Inactive organization loses charitable exemption

Plain-English summary

An organization reported that it had been inactive for several years, had no operations or financial activity planned, and had entered bankruptcy. It did not respond to certified audit correspondence or repeated requests for records concerning its receipts, expenditures, and activities. The IRS concluded that an organization conducting no activities is not operated exclusively for exempt purposes and therefore fails the section 501(c)(3) operational test. Its exemption was revoked effective July 1 of the redacted year.

Ruling snapshot

• Question: Can an organization retain section 501(c)(3) status after it ceases all activities and fails to provide requested records?
• Outcome: Revoked
• Key authorities: IRC §§ 501(a), 501(c)(3), 6001, and 6033(a)(1); Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: February 5, 2015
Release Number: 201519032
Release Date: 5/8/2015

UIL Code: 501.03-00 Taxpayer Identification Number:

Person to Contact:
Employee Identification Number:

Employee Telephone Number:
Phone
Fax

CERTIFIED MAIL — RETURN RECEIPT

Dear:

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code. Our favorable determination letter to you dated July 19XX is hereby
revoked and you are no longer exempt under section 501(a) of the Code effective July 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized
and operated exclusively for exempt purposes. You have failed to produce documents to
establish that you are operated exclusively for exempt purposes and that no part of your net
earnings inures to the benefit of private shareholders or individuals. You failed to respond to
repeated reasonable requests to allow the Internal Revenue Service to examine your records
regarding your receipts, expenditures, or activities as required by sections 6001 and 6033(a)(1) of
the Code.

You did provide information stating that your organization has been inactive for several prior
years 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 section
501(c)(3).

Contributions to your organization are no longer deductible under IRC §170 after July 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 June 30, 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 the United States Tax Court at the following address:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

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
Office of the 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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:
Publication 892

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

Exempt Organizations: Examinations

15 New Sudbury St, JFK 8th Floor

Boston, MA 02203

Date:
June 25, 2014
Taxpayer Identification Number:

Form:

Tax Year(s) Ended:
June 30, 20XX
Person to Contact/ID Number:

Contact Numbers:
Tel:
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,
Mary A. Epps,
Acting Director, EO Examinations
Enclosures:
Report of Examination
Form 6018
Publication 5

Publication 892
Publication 3498

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

. Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX

Issue:
Whether an organization can retain its tax exemption as a 501(c)(3) organization if it no longer performs
activities.

Facts:

The was granted tax exemption under IRC 501(c)(3). The
organization filed a tax return showing that no activities were conducted during the year, with no revenues
or expenses associated with exempt functions. The tax return also contained a written statement of
bankruptcy and that all activities have ended. The agent mailed an audit letter to the taxpayer, via certified
mail. Agent received the signed certified receipt, but the taxpayer did not respond to the audit letter. Efforts
to contact the taxpayer by phone were not successful.

Law:

Section 501(a) of the Code provides, in part, that organizations described in section 501(c) are exempt
from federal income tax. Section 501(c)(3) of the Code describes, in part, an organization which is
organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purpose, no part of the net earnings of which inures to the benefit of any private shareholder or
individual.

Section 501(c)(3) of the Code provides, in part, for the exemption from Federal income tax of organizations
organized and operated exclusively for charitable, religious or educational purposes, no part of the net
earnings of which inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations states that in order to qualify under section
501(c)(3) of the Code, 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 or
operational test, it is not exempt.

Section 1.501(c)(3)-1(a)(2) of the Regulations states the term “exempt purpose or purposes”, means any
purpose or purposes specified in section 501(c)(3) of the Code.

Section 1.501(c)(3)-1(c)(1) of the Regulations states 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 such exempt purposes specified in section 501(c)(3) of the Code. An organization will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(c)(2) of the Regulations provides that an organization is not operated exclusively for
one or more exempt purposes if its net earning inure in whole or in part to the benefit of private
shareholders or individuals.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an organization is not operated exclusively for
one or more exempt purposes unless it serves a public rather than a private interest. It must not be
operated for the benefit of designated individuals or the persons who created it.

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX

Government's Position:

Section 501(c) of the Code and Section 1.501(c)(3)-1(a) of the Regulations sets forth two requirements for
qualification for exempt status. An organization must be organized and operated exclusively for purposes
described in section 501 (c)(3) of the Code. An organization must satisfy the operational test. The key
requirement is that an organization be operated exclusively for one or more purposes describe in section
501(c)(3) of the Code. An organization must be operational. If an organization conducts no activities and
is not operating, it is not operated exclusively for exempt purposes. Therefore, it fails the operational test,
and it is no longer entitled to continued exempt status.

Taxpayer's Position:
The taxpayer did not respond to any IRS communication.

Conclusion:
The is no longer organized and operated as an IRC 501(c)(3)
organization, and the tax exemption is to be revoked effective July 1, 20XX.

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