Charity lost exemption after ignoring record requests and making an unexplained payment

Plain-English summary

A section 501(c)(3) organization did not respond to repeated IRS requests for records needed to verify its continued exemption. Its return preparer told the examiner that the organization had never operated to her knowledge, that its principal officer had died, and that she had no contact with any current officer. Bank records also showed a payment to an entity controlled by a private person, and the organization supplied no documents showing that the payment furthered an exempt purpose. The IRS concluded that the unexplained payment served private rather than public interests and that the organization had not established compliance with the recordkeeping and reporting rules. It revoked the organization's exemption and stated that contributions were no longer deductible under section 170.

Ruling snapshot

• Question: Did the organization establish continued section 501(c)(3) qualification despite its failure to provide records and an unexplained payment to a privately controlled entity?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-2; Rev. Rul. 59-95

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service October 11, 2023
Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):

Form:

Tax periods ended:

Release Number: 202401019

Release Date: 1/5/2024 Person to contact:
UIL Code: 501.03-00 Name:
ID number:
Telephone:
Fax:

Last day to file petition with United States
Tax Court: January 9, 2024

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 exempt
from Federal income tax under section 501(c)(3) of the Code are required to operate exclusively for charitable,
educational, or other exempt purposes. Organizations are not operated exclusively for exempt purposes if the
net earnings of the organization inure in whole or in part to the benefit of private shareholders or individuals of
the organization. See Treas. Reg. § 1.501(c)(3)-1(c)(2).

You have 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) of
the IRC and Rev. Rul. 59-95, 1959-1 C.B. 627. Section 1.6033-2(i)(2) of the Income Tax Regulations provides,
in part, that every organization which is exempt from tax, shall submit such additional information as may be
required by the Internal Revenue Service for the purpose of inquiring into its exempt status.

Since you have not provided the requested information, you have failed to establish that you are operated
exclusively for exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net
earnings inure to the benefit of private shareholders or individuals.

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:

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

° The United States Tax Court,

* The United States Court of Federal Claims, or
° The United States District Court for the District of Columbia

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).

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

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 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,

Lynn A. Brinkley

Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

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

Date:
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date:
June 5, 2023
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:

July 7th, 2023

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
l. 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,

Digitally signed by Jason E.
Brasch
Date: 2023.06.05 10:54:59 -07'00'

for Lynn Brinkley
Director, Exempt Organizations
Examinations

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

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
ISSUES

1. Whether (the Taxpayer) provided information verifying its continued

qualification for exempt status under Section 501(c)(3) of the Internal Revenue Code (IRC).

2. Whether the Taxpayer engaged in nonexempt activities prohibited by IRC Section 501(c)(3).
3. Whether the Taxpayer’s exempt status should be revoked for engaging in nonexempt activities and

failing to provide information verifying its continued qualification for exempt status for the tax
period ending

FACTS
The Taxpayer was incorporated in the State of on , as a domestic non-profit
corporation. Article 10(a) of its Articles of Incorporation state its purpose is to.

The Taxpayer is currently active with the State of . Its address is registered as

On , the Internal Revenue Service (IRS) received
, from the Taxpayer. The principal
officer for the Taxpayer is listed as . The Taxpayer listed its address as

On , the IRS granted tax-exemption to the Taxpayer under IRC Section 501(c)(3), and
further classified it as a public charity described in IRC Sections 509(a)(1) and 170(b)(1)(A)(vi), effective

On , the Taxpayer registered in the State of as a foreign public benefit corporation
incorporated in the State of . The Taxpayer is currently inactive with the State of due to
. Its last mailing address was registered as

In , the assigned agent began an examination of the Taxpayer’s for tax year ended

On , the assigned agent mailed the initial contact letter and Information Document Request
(IDR) 1 to the Taxpayer at the address , which is the current
mailing address per IRS records and Secretary of State registration. On , this letter
was returned to sender, stating “recipient is not at this address.”

