Inactive service organization loses its exemption

Plain-English summary

An organization was formed to provide job-training facilities, residential treatment, and interpreter services for hearing-impaired people. During the examined year, it conducted no training, provided no facilities or services, and reported that it had been inactive since an earlier year. Its final return showed investment income and a savings-account balance, but it had not completed the steps needed to terminate or transfer the remaining assets to another qualifying charity. The IRS concluded that conducting no exempt activities failed the section 501(c)(3) operational test. It revoked the organization's exemption and the deductibility of contributions effective January 1 of the redacted year.

Ruling snapshot

• Question: Does the organization remain exempt after becoming inactive and conducting none of its stated charitable or educational activities?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3) and 509(a)(2); Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 90-27

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201752011
Release Date: 12/29/2017
UIL Code: 501.03-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

Date: JUL 27 2017

Person to Contact:
Identification Number:

Contact Telephone Number:
Telephone Number:

Fax:
EIN:

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a final determination that your exempt status under section 501(c)(3) of the Internal Revenue
Code is revoked. Recognition of your exemption under Internal Revenue Code section 501(c)(3) is

revoked effective January 1, 20xx for the following reason(s):

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.

Treasury Regulation §1.501(c)(3)-1(c)(1) states 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 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.

During the conduct of an examination, the President stated that

since sometime during 20xx. During 20xx
provided no facilities for services to anyone as it stated it would do in its Articles and in its
Form 1023. Neither were these activities conducted during the year ended December 31, 20xx.

had been inactive
conducted no training of any kind and

As such, you failed to meet the requirements of Internal Revenue Code section 501(c)(3) and
Treasury Regulation Section 1.501(c)(3)-1(d), in that you failed to establish that you were
operated exclusively for an exempt purpose.

Contributions to your organization are no longer deductible under section 170 of the Internal
Revenue Code effective January 1, 20xx.

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
subsequent years.

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, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court
for the District of Columbia. A petition or complaint in one of these three courts must be filed
within 90 days from the date this determination letter was mailed to you. 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. 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

You may also be eligible for help from the Taxpayer Advocate Service (TAS). 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 www.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,

Enclosures: Maria Hooke
Publication 892 Director, EO Examinations


Internal Revenue Service
Tax Exempt and Government Entities Taxpayer Identification Number:
IRS Exempt Organizations Examinations

Department of the Treasury                         Date: June 22, 2016

Form:

Tax Year(s) Ended:
Dec 31, 20xx
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager's Name/ID Number:

Manager’s Contact Number:

Response due date:
July 23, 2016

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.

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


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 A. Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Schedule number or exhibit

Form 886-A

Name of taxpayer Tax Identification Number Year/Period ended

Dec 31, 20xx

ISSUE:

Should the income tax exemption of Section 501(c)(3) be revoked since the organization fails the
operational test on the grounds that the failure to conduct any activities violates the requirement
that it be operated exclusively for exempt purposes?

FACTS:

, herein referred to as “ ” is recognized as an IRC
501(c)(3) and as a 509(a)(2) public charity. received its exemption from the Internal
Revenue Service on April 27, 19xx.

The Amended Articles of Incorporation filed on April 11, 19xx state in Article IV that the purpose of
the organization is to “provide training facilities for hearing impaired individuals who are in need of
job training or supervision, services to the deaf; etc.” Part Il of Form 1023 states that since 9-1-
19xx has provided a residential treatment facility for chemically dependent, hearing
impaired individuals and that since 11-1-19xx they have “provided interpreter services for hearing
impaired.” These activities were all included in the application form 1023.

Agent performed an examination of Form 990 filed by (“ ”)
for the year ended Dec 31, 20xx. This examination disclosed that there had been no activities
conducted by during the year under exam. The 20xx Form 990 was marked in its’
heading as a “Final Return”.

During the conduct of the examination, the President stated that had been inactive
since sometime during 20xx. During 20xx conducted no training of any kind and

provided no facilities for services to anyone as it stated it would do in its Articles and in its’ Form
1023. Neither were these activities conducted during the year ended December 31, 20xx.

