Inactive nursing home charity loses exemption

Plain-English summary

A tax-exempt organization had operated a nursing home for elderly residents. It sold all of its assets, stopped providing nursing home care, and ceased all activity. The examination report stated that the organization had no operations or regular financial activities conducted or planned, and the taxpayer agreed that exemption should be revoked. The IRS found that the organization no longer met the operational test under IRC § 501(c)(3). It revoked exemption effective on the redacted date, stated that later contributions were no longer deductible, and required the organization to file Form 1120.

Ruling snapshot

• Question: Did an organization that sold its nursing home assets and ceased operations continue to qualify under IRC § 501(c)(3)?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), and 7428; Treas. Reg. § 1.503(c)(3)-1(c) as printed in the examination report

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

August 24, 2016

Release Number: 201647010
Release Date: 11/18/2016
UIL Code: 501.03-00

Taxpayer Identification Number:

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 to you
effective May 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):

As a result of our examination for the tax year ended June 30, 20XX, it was determined
that your organization became inactive since June 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 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
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

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities Division
1100 Commerce Street, MC4980 DAL
Dallas, TX 75242

Date:
02/16/2016

Taxpayer Identification Number:

Form:

Tax year(s) ended:
June 30, 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:
03/02/20XX

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.

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.

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,

Paul A. Marmolejo
Acting Director, EO Examinations

Enclosures:

Report of Examination
Form 6018

Publication 892
Publication 3498

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

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer
Tax Identification Number
Year/Period ended
June 30, 20XX
ISSUE
Whether , located in continues to qualify for

exemption under Section 501(c)(3) of the Internal Revenue Code?

FACTS

, was granted tax-exempt status as a
Section 501(c)(3) organization in May 19XX. The purpose of EO was to run and maintain a nursing home
for the elderly..

By June 30, 20XX, all of the assets and property were sold and the EO no longer provided nursing home
care for the elderly. They had ceased all activity. The last Form 990 submitted by the organization was for
the tax year ending June 30, 20XX, and was received on November 11, 20XX by the Internal Revenue
Service (IRS). The total income and expenses equaled $X.XX.

purchased this nursing home from
in January 20XX.
Sales prices:

Total value - $X,XXX,XXX
Total debt - $X,XXX,XXX
Net profit - $XXX,XXX

The profit on the sale of the nursing home went to the to carry on their
purpose of providing community assistance in the areas of education, health, and well-being.
continues to operate as a 501(c)(3).

LAW

IRC § 501(c)(3) exempts from Federal income tax corporations, and any community chest, fund, or
foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes, 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 and which
does not participate in, or intervene in (including the publishing or distributing of statements), any political
campaign on behalf of any candidate for public office.

Treasury Regulations (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.

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


Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer
Tax Identification Number
Year/Period ended
June 30, 20XX

(2) Distribution of earnings. —An organization is not operated exclusively for one or more exempt
purposes if 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.

TAXPAYER'S POSITION

The taxpayer agrees that the organization should be revoked.

GOVERNMENT'S POSITION

EO has failed to show that they meet the operational test for a § 501(c)(3) organization for the year under
examination. In order to meet the operational test, they must show that they engage 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.

The organization has confirmed that they did not operate for charitable purposes for the year under
examination and in the year prior.

CONCLUSION

As a result of the examination, the IRS has determined that EO has failed to operate for exempt purposes
as a §501(c)(3) organization. They have ceased operations and sold their assets. Therefore, since the
organization failed to operate primarily for exempt purposes their exempt status is 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