Final adverse determination revoking a 501(c)(3) charity's exemption for failing to substantiate that its emergency-relief spending served exempt purposes

Plain-English summary

A small charity that had obtained § 501(c)(3) status through the streamlined Form 1023-EZ application lost that status after an examination. The organization said its purpose was emergency assistance (eviction prevention, utility shut-off prevention, and food emergencies). When the IRS audited its Form 990-N, the organization responded that it was dissolving and no longer wished to keep its exempt status, and it later sent a breakdown of donations received and amounts spent. But it provided no receipts, invoices, canceled checks, bank statements, or any documentation showing who actually received the funds or how recipients were selected. Because an exempt organization must keep records and supply information under §§ 6001 and 6033, and must be both organized and operated exclusively for exempt purposes, the IRS could not verify that the money went to a charitable class or exempt purpose. Citing Rev. Rul. 59-95 (revocation is proper when an organization cannot substantiate its exempt operations), the IRS revoked the exemption effective January 1 of the examined year. Contributions are no longer deductible under § 170, and the organization must file corporate income tax returns (Form 1120). This matters because it shows that stating charitable expenses is not enough: without source documents proving the money reached a charitable class, the operational test is not met.

Ruling snapshot

• Question: Should the organization's § 501(c)(3) exemption be revoked when it failed to produce records substantiating that its receipts and expenditures were used exclusively for exempt purposes?
• Outcome: Revocation (final adverse determination; exemption revoked effective January 1 of the examined year, Form 1120 required, § 170 deductibility ends)
• Key authorities: IRC §§ 501(c)(3), 6001, 6033, 170, 511; Treas. Reg. §§ 1.501(c)(3)-1(a), (a)(1), (c)(1), 1.6001-1(c), (e), 1.6033-1(h)(2), 1.6033-2(a)(1), (i)(2), 1.61-1; Rev. Rul. 59-95

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, page furniture and footers are transcribed as scanned, redacted amounts are shown as [redacted], the original's own redaction gaps are shown as written, and unreadable spots are marked [illegible].

[Page 1]

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: November 30, 2018
Number: 202151012
Release Date: 12/23/2021
Tax Year Ending:

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:

Employee Telephone Number:

UIL: 501.03-00

CERTIFIED MAIL - RETURN RECEIPT
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 December 12, 20XX is
revoked.

The revocation of your exempt status was made for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax
under section 501(a) must be both organized and operated exclusively for exempt purposes. You
have failed to respond sufficiently to establish that you are operated exclusively for exempt
purposes and that no part of your net earnings inure to the benefit of private shareholders or
individuals. You failed to respond sufficiently to allow the Internal Revenue Service to examine
your records regarding your receipts, expenditures, or activities as required by sections 6001 and
6033(a)(1) and the regulations thereunder.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

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 letter 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, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

[Page 2]

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.

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 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,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

[Page 3]

Department of the Treasury Date: [illegible], 2018
Internal Revenue Service Taxpayer ID number:
Tax Exempt and Government Entities Division
IRS Exempt Organizations Examination

Tax periods ended:

Person to contact:

Employee ID number:

Telephone number:

Fax:

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).

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 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. 4-2017)
Catalog Number 34809D

[Page 4]

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,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:

Form 6018

Form 4621-A Report of Examination
Form 886-A
Publication 892
Publication 3498-A

Letter 3618 (Rev. 5-2017)
Catalog Number 34809D

[Page 5]

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
(Rev. 4-68) Explanation of Items

Name of Taxpayer | Year/Period Ended

Date of Notice: August [illegible], 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
substantiate that the organization is meeting the operational test?

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 December 05, 20XX, and was granted tax-exempt status as a
501(c)(3) on December 12, 20XX, with an effective date of October 31, 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 fully respond to the Internal Revenue Service attempts to
obtain all the necessary information to perform an audit of Form 990-N for the tax year
ending December 31, 20XX.

The Form 1023-EZ application lists the phone number of for the Executive
Director of

attested on Form 1023-EZ, Part III, that the organization would be
organized and operated exclusively to further charitable and religious purposes.
By marking "yes" on Form 1023-EZ, Part III, questions 5, 6, and 11,
indicated that the organization would pay compensation to officers,
directors, or trustees; donate funds to or pay expenses for individuals; and provide disaster
relief.

Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization on January 16,
20XX with a response date of February 16, 20XX. This letter requested the organization's
organizing documents, a detailed description of each of their activities, minutes, and
financials. Form 4564, Information Document Request, (IDR) also asked

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

[Page 6]

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
(Rev. 4-68) Explanation of Items

questions about what was marked as "yes" on the Form 1023-EZ, Part III.

A response was received from organization on February 8, 20XX. The response indicated
that the organization would be dissolving the week of February 14, 20XX and does not
wish to maintain their exempt status. It also stated all activities ended December 31, 20XX.

