IRS revokes a charity's 501(c)(3) exemption after it would not let the agency examine its records

Plain-English summary

This is a final adverse determination letter revoking an organization's tax-exempt status under Section 501(c)(3). The organization ran an annual performing and visual arts festival and had been recognized as a public charity under Section 509(a)(2). During an examination, the IRS made repeated requests for the group's financial records and information, using document requests, phone calls, a delinquency notice, and eventually a pre-summons letter. The organization did not respond adequately. Because a 501(c)(3) must keep records and let the IRS inspect them (Sections 6001 and 6033) and must show it operates exclusively for exempt purposes, the failure to cooperate meant the group could no longer establish that it qualified. The IRS revoked the exemption, which also ends the deductibility of contributions under Section 170 and generally requires the organization to file Form 1120 and pay tax going forward.

Ruling snapshot

• Question: Does the organization continue to qualify for exemption under IRC Section 501(c)(3) after failing to provide requested records during an examination?
• Outcome: Revocation of exempt status
• Key authorities: IRC §§ 501(c)(3), 501(a), 6001, 6033(a)(1), 170, 7428; Treas. Reg. §§ 1.501(c)(3)-1(c), 1.6001-1, 1.6033-2; Rev. Rul. 59-95

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 10-27-2022
IRS Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):

Form:

Tax periods ended:
Release Number: 202317025

Release Date: 4/28/2023 Person to contact:

Name:

UIL Code: 501.03-00 ID number:

Telephone:
Fax:

Last day to file petition with United States
Tax Court:

01/25/2023
CERTIFIED MAIL - Return Receipt Requested

Dear

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 failed to adequately respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC Sections 6001 and 6033(a)(1) as well as the regulations thereunder. You also failed to demonstrate that you are operating exclusively for one or more exempt purposes as required by Treasury Regulations Section 1.501(c)(3)-1(c)(2).

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 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 can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either:

• The United States Tax Court, .
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint.

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below:

United States Tax Court
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW

Washington, DC 20001

dcd.uscourts.gov

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428.

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

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:

Internal Revenue Service
Taxpayer Advocate Office

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.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

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 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.

You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.

Sincerely,

an Brinkley
Acting Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

Date:

Department of the Treasury February 4, 2022
Internal Revenue Service Taxpayer ID number:

IRS Tax Exempt and Government Entities

Form:
Tax periods ended:

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

Manager's contact information:
Name:
ID number:

Telephone:
Response due date:
March 4, 2022

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.

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

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).

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

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations
Examinations

Enclosures:

Form 886-A
Form 6018

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

886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of Taxpayer Tax Identification Number Year/Period Ended
ISSUE

1. Whether , continues to qualify for exemption under section 501(c)(3)

of the Internal Revenue Code.
FACT

was formed under the laws of the State of . This organization is
recognized under section 501(c)(3) and 509(a)(2) status.

The organization's primary exempt purpose, per the , is an "annual performance and visual arts festival held in and surrounding areas. The festival aspires to bring emerging and established artists to audiences with works that are imaginative, innovative, and enriching. The strives to foster stronger relationships in the community by joining local businesses audiences and performers".

On , a letter was sent to , requesting the organization to
contact the requesting agent to confirm the appointment. Also, attached was Form 4564, Information Document Request, which includes a list of requested information to be sent to the agent. The organization failed to provide the Internal Revenue Service with the requested information. Additional attempts were made to retrieve requested information from the organization and an adequate response was not established.

Additional attempts were made on:

, re-mailed Information Document Request as Certified Mail to
. USPS tracking confirmed delivery on

, Agent called the number listed for the organization. A message was left on voicemail to contact the agent.

, Delinquency Notice mailed to organization with due date for

, Agent called the number listed for the organization. A message was left on voicemail to contact the agent.

, Agent was able to contact the Treasurer and records keeper,
through "unable to locate" procedure. Confirmed organization address is correct and letter has been received. Agents discuss Information Document Request with treasurer and due date.

, Agent called Treasurer to follow up on Information Document Request. A message was left on voicemail to contact the Agent.

, Agent called Treasurer to follow up on Information Document Request. A message was left on voicemail to contact the Agent.

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of Taxpayer Tax Identification Number Year/Period Ended

, Pre-summons letter was mailed to organization confirmed address. Law

Section 6001 of the Code provides that every person liable for any tax imposed by the Code, or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time prescribe.

Section 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.

Section 1.6001-1(a) of the regulations in conjunction with section 1.6001-1(c) provides that every organization exempt from tax under section 501(a) of the Code and subject to the tax imposed by section 511 on its unrelated business income must keep such permanent books or accounts or records, including inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters required to be shown by such person in any return of such tax. Such organization shall also keep such books and records as are required to substantiate the information required by section 6033.

Section 1.6001-1(e) of the regulations states that the books or records required by this section shall be kept at all times 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.

Section 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 507 and the following), chapter 1 of the Code and section 6033.

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.

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

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of Taxpayer Tax Identification Number Year/Period Ended

the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax.

Taxpayer's Position

At the issuance of this letter the taxpayer's position was not known. It is requested of the taxpayer that they provide comments and/or records in order to verify the accuracy of their gross receipts.

Government's Position

Under I.R.C. section 6033(a) an exempt organization receiving under $ in gross receipts must file a Form or Form _. Since your organization has failed to provide proper documentation of your financial position, it is undetermined that the organization's gross receipts were under $

Under Treas. Reg. section 1.6033-2(i)(2), every organization exempt from tax, whether or not it is required to file an annual information return, shall submit additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status. During our examination we made several requests for information, but the organization failed to supply the requested information. Except for organizations that are exempted from the annual filing requirements, I.R.C. section 6033(a)(1) and Treasury Regulation section 1.6033-2(a) provide that every organization exempt from taxation under I.R.C. section 501(a) is required to file an annual return (Form __), stating specifically the items of gross income, receipts, and disbursements, and shall keep such records, render under oath such statements, make such other returns and comply with such rules and regulations as the Secretary of the Treasury or his delegate may from time to time prescribe. Treasury Regulation section 1.6033-2(i)(2) provides that every organization that 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.

Treasury Regulation 1.6033-2(g)(4) defines the term "gross receipts" [when used as to exempt organizations that normally do not have gross receipts in excess of $ 5,000] to mean the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses. The term includes, but is not limited to, the gross amount received as contributions, gifts, grants and similar amounts without reduction for the expenses of raising and collecting these amounts.

Conclusion

It is the Internal Revenue's position that have failed to meet the requirements for an organization described in Internal Revenue Code section 501(c)(3) and exempt from tax under section 501(a). The organization have failed to provide information and establish that their operation is exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective

Form 1120 return should be filed for the tax periods ending
, and all other subsequent tax years.