Private foundation that stopped operating and never produced records loses exemption

Plain-English summary

A private foundation was selected for audit to confirm it was still doing the charitable work it had been approved for. Reaching it proved almost impossible. The examination report logs five letters, most sent certified, coming back as forwarding expired, unclaimed, no such number, or with a note that the addressee was no longer there, and two listed phone numbers that were dead. The president eventually called back and said the organization had stopped operating years earlier, that he believed the CFO had filed a final return, and that someone else planned to restart it. The IRS granted two extensions, but no records ever arrived, and no Form 990-PF had been filed for several years. The state had also cancelled the entity's status for failure to file. Because an exempt organization must keep records and hand them over on request under sections 6001 and 6033, that failure alone justifies revocation under Rev. Rul. 59-95. Exemption was revoked retroactively, contributions are no longer deductible, and Forms 1120 are due going forward.

Ruling snapshot

• Question: May exemption be revoked when a private foundation stops operating, stops filing Form 990-PF, and never produces records for an examination?
• Outcome: Revocation
• Key authorities: IRC §§ 61, 170, 501(c)(3), 511, 6001, 6033(a)(1), 7428; Treas. Reg. §§ 1.61-1, 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.6001-1(c), 1.6001-1(e), 1.6033-1(h)(2); Rev. Rul. 59-95, 1959-1 C.B. 627

Transcription note: this is a scanned document (10 PDF pages) transcribed by OCR and proofread against the page images. It bundles the final adverse determination letter, the proposed revocation (Letter 3618), and the Form 886-A report of examination. Repeating Form 886-A header and footer furniture has been replaced with [Form 886-A page N] markers using the report's own printed page numbers. Redacted names, addresses, dates, and certified-mail article numbers appear as blanks or as 20XX/XXX-XXX-XXXX exactly as the IRS released them.

Full text (IRS public release)

= DEPARTMENT OF THE TREASURY
isan Internal Revenue Service
ss E TE/GE EO Examinations
QWs y 1100 Commerce Street
— Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES Date: Dec. 02 2016
DIVISION
Release Number: 201716047 Taxpayer Identification Number:

Release Date: 4/21/2017
Person to Contact:

Employee Identification Number:
Employee Telephone Number:

UIL: 501.03-00

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:

Organizations described in I.R.C. § 501(c)(3) and exempt under section 501(a) must be both organized and operated exclusively for exempt purposes. 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). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. You have not established that you have operated exclusively for an exempt purpose.

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. If you have not already filed these returns and the agent has not provided you instructions for converting your previously filed Form 990 to Form 1120, you should file these income tax returns 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, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed before the

91st day after the date this determination was mailed to you if you wish to seek review of our determination. Please contact the clerk of the respective court for rules and the appropriate forms regarding filing petitions for declaratory judgment by referring to the enclosed Publication 892. Please note that the United States Tax Court is the only one of these courts where a declaratory judgment action can be pursued without the services of a lawyer. You may write to the courts at the following addresses:

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

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect you taxpayer rights. We 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 our assistance, which is always free, we 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 yours,

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

9) Department of the Treasury Date: August 18, 2016

Internal Revenue Service _ ae Taxpayer Identification Number: IRS Tax Exempt and Government Entities Division Exempt Organizations Examinations Form:

Tax year(s) ended:

Person to contact/ ID number:

Contact numbers:
Long Distance
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.

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 may also 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.

Letter 3618 (06-2012)
Catalog Number 34809F

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

Phone Number:

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, Exempt Organizations Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (06-2012)
Catalog Number 34809F

Date of Notice: August 18, 20XX

Issues:

Whether the organization continues to qualify for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code.

Facts:

applied for tax-exempt status by filing the Form 1023 on April 23, 20XX, and was granted tax-exempt status as a 501(c)(3) on July 07, 20XX, with an effective date of May 15, 20XX.

An organization exempt under 501(c)(3) needs to 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.

was selected for audit to ensure that the activities and operations align with their approved exempt status.

failed to respond to the Internal Revenue Service attempts to obtain information to perform an audit of Form 990-PF, Return of Private Foundation, for the tax year December 31, 20XX.

has not filed a Form 990-PF series return for the tax years December 31, 20XX through December 31, 20XX tax year.

The Form 1023 application list the phone number of XXX-XXX-XXXX for the president of

Per the State of web-site, status has been cancelled/failure to file/statement cont. existence on 05/21/20XX, copy attached from state web-site.

e Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization on January 14, 20XX, with a response date of February 16, 20XX. This letter was return by the post office on January 19, 20XX; with the statement

“Forward Time Exp Rtn To Send:

’

o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the address
; January 21, 20XX.

