IRS revokes 501(c)(3) status of a dormant supporting-organization foundation that only traded securities and made no charitable distributions

Plain-English summary

A foundation had been recognized as a 501(c)(3) public charity, specifically a Section 509(a)(3) supporting organization, meaning it existed to support one named charity. A supporting organization keeps its exempt status only if it actually operates to benefit that supported charity and meets tests for responsiveness, control, and involvement. On audit, the IRS found the foundation had gone dormant. It made no distributions to its supported organization or anyone else during the years examined, sent no notices of support, and had no working relationship with the supported charity. Its only activity was investing in securities and trading stocks, which is not a charitable activity. On top of that, the board was made up of family members who were disqualified persons under Section 4946, so the foundation was controlled by disqualified persons, which a Type III supporting organization may not be. The taxpayer agreed with the government's position. Because the foundation no longer engaged in any exempt activity, the IRS revoked its exemption effective the first year under examination, and the organization must file corporate income tax returns going forward.

Ruling snapshot

• Question: Should a 509(a)(3) supporting-organization foundation keep its 501(c)(3) exemption when it made no distributions, had no relationship with its supported charity, was controlled by disqualified persons, and only traded securities?
• Outcome: Revocation (final adverse determination; taxpayer agreed)
• Key authorities: IRC §§ 501(c)(3), 509(a)(3), 4946; Treas. Reg. §§ 1.501(c)(3)-1(a), (c)(1), 1.509(a)-4(b)(1), (e), (i); Rev. Rul. 58-617, 1958-2 C.B. 260

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service December 7, 2021
Tax Exempt and Government Entities Taxpayer ID number:
Form:
Release Date: 11/4/2022

Person to contact:
Name:
ID number:
Telephone:
Fax:

UIL: 501.03-00

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Why we are sending you this letter

This is a final determination that you don't 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
. Your determination letter dated 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 IRC 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 IRC Section 501(c)(3).

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.

Contributions to your organization are no longer deductible under IRC Section 170.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was
mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment

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.

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court U.S. Court of Federal Claims U.S. District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 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.

Letter 6337 (12-2020)
Catalog Number 74808E

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).

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Sincerely,

[illegible signature]
Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

Department of the Treasury Date:
Internal Revenue Service August 4, 2021
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:
Response due date:

CERTIFIED MAIL — Return Receipt Requested

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.

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.

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

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

Department of the Treasury - Internal Revenue Service Schedule number or exhibit
Form 886-A Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

ISSUES:
1) Does (the Foundation) conduct activities that
satisfy the operational test requirement for the purposes of exemption under §501(c)(3) of the Internal
Revenue Code ("Code")?

2) Should the taxpayer continue to be recognized as tax exempt under §501(a) of the Code as an
organization described in §501(c)(3)?

FACTS

The , hereinafter referred to as the Foundation, was
incorporated under the laws of the state of as a nonprofit corporation on . In a
determination letter dated , it was held to be exempt from federal income tax as an organization
described in Code §501(c)(3) and classified as a public charity described in Code §509(a)(3).

The Foundation's purpose as stated in its Articles of Incorporation is to conduct or support activities for the
benefit of or to carry out the purposes of

In its original application for exemption, the Foundation stated that its primary activity would be the investment
of corporate assets in order to generate income and capital which may be used in support of the
, or such other qualified §501(c)(3) exempt organizations as may subsequently
be designated as the organization which the corporation is to support. The corporation would also provide
financial support for other educational and charitable organizations, which may either be affiliated with or
unaffiliated with the

On , the Foundation submitted a letter stating that they were intended to support only the
and provided amended articles and bylaws to remove the provision
referencing the support of other organizations.

The Board of Directors controls the organization. Based on the Bylaws, there are to be two classes of board
membership: Federation Class and Donor Class. Federation Class Directors are elected by the
The Donor Class Directors are elected by the Foundation.
stated that the Foundation had no board members that were elected by or otherwise affiliated
with the The board members consisted of family members,
including , , and . Review of the Secretary of State filing on list also
as a board member. The combined voting power of board members that are disqualified persons as
defined under 4946(a) is %.

