Inactive charity lost its section 501(c)(3) exemption

Plain-English summary

The IRS revoked an organization's section 501(c)(3) exemption after finding that it had stopped conducting charitable work and had no regular operations or planned activities. The examination report says the organization's recent activity consisted mainly of overseeing repairs to an asset while paying board salaries, travel costs, and other expenses. The IRS concluded that the organization failed the operational test and also raised concerns about an asset purchased with the organization's funds but registered to a for-profit business. Contributions ceased to be deductible under section 170 after the redacted effective date, and the organization was required to file Form 1120 corporate income tax returns. The taxpayer agreed with the examination conclusion and signed a form agreeing to dissolution.

Ruling snapshot

• Question: Did an inactive organization continue to qualify for exemption under section 501(c)(3)?
• Outcome: Exemption revoked effective on a redacted date.
• Key authorities: IRC §§ 170, 501(c)(3), 503, 6033, 7428, and 7805(b); Treas. Reg. §§ 1.501(a)-1, 1.501(c)(3)-1, and 1.6033-1

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

November 24, 2015

Release Number: 201609007                    Taxpayer Identification Number:
Release Date: 2/26/2016
UIL Code: 501.03-00                          Person to Contact:

                                             Identification Number:

                                             Contact Telephone Number:

CERTIFIED MAIL

Dear [illegible]:

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 June 1999 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 your organization has been inactive since 20XX and that there have
been no operations or regular financial activities conducted or planned. As such, you
failed to meet the operational requirements for continued exemption under IRC
501(c)(3).

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

The Taxpayer Advocate Service (TAS) is an independent organization within the
IRS that can help protect your taxpayer rights. TAS can offer you help if your tax
problem is causing a hardship, or you’ve tried but haven't been able to resolve
your problem with the IRS. If you qualify for TAS assistance, which is always
free, TAS will do everything possible to help you. Visit taxpayeradvocate.irs.gov
or call 1-877-777-4778.

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

Enclosure:
    Publication 892

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


Department of the Treasury                       Date:
Internal Revenue Service                         02/24/2015
Tax Exempt and Government Entities Division      Taxpayer Identification Number:
801 Broadway, MDP 13
Nashville, TN 37203

                                                  Form:
                                                  990
                                                  Tax year(s) ended:
                                                  20XX
                                                  Person to contact / ID number:

                                                  Contact numbers:
                                                  Phone Number:
                                                  Fax Number:
                                                  Manager's name / ID number:

                                                  Manager's contact number:
                                                  Phone Number:
                                                  Response due date:
                                                  3/24/2015

Certified Mail - Return Receipt Requested

Dear [illegible]:

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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:
Report of Examination
Form 6018
Publication 892
Publication 3498

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


Form 886A            Department of the Treasury - Internal Revenue Service       Schedule No. or
                                    Explanation of Items                          Exhibit
Name of Taxpayer                                                               Year/Period Ended
                                                                               20XX

ISSUE:

Whether [illegible] continues to qualify for exemption as an organization
described in the Internal Revenue code (IRC) Section 501(c)(3) because of a lack of
operation or activity since 20XX.

FACTS:

[illegible] was incorporated under the laws of the State of [illegible]
as a for-profit corporation on 11/04/19XX. There is no record of [illegible]
being incorporated in the State of [illegible] as a non-profit.

On June 19XX, [illegible] was recognized to be exempt from Federal
income tax as an organization described in IRC Section 501(c)(3).

In 19XX [illegible] purchased a [illegible] ([illegible]) that was
capable of carrying [illegible] all over the world. Since 19XX the EO has
been involved in [illegible] and [illegible] projects in [illegible], [illegible], and
other parts of Central and South America. They transported food and medical
supplies for the local residents in need, assisted other organizations with [illegible],
and transported [illegible] for humanitarian aid.

The [illegible] ([illegible]) was sold in 20XX and a smaller [illegible] ([illegible]) was
purchased in May 20XX for $[illegible] in [illegible]. The [illegible] was registered
under the company name [illegible] which is incorporated in the
[illegible]. All of the funds to purchase the [illegible] came from [illegible]
bank accounts.

In June 20XX, the [illegible] ([illegible]) needed extensive repairs and was returned to
[illegible] in [illegible]. As of January 20XX, the [illegible] is currently still in [illegible] in
[illegible]. No charitable work based on their mission statement has been conducted
since June of 20XX. The majority of the EO’s activity has been to oversee the repair
of the [illegible], traveling to and from [illegible] and [illegible]. The EO has been paying
salaries to the Board of Directors, paying for their auto expenses for the travel to
[illegible], and paying office and other expenses. Their only income in 20XX was from the
sale of assets.