[Form 886-A page 1]

o Letter 3844-A (12-2015) with attachments, was mailed certified to the organization/president located at on March 11, 20XX, with a response date of April, 20XX, Article Number
. Per the United States Postal Service (USPS) tracking, this was returned on April 6, 20XX at 4:37 pm as unclaimed/max hold time expired. This letter was received back at the Internal Revenue Service on April 14, 20XX.

o Letter 3844-A (12-2015), with attachments, was mailed certified to the Director ( ), per Form 1023 application, on April 26, 20XX, with a respond date of May 26, 20XX. Article Number
. Per USPS tracking this was delivered, individual picked up at postal facility on April 29, 20XX at 6:52 AM. This letter was received back at the Internal Revenue Service on May 16, 20XX with the word “RTS No Longer here”.

o Letter 3844-A (12-2015), with attachments, was mailed certified to the organization/President, located at on April 26, 20XX, with a respond date of May 26, 20XX. Article Number
. This letter was return by the post office on April 29, 20XX at 8:40 am as “return to sender no such number unable to forward”. This letter was received back at the Internal Revenue Service on May 06, 20XX.

o Letter 3844-A (12-2015), with attachments, was mailed to the organization/President, located at on May 25, 20XX, with a respond date of June 22, 20XX. This letter was not returned.

e Telephone contact for the audit was as follows:

o May 25, 20XX, called the phone number listed on the Form 1023 application for the President of XXX-XXX-XXXX; when this phone number is called, a message says this is not a valid number.

o May 25, 20XX, per Google research located a phone number of XXX-XXX-XXXX; however, when calling this number the call will not go through.

o June 22, 20XX, Tax Compliance Officer (TCO) received a phone call from the President, XXX-XXX-XXXX. The President had received the letter mailed on May 25, 20XX. The following information was also provided by the president during this phone call:

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

[Form 886-A page 2]

« The President stated that the organization quit operating in 20XX.
« The President thought that the CFO had filed the final Form 990-PF.

« The President requested additional time to provide the information requested in Letter 3606 and Form 4564. An extension was granted to July 22, 20XX.

« The President stated that is
the correct mailing address for the President.

« The President stated the address at
, No longer existed and the building had been torn down.

« The President also stated the address at
is no longer a good address for the organization

« The President also stated that someone else is taking over the organization and will be starting it back up.

o July 26, 20XX, | received a voice message system (VMS) from the President stating:

« The bank provided the incorrect information. The President had called the bank and it will take a week or so for the bank to provide the correct information.

= The President wanted to know the correct address to send the response to. He stated a return envelope was not provided.

o July 26, 20XX, TCO return the President phone call and received VMS.

« TCO thanked the president for letting the TCO know there was a problem with the information received from the bank.

«= TCO provided the mailing address to send the response to.

• TCO granted an extension to August 09, 20XX.

o August 16, 20XX, TCO called the president at 10:20 AM MST and received VMS. A message was left that a reply had not been received from the organization and to call the TCO and provide an update. A return phone call was not received.

[Form 886-A page 3]

Law:

Internal Revenue Code (IRC) §501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual.

IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations.

IRC §6001 of the Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.

IRC §6033(a)(1) of the Code provides, except as provided in section 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.

Treasury Regulations (Regulation) 1.501(c)(3)-1 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).

Regulation §1.501(c)(3)-1(a)(1) of the regulations states that in order to be exempt as an organization described in section 501(c)(3), 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 test or the operational test, it is not exempt.

Regulation 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded as "operated exclusively" for one or more exempt purposes described in section 501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance of a 501(c)(3) purpose. Accordingly, the organization does not qualify for exemption under section 501(c)(3) of the Code.

[Form 886-A page 4]

Regulation §1.6001-1(c) of the Code provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3.

Regulation §1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at all time 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.

Regulation §1.6033-1(h)(2) of the regulations 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 section 6033.

Regulation §1.61-1 of the regulations provides that Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash.

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 section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status.

Organizations Position

The organization has failed to respond to all attempts to contact them

[Form 886-A page 5]

Governments Position

Based on the above facts, the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the organizational test or the operational test, it is not exempt.

In accordance with the above-cited provisions of the Code and regulations under sections 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 (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.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status.

Using the rationale that was developed in Revenue Ruling 59-95, the Organization's failure to provide requested information should result in the termination of exempt status.

Conclusion:

Based on the foregoing reasons, the organization does not qualify for exemption under section 501(c)(3) and its tax exempt status should be revoked.

It is the IRS's position that the organization failed to meet the reporting requirements under sections 6001 and 6033 to be recognized as exempt from federal income tax under 501(c)(3) of the Internal Revenue Code. Accordingly, the organization's exempt status is revoked effective January 1, 20XX.

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

[Form 886-A page 6]