Unfunded organization loses exemption after incomplete dissolution

Plain-English summary

A recently recognized charity intended to distribute religious teddy bears to children but was unable to obtain funding. Its president said the organization wanted to close, filed a Form 990-N marking the termination box, and reported that it had no assets and a negative account balance. The state had involuntarily dissolved the corporation for failure to file an annual report, but state law allowed reactivation and the organization did not file the formal dissolution documents requested by the IRS. It also did not provide the records needed to verify that it had operated exclusively for exempt purposes or met its reporting duties. The IRS therefore revoked the exemption rather than recognizing a completed termination.

Ruling snapshot

• Question: Did the organization establish continued Section 501(c)(3) qualification or complete a proper dissolution?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(3), 6001, 6033, 6043(b); Treas. Reg. §§ 1.501(c)(3)-1(a), 1.6001-1, 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue
Service TEGE EO
Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES .
DIVISION Date: JAN 31, 2018

Person to Contact:

Number: 201829019 Identification Number:

Release Date: 7/20/2018 Employee Telephone Number:
In Reply Refer to:

EIN:

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 as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the code is hereby revoked effective January 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations described in I.R.C. § 501(c)(3) and exempt under section 501(a)
must be both organized and operated exclusively for exempt purposes. You
have failed to produce documents or otherwise establish that you are operated
exclusively for exempt purposes and that no part of your net earnings inures to
the benefit of private shareholders or individuals. You failed to respond to
repeated reasonable requests to allow the Internal Revenue Service to examine
your records regarding your receipts, expenditures, or activities as required by
I.R.C. § 6001, 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

Contributions to your organization are no longer deductible under section 170 of the Internal
Revenue Code.

You are required to file Federal income tax returns on Form 1120. If you have not already
filed these returns and the agent has not provided you instructions for converting your
previously filed Form 990 to Form 1120, you should file these income tax returns with the
appropriate Service Center for the tax year ending December 31, 20XX and for all tax years
thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments 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:

United States Tax Court, the United States Court of Federal Claims, or the United States
District Court for the District of Columbia. A petition or complaint in one of these three
courts must be filed before the 91st day after the date this determination was mailed to you
if you wish to seek review of our determination. 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. Please note that the United States Tax Court is
the only one of these courts where a declaratory judgment action can be pursued without the
services of a lawyer. You may write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439

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.

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, EO Examinations

Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities Division

Date: July 14, 2017
Taxpayer Identification Number:
Form:
Tax year(s) ended:
Person to contact / ID number:
Contact numbers:
Phone Number:
Fax Number:
Manager's name / ID number:
Manager's contact number:
Phone 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.

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

Thank you for your cooperation.

Enclosures:

Report of Examination
Form 6018

Form 4621

Publication 892
Publication 3498

Form 1023EZ
Determination Letter 5436

Sincerely,

Maria Hooke
Director, EO Examinations

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
20XX
Date of Notice: July 14, 20XX
Issues:
Whether qualified for exemption from federal income tax under

Section 501(c)(3) of the Internal Revenue Code by meeting the organizational and
operational requirements.

Facts:

The organization filed Form 1023EZ for exemption on July 31, 20XX and was granted
exemption as a 501(c)(3) on August 11, 20XX with an effective date of July 31, 20XX.

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

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.

Letter 3606 was sent to organization with Information Document Request (IDR) on
December 20, 20XX. IDR was requesting copy of Articles of Incorporation, description of
activities, statement of revenues, expenses, assets and liabilities and meeting minutes from
January 1,20XX. Questions were also asked regarding paying compensation to officers,
trustee or directors and donating or paying funds or expenses for individuals.

The organization responded on January 4, 20XX with a phone call from President.
She stated she was confused because she just received a letter telling her that the
organization had been dissolved then she received my letter asking about the audit. | asked
her if the first letter was from the State of as I can see onthe state website their
organization had been dissolved for not filing their annual return.

said she had not been able to come up with any funding for the organization. The only
grant she could get was one from who wanted her to take the words Jesus off of
the Teddy Bears they were going to give to children. She said without Jesus in her life when
she was a young girl she would never have survived and turned the grant down.

said she wants to terminate.

has been involuntarily dissolved by the state for not filing an annual
report.

