Final adverse determination revoking a 501(c)(3) exemption for an unanswered audit and a missing dissolution clause

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 IRS sent a long series of letters and made repeated phone calls seeking the organization's records and its state-approved organizing documents. The organization partially responded (it faxed a certificate of incorporation and some materials) but never produced organizing documents containing a dissolution clause, which the organizational test requires, and did not fully cooperate. Because an exempt organization must keep records and supply information under §§ 6001 and 6033, and must be organized exclusively for exempt purposes under Treas. Reg. § 1.501(c)(3)-1(b), the IRS proposed revocation, and after the organization did not adequately respond, issued this final determination. Citing Rev. Rul. 59-95 (revocation is proper when an organization cannot substantiate its exempt operations), the exemption was revoked effective January 1 of the examined year.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 two independent grounds for losing exemption: not answering an audit, and an organizing document that omits the required dissolution clause.

Ruling snapshot

• Question: Should the organization's § 501(c)(3) exemption be revoked when it failed to respond to the examination and its organizing document lacked a dissolution clause?
• 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; Treas. Reg. §§ 1.501(c)(3)-1(a), (b), (c)(1), 1.6001-1, 1.6033-1(h)(2); 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, redaction gaps in the original 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
4100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: February 4, 2019
Number: 202151013
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 produce documents or otherwise 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 to repeated reasonable requests 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: May 15, 2018
Internal Revenue Service Taxpayer Identification Number:
IRS Tax Exempt and Government Entities Division
Exempt Organizations Examinations Form:

Tax year(s) ended:

Person to contact / ID number:

Contact numbers:

Toll Free

Long Distance

Fax:

Manager's name / ID number:

Manager's contact number:

Response due date:

Certified Mail - Return Receipt Requested
Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal
Revenue Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree
If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action—
Section 7428, and return it to the contact person at the address listed above (unless you have already
provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren't an
organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

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 revocation letter. Failing to respond to this proposal will adversely impact your legal standing to
seek a declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax
year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone conference
with the supervisor of the IRS contact identified in the heading of this letter. You may also file a
protest with the IRS Appeals office by submitting a written request to the contact person at the
address listed above within 30 calendar days from the date of this letter. The Appeals office is
independent of the Exempt Organizations division and resolves most disputes informally.

Letter 3618 (06-2012)
Catalog Number 34809F

[Page 4]

For your protest to be valid, it must contain certain specific information including a statement of the
facts, the applicable law, and arguments in support of your position. For specific information needed
for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS
Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination
Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS
collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally
doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892.
Please contact the individual identified on the first page of this letter if you are considering requesting
technical advice. If we issue a determination letter to you based on a technical advice memorandum
issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative
appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a substitute
for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't
reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition
in a United States court. They can, however, see that a tax matter that hasn't been resolved through
normal channels gets prompt and proper handling. You may call toll free 1-877-777-4778 and ask for
Taxpayer Advocate assistance. If you prefer, you may contact your local Taxpayer Advocate at:

Tel:
Fax:
EEFax:

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient time
to call if we need to contact you.

Thank you for your cooperation.
Sincerely,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498-A

Letter 3618 (06-2012)
Catalog Number 34809F

[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
| December 31, 20XX
Date of Notice: May 7, 20XX

Issues:
Whether the exempt status of Organization under IRC § 501(c)(3)
should be revoked, effective January 1, 20XX because it is not organized exclusively for
exempt purposes within the meaning of section 501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(b)
due to the organizing document not including a dissolution clause?

Facts

The organization filed Form 1023-EZ for exemption on November 19, 20XX and was granted
exemption as a 501(c)(3) on December 12, 20XX with an effective date of exemption of
November 21, 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 examined organization's activities
and operations align with its approved exempt status.

The organization failed to respond to the Internal Revenue Service attempts to obtain
additional information to complete the review of an audit of Form 990-N for the above-
mentioned tax period.

Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments were mailed to the organization on
October 27, 20XX, with a response date of November 27, 20XX.

o Letter 3844-A was mailed certified to the organization on December 2, 20XX, with
a respond date of December 16, 20XX.

o Received faxed response from the organization on January 3, 20XX; with
information on the purpose of the organization, bank statements and paper
articles and completed Form 2848 for POA. Organizing Documents with State
Stamp and dated for approval were not included in the response.

o Letter 3844-B was mailed certified to the POA address on April 7, 20XX, with a
response date of April 17, 20XX. Article Number
Per the United States Postal Service (USPS) the receipt was returned to
the IRS with signature and date April 23, 20XX.

o Letter 3844-B with Form 4564 IDR sent to the POA on May 18, 20XX, with a
response date of June 8, 20XX

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

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

o Letter 5077-B with Form 4564 mailed to POA on February 14, 20XX, with a
response date of February 28, 20XX.

o Received faxed response on March 9, 20XX from the POA with the Certificate of
Incorporation. No dissolution information included as required with the state of

e Telephone contact for the audit was as follows:

o December 27, 20XX, TCO called President, and went over Letter 3606,
Form 4564 (Information Document Request), and Publication 1 (Your Rights as a
Taxpayer). Extension granted per request for 30 days.

o January 4, 20XX, TCO called , CPA from 2848 Form and discussed
with him the missing organizing documents. Granted extension to research and
send the organizing documents.

o February 14, 20XX, Called , CPA and left a message following up on
his actions of gathering the Organizing Documents. No return phone call.

o March 8, 20XX MST, TCO called , POA and , President and
left messages with both parties requesting a follow-up. The phone call was not
returned.

o January 8, 20XX, at 12:30 MST, TCO called POA, requesting a follow
up on the Organizing Documents that were required for audit.

o March 02, 20XX, , POA called letting me know that the organizing
documents have been ordered by the state they are still awaiting the response.

o March 14, 20XX, at 3:14 MST, TCO left a voice message with , POA,
requesting to amend their organizing documents to include the dissolution clause.

o April 24, 20XX, at 10:45 MST, TCO called POA, following up on
documents requested to completed the audit. Phone conversation was ended by
with no response.

Law:

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
| December 31, 20XX

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 §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 such
person is liable for tax under this title.

IRC §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.

IRC §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.

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.

Federal Tax Regulations (FTR) §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.

Section 1.501(c)(3)-1(a) 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).

FTR §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.

Section 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

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
| December 31, 20XX

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.

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.

Organizations Position

The organization has failed to respond to respond to meet the Organizational test.
The taxpayer's position on the issue(s) is currently unknown at this time.

Governments 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 revocation 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 meet the reporting requirements under
sections 6001 and 6033 to be recognized as exempt from federal income tax under 501(c)(3)
of the Internal Revenue Code. Accordingly, the organization's exempt status is revoked
effective January 1, 20XX.

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
| December 31, 20XX

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

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