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

The net income from operations for the years ending , , and , as
reported on the Forms Short Form Return of Organization Exempt From Income Tax, which the
organization filed to the Service, was as follows:

REVENUES
Form Form Form
Contributions, gifts, grants: $ $ $
TOTAL REVENUE $ $ $
EXPENSES
Form Form Form
Other Expenses: $ $ $
TOTAL EXPENSE $ $ $
NET INCOME
Form Form Form
NET INCOME or (LOSS) $ $ $

After review of the organization's books and records for the period ending , the Service found that
the sources of income, expenditures, and net income for the period, based on the brokerage statements, was
as follows:

REVENUES Per Form Per Audit
Contributions, gifts, grants: $ $ -
Investment Income $ $
Gross amount from sale of assets $ $
Less cost or other basis of sales expenses $ $
Other Revenue $ $
TOTAL REVENUE $ $
EXPENSES Per Form Per Audit
Bank Fees $ $
TOTAL REVENUE $ $
NET INCOME Per Form Per Audit
NET INCOME or (LOSS) $ $

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

The Foundation declared on their Form filed for the periods ending through
that they were excluded from private foundation status as a Type III non-functionally integrated supporting
organization. Forms , Schedule A, Part V-Type III Non-Functionally Integrated 509(a)(3) Supporting
Organization prepared and submitted by the Foundation shows a Distributable Amount of $ for the period
ending and $ for the period ending . The for the period ending
did not contain a computation for the required distributable amount. Based on the Form
instructions, the organization's distributable amount for the current tax year is ordinarily the greater of % of its
adjusted net income for the prior tax year or its minimum asset amount for the prior tax year, less income taxes
imposed on the organization during the prior tax year. During the years under examination, the Foundation did
not make any distributions to any organization, including the

On , , President, was interviewed regarding the organization's operations. During
the interview, the following facts were established:

1. The current board members were all appointed by
2. No current board member serves on the board of the
3. There is no close and continuous working relationship with the officers, directors or trustees of the
4. No written notice of support or copy of the is sent to the supported organization.
5. No charitable distributions have been made for the last to years.
6. The organization does not have plans to provide future support to the supported organization.

LAW

Code §501(c)(3) exempts from federal income tax organizations organized and operated exclusively for
charitable, educational, and other purposes, provided that no part of the organization's net earnings inures to
the benefit of any private shareholder or individual.

Code §509(a)(3) includes in the definition of an organization described under §501(c)(3) an organization which
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 paragraph (1) or (2), operated in
connection with one or more such organizations, and is not controlled directly or indirectly by one or more
disqualified persons other than foundation managers and other than one or more organizations described in
paragraph (1) or (2).

Section 1.501(c)(3)-1(a) of the Income Tax Regulations (Treas. Reg.) provides that in order to be exempt as an
organization described in Code §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.

Treas. Reg. §1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated exclusively" for one
or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt
purposes specified in Code §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.

Treas. Reg. §1.509(a)-4(b)(1) provides that 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

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

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) establishes the requirements of the operational test to include permissible
beneficiaries and permissible activities. It provides that a supporting organization will be regarded as operated
exclusively to support one or more specified publicly supported organizations 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.

Treas. Reg. §1.509(a)-4(i)(1) provides that for each taxable year, a supporting organization is operated in
connection with one or more supported organizations (that is, is a "Type III supporting organization") only if it is
not disqualified by reason of paragraph (f)(5) or paragraph (i)(10) of this section, and it satisfies the notification
requirement, which is set forth in paragraph (i)(2) of this section; the responsiveness test, which is set forth in
paragraph (i)(3) of this section; and the integral part test, which is satisfied by maintaining significant involvement
in the operations of one or more supported organizations and providing support on which the supported
organization(s) are dependent. In order to satisfy this test, the supporting organization must meet the
requirements either for (A) Functionally integrated Type III supporting organizations set forth in paragraph (i)(4)
of this section; or (B) Non-functionally integrated Type III supporting organizations set forth in paragraph (i)(5) of
this section.

Revenue Ruling (Rev. Rul.) 58-617, 1958-2 CB 260, (Jan. 01, 1958) Rulings and determinations letters granting
exemption from federal income tax to an organization described in §501(a) of the Internal Revenue Code of
1954, to which contributions are deductible by donors in computing their taxable income in the manner and to
the extent provided by section 170 of the Code, are effective only so long as there are no material changes in
the character of the organization, the purposes for which it was organized, or its methods of operation. Failure
to comply with this requirement may result in serious consequences to the organization for the reason that the
ruling or determination letter holding the organization exempt may be revoked retroactively to the date of the
changes affecting its exempt status, depending upon the circumstances involved, and subject to the limitations
on retroactivity of revocation found in §503 of the Code

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)

ISSUE #1 — Does the Foundation conduct activities that satisfy the operational test requirement for the purposes
of exemption under §501(c)(3) of the Code?