Information Document Request #2 dated April 20, 20xx was provided to to assist in
completing the steps required to terminate the organization. Managing Director

told Agent during the examination that he wished to terminate the
organization. As of June 20, 20xx, no reply had been received to show that he had completed
any of the steps towards termination. The reply was due on May 11, 20xx.

The final return of showed income from investments of $xxx.xx but showed no
investments on the balance sheet. Upon inquiry, provided selected monthly
statements from where they maintain a savings account. The balance on the

October 31, 20xx account statement was shown as $xxx,xxx.xx. The Managing Director
showed me a cumulative list of earnings and losses for the organization to show that it had lost
money over its’ life. Agent stated that such losses did not carry forward and obviate the need to
donate all funds to another public charity in connection with its (proposed) termination.

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

Dec 31, 20xx

LAW:

IRC Section 501(c)(3) of the Internal Revenue Code (“IRC”) exempts from federal income tax
organizations which are organized and operated exclusively for charitable, educational, and other
exempt purposes, provided that no part of the organization’s net earnings inures to the benefit of
any private shareholder or individual.

Tax Reg. Section 1.501(c)(3)-1(a)(1) provides 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.

Tax Reg. Section 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an
organization described in section 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.

Reg. 1.501(c)(3)—1(c)(1) provide that an organization is “operated exclusively” for charitable
purposes only if it engages primarily in activities which accomplish one or more of such exempt
purposes specified in Section 501(c)(3).

REG 1.501(c)(3)-1(b)(4) provides that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets
will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such
assets would, by reason of a provision in the organization's articles or by operation of law, be
distributed for one or more exempt purposes, or to the Federal government, or to a State or local
government, for a public purpose, or would be distributed by a court to another organization to be
used in such manner as in the judgment of the court will best accomplish the general purposes for
which the dissolved organization was organized. However, an organization does not meet the
organizational test if its articles or the law of the State in which it was created provide that its
assets would, upon dissolution, be distributed to its members or shareholders.

IRC Section 509(a)(2) of the IRC specifies such public charities normally receive more than one-
third of its support in each taxable year from any combination of gifts, grants, contributions, or
membership fees, and from gross receipts from admissions, sales of merchandise, performance of
services, or furnishing of facilities.

Rev Proc. 90-27, 1990-1 C.B. 514, (April 30, 1990) states that a ruling or determination letter
recognizing exemption may be revoked or modified by (1) a notice to the taxpayer to whom the
ruling or determination letter originally was issued, (2) enactment of legislation or ratification of a
tax treaty, (3) a decision of the United States Supreme Court, (4) issuance of temporary or final
regulations, or (5) issuance of a revenue ruling, revenue procedure, or other statement published
in the Internal Revenue Bulletin. The revocation or modification may be retroactive if the

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

Dec 31, 20xx

organization omitted or misstated a material fact, operated in a manner materially different from
that originally represented, or, in the case of organization to which section 503 applies, engaged in
a prohibited transaction with the purpose of diverting corpus or income of the organization from its
exempt purpose and such transaction involved a substantial part of the corpus or income of such
organization. Where there is a material change, inconsistent with exemption, in the character, the
purpose, or the method of operation of an organization, revocation or modification will ordinarily
take effect as of the date of such material change.

GOVT POSITION:

Since the organization has failed to carry on exempt operations since January 1, 20xx through the
present, this constitutes a failure to meet the operational test and thus it does not qualify for tax
exemption under Section IRC 501(c)(3) of the IRC.

TAXPAYER POSITION:

The taxpayer has stated that they wish to terminate the organization but has not shown any
progress towards meeting the requirements for termination. As to their funds on hand, it is not
clear if the organization believes that prior period losses reduce the amount of net assets to be
given to a qualifying charity.

CONCLUSION:

The organization does not qualify for exemption under IRC 501(c)(3), therefore its tax exempt
status should be revoked effective January 1, 20xx.

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service