Inactive supporting organization lost charity exemption

Plain-English summary

A Type I supporting organization had no income, expenses, bank account, assets, liabilities, or activities after formation. It made no payments to its supported organization and provided no services or facilities. The IRS concluded that it failed the operational test for a Section 509(a)(3) supporting organization because it did not operate exclusively to support or benefit the designated public charity. The organization agreed with the IRS and drafted articles of dissolution. The IRS revoked its Section 501(c)(3) exemption effective April 1 of the redacted year.

Ruling snapshot

• Question: Did an inactive Type I supporting organization continue to qualify under Sections 501(c)(3) and 509(a)(3)?
• Outcome: Revocation effective April 1 of the redacted year.
• Key authorities: IRC §§ 501(c)(3) and 509(a)(3); Treas. Reg. §§ 1.509(a)-4(b)(1) and 1.509(a)-4(e)(1)

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
Date:
September 17, 2020
Taxpayer ID Number:
UIL 501.03-00
Form:
Number: 202110019
Release Date: 3/12/2021
Tax Period(s) Ending:
Person to Contact:
Identification Number:
Telephone Number:
Fax 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 (IRC) Section 501(a) as an organization described in IRC
Section 501(c)(3), effective April 1, 20XX. Your determination letter dated March 9, 20XX

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

Organizations described in IRC Section 501(c)(3) and exempt under
Section 501(a) must be both organized and operated exclusively for
exempt purposes. You have not demonstrated that you are organized and
operated exclusively for charitable, educational, or other exempt purposes
within the meaning of Section 501(c)(3). An organization will not be so
regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose. You have not established that you have
organized and operated exclusively for an exempt purpose.

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury
Regulations Section 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 IRC Section 170.

Organizations that are not exempt under IRC 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 IRC Section 7428 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 20439

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 IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501(c)(3).

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

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 892

2

Department of the Treasury Date:
Internal Revenue Service 3/31/2020
I Tax Exempt and Government Entities Taxpayer ID number:

Form:
Tax periods ended:

Person to contact:
Name:

ID number:
Telephone:
Fax:
Address:

Manager's contact information:
Name:
ID number:

Telephone:
CERTIFIED MAIL — Return Receipt Requested Response due date:

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.

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.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

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,

Russell T. Renwicks

For
Maria Hooke
Director, Exempt Organizations Examinations
Enclosures:
Form 886-A
Form 6018

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
. or exhibi
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
March 31, 20XX
ISSUE:
Does continue to qualify for exemption from Federal income tax under

section 501(c)(3) of the Internal Revenue Code as an IRC 509(a)(3) Supporting Organization?

FACTS:

The organization was granted exemption under Internal Revenue Code Section 501(c)(3) on
March 9, 20XX, effective September 19, 20XX. The organization was also determined to be a
Type I supporting organization under section 509(a)(3).

The organization was incorporated in the state of on September 22, 20XX.

The organization’s stated purpose is to be operated exclusively for the benefit of, to perform the
functions of, or to carry out the purposes of . (the Supported Organization), a
nonprofit organization described under section(s) 501(c)(3) and 509(a)(2).

Pursuant to the organization’s Bylaws, the sole member of the corporation is
the supported organization. As the sole member, shall appoint the
directors to manage the business affairs of the organization.

The treasurer stated the organization had never had any income and expenses and does
not have a general ledger. There is no bank account, and no assets or liabilities for the
organization. There are no books of account, auditor’s financial statements or
reconciliations.

The organization does not make any payments or provide any financial support to the
supported organizations.

The organization does not provide any services or facilities to the supported organizations.

The organization has not conducted any activity since its formation in 20XX and has filed
Form 990-EZ with no income or expenses each year to-date.

Articles of Dissolution were drafted by the Board of Directors on March 2, 20XX, with the

dissolution to be effective March 31, 20XX. Any assets are to be transferred to the parent
organization, , a 501(c)(3) organization. There are no assets to be distributed.

