202150026: IRS revokes a cemetery association's 501(c)(3) status because running a cemetery is not a charitable purpose

Plain-English summary

A cemetery association that had obtained recognition as a charity under Internal Revenue Code § 501(c)(3) through the streamlined Form 1023-EZ lost that status on audit, because operating a cemetery is not a § 501(c)(3) charitable purpose. The IRS found the organization failed both of the two basic tests for exemption. It failed the organizational test because its articles of incorporation stated purposes broader than § 501(c)(3) allows: the corporation was organized "for religious and benevolent purposes" and to "support and maintain the cemetery," which is not a purpose limited exclusively to those the statute permits. It failed the operational test because its actual activities, maintaining the cemetery grounds, opening and closing graves, and selling grave plots (with reported revenue from burials, cremations, and plot sales), do not further an exempt § 501(c)(3) purpose. Because the organization was neither organized nor operated exclusively for exempt purposes, the IRS revoked the exemption retroactively. Contributions are no longer deductible under § 170, and the organization must file federal income tax returns. The practical point: a cemetery association may qualify for some tax exemption, but not as a § 501(c)(3) charity, and self-certifying that status on a Form 1023-EZ does not make it correct.

Ruling snapshot

• Question: Does a cemetery association that maintains grounds and sells grave plots qualify as an organization organized and operated exclusively for exempt purposes under § 501(c)(3)?
• Outcome: revocation, effective January 1, 20XX (contributions no longer deductible; income tax returns required)
• Key authorities: IRC §§ 501(c)(3), 170; Treas. Reg. §§ 1.501(c)(3)-1(a), (b)(iv), (c)(1), (d)(1)

Full text (IRS public release)

This document is an OCR transcription of a scanned IRS release. Wording is preserved verbatim; obvious scanning misreads have been corrected, and page furniture and footers are transcribed as scanned. Unreadable spots are marked [illegible].

[Page 1]

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: October 24, 2019
EIN:
Number: 202150026
Release Date: 12/17/2021 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 May 28, 20XX 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,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892

[Page 2]

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

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,

for Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018
Form 4621-A
Publication 892
Publication 3498-A

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

[Page 3]

Form 886 A 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:

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

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

III. 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 6436, Determination of Exemption under Section 501(c)(3) as a
Public Charity-EZ and was granted exempt status under IRC Sec. 501(c)(3) on May 20XX,
with an effective date of April 9, 2015.

The Organization states in their Articles of Incorporation, "This corporation is organized for
religious and benevolent purposes and for the solicitation and acceptance of gifts, devises and
bequests of both real and personal property and to support and maintain the cemetery or
cemeteries related to said organization 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 sale of grave spaces for burials. The
Cemetery non-profit also facilitates the upkeep and repairs to the cemetery property." The
Organization further stated "The board of directors sets the prices for the sale of grave
spaces..."

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

"501C3 was again discussed. To receive the advantage of this grant money the
cemetery 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 cemetery's grounds year-round, to open
and close graves upon the day of burials which may occur during the year, and to sell grave
spaces. 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
Contributions, gifts & grants 0.00
Burials 0.00
Cremations 0.00
Plots 0.00

Total revenues 0.00

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

[Page 4]

Form 886 A 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

[Page 5]

Form 886 A 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 cemetery or
cemeteries 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 cemetery or cemeteries 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).

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 is not in furtherance of a 501(c)(3) purpose.

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

[Page 6]

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

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

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 grave spaces for burials."

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
Contributions, gifts & grants 0.00
Burials 0.00
Cremations 0.00
Plots 0.00
Total revenues 0.00

The total revenues generated by burials, cremations, and sale of grave plots $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