Inactive youth-health charity loses exemption

Plain-English summary

An organization formed to promote health, exercise, and healthy eating among school-age children reported no funding and did not substantiate that it conducted field days, fitness classes, or nutrition classes. Its president said the organization had no operational activities and agreed to the proposed revocation. The organization also failed to provide requested organizational and financial records. The IRS concluded that it failed both the Section 501(c)(3) operational test and the recordkeeping and reporting requirements, and revoked its exemption.

Ruling snapshot

• Question: Did the organization continue to qualify under Section 501(c)(3) despite its lack of substantiated exempt activity and records?
• Outcome: Revocation effective January 1, 20XX.
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1

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: MAR 23 2018
DIVISION
Person to Contact:
Number: 201829014 Identification Number:
Release Date: 7/20/2018 Telephone Number:

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 regarding your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). Our favorable determination letter to you dated July 11,
20XX, 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 January 1, 20XX.

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), and that no part of your net earnings inure to the benefit of private
shareholders or individuals.

You failed to provide information and documents 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 failed 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 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 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,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Publication 892

Department of the Treasury Date: June 26, 2017

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

Exempt Organizations Examinations
Form:

Tax Year(s) Ended:
Person to Contact / ID Number.

Employee ID:
Contact numbers:
Telephone:
Fax:
Manager's Name / ID Number:

Employee ID:
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

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,

Maria Hooke
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
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Years/Period ended
20XX

ISSUE:

Whether continue to qualify for exemption under Internal Revenue code (IRC)

§501(c)(3)?

FACTS:

was issued their Determination Letter for tax-exemption under IRC §501(c)(3) on July
11, 20XX with an effective date of exemption of October 22, 20XX. The organization filed its
Articles of Incorporation with the Secretary of State for the State of on October 22, 20XX.
’ exempt purpose is to promote health, exercise, and healthy eating habits for school age
children. It educates communities and provides healthy after-school resources at school
recreation centers and hosts field day events for low-budget school districts with under-
privileged children.

was referred to the Exempt Organizations Examination division by the Tax Compliance
Office of the Small Business/Self Employed business unit. The organization’s President, ,
claimed the expenses that she paid for as a cash contribution on her Schedule A,
Itemized Deductions.

The organization filed Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt
Organizations Not Required to File Form 990 or Form 990-N. At the initial interview,

provided bank statement with of . The 01/1/20XX
statement showed a previous balance of $0. stated the funds were from a personal loan
she received for $0 in 20XX. The loan was deposited into the bank account to show
funds so that might qualify for grants. stated that the organization hadn't received
any funds since receiving exempt status. All expenses were paid by her.

The examiner requested documentation showing that was operating in accordance with
its exempt purpose. For example, provided a list of zero (0) schools where she
conducted field days. She stated that she has a vendor no. with ( )and
they had assigned zero (0) schools to for athletic programs. also stated that
conducted fitness and nutrition classes at .

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

Form 886-A (Rev.01-94) Page 1 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 Years/Period ended

20XX

(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.

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the
collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate
may from time to time prescribe.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt
from tax under § 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. The Secretary may also prescribe by forms or regulations the
requirement of every organization to 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.

Treas. Reg. § 1.6001-1(c) states that in addition to 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

Form 886-A (Rev.01-94) Page 2 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 Years/Period ended
20XX

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 -3.

Treas. Reg. § 1.6001-1(e) states 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.

TAXPAYER’S POSITION:

President, declared that the organization had no operational activities
since 20XX due to the ongoing IRS audits. Agent discussed revocation with on June
23, 20XX and she agreed to the proposed revocation as the organization no longer wants to
operate for an exempt purpose.

GOVERNMENT’S POSITION:

Failure to Meet the Operational Test

The EO has failed to show us that they meet the operational test for a § 501(c)(3) organization
for the year under examination. In order to meet the operational test, they must show that they
engage primarily in activities which accomplish one or more of such exempt purposes specified
in section § 501(c)(3). We will not regard an 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 the EO’s failure to operate for exempt purposes, the requested documentation to
show valid agreements with , , or any of the zero (0) schools mentioned wasn't
provided. The EO 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 they do not operate for exempt purposes.

Failure to Provide Records

The EO has failed to provide records as is required in Code § 6033(a)(1) and Regulation §
1.6033-1(h)(2). They failed to provide any organizational or financial information that we
requested during the examination.

Without the EO’s records, we cannot verify that they are operating according to their exempt
purpose. Our position is that the organization, then, is not operating for exempt purposes. They
have provided nothing to the contrary.

Form 886-A (Rev.01-94) Page 3 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 Years/Period ended
20XX

CONCLUSION:

By not complying with the Code and Regulations, has jeopardized its exempt status.

The documentation that they have provided to us failed to show that they are operating for
exempt purposes. They have also failed to provide required documentation, thereby failing to
be compliant with the Code, and failing to show any evidence of their exempt activities. We
have no reason to believe that is operating for exempt purposes.

As a result of the examination, we have determined that is not operating for exempt
purposes as a §501(c)(3) organization. They have not provided any information to the contrary.
Accordingly, since the organization failed to operate primarily for exempt purposes, we are
proposing revocation of their tax-exempt status, effective January 1, 20XX.

Since the organization will no longer have tax-exempt status beginning January 1, 20XX, they
are liable for filing Form 1120, U.S. Corporation Income Tax Return, as of that date.

Form 886-A (Rev.01-94) Page 4 Department of the Treasury - Internal Revenue Service