IRS revokes exemption for failing the organizational and operational tests

Plain-English summary

An organization received section 501(c)(3) recognition through Form 1023-EZ, but an IRS examination later reviewed its governing documents and activities. The IRS found that the articles described religious and benevolent purposes without limiting the organization exclusively to exempt purposes, and also authorized maintenance and sales activities that were not shown to further an exempt purpose. The examination report concluded that the organization failed both the organizational and operational tests in the section 501(c)(3) regulations. The IRS therefore revoked its exemption effective at the start of a redacted year, and contributions were no longer deductible under section 170. The final letter explained that the organization could seek declaratory relief under section 7428 within 90 days.

Ruling snapshot

• Question: Did the organization remain organized and operated exclusively for purposes described in section 501(c)(3)?
• Outcome: revocation, because the organization failed both the organizational and operational tests
• Key authorities: IRC §§ 170, 501, and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Transcriber's note: this document is a scan. Obvious OCR errors in section numbers, capitalization, punctuation, addresses, form headings, and signature layout were corrected by comparison with all eight page images. Redacted blanks remain blank, source wording and source errors are otherwise preserved, and unreadable handwritten signatures are marked [illegible].

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
11009 Commerce Street, MC 4920DAL

Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: October 24, 2019

Number: 202005023 EIN:

Release Date: 1/31/2020
Person to Contact:

UIL: 501.03-00
Identification Number:

Telephone Number:

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, 20   . Your determination letter dated May 28, 20   is revoked.

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

You have not established that you are organized and 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).

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.

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 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

U.S. 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.

Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal
appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct
tax determination, nor extend the time fixed by law that you have to file a petition in Court. The
Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through
normal channels gets prompt and proper handling.

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

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

Sincerely,

[illegible]

for Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892


Department of the Treasury                                      Date:
Internal Revenue Service                                      July 1, 2019
IRS Tax Exempt and Government Entities Taxpayer Identification Number:

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

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


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,

[illegible]

for Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:

Form 886-A

Form 6018

Form 4621-A
Publication 892
Publication 3198-A

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

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

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

Date of Notice: July 1, 20XX
Issues:

1. Whether (Organization), meets the organizational test under
Internal Revenue Code (IRC) Section (Sec.) 501(c)(3)?

2. Whether the Organization meets the operational test under IRC Sec. 501(c)(3)?

3. Whether the Organization continues to qualify for exemption from Federal income tax under
IRC Sec. 501(c)(3)?

Facts:
The Organization filed Form 1023-EZ, Streamlined Application for Recognition of Exemption
Under Section 501(c)(3) of the Internal Revenue Code, for exemption on May 22, 20XX.
The Organization received Letter 5436, Determination of Exemption under Section 501(c)(3)
as a Public Charity-EZ and was granted exempt 20XX.

The Organization states in their Articles of Incorporation, “This corporation is organized for

within the purposes provided in Section 501 (c) (3) of
the Internal Revenue Code of 19XX.”

, Treasurer of the Organization stated in a letter dated March 26, 20XX, the
Organization is a “non-profit was formed to handle . The
non-profit also facilitates the upkeep and repairs to the .” The
Organization further stated “The board of directors sets the prices for the sale of

The Organization in its 20XX meeting minutes states the following:

“501C3 was again discussed. To receive the advantage of this grant money the
association needs to be incorporated. Costs incurred to achieve this status will

be taken from account.”
The main activity of the organization is to maintain the year-round, to open
and upon the day of which may occur during the year, and to sell

. On the Form 990, Return of Organization Exempt From Income Tax, for the tax period
ended December 31, 20XX the Organization reported four sources of revenue shown in the
table below.

Description of revenues Amounts

0.00
0.00
0.00
0.00
Total revenues 0.00

Form 886-A(Rev.4-68) Page: -1- Department of the Treasury. - Internal Revenue Service

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

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

Law:
Internal Revenue Code (IRC)

IRC Sec. 501(c)(3) Requires tax exempt entities be organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary, or educational purposes or to
foster national and/or international amateur sports competition, or for the prevention of cruelty
to children or animals, provided that no part of the net earnings inures to the benefit of any
private shareholder or individual.

Treasury Regulations (Treas. Reg.)

Treas. Reg. Sec. 1.501(c)(3)-1(a)(1) 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 the section. If an organization fails to meet either the
organizational test or the operational test, it is not exempt.

