Revokes inactive organization's exemption

Plain-English summary

An organization had previously lost exemption automatically for failing to file returns, then reapplied and received retroactive reinstatement under section 501(c)(3). Its stated plans included community beautification, scholarships, and construction of a community center, but it never began operations. The organization later said it wanted to terminate, filed a final return, and stated that it had no assets or liabilities. It did not provide filed articles of dissolution despite two IRS requests, so the IRS could not process a voluntary termination. The IRS concluded that the organization failed the operational test and revoked its exemption effective January 1 of a redacted year.

Ruling snapshot

• Question: Did an organization that never began operations continue to qualify under section 501(c)(3)?
• Outcome: Revocation, effective January 1 of a redacted year.
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 6104(c), and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

[Redaction note: the IRS release blanks the organization's identity, taxpayer identification number, contact information, state, years, and petition deadline.]

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: MAY 10, 2018

DIVISION

Person to Contact: Identification Number:

Number: 201833026 Telephone Number:
Release Date: 8/17/2018 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 January 30, 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 within the meaning of IRC section 501(c)(3).

You have not established that no part of your net earnings inure to the benefit of any private shareholder or individual.

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

Date:
February 21, 2018
Taxpayer Identification Number:

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

Exempt Organizations Examinations
Form:

Tax Year(s) Ended:
Person to Contact:

Employee ID:
Telephone:
Fax:
Manager's Contact Information:

Employee ID:
Telephone:
Response Due Date:

CERTIFIED MAIL — Return Receipt Requested
Dear

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3).

If you agree

If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above.

After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
   letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
   send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the

IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax- Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t apply now that we’ve issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
   Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals.

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 adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

The Taxpayer Advocate Service (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 877-777-4778.

For additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

If you have questions, you can contact the person shown at the top of this letter.

For: Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:

Form 886-A

Form 6018

Form 1023

Letter 947

Articles of Incorporation
Current Corporate Status

Form 886-A

Explanations of Items

Issue:

1. Does ( ) qualify for exempt status under Section

501(c)(3) of the Internal Revenue Code (IRC)?
Facts:

was automatically revoked in 20XXX for failing to file a return for three consecutive years. In August 20XX reapplied for exempt status (See attached Form 1023 and all addendum). stated in their Form 1023, that they would provide community beautification, and provide scholarships to high school graduates. Their goal was to build a community center. exempt status was reinstated on January 30, 20XX retroactively for May 15, 20XX. (See attached Letter 945 with addendum).

was incorporated on February 12, 20XX. The articles of incorporation contain a purpose and dissolution clause. As of February 20XX, they are deemed an active entity on the Secretary of State corporation site. (See attached articles of incorporation and current corporate status).

On December 8, 20XX, advised the Revenue Agent, that they had not begun operations, and wished to terminate. The Revenue Agent advised them, that in order to terminate their exempt statue they must file a final return, provide verification of the disposition of assets, and file articles of dissolution with their state. provided a formal statement with the Revenue Agent that they had no assets or liabilities. They filed their final 20XX return with the Revenue Agent on December 22, 20XX.

On December 22, 20XX, the Revenue Agent requested that file their articles of dissolution with the state of and provide her with a copy. The organization did not respond. The Revenue Agent sent out a follow up request on January 26, 20XX. As of February 20XX, the organization has not responded to both requests.

Law:

Section 501(c)(3) of the Internal Revenue Code (Code) exempts from federal income tax corporations, and any community chest, fund or foundation, organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, 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.

Treasury Reg. Section 1.501(c)(3)-1(a)(1) states that in order to qualify under section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more exempt purposes. If an organization fails to meet either the organizational or operational test, it is not exempt.

Treas. Reg. Section 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 of such exempt purposes specified in section 501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg 1.501(c)(3)-a(d)2 states one purpose that qualifies as a charitable purpose is the lessening of the burdens of government. An organization may be considered to lessen the burdens of government if a government unit (1) has accepted as its responsibility the activities conducted by the organization and (2) recognizes that the organization is acting on the government's behalf

Tax Payers Position:
Unknown
Governments Position:

has not begun operations since they incorporated in 20XX. Internal Revenue Code Section 501(c)(3) exempts from federal income tax corporations, and any community chest, fund or foundation, organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, 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. Treasury Reg. Section 1.501(c)(3)-1(a)(1) states that an exempt organization must meet both the organizational and operational test. Although the organizational documents contain the required clauses, fails the operational test, and thus, cannot remain exempt from taxation under Section 501(c)(3) IRC.

Conclusion:

Based on the Service’s review of all facts and analysis above, it is the government's position that exempt status should be revoked due to its failure to meet the operational test required by IRC Section 501(c)(3). The Revenue Agent, is unable to process a termination request without articles of dissolution filed with the state.

Accordingly, the organization’s exempt status should be revoked effective January 1, 20XX.

Form 1120, US Corporation Income Tax Return, should be filed for the tax periods ending on and after January 1, 20XX