Inactive charity loses exemption after incomplete filings

Plain-English summary

A section 501(c)(3) organization had once collected clothing and goods for a shelter but later had no receipts, expenditures, or activities. Its president told the examining agent that maintaining exemption was no longer a priority for the officers and that the organization did not intend to continue operating. Despite repeated calls and instructions, the organization submitted an incomplete Form 990, filed Form 990-N for the wrong year, and did not provide the requested final filing or written explanation. The IRS concluded that the organization failed to show it was conducting activities in furtherance of exempt purposes and did not provide required records. It revoked the exemption effective January 1 of the redacted year.

Ruling snapshot

• Question: Does the inactive organization remain exempt when it fails to provide complete returns and records supporting exempt activities?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033(a)(1); Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1(h)(2); Rev. Rul. 59-95

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 Date: JUN 15 2017
DIVISION
Person to Contact:
Identification Number:
Number: 201751020 Telephone Number:
Release Date: 12/22/2017 In Reply Refer to:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested
Dear

This is a Final Adverse Determination Letter that your exempt status under section 501(c)(3)
of the Internal Revenue Code (IRC) is revoked. Recognition of your exemption under IRC
section 501(c)(3) is revoked effective January 1, 20xx.

Our adverse determination was made for the following reason(s):

You have not established that you are operated exclusively for an exempt
purpose or that you have been engaged primarily in activities that accomplish
one or more exempt purposes within the meaning of IRC section 501(c)(3).

Contributions to your organization are not deductible under section 170 of the Internal
Revenue Code.

You are required to file Federal income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the year ending December 31, 20xx and for all
years thereafter.

Processing of income tax returns and assessment 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 in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District
Court of the United States for the District of Columbia before the 91st day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment.


The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect your 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.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely yours,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosure:
Publication 892


Department of the Treasury Date:

Internal Revenue Service June 14, 2016
IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:
Form:

Tax year(s) ended:

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.

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


Internal Revenue Service Schedule number or exhibit
Form 886-A Department of the Treasury- Internal Revenue Service
(Rev. January 1994) Explanation of Items
Name of Organization/Taxpayer Tax Identification Number Year/Period ended
December 31, 20xx
Issues:
Whether (Organization) tax exempt status under Internal Revenue Code (IRC) Section

(Sec.) 501(c)(3) should be revoked.

Whether (Organization) is liable for filing Form 1120 U.S. Corporation Income Tax
Return for the tax year 20xx and all years thereafter.

Facts:

The Organization filed Form 1023 for exemption on July 10, 20xx and was granted exemption under IRC
Sec. 501(c)(3) on July 27, 20xx with an effective date of exemption of January 26, 20xx.

Internet research on the Secretary of State’s website shows that Franchise Tax Board suspended the
Corporate status of the organization on December 1, 20xx.

An organization exempt under IRC Sec. 501(c)(3) must be organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary or educational purposes and to foster national and
amateur sports competition.

The organization was selected for audit to ensure that the Organization's activities and operations align with
its approved exempt status.

The organization failed to respond to the Internal Revenue Service attempts to obtain information to perform
an audit of Form 990 for the above mentioned tax period.

Correspondences for the audit were as follows:

— Initial Letter 3606 (Rev. 6-2012) with attachments were mailed to the organization on May 12, 20xx, with
a response date of June 3, 20xx.

— Initial EOCA Letter 0000 was mailed on June 19, 20xx.

— Second Letter 3606 (Rev. 6-2012) with attachments were mailed to the organization at two different
address per Internet research on November 10, 20xx.

— Second EOCA Letter 0000 was mailed was via regular mail to the organization at both addresses on
December 9, 20xx with a response date of January 6, 20xx.

— Incomplete Form 990 for tax year ending December 31, 20xx was received from the organization on
December 17, 20xx.

Telephone contacts for the audit were as follows:
— November 10, 20xx. Revenue Agent (RA) called the phone number listed on the Form 1023 application

for , President. RA received voice mail and left a message for an officer to return the
phone call. RA also left message that the case had been reassigned.

