Inactive community-facility organization loses exemption

Plain-English summary

A tax-exempt organization had been formed to plan, fund, construct, manage, and maintain a mixed-use community facility. During an examination of its Form 990, the organization repeatedly failed to provide requested records despite several letters, including certified mail. It returned a consent to revocation that was not signed by an officer and stated that it had lost its mission and purpose and had become inactive. The IRS concluded that the organization had not shown compliance with the recordkeeping and reporting duties in sections 6001 and 6033 or continued operation for an exempt purpose. It revoked the organization's section 501(c)(3) status effective January 1 of the redacted year.

Ruling snapshot

• Question: Should the inactive community-facility organization lose exemption for failing to provide records and establish continued exempt operations?
• Outcome: Revocation, effective January 1 of the redacted year.
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1(a), 1.6001-1, and 1.6033-1(h)(2); Rev. Rul. 59-95.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: March 31, 2015
DIVISION

UIL: 501.03-00

Number: 201526019

Release Date: 6/26/2015 Person to Contact:
Identification Number:
Contact Telephone Number:
In Reply Refer to:
EIN:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

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:

You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of I.R.C. section 501(c)(3). You have failed to produce documents or otherwise 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 keep adequate books and records as required by I.R.C. § 6001, 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

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.

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, Tel: or write:

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,

Margaret Von Lienen
Director, EO Examinations

Enclosure:
Publication 892

Department of the Treasury
Internal Revenue Service
Mail Stop 1112, PO Box 12307
IRS Ogden, UT 84412

Date:

August 7, 2014
Person to Contact/ID Number:

Contact Numbers:
Telephone: Toll Free
Long Distance
Fax:

Taxpayer Identification Number:
Form:
Tax Year(s) Ended:

Certified Mail - Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed Publication 3498, The Examination Process, explains 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.

If you request a conference, we will forward your written statement of protest to the Appeals Office and they will contact you. For your convenience, an envelope is enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals conference, or if you do not request an Appeals conference, you may file suit in United States Tax Court, the United States Court of Federal Claims, or United States District Court, after satisfying procedural and jurisdictional requirements as described in Publication 3498.

You may also request that we refer this matter for technical advice as explained in Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a determination letter is issued to you based on technical advice, no further administrative appeal is available to you within the IRS on the issue that was the subject of the technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed Adverse Action. We will then send you a final letter revoking your exempt status. If we do not hear from you within 30 days from the date of this letter, we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final. In that event, you will be required to file Federal income tax returns for the tax

Letter 3610 (Rev. 11-2003)
Catalog Number: 34801V

period(s) shown above. File these returns with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

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:

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,

Barbara L. Harris

Barbara L. Harris
Acting Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination

Letter 3610 (Rev. 11-2003)
Catalog Number: 34801V

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS 1
Name of taxpayer Tax Identification Number | Year/Period ended

December 31, 20XX

Issue:

Should CORPORATION a 501(c)(3) exempt organization be revoked due to its failure to respond and produce records?

Facts:

CORPORATION has not provided the requested information for the examination of the Form 990 for the tax year ending December 31, 20XX. The organization received their approval for tax exemption in June 20XX. The organization was established for the purpose of maintaining a mixed use community facility, including planning and obtaining funding for its development, overseeing its construction, and providing for its management and

maintenance for the benefit of the Community of

Exhibit A (below) provides a list of the Internal Revenue Service correspondence or phone contact made to you or your Power of Attorney (POA) requesting that you provide information pertaining to your Form 990 for the year ending December 31, 20XX.

Summary of Exhibit A
Contact Correspondence Date Certified Receipt
type sent / Phone sent or Mail? Signed date or phone
contact called Y/N response
Letter Sent Letter 3606C 04-02- N No response
to XX
Letter Sent No 07-15- N No response
Response Letter to XX
Letter Sent No 08-14- Certified No response
Response Letter to XX Mail
08-23- N/A Received Certified Mail
XX receipt signed by
Letter Sent Draft proposal 02-27- Certified Received signed Form for Revocation XX Mail 6018, but was not sign by

letter to

officer

CORPORATION (hereafter referred to as the “organization”) has failed to meaningfully respond to the Internal Revenue Service correspondence for information pertaining to the Form 990 for the tax period ending December 31, 20XX.

Law:

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS |
Name of taxpayer Tax Identification Number | Year/Period ended

December 31, 20XX

501(c)(3)

IRC § 501(c)(3) Requires tax exempt entities be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes and to foster national and amatuer sports competition.

Treas. Reg. § 1.501(c)(3)-1(a) In order to be exempt under §501(c)(3) the organization must be both organized and operated exclusively for one or more of the purposes specified in the section. (religious, charitable, scientific, testing for public safety, literary or educational)

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time prescribe.

Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that every organization exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511 on its unrelated business income must keep such permanent books or accounts or records, including inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters required to be shown by such person in any return of such tax. Such organization shall also keep such books and records as are required to substantiate the information required by IRC § 6033.

Treas. Reg. § 1.6001-1(e) states that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe.

Treas. Reg § 1.6033-1(h)(2) provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and IRC § 6033.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of IRC § 6033 and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds

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

Page: -2-

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS 1
Name of taxpayer Tax Identification Number | Year/Period ended

December 31, 20XX

that the organization has not established that it is observing the conditions required for the continuation of exempt status.

IRC § 6033(b) sets out an affirmative duty on the part of the organization to furnish annual information in such a manner as the Secretary may prescribe via forms or regulations. Tax exemption is a matter of legislative grace, and an organization seeking an exemption must prove that it “comes squarely within the terms of the law conferring the benefit sought”. Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958); see also Fla. Hosp. Trust v. Commissioner, 103 T.C. 140, 153, (1994), affd. 71 F.3d 808 (11th Cir.1996). Because an exemption from tax is a deviation from the norm of taxation, courts have reasoned that “a heavy burden” to establish satisfaction of all requisites for such status falls on the entity. Harding Hosp., Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir.1974); Western Catholic Church v. Commissioner, 73 T.C. 196, 210 (1979).

Government’s Position:

In accordance with the above cited provisions of the Code and regulations under

IRC §§ 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information return (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax.

Several attempts have been made to contact the organization, and the organization has failed to meaningfully respond to requests for information. Because of the organization’s failure to meaningfully respond and provide information, the organization has not established that it is observing the conditions required for the continuation of its exempt status. The organization has not established that it is organized and operated exclusively for an exempt purpose.

Organization’s Position:

Several attempts to contact the organizations have been made by either letters or phone calls. The organization received the letter Draft proposal for revocation and responded with a Form 6018 agreeing to the revocation but it was not signed by an officer. The organization stated it had lost its mission and purpose and became inactive.

Conclusion:

It is the IRS's position that the organization failed to establish that it meets the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Furthermore, the organization has not established that it is observing the conditions required for the continuation of its exempt status or that it is

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -3-

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS 1

Name of taxpayer Tax Identification Number | Year/Period ended December 31, 20XX

organized and operated exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective January 1, 20XX.

Form(s) 1120, U.S. Corporation Income Tax Return should be filed for the tax periods ending on or after December 31, 20XX.

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