Form 886-A(Rev.4-68)            Department of the Treasury - Internal Revenue Service
Page: -1-


Form 886A            Department of the Treasury - Internal Revenue Service       Schedule No. or
                                    Explanation of Items                          Exhibit
Name of Taxpayer                                                               Year/Period Ended
                                                                               20XX

LAW:

IRC § 501(c)(3) exempts from federal income tax organizations which are 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.

Tax Reg. § 1.501(c)(3)-1(a)(1) of the regulations 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.

Treas. Reg. § 1.503(c)(3)-1(c) Operational Test
    (1) Primary activities. —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). An
        organization will not be so regarded if more than an insubstantial part of its activities
        is not in furtherance of an exempt purpose.

    (2) Distribution of earnings. —An organization is not operated exclusively for one or
        more exempt purposes of its net earnings inure in whole or in part to the benefit of
        private shareholders or individuals. For the definition of the words “private
        shareholder or individual”, see paragraph (c) of §1.501(a)-1.

Revenue Procedure 90-27, 1990-1 CB 514, (Apr. 30, 1990) states that a ruling or
determination letter recognizing exemption may be revoked or modified by (1) a notice
to the taxpayer to whom the ruling or determination letter originally was issued, (2)
enactment of legislation or ratification of a tax treaty, (3) a decision of the United States
Supreme Court, (4) issuance of temporary or final regulations, or (5) issuance of a
revenue ruling, revenue procedure, or other statement published in the Internal
Revenue Bulletin. The 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, or, in the case of organizations to which section 503 applies,

Form 886-A(Rev.4-68)            Department of the Treasury - Internal Revenue Service
Page: -2-


Form 886A            Department of the Treasury - Internal Revenue Service       Schedule No. or
                                    Explanation of Items                          Exhibit
Name of Taxpayer                                                               Year/Period Ended
                                                                               20XX

engaged in a prohibited transaction with the purpose of diverting corpus or income of
the organization from its exempt purpose and such transaction involved a substantial
part of the corpus or income of such organization. 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. In cases where a ruling or determination letter was issued in
error or is no longer in accord with the holding of the Service, when section 7805(b)
relief is granted (see sections 15 and 18 of Rev. Proc. 90-4), 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.

Revenue Ruling 58-617, 1958-2 CB 260, (Jan. 01, 1958) Rulings and determinations
letters granting exemption from Federal income tax to an organization described in
section 501(a) of the Internal Revenue Code of 1954, to which contributions are
deductible by donors in computing their taxable income in the manner and to the extent
provided by section 170 of the Code, are effective only so long as there are no material
changes in the character of the organization, the purposes for which it was organized,
or its methods of operation. The District Director of Internal Revenue for the district in
which the organization is located must be advised immediately of any such changes in
order that a determination may be made as to the effect the changes may have upon
the exempt status of the organization. See generally sections 1.501(a)-1 and 1.6033-1
of the Income Tax Regulations. Failure to comply with this requirement may result in
serious consequences to the organization for the reason that the ruling or determination
letter holding the organization exempt may be revoked retroactively to the date of the
changes affecting its exempt status, depending upon the circumstances involved, and
subject to the limitations on retroactivity of revocation found in section 503 of the Code.

TAXPAYER’S POSITION:

The taxpayer has agreed with this conclusion and has signed Form 6018 on June 3,
20XX agreeing to dissolution.

GOVERNMENT'S POSITION AND CONCLUSION:

The Service's position is that the organization has been inactive for several years
now and that there have been no activities conducted. This org has not conducted
any charitable work since 20XX. Their main source for charitable work, their
[illegible], has been in [illegible] since June 20XX.

The purchase of the [illegible] was solely funded by [illegible]. Even
though the [illegible] was registered under [illegible], the [illegible] technically
belongs to, [illegible] – [illegible] funds were used to
purchase the [illegible]. As a tax exempt organization, they cannot purchase property for a

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


Form 886A            Department of the Treasury - Internal Revenue Service       Schedule No. or
                                    Explanation of Items                          Exhibit
Name of Taxpayer                                                               Year/Period Ended
                                                                               20XX

for-profit business. That is inurement, misuse of funds, and taxable. Therefore, the
[illegible] legally belongs to [illegible].

Since the organization has not conducted any charitable activity since 20XX the
organization’s tax exempt status is to be revoked and they may convert their 990
returns to 1120 tax returns for all years beginning January 1, 20XX to present.

[illegible] fails to meet the operational requirements
to continue its exemption status under IRC 501(c)(3). Therefore the effective date of
revocation will be 01/01/20XX.

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