Inactive charity lost its section 501(c)(3) exemption

Plain-English summary

A public charity formed to support rural development, youth empowerment, and people in poverty stopped operating, had no income or assets during the examination year, and was administratively dissolved by its state. Its board president agreed to revocation and confirmed the decision to dissolve. The IRS concluded that an organization with no operations or activities could not satisfy section 501(c)(3)’s operational test. It revoked the exemption effective on a redacted date and required Form 1120 corporate income tax returns for that year and later years. Contributions were no longer deductible under section 170.

Ruling snapshot

• Question: Could an inactive and dissolved organization continue to qualify under section 501(c)(3)?
• Outcome: revocation, because it had ceased operations and no longer met the operational test
• Key authorities: IRC §§ 170, 501(c)(3), 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 90-27; Rev. Rul. 58-617

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
DIVISION

Date: December 13, 2018

UIL: 501.03.00

Number: 201921015
Release Date: 5/24/2019

Person to Contact:
Identification Number:
Telephone Number:
In Reply Refer to:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

CERTIFIED MAIL – Return Receipt Requested

Dear [redacted]:

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 December
18, 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).

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,

[signature]
for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Publication 892

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

Date:
June 8, 2018

Taxpayer Identification Number:

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 [redacted]:

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.

Sincerely,

[signature]

Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018
Form 4621-A
Publication 892
Publication 3498

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Form 886-A (May 2017)
Department of the Treasury – Internal Revenue Service
Explanations of Items

Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended: 12/31/20XX

Issue:

Whether [redacted], continues to qualify for exemption
as an organization described within Internal Revenue Code (IRC) 501(c)(3) because of no
operation or activity since December 31, 20XX, which includes the year of examination.

Facts:

The organization incorporated with [redacted] Secretary of State office on May 7, 20XX, as a
nonprofit organization under the name [redacted]. An amended Articles of Incorporation was filed
on March 19, 20XX, which changed their name to [redacted].

The organization’s purpose is described in their Articles of Incorporation as rural development,
youth empowerment to encourage and help those in poverty with future plans to help them get
social services.

On December 18, 20XX, the organization was granted exemption under IRC 501(c)(3)
public charity status for section 509(a)(1) and 170(b)(1)(A)(vi). On September 22, 20XX,
Secretary of State filed the organization’s status as administrative dissolution and inactive.

During the examination, the board president stated the organization has ceased operations. There
were no activities, no income and no assets during year 20XX. Form 990-N for year 20XX was the
last return filed by the organization. Revocation was discussed with the board president on May
23, 20XX and May 24, 20XX. The board president agreed with proposed revocation. He stated he
thought the organization would be automatically revoked. In addition, the agent received a faxed
letter from the organization on May 24, 20XX, that confirms the organization decision to dissolve
the company.

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 (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 Procedure 90-27, 1990-1 CB 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
organization omitted or misstated a material fact, operated in a manner materially different from
that originally represented, or in the case of organizations 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. In cases where a ruling or
determination letter was issued in error or is no longer in accord with the holding of the Service,
when section 7805(b) relief is granted (see sections 15 and 18 of Revenue Procedure 90-4),
retroactivity of the revocation or modification ordinarily will be limited to a date not earlier than that
on which the original ruling or determination letter is modified or revoked.

Revenue Ruling 58-617, 1958-2 CB 260, (January 1, 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. The District Director of the Internal
Revenue for the district in which the organization is located must be advised immediately of any
such changes in order that a determination may be made as to the effect the changes may have
upon the exempt status of the organization. See generally sections 1.501(a)-1 and 1.6033-1 of
the Income Tax regulations. Failure to comply with this requirement may result in serious
consequences to the organization because 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.

Taxpayer’s Position:

The board president said the organization ceased operations. There were no activities, no income
and no assets during year 20XX. Form 990-N for year 20XX was the last return filed by the
organization. Revocation discussed with the board president on May 23, 20XX and May 24, 20XX.
The board president agreed with proposed revocation. He thought the organization would
automatic revoke. In addition, received faxed letter from the organization on May 24, 20XX, that
confirms the organization decision to dissolve the company.

Government’s Position and Conclusion:

The Service position is that, the organization has been inactive since December 31, 20XX.
Operations have ceased for this entity. As such, [redacted]
fails to meet the operational requirements to continue its exemption status under IRC 501(c)(3).
The effective date of revocation will be January 1, 20XX.

If you agree to this conclusion, please sign the attached forms.

If you disagree, please submit a written statement of your position with supporting law.