Charity loses exemption after failing to produce audit records

Plain-English summary

An organization obtained section 501(c)(3) status after filing Form 1023-EZ and was later selected for an audit of a Form 990-N filing. The IRS sent multiple examination letters to the organization and its officers and made repeated telephone calls, but received no records or substantive response. Without access to information about the organization's receipts, expenses, and activities, the IRS concluded that the organization had not established that it continued to operate exclusively for exempt purposes. It also found that the organization failed to meet the recordkeeping and information-production requirements of sections 6001 and 6033. The IRS revoked the exemption, ended the deductibility of contributions, and required the organization to file corporate income tax returns.

Ruling snapshot

• Question: May the organization retain section 501(c)(3) status after repeatedly failing to respond to an examination and produce requested records?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; 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

TAX EXEMPT AND Date: AUG 21 2017
GOVERNMENT ENTITIES
DIVISION
Release Number: 201752014 Person to Contact:
Release Date: 12/29/2017 Identification Number:
UIL Code: 501.03-00 Telephone Number:

In Reply Refer to: TE/GE Review Staff

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

CERTIFIED MAIL —Return Receipt Requested

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). Our favorable determination letter to you dated
is hereby revoked and you are no longer exempt under section 501(a),

as an organization described in section 501(c)(3) of the IRC, effective

Our adverse determination was made for the following reasons:

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 as required by Treas. Reg. section 1.501(c)(3)-

1(c)(1).

You failed to respond to repeated reasonable requests to allow the Internal
Revenue Service to examine your receipts, expenditures, or activities as
required by the Code sections 6001 and 6033(a)(1). As such, you fail to meet
the operational requirements for continued exemption under section 501(c)(3)
of the Code and Treas. Reg. section 1.501(c)(3)-1(a)(1).

Contributions to your organization are no longer deductible under section 170 of the 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 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 Court of Federal Claims 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. 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

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,

Director, Exempt Organizations Examinations
Enclosures:
Publication 892

Department of the Treasury                         Date: May 2, 2017
Internal Revenue Service                         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:

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

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,
Director, Exempt Organizations Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498
Form 1023-EZ

Letter 5436

Form 990-N

Letter 3618 (06-2012)
Catalog Number 34809F

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
Issues:
Whether (the organization), which qualified for exemption from Federal income

tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked due to its
failure to respond and produce records?

Facts:

applied for tax-exempt status by filing the Form 1023-EZ
on , and was granted tax-exempt status as a 501(c)(3) on
, with an effective date of .

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 amateur sports competition.

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

The organization failed to respond to the Internal Revenue Service attempts to obtain
information to perform an audit of Form 990-N for the tax year ending

The Form 1023 application list the phone number of for the
President of

Per the State of web-site, it lists the organization as in good
standing, copy attached from state web-site.

• Correspondence for the audit was as follows:
  ◦ Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
on , with a response date of . This letter

was not returned by the post office as being undeliverable.

  ◦ Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the

organization/President , with a response date of
March 10, 20xx. Article Number . Per the United
States Postal Service (USPS) tracking, the letter was signed for and received
on March 4, 20xx . This letter was signed for by . The signed
certified receipt was received back at the Internal Revenue Service on March
7, 20xx.

  ◦ Letter 3844-A (12-2015), with attachments, was mailed certified to

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

, Secretary per the Form 1023-EZ application, on March 22, 20xx, with a
respond date of April 10, 20xx. Article Number
Per USPS tracking this was claimed on March 29, 20xx. The certified signed
receipt was returned to the Internal Revenue Service on April 3, 20xx.

  ◦ Letter 3844-A (12-2015), with attachments, was mailed to the Trustee ,
on March 22, 20xx, with a respond date of April 10, 20xx. This letter was
return by the post office as being undeliverable.

  ◦ Letter 3844-A (12-2015), with attachments, was mailed to the Vice President
, with a respond date of April 10, 20xx _— This letter was return by the post
office as being undeliverable.

• Telephone contact for the audit was as follows:

  ◦ November 29, 20xx, 9:00 am , called the phone number listed on the
Form 1023 application for the President . Received
voicemail but unable to leave voicemail as mailbox is full.

  ◦ November 30, 20xx, 11:00 am __, called the phone number listed on the
Form 1023 application for the President . Received
voicemail but unable to leave voicemail as mailbox is full.

  ◦ December 6, 20xx, 11:00 am , called the phone number listed on the Form
1023 application for the President . Received
voicemail but unable to leave voicemail as mailbox is full.

  ◦ February 23, 20xx 9:45am , called the phone number
listed on the Form 1023 application for the President . Received
voicemail but unable to leave voicemail as mailbox is full.

  ◦ March 21, 20xx, 1 PM, called the phone number listed on the Form 1023

application for the President . Received voicemail
but unable to leave voicemail as mailbox is full.

  ◦ March 21, 20xx, 1:10 PM , called the phone number listed on the Form
1023 application for the Secretary . Received voicemail

and left message to contact me ASAP.
  ◦ March 21, 20xx, 2:00 PM , called the phone number listed on the Form

1023 application for the Trustee . Unable to leave
message.

  ◦ March 21, 20XX, 2:30 PM , called the phone number listed on the
Form 1023 application for the Vice President . Wrong number.

  ◦ March 21, 20xx, 3:00 PM , called the phone number listed on the
Form 1023 application for the Trustee . Spoke with his wife
he is deceased.

  ◦ April 10, 20xx, 9:45 am , called the phone number listed on the Form

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

Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
1023 application for the Secretary . Unable to leave
message the mail box was full.
  ◦ April 27, 20xx, 9:45 am , called the phone number listed on the Form
1023 application for the Secretary . Person that

answered the phone said it was the wrong number.

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.

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.

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).

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.

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

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.

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.

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

Organization’s Position

has failed to respond to all attempts to contact them.
As a result, the taxpayer’s position is unknown at this time.

Government’s Position

has failed repeatedly to respond to the
Service’s request for information and therefore is in violation of Treas. Reg. § 1.6033-
1(h)(2) which requires an organization to provide such information as requested to allow
the Service to make a determination of organization’s tax exempt status.

It is the Service’s position that failed to meet the reporting
requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal
income tax under IRC § 501(c)(3).

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 of 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:
It is the Internal Revenue Service's position that failed to meet the
reporting requirements under IRC § 6001 and 6033 to be recognized as exempt from federal
income tax under IRC § 501(c)(3). Furthermore, the organization has not established that it is
observing the conditions required for the continuation of its exempt status or that it is
organized and operated exclusively for an exempt purpose

Accordingly, tax exempt status is revoked effective
Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods
after

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -5-