Reinstatement denied for missing dissolution terms and unexplained donor-advised accounts

Plain-English summary

A nonprofit corporation sought reinstatement of section 501(c)(3) status after its prior exemption was automatically revoked for failing to file Form 990 for three consecutive tax periods. Its articles listed charitable, educational, social, and literary purposes but did not say that assets would pass to exempt purposes at dissolution. The application also said contributors could advise on the use or distribution of separately maintained funds. Despite repeated written requests and telephone attempts, the organization provided neither a filed amendment correcting the articles nor an explanation of those donor-advised accounts. The IRS denied reinstatement because the organization did not establish that it met either the organizational or operational test.

Ruling snapshot

• Question: Did the organization establish that it was organized and operated exclusively for section 501(c)(3) purposes?
• Outcome: denied, because required organizing-document changes and operational information were not provided
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), (b), (c), and (d); Rev. Proc. 2019-5

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
IRS Cincinnati, OH 45201

Date: July 18, 2019

Number: 201941030 Employer ID number:
Release Date: 10/11/2019

Contact person/ID number:
Contact telephone number:

Form you must file:

Tax years:

UIL: 501.00-00, 501.03-05, 501.03-30, 501.29-00

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at

1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501 (c) (3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: May 16, 2019

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.00-00
C = State 501.03-05
D = Date 501.03-30
E = Date 501.29-00
Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts

You formed as a nonprofit corporation on B in the state of C. You were recognized as exempt under Section
501(c)(3) of the Code in D. On E, you were subsequently revoked for failure to file Form 990 for three
consecutive tax periods. You then filed Form 1023 to reinstate your exempt status.

Your Articles of Incorporation state that your purpose is charitable, educational, social and literary. They are
silent regarding how your assets will be distributed upon your dissolution. Your Form 1023 indicates you
maintain or will maintain separate accounts for any contributor under which the contributor has the right to
advise on the use or distribution of funds. Your Form 1023 attachments show you are a community service
agency that wishes to provide various services including a food and clothing program, health support services
counseling programs and short-term shelter options. The attachments also indicate that you are dedicated to
helping students, between the age of and __ with projects and education. In addition, your Form 1023 states
that you have a -person volunteer board and will be funded through gifts, grants, and contributions.

We wrote a letter requesting that an authorized person sign the Form 1023. The letter also explained that you
must amend your Articles of Incorporation to meet the organizational test under Section 501(c)(3) of the Code
as well as requested an explanation concerning your statement that you maintain or will maintain separate
accounts for any contributor under which the contributor has the right to advise on the use or distribution of
these funds. You subsequently only submitted the signed Form 1023, but you did not provide proof that you
have filed the Articles of Amendment nor an explanation concerning your statement that you maintain or will

2

maintain separate accounts for any contributor under which the contributor has the right to advise on the use or
the distribution of funds. We wrote another letter requesting this information. We also attempted to contact you
by phone multiple times. However, you never submitted the Articles of Amendment showing proof they were
filed with your state or an explanation concerning your statement that you maintain or will maintain separate
accounts for any contributor under which the contributor has the right to advise on the use or distribution of
funds.

Law

Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in Section 501(c)(3) of the Code, 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.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:

(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) 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) 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. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen
neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The
term “charitable” also includes lessening of the burdens of government.

Revenue Procedure 2019-5, 2018-1 ILR.B. 233, Section 3 states that a determination letter or ruling on exempt
status is issued based solely upon the facts and representations contained in the administrative record. The
applicant is responsible for the accuracy of any factual representations contained in the application. Section 6
(and its predecessors) provides that a favorable determination letter or ruling will be issued to an organization
only if its application and supporting documents establish that it meets the particular requirements of the section
under which exemption from federal income tax is claimed.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

3

In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that “one
seeking a tax exemption has the burden of establishing his right to a tax-exempt status.”

Pius XII Academy v. Commissioner, T.C. Memo. 1982-97 provides that an organization must establish through
the administrative record that it operates as an exempt organization. Denial of exemption may be based solely
upon failure to provide information describing in adequate detail how the operational test will be met.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization’s
request for tax-exempt status was reasonable.

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service’s denial, stated “It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant.” The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

Application of law

A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of Section 501(c)(3) of the Code.
Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3).

Your Articles of Incorporation do not limit your purposes to those described in Section 501(c)(3) of the Code or
dedicate your assets to an exempt purpose upon your dissolution. Furthermore, you did not provide a filed
Articles of Amendment containing these provisions that were requested multiple times. As a result, you have
not satisfied the organizational test described in Treas. Reg. Sections 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-

1(b)(4).

You do not meet the operational test under Section 501(c)(3) of the Code because you have not demonstrated
that you are operating exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-
1(c)(1) because you did not provide an explanation about the fact you indicated that you maintain or plan to
maintain separate accounts for any contributor under which the contributor has the right to advise on the use or
the distribution of funds. As provided in Treas. Reg. Section 1.501(c)(3)-1(d)(2), you have not established that
your operations accomplish exclusively charitable purposes.

You have not submitted sufficient information establishing you are operated exclusively for 501(c)(3) purposes.
(See Universal Life Church, Pius XII Academy, La Verdad, and New Dynamics Foundation) You have not
provided any specific details regarding the fact that you maintain or plan to maintain separate accounts for any
contributor under which the contributor has the right to advise on the use or the distribution of funds.
Therefore, there is not sufficient documentation to establish that you are exempt from taxation as required by
Section 501(c)(3) of the Code and Revenue Procedure 2019-5. As in Universal, you have the burden of
establishing that you qualify for tax exemption.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

In Pius, La Verdad, and New Dynamics, it was established that an organization must establish, through its
administrative record, that it meets the requirements for exemption. Because you failed to provide sufficient
information in your initial application and subsequently failed to provide additional documentation that we
requested multiple times, you have not established that you meet the requirements for exemption under Section
501(c)(3) of the Code. As provided in New Dynamics, any gaps in the administrative record will be resolved
against the applicant. .

Conclusion

Based on the information submitted, you have failed to establish that you are organized and operated
exclusively for exempt purposes within the meaning of Section 501(c)(3) of the Code and the related income
tax regulations. Therefore, based on the administrative record, you fail to qualify for exemption under Section
501(c)(3) of the Code.

If you agree
If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from

you within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree

You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

• Your name, address, employer identification number (EIN), and a daytime phone number

• A statement of the facts, law, and arguments supporting your position

• A statement indicating whether you are requesting an Appeals Office conference

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
  organization or your authorized representative

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

5

We’ll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get 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 listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

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 if 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K