Per the State of — web-site, it lists the organization as dissolved as of December
01, 20XX. See the attached copy from state website.

Another response was received from the organization on April 06, 20XX which was
responding to the information requested in Letter 3606. It stated that business income
for the 20XX tax year was cash donations from four individuals that totaled $[redacted]. The
expenses listed were $[redacted] for funds allocated for charitable activities, $[redacted] was listed for
expenses for 20XX and $[redacted] for vehicle purchase. The organization further broke down the
expenses listed as $[redacted] for charitable purposes as $[redacted] for Eviction Prevention paid February
10, 20XX, $[redacted] for Eviction Prevention paid May 20, 20XX, Utility Shut off Prevention for $[redacted]
paid June 12, 20XX and Food Emergency for $[redacted] paid August 19, 20XX. No receipts,
invoices, canceled checks, or documentation was included in the response as to the
individual and/or business who received the funds. The organization does not have any
bank statements.

The response explained that the executive director would receive the donations by cash
when a recipient's need arises and then she would travel directly to pay the recipients
emergency. The response went on to state that, "0% of
time is spent on maintaining the company in order to provide our non-profit
services to others. This maintenance includes: maintaining website, grant writing &
applying for grants, Graphic Design/Marketing & Outreach Material/Publishing, Research
& other Office activities (data entry, clerical, copying/faxing, phone calls & emails, local
travel, 0% of time is spent on the actual Charitable
Activities of responding/interacting with recipients in need i.e. phone calls, traveling to their
location, traveling to obtain funds, making the assistance transactions and accounting.
During the year of did not publicize our charitable activities.
We are still a young company and cannot assist the number of community residents we
would like to. We do however maintain our website where we outline our endeavors."

The organization responded to the compensation questions with this statement, "No
Compensation was allocated for 20XX. All finances went to overhead and charitable
activities. will not compensate it's members until after public fundraising and
outreach activities begin, which will be in 20XX."

The response also addressed the questions about donating funds to or paying expenses
for individuals. Form 4564 asked the organization to describe in detail the purpose of the

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

[Page 7]

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
(Rev. 4-68) Explanation of Items

Name of Taxpayer | Year/Period Ended
| 20XX

funds and/or the types of goods they distributed during the year(s) under examination and
how the funds and/or goods were used by the individual recipients. The organization
replied with a breakdown of their expenses.

The initial letter also asked the organization to describe their organization's recipient
selection process, including the criteria that was used to determine the recipients of the
funds and/or goods. The organization's response was that the recipients become aware of
their services through word of mouth or website. The response also went on to explain
that the recipient contacts the organization and then must verify their emergency and low-
income status by way of documents. The recipient is then approved or denied based on
ability to verify their emergency and low-income status. There were no examples/samples
of applications and what type documents were reviewed for the organization to make their
determination.

Letter 3844-B (Rev. 11-2015) with attachments, was mailed certified to the
on July 25, 20XX, with a response date of August 8, 20XX, Article
Number . It included a copy of Form 1023-EZ, Letter 5436,
Form 990-N for the tax period ending December 31, 20XX, and Form 4564.

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

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

[Page 8]

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
(Rev. 4-68) Explanation of Items

Name of Taxpayer | Year/Period Ended

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 §1.6033-2(a)(1) of the Regulations provides, in part, that, except for certain
exceptions not here applicable, every organization exempt from taxation under section

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

[Page 9]

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
(Rev. 4-68) Explanation of Items

Name of Taxpayer | Year/Period Ended
| 20XX

501(a) shall file an annual information return specifically setting forth its items of gross
income, gross receipts and disbursements, and such other information as may be
prescribed in the instructions issued with respect to the return.

Regulation §1.6033-2(i)(2) of the Regulations provides, in part, that every organization
which is exempt from tax, whether or not it is required to file an annual information return,
shall submit such additional information as may be required by the Internal Revenue
Service for the purpose of inquiring into its exempt status and administering the provisions
of subchapter F, chapter 1 of subtitle A of the Code, section 6033, and chapter 42 of
subtitle D of the Code.

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

During the examination, the organization did not respond fully 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. The books and records are not adequate to permit the
Internal Revenue Service to verify that the funds and activities were used for an exempt
purpose. The organization did not maintain original source documents to support your
transactions. Specifically, we cannot determine how and under what circumstances
funds were distributed. Also, we cannot confirm the recipients of the charitable
distributions, and whether they were charitable organizations or of a charitable class.
Consequently, we cannot ascertain whether the organization's assets were dedicated
exclusively for charitable purposes in order to justify continued recognition of tax-

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

[Page 10]

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
(Rev. 4-68) Explanation of Items

| 20XX

exempt status under IRC 501(c)(3) of the Code.

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 ability 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' 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
December 31, 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -6-