Inactive small-business lender loses exemption

Plain-English summary

A nonprofit was formed to provide equity capital and loans to disadvantaged small businesses in low- and moderate-income neighborhoods. An IRS examination found that it had stopped making loans, conducted no exempt activities or meetings for years, and regularly commingled funds with a section 501(c)(4) organization. The IRS also found that it had not met reporting requirements under sections 6001 and 6033. The organization's representative agreed that exemption should be revoked because the organization was no longer operating for its exempt purpose. The IRS therefore revoked its section 501(c)(3) status.

Ruling snapshot

• Question: Does a nonprofit that stopped its lending activity and no longer conducts exempt operations retain section 501(c)(3) status?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. § 1.501(c)(3)-1; 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 7, 2015
Release Number: 201615015 Taxpayer Identification Number:
Release Date: 4/8/2018
UIL Code: 501.03-00 Person to Contact:

Identification Number:

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 January 19XX is hereby revoked and you are no longer exempt under
section 501(a) of the Code effective June 1, 20XX.

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

As a result of our examination for the tax years ended May 31, 20XX, May 31, 20XX
and May 31, 20XX, it was determined that either a) the organization has been inactive
since 20XX and there have been no regular exempt 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 June
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 May 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

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

Exempt Organizations: Examinations

801 Tom Martin Drive

Room 263

Birmingham, AL 35211

Date:
November 13, 2014
Taxpayer Identification Number:

Form:

990
Tax Year(s) Ended:

May 31, 20XX, 20XX & 20XX
Person to Contact/ID Number:

Contact Numbers:
Manager’s name/ID number:
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,
Acting Director, EO Examinations

Enclosures

Report of Examination
Form 6018
Publication 892
Publication 3498

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


Form 886-A EXPLANATION OF ITEMS Schedule number or exhibit
(Rev. January 1994)

Name of taxpayer Tax Identification number Year Period ended
May 31, 20XX, 20XX & 20XX

Issues

1. Whether the , continues to qualify for exemption
under 501(c)(3) of the Internal Revenue Code.

Facts

The organization was formed on August 3, 19XX when the Articles of Incorporation (for
Domestic Non-Profit Corporations) were filed with the State of . The purposes of the
organization as stated in the Articles is as follows: “To improve and stimulate the economy of

, particularly in low-to moderate-income neighborhoods, and Disadvantaged Small
Businesses located therein by providing such private equity capital and loan funds as may be
necessary or desirable for the sound financing and carrying on of the business operations of
small businesses and for their growth, expansion and modernization.”

The initial examination appointment was conducted with the Power of Attorney (POA). During
the initial examination it was discovered that the organization had ceased to provide loans. The
date of the last loan payment was on September 29, 20XX. It was also discovered that the
organization maintains office space with another non-profit organization that is a 501(c)(4). The                 and the
501(c)(4) organization would on a regular basis comingle funds. It was stated by the POA, “that
the organizations would comingle funds to help pay expenses if one organization lacked funds.”
It was noted on the bank statements that large funds would come from the 501(c)(4)

organization and would be deposited into the account of the                 . The funds would
later be deposited back into the account of the 501(c)(4) organization. It was also stated by the
POA, “that the                 is providing

technical assistance to the 501(c)(4) organization.” The organization was asked in Information
Document Request #2 for the year ended May 31, 20XX why they were stating on Form 990
that they were still providing loans to organization, and the response from the POA was, “that
the organization stopped providing loans due to the economy and that they had intended on
providing loan again.”

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, or no part of the net earnings of which inures to the benefit of any
private shareholder or individuals, 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(d)(i) states that an organization may be
exempt as an organization described in 501(c)(3) if it is organized and operated exclusively for
one or more of the following purposes: religious, charitable, scientific, testing or public safety,
literary, educational, or prevention of cruelty to children or animals.

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


Form 886-A EXPLANATION OF ITEMS Schedule number or exhibit
(Rev. January 1994)

Name of taxpayer Tax Identification number Year Period ended
May 31, 20XX, 20XX & 20XX

Form 886-A (1-1994) Catalog Number 20810W Page 2

Section 1.501(c)(3)-1(a)(1) of the Federal tax Regulations (regulations) provides that in order to
be exempt as an organization described in section 501(c)(3) of the Internal Revenue Code,
(IRC) the organization must be one that is both organized and operated exclusively for one or
more purposes specified in that section. If an organization fails to meet either the organizational
or operational test, it does not meet the requirement for tax exemption.

Section 1.501(c)(3)-1(c)(1) of the regulations specifies that with regard to the primary activities
within the operational test, 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 IRC 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.

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 Unites States Supreme Court, (4) issuance of
temporary or final regulations, or (5) issuance of a Revenue Bulletin. The revocation or
modification may be retroactive if the organization omitted or misstated material fact, operated
in a manner materially different from that originally represented, or in the case of organizations
to which section 503 applies, 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 charter, the purpose, of the method of operation of
an organization, revocation or modification will ordinarily will 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 or 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.

Tax Payer’s Position:

The taxpayer’s POA declared that the organization is not providing loans. The organization is
agreeing that the organization’s tax exempt status should be revoked because the organization
is not operating for its exempt purpose.

Governments’ Position:

The organization does not pass the operational test as specified in section 1.501(c)(3)-1(c) of
the regulations because the lack of activities is evidence that they were not operated exclusively
for one or more charitable purposes. To be considered as operating exclusively for charitable
purposes, the Organization would have had to engage in activities which accomplish one or
more of such exempt purposes as specified in section 501(c)(3) of the Code. An organization
will not be regarded if more than an insubstantial part of its activities is not in furtherance or an
exempt purpose.

publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A EXPLANATION OF ITEMS Schedule number or exhibit
(Rev. January 1994)

Name of taxpayer Tax Identification number Year Period ended
May 31, 20XX, 20XX & 20XX

Form 886-A (1-1994) Catalog Number 20810W Page 3

In addition to the lack of any charitable activity, the organization has not provided evidence of
conducting meetings. The organization’s funds have been comingled with those of a 501(c)(4)
organization. The organization has clearly failed to conduct any exempt activities since 20XX.
Additionally, the organization has failed to meet the reporting requirements under IRC 6001 and
6033 to be recognized as exempt from federal income tax under IRC 501(c)(3). Accordingly, it
is the Government's position that the organization’s exempt status should be revoked back to
May 31, 20XX.

Conclusion:

The organization received exemption under 501(c)(3) of the Internal Revenue Code after
providing information about their intended activities as described in their Articles of
Incorporation, however, the organization has engaged in activities that are not for its exempt
purpose that is stated under Internal Revenue Code Section 501(c)(3). The operational test
concerns the organizations activities. An organization whose activities are not within the statute
will not qualify for exemption by virtue of a well written charter.

The IRC section 501(c)(3) tax exempt status of the                 should be
revoked, effective May 31, 20XX, because it is not operating exclusively for tax exempt
purposes pursuant to the requirements set forth in section 1.501(c)(3)-1(c)(1) of the regulations.

publish.no.irs.gov Department of the Treasury-Internal Revenue Service