Have not received requested information in regard to termination. On February 3, 20XX I
called and was unable to leave voicemail because her voicemail was full. Called
again on February 10, 20XX and still no way to leave voicemail. Sent letter 3844-A with
IDR (Information Document Request) certified asking her to provide a dissolution statement
and to file the 20XX 990-N and mark the termination box. Request was made that if she has

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

Page: -1-

Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX

Form 886-A

changed her mind and no longer wishes to terminate then she needs to send me the
information from my original Letter 3606 with IDR dated December 10, 20XX.

Received fax from on February 10, 20XX showing me she has e-filed her 990-N for
20XX and marked the termination box. She wrote on her copy of the 990-N print out that
organization is closing due to lack of funding.

Received signed certified receipt back on February 16, 20XX.

On February 14, 20XX I tried to call to ask her for dissolution of assets statement.
There was no way to leave voicemail because voicemail box’s full. Tried to call again on
February 15, 20XX and no pickup or anyway to leave voicemail.

On March 3, 20XX sent Letter 3844-A with IDR certified asking for dissolution of asset
documents. Letter came back undeliverable.

Found phone numbers for officers identified on Form 1023EZ. Called , and
on April 13, 20XX and left voicemails to have them call me regarding

Received call from on April 13, 20XX and she said she thought this had all been

taken care of. sent statement of dissolution of assets on April 19, 20XX.
Statement from states she wants to dissolve and there are no assets and account is in

the negative. She has taken responsibility to pay any outstand bills and debts.

still has not dissolved with the state of . Since the organization was dissolved by
the state the organization can come back in and pay the late annual report fee and be
reactivated.

Organization has failed to file the proper dissolution forms with the State of

Calls have been made to at and to dissolve with the
state and send proof of the dissolution but as of this date no response has been received.

Requirements of the State of request organizations to report to the Secretary of State
any change in the corporate name, duration or purpose will require the Articles of
Incorporation be amended, using the proper form. Also, should the corporation need to
report a merger, dissolution or reinstatement; it should use the proper form. All forms for
these reports are available from the Secretary of State and should be filed upon the
occurrence of the particular event.

Law:

501(c)(3)

§501(c)(3) Requires tax exempt entities 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.

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

Page: -2-

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX

Treas. Reg. § Reg. 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)

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.

Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that every
organization exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511
on its unrelated business income must keep such permanent books or accounts or records,
including inventories, as are sufficient to establish the amount of gross income, deduction,
credits, or other matters required to be shown by such person in any return of such tax. Such
organization shall also keep such books and records as are required to substantiate the

information required by IRC § 6033.

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 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 § 6033(a)(1) provides, except as provided in IRC § 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.

Treas. Reg.§ 1.6033-1(h)(2) 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 IRC § 6033.

IRC § 6043(b) Every organization which for any of its last 5 taxable years preceding its
liquidation, dissolution, termination, or substantial contraction was exempt from taxation under
section 501(a) shall file such return and other information with respect to such liquidation,
dissolution, termination, or substantial contraction as the Secretary shall by forms or regulations

prescribe.

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 IRC § 6033 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: -3-

Name of Taxpayer Year/Period Ended
20XX

Taxpayers Position:

E-filed 990-N for December 31, 20XX and marked termination box.
Sent statement stating they want to close and there were no assets.

Government's Position:

Based on the above facts, the organization did not respond to verify that they are organized and
operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an
organization fails to meet either the organizational test or the operational test, it is not exempt.

In accordance with the above cited provisions of the Code and regulations under IRC §§ 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 return (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.

Also based on the above facts, the organization also did not respond to verify that they have

properly dissolved the corporation under the State of for us to acknowledge a proper
termination per IRC §6043(b).
Organizations in the State of must notify the state attorney general or other appropriate

state office of the organization's intent to dissolve, liquidate, or terminate. You failed to provide
a certified copy of your articles of dissolution to the state and to the Internal Revenue Service.

This is relevant in the examination process to determine if an organization has properly
terminated.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall
submit additional information for the purpose on enabling the Internal Revenue Service to
inquire further into its exempt status.

Conclusion:

It is the Internal Revenues position that the organization failed to meet the reporting
requirements under IRC §§ 6001, 6033, and 6043.

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.

Furthermore, by failing to file the articles of dissolution with the state and providing the Internal
Revenue Service a copy of the articles of dissolution we are unable to acknowledge that the
organization has been properly terminated. The organization's tax exempt status is revoked
with the effective date of January 1, 20XX.

Form(s) 1120, U.S. Corporation Income Tax Return should be filed for the tax periods ending
on or after December 31, 20XX.

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