LAW:

Section 501(c)(3) of the Internal Revenue Code provides for exemption from Federal income tax
of organizations organized and operated exclusively for "charitable" purposes.

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)

Schedule number

Form 886-A Department of the Treasury — Internal Revenue Service hibit
. or exhibi
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

March 31, 20XX

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations states that the term "charitable” is used
in section 501(c)(3) of the Code in its generally accepted legal sense. Such terms include the
relief of the poor and distressed or the under privileged.

Section 509(a) of the Code defines the term "private foundation" as an organization described in
section 501(c)(3) other than organizations described in section 509(a)(1), (2), (3), or (4). Section
509(a)(3) provides that the term "private foundation" does not include an organization that:

(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform
the functions of, or to carry out the purposes of one or more specified organizations described

in section 509(a)(1) or (2),

(B) is operated, supervised, or controlled by or in connection with one or more organizations
described in section 509(a)(1) or (2), and

(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in
section 4946) other than foundation managers and other than one or more organizations
described in section 509(a)(1) or (2).

Treas. Reg. 1.509(a)-4(b)(1) states that “Under subparagraph (A) of section 509(a)(3), in order to
qualify as a supporting organization, an organization must be both organized and operated
exclusively for the benefit of, to perform the functions of, or to carry out the purposes of
(hereinafter referred to in this section as being organized and operated to support or benefit) one
or more specified publicly supported organizations. If an organization fails to meet either the
organizational or the operational test, it cannot qualify as a supporting organization.”

Treas. Reg. 1.509(a)-4(e)(1) provides that “A supporting organization will be regarded as operated
exclusively to support one or more specified publicly supported organizations (hereinafter referred
to as the operational test) only if it engages solely in activities which support or benefit the
specified publicly supported organizations. Such activities may include making payments to or for
the use of, or providing services or facilities for, individual members of the charitable class
benefited by the specified publicly supported organization. A supporting organization may also, for
example, make a payment indirectly through another unrelated organization to a member of a
charitable class benefited by the specified publicly supported organization, but only if such a
payment constitutes a grant to an individual rather than a grant to an organization. In determining
whether a grant is indirectly to an individual rather than to an organization the same standard shall
be applied as in § 53.4945-4(a)(4) of this chapter. Similarly, an organization will be regarded as
operated exclusively to support or benefit one or more specified publicly supported organizations
even if it supports or benefits an organization, other than a private foundation, which is described
in section 501(c)(3) and is operated, supervised, or controlled directly by or in connection with
such publicly supported organizations, or which is described in section 511(a)(2)(B). However, an
organization will not be regarded as operated exclusively if any part of its activities is in

Catalog Number 20810W Page 2 www.irs.gov Form 886-A (Rev. 5-2017)

Schedule number

886-A Department of the Treasury — Internal Revenue Service ua
Form - . or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

March 31, 20XX

furtherance of a purpose other than supporting or benefiting one or more specified publicly
supported organizations.”

TAX PAYER POSITION:

The organization indicated that it is in agreement with the Government's position that the
organization does not qualify for exemption from Federal income tax under section 501(c)(3) of the
Internal Revenue Code as an IRC 509(a)(3) Supporting Organization.

Articles of Dissolution were drafted by the Board of Directors on March 2, 20XX, with the
dissolution to be effective March 31, 20XX.

GOVERNMENT POSITION:

We are proposing the revocation of the Tax-Exempt Status of due to
the fact that the organization fails the operational test of Treas. Reg. 1.509(a)-4(e)(1) as it is not
operated exclusively to provide support or benefits to the supported organizations.

The organization has not conducted any activities since its formation in 20XX.

The organization does not make any payments or provide any financial support to the supported
organizations.

The organization does not provide any services or facilities to the supported organizations.

If an organization fails to meet either the organizational or the operational test, it cannot qualify as
a supporting organization.

Therefore, it is recommended that the exempt status of the organization be revoked effective April
1, 20XX.

Catalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)