Treas. Reg. Sec. 1.501(c)(3)-1(b)(iv) In no case shall an organization be considered to be
organized exclusively for one or more exempt purposes, if, by the terms of its articles, the
purposes for which such organization is created are broader than the purposes specified in
section 501(c)(3). The fact that the actual operations of such an organization have been
exclusively in furtherance of one or more exempt purposes shall not be sufficient to permit the
organization to meet the organizational test. Similarly, such an organization will not meet the
organizational test as a result of statements or other evidence that the members thereof intend
to operate only in furtherance of one or more exempt purposes.

Treas. Reg. Sec. 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.

Treas. Regs. Sec. 1.501(c)(3)-1(d)(1)(i) — In general 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

Prevention of cruelty to children or animals.

Form 886-A(Rev.4-68) Page: -2- Department of the Treasury - Internal Revenue Service

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

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

Treas. Regs. Sec. 1.501(c)(3)-1(d)(1)(ii) - An organization is not organized or operated
exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph
unless it serves a public rather than a private interest. Thus, to meet the requirement of this
subdivision, it is necessary for an organization to establish that it is not organized or operated
for the benefit of private interests such as designated individuals, the creator or his family,
shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests.

Organization’s Position
The Organization has not received this report.
Government's Position

1. It is the Government's position the Organization does not meet the organizational test under
IRC Sec. 501(c)(3).

Under IRC Sec. 501(c)(3) tax exempt entities are organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary, or educational purposes or
to foster national and/or international amateur sports competition, or for the prevention of
cruelty to children or animals, provided that no part of the net earnings inures to the benefit
of any private shareholder or individual.

Further, Treas. Reg. Sec. 1.501(c)(3)-1(b)(iv) state in no case shall an organization be
considered to be organized exclusively for one or more exempt purposes, if, by the terms of
its articles, the purposes for which such organization is created are broader than the
purposes specified in Section 501(c)(3).

Here, the Organization states in their Articles of Incorporation, “This corporation is
organized for religious and benevolent purposes...and to support and maintain the
related to said organization.

The clause states broadly the Organization was organized for religious and benevolent
purposes, but not exclusively for religious and benevolent purposes. Additionally, the
purpose clause empowers the Organization to engage in activities, i.e. support and maintain
the related to said organization, which are not in the furtherance of
an exempt purpose within the meaning of IRC Sec. 501(c)(3).

Therefore, this does not meet the organizational test under IRC Sec. 501(c)(3).

2. It is the Government's position the Organization does not meet the operational test under
IRC Sec. 501(c)(3).

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


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

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

Under Treas. Reg. Sec. 1.501(c)(3)-1(c)(i) 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 ins not in furtherance of a 501(c)(3) purpose.

Here, , Treasurer of the Organization stated in a letter dated March 26, 20XX
the Organization is a “non-profit was formed to handle the sale of

On the Form 990, Return of Organization Exempt From Income Tax, for the tax period
ended December 31, 20XX the Organization reported four sources of revenue shown in the

table below.
Description of revenues Amounts
0.00
0.00
0.00
0.00
Total revenues 0.00
The total revenues generated by $0.00,

activities not exempt under IRC Sec. 501(c)(3). 0% of total revenues are generated by
these activities.

Therefore, the Organization is engaged in more than an insubstantial (0%) of activities
exempt within the meaning of IRC Sec. 501(c)(3).

3. It is the Government's Position the Organization does not continue to qualify for exemption
from Federal income tax under IRC Sec. 501(c)(3).

Under, IRC Sec. 501(c)(3) requires tax exempt entities be organized and operated
exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national and/or international amateur sports competition,
or for the prevention of cruelty to children or animals, provided that no part of the net
earnings inures to the benefit of any private shareholder or individual.

Here (in issues one and two) it has been established the Organization was not organized or
operated exclusively for one or more exempt purposes within the meaning of IRC Sec.
501(c)(3).

Therefore, the Organization no longer continues to qualify for exempt status under IRC Sec.
501(c)(3).

Conclusion
It has been determined the Organization was not organized or operated for exempt purposes

within the meaning IRC Sec. 501(c)(3). Accordingly, the organization’s exempt status is
revoked effective January 1, 20XX.

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