Inactive mentoring organization loses its exemption

Plain-English summary

A section 501(c)(3) organization focused on low-income and minority populations and provided mentoring to young people through workshops and other activities. It ceased operations because of operating losses and later had no operational or financial activity apart from paying outstanding debts. Its representative agreed with the proposed revocation and said the organization had no plans for future activities. The IRS concluded that an inactive organization conducting no exempt activities failed the section 501(c)(3) operational test. It revoked the organization's exemption effective December 31 of the redacted year, and contributions were no longer deductible under section 170.

Ruling snapshot

• Question: Does an organization remain exempt under section 501(c)(3) after it ceases operations and has no plans for future exempt activities?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(c)(3), and 503; 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

Date: JUL 17 2017

Release Number: 201752010
Release Date: 12/29/2017
UIL Code: 501.03-00

Person to Contact:
Identification Number:
Telephone Number:
In Reply Refer to:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: OCT 30 2017

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 December 31, 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                           August 17, 2016
Tax Exempt and Government Entities                 Taxpayer Identification Number:
IRS Exempt Organizations Examinations

                                                   Form:

                                                   Tax Year(s) Ended:
                                                   December 31, 20xx
                                                   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

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

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

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

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


Form 886A                 Department of the Treasury - Internal Revenue Service
                                      Explanation of Items

Name of Taxpayer                                  Schedule No. or Exhibit
                                                  Year/Period Ended
                                                  20xx12

ISSUE:

Whether                 , continues to qualify for exemption as an organization
described in the Internal Revenue Code (IRC) Section 501(c)(3) because of no
operation or activity since July 20xx which includes the year of examination.

FACTS:

                 (Hereafter                 ) was incorporated under the laws of the
State of                 as a non-profit corporation on May 13, 20xx for the purpose of the
following:

                 SPECIFICALLY FOCUS ON LOW-INCOME AND MINORITY
          POPULATIONS WITH A COMMITMENT TO COMMUNITY SERVICE, CIVIC
                 ENGAGEMENT AND ECONOMIC DEVELOPMENT

On April 28, 20xx                 was recognized to be exempt from federal income tax as
an organization described in IRC Section 501(c)(3).

                 has operated to provide mentoring to low income and minority youth
through workshops and other activities. In July 20xx the organization ceased
operations due to operating losses. The organization has not been activity since July
20xx.

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
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.

Form 886-A (Rev.4-68)             Department of the Treasury - Internal Revenue Service
Page: -1-


Form 886A                 Department of the Treasury - Internal Revenue Service
                                      Explanation of Items

Name of Taxpayer                                  Schedule No. or Exhibit
                                                  Year/Period Ended
                                                  20xx12

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.

TAXPAYER’S POSITION:

The organization’s representative declared that the organization has no operational
or financial activities since July 20xx. Agent discussed revocation with the
organization’s representative on August 16, 20xx and he agreed to the proposed
revocation as organization is no longer operating for an exempt purpose.

GOVERNMENT'S POSITION AND CONCLUSION:

As demonstrated in Rev. Rul. 58-617, an organization’s exempt status will remain in
effect 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. In
the case of                 the organization has been inactive for since July
20xx and has no plans for future activities. The sole financial activity is from payment
of outstanding debts. As such,                 fails to meet the operational
requirements to continue its exemption status under IRC 501(c)(3). Therefore the
effective revocation date will be December 31, 20xx.

Form 886-A (Rev.4-68)             Department of the Treasury - Internal Revenue Service
Page: -2-


Form 886A                 Department of the Treasury - Internal Revenue Service
                                      Explanation of Items

Name of Taxpayer                                  Schedule No. or Exhibit
                                                  Year/Period Ended
                                                  20xx12

Conclusion:

It was determined the organization does not meet the requirements under 501(c)(3) or
501(c)(3) of the code.

Forms 1120, U.S. Corporation Income Tax Return should be obtained for the fiscal
years December 31, 20xx to the present.

If this proposed revocation becomes final, appropriate State officials will be
advised of the action in accordance with Internal Revenue Code Section 6104(c)
and applicable regulations. The organization may re-apply for tax exemption as
long as it can be determined their activities meets the section’s exempt purpose.

Form 886-A (Rev.4-68)             Department of the Treasury - Internal Revenue Service
Page: -3-