Form 886-A (1-1994) Page 1 of 6 Department of the Treasury-Internal Revenue Service


Internal Revenue Service Schedule number or exhibit

- €
Form 886-A Department of t Treasury nternal Revenue Servic:
(Rev. January 1994) Explanation of Items
Name of Organization/Taxpayer Tax Identification Number Year/Period ended
December 31, 20xx
— November 20, 20xx. RA received a return phone call from (President). She confirmed

that she was still an organizational officer. She indicated to the RA that she contacted and informed the
prior agent of the following: 1) The organization collected clothing and goods for a shelter a while ago; 2)
It has not received and/or expended anything since then; and 3) It has not done anything, but she will try
to hold a fundraiser by the end of the year if the organization must do so. She also indicated that
remaining exempt is not the organization's priority anymore due to various life changes and
commitments for all of the officers. The RA requested that the President confirm the aforementioned in
writing and file Form 990-N for 20xx12 with the “Final Return/Terminated” box checked.

— November 23, 20xx. RA contacted the President to confirm that Form 990-N contains “Final
Return/Terminated” box option.

— December 21, 20xx. RA attempted to return the President’s call. RA left message to confirm that Form
990 for the subject year was received; however, RA informed the President to check the “Final
Return/Terminated” box, sign and date the return and mail it. RA also left message informing the
President to submit a brief statement to confirm that the organization has not been conducting activities
and does not intend to continue to do so.

— March 3, 20xx. RA contacted the President. She indicated that she never received RA’s voicemail of
December 21, 20xx. RA provided the same instructions. The President indicated that she would
complete and file Form 990-N. RA requested that she forward copy of Form 990-N filing
acknowledgement.

— March 17, 20xx. RA contacted the President to inform her that Form 990-N was filed for the incorrect
year. EO Select Check on www.irs.gov showed that the organization filed Form 990-N for tax year
20xx. RA requested again that the organization file Form 990-N for 20xx12 and submit an explanation
regarding the organization’s lack of activities.

— March 28, 20xx. RA made a follow-up call to the President. The President stated that she completely
forgot about submitting Form 990-N until she recently found her notes. She stated that Form 990-N and
statement will be submitted as soon as possible.

— March 30, 20xx. RA received voicemail from the President stating that she is experiencing technical
difficulties on www.irs.gov. RA confirmed that the website was having problems. RA contacted the
President to inform her that Form 990-N can only be filed electronically. The President stated that she
will complete Form 990-N and mail explanation.

— April 25, 20xx. RA contacted the President to follow-up on March 30th discussion. She asked for
confirmation of RA’s address and stated that the mailing address did not sound familiar. She stated
that she will check her records and mail everything again.

— May 6, 20xx. RA contacted the President again. She stated that she mailed the requested documents,
but will either send them again via certified mail or drop them off at the RA’s post of duty because she
anticipates being in the area sometime within the next couple of weeks. RA emphasized that Form 990
needs to have an original signature.

No further communication was received from the President and no information was information was
submitted. The Organization failed to provide evidence to support that its activities are being conducted in

Form 886-A (1-1994) Page 2 of 6 Department of the Treasury-Internal Revenue Service


Internal Revenue Service Schedule number or exhibit
Form 886-A Department of t ¢ Treasury- nternal Revenue Service
(Rev. January 1994) Explanation of Items
Name of Organization/Taxpayer Tax Identification Number Year/Period ended
December 31, 20xx

furtherance of its exempt status.

Law:

IRC Sec. 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.

IRC Sec. 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 Sec. 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, including those described in section 501(c)(3).

IRC Sec. 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 Sec. 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.

IRC Sec. 1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at
all times available for inspection by authorized Internal Revenue Service officers or employees, and shall be
retained as long as the contents thereof may be material in the administration of any Internal Revenue law.

IRC Sec. 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.

Federal Tax Regulations (FTR) Sec. 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.

Form 886-A (1-1994) Page 3 of 6 Department of the Treasury-Internal Revenue Service


Internal Revenue Service Schedule number or exhibit
Form 886-A Department of the reasury- internal Revenue Service
(Rev. January 1994) Explanation of Items
Name of Organization/Taxpayer Tax Identification Number Year/Period ended
December 31, 20xx

FTR Sec. 1.501(c)(3)-1(a) 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).

FTR Sec. 1.501(c)(3)-1(a)(1) 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.