TAXPAYER'S POSITION

Based on the conversation with by phone on , the taxpayer agrees with the
government's position.

GOVERNMENT'S POSITION

It has been determined that the Foundation did not operate for the benefit of, perform the functions of, or carry
out the purposes of its specified publicly supported organization, as required under §509(a)(3). Furthermore, the
Foundation does not qualify for exemption as an organization described in Code § 501(c)(3) because it does not
meet the operational test under Code §501(c)(3) and Treas. Reg. §1.501(c)(3)-1(a)(1). It does not meet the
operational test because it is not operated exclusively for a §501(c)(3) purpose as required by Treas. Reg.
§1.501(c)(3)-1(c)(1). It is not operated exclusively for a §501(c)(3) purpose because it does not engage in
activities that accomplish and exempt purpose, and its sole activity is not in the furtherance of an exempt
purpose.

Based on testimony by phone on , the Foundation has not engaged in any activities
with for the last to years. During the periods under
examination, there were no distributions made to the supported organization or any other beneficiaries. There
were no activities conducted for the benefit of the supported organization. In addition, the Foundation is directly
controlled by disqualified persons, as defined in Code §4946. No written notice describing the type and amount
of support for the taxable year has been provided to the supported organization. No officers, directors or trustees
of either organization are elected or appointed by the other. There is no close or continuous working relationship
between the organizations. As such, the Foundation fails to pass the tests required of supporting organizations
under Treas. Reg §1.509(a)-4, specifically the organizational, operational, control, and relationship test, or the
additional tests required of Type III supporting organizations, which are the notification requirement,
responsiveness and integral part tests. Therefore, under the guidance of Treas. Reg. §1.509(a)-4(b)(1), the
Foundation would not qualify as a supporting organization.

Furthermore, as there are no exempt activities, the Foundation fails to meet the statutory requirements to
continue its exemption status under Code §501(c)(3). As previously discussed, the Foundation does not engage
in any exempt activity and per statement on , has been dormant for to
years. The sole activity is investment in securities, specifically the trading of stocks on the open market. This
activity is not in furtherance of an exempt purpose. As such, the organization is not regarded as "operated
exclusively" for one or more exempt purposes because it has no activity that accomplishes one or more of such
exempt purposes specified in Code §501(c)(3). Its sole activity of investment is not in the furtherance of an
exempt purpose.

As demonstrated in Rev. Rul. 58-617, an organization's exempt status will remain in effect only so long as there
are no material changes in the character of the organization, the purposes for which it was organized, or its
methods of operation. In the case of the Foundation, the organization has ceased the support of
and does not operate as an exempt organization. Therefore, the Foundation no
longer operates for the purposes for which it was originally organized and does not operate exclusively for
charitable, religious, or other exempt purposes. It is concluded that the Foundation does not conduct activities
that satisfy the operational test requirement for the purposes of exemption under §501(c)(3) of the Code.

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

ISSUE #2 — Should the taxpayer continue to be recognized as tax exempt under §501(a) of the Code as an
organization described in §501(c)(3)?

TAXPAYER'S POSITION

Based on the conversation with by phone on , the taxpayer agrees with the
government's position.

GOVERNMENT'S POSITION

The Foundation should not continue to be recognized as tax exempt under §501(a) of the Code as an
organization described in §501(c)(3) because it does not meet the operational test under Code §501(c)(3) and
Treas. Reg. §1.501(c)(3)-1(a)(1). The Foundation fails the operational test because it does not engage in any
activities that accomplish an exempt purpose, and more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

CONCLUSION

The Foundation is not an organization described in Code § 501(c)(3) and therefore is not exempt from federal
income tax. The government will propose revocation of exemption on the first day of the tax year in which the
noncompliant activities were substantiated, which is the first period under examination. Therefore, the effective
date of revocation is . Forms , U.S. Corporate Income Tax Return, should be prepared and filed
by the organization for the period of examination forward.

Catalog Number 20810W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)