Charity loses exemption after failing to provide records for audit

Plain-English summary

The IRS revoked a charity's section 501(c)(3) exemption after it repeatedly failed to provide records requested for an audit of its Form 990-N filing. The organization did not establish that it operated exclusively for exempt purposes, avoided private inurement, or maintained records showing its receipts, expenditures, and activities. The examination report recounts several mailed requests and telephone contacts, including a conversation in which an officer said the organization had little activity after its president died and might terminate. Under sections 6001 and 6033 and Revenue Ruling 59-95, the IRS concluded that failure to supply the requested information prevented the organization from showing continued eligibility for exemption. Revocation and the loss of contribution deductibility were effective January 1 of a redacted year.

Ruling snapshot

• Question: Did the organization establish continued qualification under section 501(c)(3) by providing records requested during its audit?
• Outcome: Revoked effective January 1 of a redacted year.
• Key authorities: IRC §§ 170, 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected. One unreadable handwritten signature is marked as illegible; wording is otherwise verbatim.

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: February 5, 2019

Release Number: 201922037
Release Date: 5/31/2019
UIL Code: 501.03-00

Tax Year Ending:

Taxpayer Identification Number:
Person to Contact:

Employee Identification Number:

Employee Telephone Number:

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section
501(c)(3) effective January 1, 20XX. Your determination letter dated December 12, 20XX is
revoked.

The revocation of your exempt status was made for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax
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 inure 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 sections 6001 and 6033(a)(1) and the regulations thereunder.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

Organizations that are not exempt under section 501 generally are required to file federal income
tax returns and pay tax, where applicable. For further instructions, forms, and information, please

visit www.irs.gov.

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: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment
by referring to the enclosed Publication 892. You may write to the courts at the following
addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you file
a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

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 1-877-777-4778.

If you have any questions about this letter, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

Date:
06/19/2018

Department of the Treasury
Internal Revenue Service

Tax Exempt and Government Entities Division Taxpayer ID number:
IRS Exempt Organizations Examination

Form:
Tax periods ended:

Person to contact:

Employee ID number:
Telephone number:
Fax:

Address:

Manager’s contact information:

Employee ID number:

Telephone number:
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.

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

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.

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,
[illegible signature]

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:

Form 886-A

Form 6018

Form 4621-A Report of Examination
Publication 892

Publication 3498-A

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

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

Explanation of Items

Year/Period Ended

Name of Taxpayer
December 31, 20XX

Date of Notice: June 19, 20XX

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 to establish that it is observing
the conditions required for the continuation of exempt status.

Facts:

applied for tax-exempt status by filing the Form 1023-EZ, Streamlined

Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue
Code, on December 4, 20XX, and was granted tax-exempt status as a 501(c)(3) on
December 12, 20XX, with an effective date of February 4, 20XX.

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 December 31, 20XX.

The Form 1023-EZ application list the phone number of for the president
of .
Per the State of web-site, it lists the organization as Active and in Good

Standing, copy attached from state web-site.
• Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
on November 15, , with a response date of December 15, 20XX. This
letter was not return by the post office as being undeliverable.

o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the
organization on April 4, 20XX, with a response date of April 16, 20XX,
Article Number . Per the United States Postal
Service (USPS) tracking, this was returned on May 7, 20XX at 11:09 am as
unclaimed/max hold time expired. This letter was received back at the

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

Page: -1-

Schedule No. or

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

Explanation of Items

Name of Taxpayer Year/Period Ended
December 31, 20XX

Internal Revenue Service on June 4, 20XX.

o Letter 5077-B (01-2017), TE/GE /DR Delinquency Notice, was mailed to the
organization, on May 3, 20XX, with a respond date of May 14, 20XX, Article
Number . This letter was not return by the post
office as being undeliverable. Per the United States Postal Service (USPS)
tracking, this was picked up at the post office on June 4, 20XX at 11:07 am.

• Telephone contact for the audit was as follows:

o November 29, 20XX, Tax Compliance Officer (TCO) called the phone
number listed on the Form 1023-EZ application for the President of
and received VMS. Left a message for an officer of the organization to return

my phone call.

o December 4, 20XX, , Vice President, called back. The Tax
Compliance Officer was informed that his wife, , President,
was deceased as of July 9, 20XX. The items requested on the IDR were
discussed. The TCO asked if he had any questions, he did not.
He stated the organization is very small with very little funds and little activity
has been conducted since his wife's passing. The TCO asked if the
organization considered termination. suggested the organization
probably should. The TCO informed of Publication 4779, Facts
About Terminating or Merging Your Exempt Organization, informing him he can
find this online at www.irs.gov. A new response date of Feb 15, 20XX was
negotiated.

o March 28, 20XX, called which went to their voice message.
Tax Compliance Officer left a message stating we last spoke on December 4,
. I have not received any response from you. Please return my phone

call.

o May 1, 20XX, called which went to their voice message. Tax
Compliance Officer left a message stating the USPS.com shows the certified
letter I sent is being returned to me as unclaimed. I will be sending another
certified letter. Please be sure to claim it. I need a response to my initial
letter. Please return my phone call.

o June 13, 20XX, called which went to their voice message. Tax
Compliance Officer left a message stating I am calling concerning his
organization, . Please give me a call back.

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

Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
: Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
December 31, 20XX

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.

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.

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).

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.

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.

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

Schedule No. or

Form 886A Department of the Treasury - Internal Revenue Service
Exhibit

Explanation of Items

Year/Period Ended

Name of Taxpayer
December 31, 20XX

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. Ruf. 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.

Organization's Position
Taxpayer's position is unknown at this time.
Government's Position

Based on the above facts, the organization did not respond to verify that they are

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

Schedule No. or

Form 886A Department of the Treasury - Internal Revenue Service ““
Exhibit

Explanation of Items

Year/Period Ended

Name of Taxpayer
December 31, 20XX

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
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 on 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:

Based on the foregoing reasons, the organization does not qualify for exemption under
section 501(c)(3) and its tax-exempt status should be revoked.

It is the IRS's position that the organization failed to establish that it meets 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, the
organization's exempt status is revoked effective January 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods
after January 1, 20XX.

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

Page: -5-