FTR Sec. 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.

Revenue Ruling 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. Sec. 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.

IRC Sec. 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 Sec. 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, including those described in section 501(c)(3).

IRC Sec. 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 Sec. 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.

Form 886-A (1-1994) Page 4 of 6 Department of the Treasury-Internal Revenue Service


Internal Revenue Service Schedule number or exhibit
Form 886-A Department of t ¢ Treasury- internal Revenue Service
(Rev. January 1994) Explanation of Items
Name of Organization/Taxpayer Tax identification Number Year/Period ended
December 31, 20xx

IRC Sec. 1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at
all times available for inspection by authorized Internal Revenue Service officers or employees, and shall be
retained as long as the contents thereof may be material in the administration of any Internal Revenue law.

IRC Sec. 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.

FTR Sec. 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.

FTR Sec. 1.501(c)(3)-1(a) 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).

FTR Sec. 1.501(c)(3)-1(a)(1) 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.

FTR Sec. 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.

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.

IRC Sec. 11(a) imposes a tax for each taxable year on the taxable income of every corporation.
IRC Sec. 11(b)(1) provides the amount of the tax imposed by subsection (a, which shall be the sum of:

— IRC Sec. 11(b)(1)(A) 15 percent of so much of the taxable income as does not exceed $50,000,

— IRC Sec. 11(b)(1)(B) 25 percent of so much of the taxable income as exceeds $50,000 but does not
exceed $75,000,

— IRC Sec. 11(b)(1)(C) 34 percent of so much of the taxable income as exceeds $75,000 but does not
exceed $10,000,000, and

~— IRC Sec. 11(b)(1)(D) 35 percent of so much of the taxable income as exceeds $10,000,000.

Form 886-A (1-1994) Page 5 of 6 Department of the Treasury-Internal Revenue Service


Internal Revenue Service Schedule number or exhibit
Form 886- A Department of the reasury- nternal Revenue Service |
(Rev. January 1994) Explanation of Items
Name of Organization/Taxpayer Tax Identification Number Year/Period ended
December 31, 20xx

IRC Sec. 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including:

— IRC Sec. 162(a)(1) a reasonable allowance for salaries or other compensation for personal services
actually rendered;

— IRC Sec. 162(a)(2) traveling expenses (including amounts expended for meals and lodging other than
amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of
a trade or business; and

— IRC Sec. 162(a)(3) rentals or other payments required to be made as a condition to the continued use or
possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not
taking title or in which he has no equity.

IRC Sec. 6020(a) states that if any person shall fail to make a return required by this title or by regulations
prescribed thereunder, but shall consent to disclose all information necessary for the preparation thereof, then,
and in that case, the Secretary may prepare such return which being signed by such person, may be received
by the Secretary as the return of such person.

IRC Sec. 6020(b)(1) states that if any person fails to make any return required by any Internal Revenue law or
regulation made thereunder at the time prescribed therefore, or makes, willfully or otherwise, a false or
fraudulent return, the Secretary shall make such return from his own knowledge and from such information as
he can obtain through testimony or otherwise.

IRC Sec. 6020(b)(2) states that any return so made and subscribed by the Secretary shall be prima facie good
and sufficient for all legal purposes.
Government’s Position

The organization has failed to provide information and/or documentation to support that Organization is
conducting activities in furtherance of their exempt status, which was requested during numerous
conversations with the President. Therefore, exempt status of Organization should be revoked and Form
1120, U.S. Corporation Income Tax Return, should be filed for 20xx and each year thereafter as long as the
organization remains subject to Federal income tax. If the proposed revocation becomes final, appropriate
State officials will be notified of such action in accordance with §6104(c) of the Internal Revenue Code.

Organization’s Position
The organization has failed to provide information as requested during numerous conversations with the
President.
Conclusion:
Since the organization was not operating exclusively for the exempt purpose under IRC section 501(c)(3), for
which it obtained its exempt status, its Federal tax exempt status under such section should be revoked

effective January 1, 20xx. is liable for filing Form 1120 U.S. Corporation Income Tax
Return for the tax year ended December 31, 20xx and all years thereafter.

Form 886-A (1-1994) Page 6 of 6 Department of the Treasury-Internal Revenue Service