Group ruling holder lost exemption after withholding audit records

Plain-English summary

A section 501(c)(3) organization holding a group exemption was selected for an audit of its activities and Form 990-N period. The IRS sent certified requests to the organization and related individuals and made repeated telephone calls. One person returned a call and promised the requested information, but the organization ultimately supplied none. The IRS concluded that it could not verify the organization's exempt activities, finances, or compliance with recordkeeping and reporting duties. It revoked the organization's exemption and warned that Revenue Procedure 80-27 would also revoke its group exemption, preventing subordinates from relying on the group ruling.

Ruling snapshot

• Question: Should the organization and its group ruling retain exemption when it did not provide records requested during an audit?
• Outcome: revocation, because the organization did not establish continued qualification or comply with sections 6001 and 6033
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1(h)(2); Rev. Rul. 59-95; Rev. Proc. 80-27

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201943022
Release Date: 10/25/2019

Date: May 16, 2019
EIN:

Person to Contact:
Identification Number:

Telephone Number:
UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

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 September 18,
20XX is revoked.

Our adverse determination as to your exempt status was made for the following reasons:

    You have failed to produce documents to establish that you are operated exclusively
    for exempt purposes within the meaning of Internal Revenue Code 501(c)(3), 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 I.R.C. Sections 6001, 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

As such, you failed to meet the requirements of I.R.C. § 501(c)(3) and Treasury Regulation §
1.501(c)(3)-1(a), in that you have not established that you were organized and operated
exclusively for exempt purposes and that no part of your earnings inured to the benefit of private
shareholders or individuals.

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

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 was mailed to you. Please contact the clerk of the
appropriate court for the rules for initiating suits for declaratory judgment. 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, 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

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.

You may be eligible for help from the Taxpayer advocate Service (TAS). (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 yours,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892

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

Date:
November 26, 2018
Taxpayer ID number:

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).

This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the
tax periods above.

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 [insert code section] 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.

In the future, if you believe your organization qualifies for tax-exempt status and would like a status
determination letter from the IRS, you can request a determination by filing Form 1024, Application for
Recognition of Exemption Under Section 501(a), and paying the required user fee.

Revenue Procedure 80-27 requires that, in the event your tax-exempt status is revoked, your group exemption
will also be revoked. If that occurs, none of your subordinates will be able to rely on the group ruling for tax-
exempt status. You should notify each subordinate of this proposed action.

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,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Form 4621-A Report of Examination
Publication 892
Publication 3498-A

Form 886A
Department of the Treasury - Internal Revenue Service
Explanation of Items

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

Date of Notice: November 26, 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 November 10, 20XX and was granted tax-exempt status as a 501(c)(3) on
September 18, 20XX, with an effective date of April 20, 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
                         of                         .
Per the State of                         web-site, it lists the organization in good standing, copy
attached from state web-site.

• Correspondence for the audit was as follows:

  ○ Letter 3606 (Rev. 6-2012) with attachments, was mailed certified to the
    organization on August 14, 20XX, with a response date of September 14,
    20XX. Article Number                         . Per the United States Postal
    Service (USPS) tracking, on October 10, 20XX This letter was return by the
    post office as being undeliverable.

  ○ Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to
                            on September 13, 20XX, with a response date of October 4, 20XX, Article
    Number                         . Per the United States Postal Service
    (USPS) tracking, this letter was out for delivery on September 21, 20XX. The
    PS Form 3811 was never returned to the Internal Revenue Service.

  ○ Letter 3844-A (12-2015), with attachments, was mailed certified to
                            , on September 13, 20XX, with a response date of October 4, 20XX.
    Article Number                         . Per the United States Postal Service
    (USPS) tracking, Letter was delivered and left with an individual on
    September 21, 20XX at 3:21 pm.

  ○ Letter 3844-A (12-2015), with attachments, was mailed certified to
                            , on September 13, 20XX, with a response date of October 4,
    20XX. Article Number                         . Per the United States Postal
    Service (USPS) tracking, Letter was delivered and left with an individual on
    September 22, 20XX at 3:13 pm.

  ○ Letter 5077-B (1-2017), TE/GE IDR Delinquency Notice, was mailed certified
    to the organization, on October 16, 20XX, with a response date of November
    5, 20XX. Article Number                         . Per USPS tracking this
    letter was Unclaimed/Being Returned to Sender on October 29, 20XX at 6:17
    am. PS Form 3800 was not received back from USPS.

• Telephone contact for the audit was as follows:

  ○ August 30, 20XX, called the phone number listed on the Form 1023-EZ
    application for                         of                         and received a VMS. Left a
    message for                         to return my call.

  ○ September 7, 20XX, called the phone number listed on the Form 1023-EZ
    application for                         of                         and received a VMS. Left a
    message for                         to return my call.

  ○ September 13, 20XX, called the phone number listed on the Form 1023-EZ
    application for                         of                         and received a VMS. Left a
    message for                         to return my call.

  ○ September 19, 20XX, called the phone number listed on the Form 1023-EZ
    application for                         of                         and received a VMS. Left a
    message for                         to return my call.

  ○ September 29, 20XX called the phone number listed on the Form 1023-EZ
    application for                         of                         and received a VMS. Left a
    message for                         to return my call.                         returned the
    call and stated that she would provide the requested information that was
    requested in Letter 3844-A by October 11, 20XX.

  ○ October 16, 20XX, called the phone number listed on the Form 1023-EZ
    application for                         of                         and received a VMS. Left a
    message for                         to return my call.

  ○ November 9, 20XX, called the phone number listed on the Form 1023-EZ
    application for                         of                         and received a VMS. Left a
    message for                         to return my call.

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.

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. 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 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
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.