Inactive nonprofit loses charitable exemption

Plain-English summary

A nonprofit had previously been automatically revoked for failing to file annual returns and was later reinstated as a section 501(c)(3) organization. During a later examination, the IRS found that the organization had become inactive and had no continuing exempt operations or planned regular financial activity. Its returns showed little or no evidence of exempt-purpose work, and one amended return reported no income or expenses. The IRS concluded that the organization failed the operational test because it did not primarily conduct activities that furthered an exempt purpose. It revoked the exemption effective as of the redacted date and required corporate income-tax returns for later years.

Ruling snapshot

• Question: Did an inactive organization with no demonstrated exempt-purpose activities continue to qualify under section 501(c)(3)?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 503, 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 58-617

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 21, 2016

Number: 201717041 Taxpayer Identification Number:

Release Date: 4/28/2017
Person to Contact:

Identification Number:

UIL: 501.03-00 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 September 18, 2014 is hereby revoked and you are no longer exempt
under section 501(a) of the Code effective September 18, 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 became inactive during 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
September 18, 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,
Mary Epps
Acting Director, EO Examinations

Enclosure:
Publication 892

Department of the Treasury Date: October 18, 2016

Internal Revenue Service
Tax Exempt and Government Entities
IRS Exempt Organizations Examinations

Taxpayer Identification Number:

Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

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

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

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.

Thank you for your cooperation.

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Enclosures:
Report of Examination

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

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
December 31, 20XX
Issue:
Whether qualifies for exemption under Section 501(c)(3)

of the Internal Revenue Code (IRC)?

Facts:
was incorporated in the state of on January 05, 20XX. The purposes of

per the Article of Incorporation are as follows:

A.

B.

C.

D.

E.
According to Exempt Organization’s auto revocation website, was auto revoked

for failure to file Form 990 for three consecutive years. The revocation date is May
15, 20XX. Revocation posting date is June 09, 20XX.

was reinstated in 20XX and the ruling date is September of 20XX. was
recognized to be exempt from federal income tax as an organization described in IRC
Section 501(c)(3).

was selected for examination for tax year ended 20XX. sole financial
activities for 20XX as follows:

Source of income received:
Interest
Income
01/15/XX -X.XX

02/14/XX -K.XX
05/15/XX -X.XX
06/13/XX -X.XX
07/15/XX -X.XX
08/15/XX -X.XX
09/15/XX -X.XX

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

December 31, 20XX

10/15/XX -X.XX
11/14/XX -X.XX
12/15/XX -X.XX

Total Interest Income -X.XX

Expenditures:
Bank Service Charges

Check 01/29/XX Fees XX.XX
Check 02/14/XX Annual Inactive Acct. Fee XXX.XX
Total Bank Service XXX.XX
Charges
Supplies
Check XX 01/21/XX Prospects X,XXX.XX
X
Total Supplies X,XXX.XX
Computer and Internet Expenses
Check XX 01/13/14 XXX.XX
X
Total Computer and Internet Expenses XXX.XX
Sponsorship
Check XX 01/02/14 XXX.XX
X
Total Sponsorship XXX.XX

amended 20XX Form 990-EZ stating in Part I that did not receive any
source of income or incurred any expenses.

According to Form 990-EZ for tax year ended 20XX, organization’s sole source of
income is from gross sales of inventory, less returns and allowances in amount of
$XX,XXX. And the sole expense is from professional fees and other payments to
independent contractors in amount of $XXX.

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

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

December 31, 20XX

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(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 for public
safety, literary, educational, or prevention of cruelty to children or animals.

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.

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

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. 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.

Government’s Position:

Failure to Meet the Operational Test

has failed to show us that meets the operational test for a § 501(c)(3)
organization for the year under examination. In order to meet the operational test,
must show that engages primarily in activities which accomplish one or more of
such exempt purposes specified in section § 501(c)(3). We will not regard an

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

December 31, 20XX

organization as having met this test if more than an insubstantial part of its activities is
not in furtherance of an exempt purpose.

As evidence of failure to operate for exempt purposes, we reviewed Form 990-
EZ filings and found little or no support for exempt operations. originally filed Form
990-EZ for tax year ended 20XX; Form 990-EZ does not state the exempt purpose or
describe the activities in Part III. The subsequent year return also does not show any
exempt purpose activities. Clearly, has not been performing exempt purpose
activities since 20XX, which is required for a §501(c)(3) organization to keep their tax-
exempt status. Accordingly, we are proposing revocation because does not
operate for exempt purposes.

Taxpayer’s Position:

Taxpayer's position is unknown at this time.
Conclusion:

It is the IRS’s position that does not qualify for exemption from federal income
tax under IRC §501(c)(3), because failed to show any evidence of their exempt
activities and failed to operated primarily for exempt purposes. As such, fails to
meet the operational requirements to continue its exemption status under IRC
501(c)(3). Accordingly, the organization’s exempt status is revoked effective
September 18, 20XX.

If you agree to this conclusion please sign the attached Form 6018.

If you disagree please submit a statement of your position.

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