
account or funds because our charity was under review by your agency so we halted all
fundraising and have had no donations.’

The Agent noted that the organization came under audit for the calendaryear20XX. The
Agent began to work this case in 20XX. The organization was not under audit from 20XX
through 20XX; the statement above by is incorrect.

The organization had no bank account or fundraising activities during the year under
examination. According to a conversation with the organization’s Director

, as well as information submitted during the examination, the organization was not
operational in the past few years and did not receive financial support. No financial
information/documentation was submitted for review.

During the examination, the organization stated that the founder was ill, but that when
he gets better, the organization planned to become active. In Information Document
Request #4, the Agent requested an action plan showing what steps the organization
would take to become active, with a detailed time line. This response was due by May
16, 20XX. No response was provided to the Agent.

Issue 2:
The organization has also engaged in other activities that are not consistent with its
exempt purpose, and for which the organization was granted exemption.

The organization was granted exemption for support of companion animals for
AIDS/HIV patients. At some point during the organization’s existence the name of the
organization changed from , to

The Form 990-N filed shows a change of corporate identity taking place between 20XX
and 20XX. With the name change the organization also decided to change its purpose
and according to Guidestar, characterizes itself as:

..a collective of Patients and Caregivers a grassroots non-profit. We offer
donated high quality to Qualified Patients on a donation or
sliding fee basis.

Internet research revealed that , and its Director,

, a longtime advocate of use, was involved in an event that included
vendors exhibiting the latest in equipment for and discussions on
therapeutic use of for a range of debilitating conditions. (See attached
dated February 27, 20XX) The article stated that group, which serves as an
information resource, “helps poor patients with terminal illness pay for the state
license and get access to treatment.”

The Agent sent out a certified letter to the organization. The certified letter was signed
and received on July 13, 20XX by . The certified letter contained
Information Document Request #6 (IDR-6) titled ‘Financial Support’ and contained a
response date of July 29, 20XX. In this letter the Agent requested the following
Information from the organization: (1) how much financial support does the
organization provide to individuals with terminal illnesses to assist in paying for the
state license?; (2) from where does your organization’s financial support come?; (3)
provide the name of the financial institution and the bank account numbers your
organization utilizes; (4) how does the organization determine who receives its
financial and/or medical assistance; (5) how do individuals become aware of the
organization’s assistance; (6) is there an application that individuals complete for
organizational review to determine eligibility for assistance; (7) provide a sample
copy of the application used to determine if an individual qualifies for organizational
assistance.; and (8) since the organization is providing financial benefits and/or
receiving donations, there must be some kind of financial institution being used to
collect and distribute funds. Provide bank statements which reflect these transactions.

The article ( dated
February 27, 20XX) stated the following:

State’s first , the event was put on by the
and its director, , a longtime advocate of
use.’

The Agent sent a certified letter to the organization which was signed for and received
on July 13, 20XX by . The certified letter contained Information
Document Request #7 titled (Advocacy) and contained a response date of July 29, 20XX.
In this letter, the Agent requested the following information from the organization: (1)
did the organization fund the ; (2) if so, from where did
it receive funds to sponsor the event; (3) did the organization receive donations or
fees for sponsoring this event. The Agent has received no response to the information
requested in IDR #7. To date, no information regarding the organization’s current
activities and how those activities relate to its exempt purpose has been received by the
Agent.

There is no apparent relationship between the original purpose of

and the current activities of .
Although, applied for and received tax-exempt status, and are two different
organizations.

Law:

Internal Revenue Code Section 501(c)(3) exempts Federal income taxes from
organizations that are organized and operated exclusively for religious, charitable, etc.
purposes where no part of its net earnings inure to the benefit of any private
shareholder or individual and no substantial part of its activities involve the carrying on
of propaganda or otherwise attempting to influence legislation.

Section 1.501(c)(3)-1(a) of the Income Tax Regulations provides that “in order to be
exempt as an organization described in Section 501(c)(3) of the Code an organization
must be both organized and operated exclusively for one of more purposes specified in
such section. If any organization fails to meet either the organizational or operational
test it is not exempt.”

Revenue Procedure 90-27, 1990-1 CB 514 (April 30, 1990), Section 14 -- Revocation or
modification of rulings or determination letters recognizing exemption states that a
ruling or determination letter recognizing exemption may be revoked or modified where
there is a material change, inconsistent with exemption, in the character, the purpose,
or the method of operation of an organization. No plans on operating according to its
exempt purpose are a material change, inconsistent with exemption, in the character,
the purpose, or the method of operation of the organization.

Rev. Proc. 90-27 provides procedures with regard to applications for recognition of
exemption from Federal income tax under Sections 501 and 521 with respect to
revocation or modification of exemption rulings and determinations letters.

Section 5.02 of Rev. Proc. 90-27 provides that “Exempt status will be recognized in
advance of operation if proposed operations can be described in sufficient detail to
permit a conclusion that the charity will clearly meet the particular requirements of the
section under which exemption is claimed...The organization must fully describe the
activities in which it expects to engage, including the standards, criteria, procedures or
other means adopted or planned for carrying out the activities, the anticipated sources
of receipts and the nature of the contemplated expenditures.

Section 14.01 of Rev. Proc. 90-27 provides that “a 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...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...When Section 7805(b) relief is granted...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.

Taxpayers Position:
It is the position of the organization that the inactivity is only temporary due to illness of

the founder.

Government's Position:

It is the government’s position that the organization known as

has failed the operational test. As consistent with Section 1.501(c)(3)-1(a) of the Income
Tax Regulations an organization is not exempt if it fails either the organizational or the
operational test.

It is the government’s position that the organization had a drastic change in its
operations. The purpose of the organization changed from assisting AIDS/HIV patients
with their pets to supporting and influencing the use of by AIDS/HIV patients.
This change is considered to be a material change to the organization’s exempt purpose
and is grounds for the revocation of the organization’s exempt status.

As a result of our examination for the tax year ended December 31, 20XX, it was
determined that either a) the organization has been inactive since 19XX and there have
been no regular financial activities or operations conducted or planned since that time,
or b) the organization has been operating but in a manner and for a purpose
significantly different from the manner of operation and purpose for which it was
granted exempt status.

Conclusion:

The Service has determined that the is not
operated exclusively for Section 501(c)(3) purposes for all years beginning on or after
January 1, 20XX. Since the organization’s inception, it has neither consistently filed a
return nor conducted the activity for which it was granted exemption. Accordingly, the
organization does not continue to qualify for exemption under Section 501(a) of the
Internal Revenue Code for all years beginning on or after January 1, 20XX.