501(c)(3) revoked because its charter gives assets to members on dissolution (fails the organizational test)

Plain-English summary

A regional association that coordinates member-club shows and awards an annual scholarship, recognized as a 501(c)(3) public charity (classified under 509(a)(2)), lost its exemption on a technical but fatal defect in its charter. Its articles of incorporation say that if the organization dissolves, its remaining assets go to its member clubs. Section 501(c)(3) requires that an organization's assets be permanently dedicated to exempt purposes, so the charter must direct that, on dissolution, assets pass to another exempt organization or to a government for a public purpose, never to members or shareholders. During the audit, the IRS agent explained the dissolution clause needed to be amended, but the organization did not intend to change it (it said it would instead reapply under a different tax subsection later). Because the charter failed this "organizational test," the IRS revoked the exemption. The organization had filed all its required returns; the only problem was the wording of its organizing document. Going forward it must file federal income tax returns.

Ruling snapshot

• Question: Does a 501(c)(3) keep its exemption when its articles direct that, on dissolution, assets be distributed to member clubs rather than to exempt purposes?
• Outcome: Revocation (final adverse determination)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a); Treas. Reg. § 1.501(c)(3)-1(b)(4)

Full text (IRS public release)

Department of the Treasury                       Date:
Internal Revenue Service                         [illegible] 12, 2023
IRS Tax Exempt and Government Entities           Taxpayer ID number (last 4 digits):

                                                 Form:
                                                 Tax periods ended:
Release Number: 202319016
Release Date: 5/12/2023                          Person to contact:
UIL Code: 501.03-00                              Name:
                                                 ID number:
                                                 Telephone:
                                                 Fax:

                                                 Last day to file petition with United States
                                                 Tax Court:
                                                 April 12, 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: You are not organized
exclusively for one or more exempt purposes. Your articles of organization do not limit your purposes to one or
more exempt purposes. Your articles of organization also expressly empower you to engage, otherwise than as
an insubstantial part of your activities, in activities which themselves are not in furtherance of one or more
exempt purposes. The purposes for which you were created are also broader than the purposes specified in
Section 501(c)(3). In addition, your assets are not dedicated to an exempt purpose. Your articles of organization
do not provide that upon dissolution your assets will be distributed for one or more exempt purposes, or to the
Federal Government, or to a State or local government, for a public purpose, or that your assets will be
distributed by a court to another organization to be used in such manner as in the judgment of the court will best
accomplish the general purposes for which you were organized. Your articles of organization also provide that
your assets will be distributed to your members upon dissolution.

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.

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.

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.

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.

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

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,

[illegible]
[illegible] Brinkley
Acting Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

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


Department of the Treasury                       Date:
Internal Revenue Service                         April 4, 2022
IRS 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:
                                                 May 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).

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

Sincerely,

[illegible] for
Lynn A. Brinkley
Acting Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

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


Form 886-A     Explanations of Items          Schedule number or exhibit
(May 2017)
Name of taxpayer     Tax Identification Number     Year/Period ended

ISSUE
If     continues to qualify for exemption under Section 501(c)(3) of the
Internal Revenue Code considering that their Articles of Incorporation state upon dissolution any remaining assets will
be distributed to members, and they do not intend to amend it?

FACTS

* The     was organized under State law in     
* On     ,     received tax exemption as a Public Charity
under 509(a)(2) within the meaning of Internal Revenue Code 501(c)(3) from the date of     
* Per their organizing documents, the purposes are
   o To stimulate activity for the promotion of     registered in the
     within the states of     ,     ,     ,     , and     
   o Encourage regional club and national association membership
   o Provide a strong representative voice for     at a national level
   o Provide a committee for the     
   o Disseminate information rule changes and promotional ideas for the national level to members
* The     accomplishes their primary purposes by coordinating
     shows across all states and awarding an annual scholarship to candidates in every state.
* Per their organizing documents, the assets of the     upon dissolution the
Board of Directors shall
   “after paying or making provisions for the payment of all the liabilities of the corporation,
   disperse all the assets of the corporation to each     in good standing based on
   the number     representatives.”
* During the examination, the Revenue Agent discussed the dissolution clause with the     
and explained the need for an amendment of said clause such that it meets Internal
Revenue Code Section 501(c)(3) criteria.
* The     filed all required returns.

LAW

Internal Revenue Code Section 501(c)(3) provides for exemption from Income Tax for corporations, and any
community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing
for public safety, literary, or educational purposes, or to foster national or international amateur sports competition
(but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of
the cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder
or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to
influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene
in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to)
any candidate for public office.

Treasury Regulations (Treas. Regs.) 1.501(c)(3)-1(a) 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.

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

Treas. Regs. 1.501(c)(3)-1(b)(4) explains that an organization is not organized exclusively for one or more exempt
purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to
an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's
articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal Government, or to a
State or local government, for a public purpose, or would be distributed by a court to another organization to be used
in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved
organization was organized. However, an organization does not meet the organizational test if its articles or the law of
the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or
shareholders.

TAXPAYER’S POSITION
The taxpayer has not provided their position at this time; however, they have stated during the examination that they
will reapply for a new subsection at a future date.

GOVERNMENT’S POSITION
The     filed their Articles of Incorporation with the Secretary of State of the
State of     on     . In their Articles of Incorporation, they state the following under Article 7;

“The assets of the corporation will be distributed on dissolution as follows:

Upon dissolution of the corporation, the Board of Directors shall, after paying or
making provisions of the payment of all the liabilities of the corporation, disperse
all the assets of the corporation to each     in good standing
based on the number of representatives. Dissolution of this corporation shall
require not less than     of the members’ written consent and shall be in
compliance with the laws of incorporation in the state of     ”

The dissolution clause expressly states that any net assets upon the dissolution of the
     shall be distributed to member clubs.

The     received tax exemption as a Public Charity under 509(a)(2) within the
meaning of Internal Revenue Code 501(c)(3) from the date of     . The Revenue Agent was assigned the
     for audit on     . During the examination, the
     provided their Articles of Incorporation and stated that no further amendments were made to
the organizing documents.

Treas. Regs. 1.501(c)(3)-1(b)(4) explains that “an organization does not meet the organizational test if its articles or
the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its
members or shareholders.” Further, Treas. Regs. 1.501(c)(3)-1(a) states that if an organization does not meet the
organizational test or the operational test, it is not exempt. Following the two preceding Treasury Regulations, the
     is not exempt under Internal Revenue Section 501(c)(3) and should be
revoked.

CONCLUSION

The     should be revoked as a tax-exempt organization described in section
501(c)(3) of the Internal Revenue Code because they are not exclusively organized for exempt purposes.

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

The effective date of revocation is     

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