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

_ i Schedule number
Form 886-A Department of the Treasury Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
On , the assigned agent reissued the initial contact and IDR 1 to the address

, which is the previous known address per IRS records and
Secretary of State registration, No response was received by the assigned agent.

On , the assigned agent reissued the initial contact and IDR 1 to the address
, which is the last known mailing address per
Secretary of State registration. On , this letter was returned to sender, stating “not deliverable

as addressed, unable to forward.”

On , the assigned agent reissued the initial contact and IDR 1 to the address
. Which is the previous known address for the Taxpayer's principal
officers per IRS records. On , this letter was returned to sender, stating “no such number,

unable to forward.”

On , the assigned agent received an email from , the preparer of the

Taxpayer's and stated that the Taxpayer has never been operational
to her knowledge, and that the principal officer is deceased.

On told the assigned agent via telephone that she is not in contact with any of
the current officers of the Taxpayer, and files the on behalf of the Taxpayer at the request
, who is not an officer of the Taxpayer.

On , emailed the assigned agent the Taxpayer’s
for reporting year , Bylaws, and filed Articles of Incorporation

The assigned agent obtained bank statements for the Taxpayer’s primary checking account with
. The statement shows a check for $ written on
, to :

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

Department of the Treasury — Internal Revenue Service Schedule number
Form 886-A “ id or exhibit
(May 2017) Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
Figure 1: Image of cancelled check dated for $ written from the Taxpayer's checking account to
IRS records indicate and proprietor of
On , the assigned agent issued IDR 2 to the Taxpayer requesting supporting
documentation for the $ payment to the address -On

, this letter was returned to sender, stating “addressee no longer at this address ”

On , the assigned agent reissued IDR 2 to the Taxpayer at the address
, per the Taxpayer’s original application for tax exemption. On
, this letter was returned to sender, stating “not deliverable as addressed, unable to forward.”

On , the assigned agent made final attempt to reach the Taxpayer by reissuing IDR 2 to the
address . response due . No response was
received by the assigned agent.

On , the assigned agent made final attempt to reach the Taxpayer by reissuing IDR 2 to the
address , which is the previous known address for the
‘Taxpayer’s principal officers per IRS records, response due . No response was received by

the assigned agent.

LAW
IRC Section 501(c)(3) provides in part tax-exemption to corporations organized and operated exclusively

for religious, charitable, or similar purposes, no part of the net earnings of which inures to the benefit of any
private shareholder or individual.

IRC Section 6033(a)(1) provides in part that every organization exempt from taxation under section 501 (a)
shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and

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

- i Schedule number
Form 886-A Department of the Treasury — Internal Revenue Service

, hibit
(May 2017) Explanations of Items oro

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

such other information for the purpose of carrying out the internal revenue laws as the Secretary may by
forms or regulations prescribe, and shall 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.

Treasury Regulations Section (Treas. Reg.) 1.501(a)-1(c) defines “private shareholder or individual” as
referring to persons having a personal and private interest in the activities of the organization.

Treas. Reg. 1.501(c)(3)-1(c)(2) states that an organization is not operated exclusively for charitable purposes
if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Treas. Reg. 1.501(c)(3)-1(d)(1) Gi) states in part that an organization is not organized exclusively for
excmpt purposes unless it serves public, rather than private, interests. Thus, il is necessary for the
organization to establish that it is not organized or operated for the benefit of private interests such as
designated individuals, the creator or their family, shareholders of the organization, or persons controlled,
directly or indirectly, by such interests.

Treas Reg 1 6001-1(a) provides in part that any person subject to tax under Subtitle A of the Code, or any
person required to file a return of information with respect to income, shall keep such permanent books of
account or records, including inventories, as are sufficient to establish the amount of gross income,
deductions, credits or other matters required to be shown by such person in any return of such tax or
information

Treas. Reg. 1.6001-1(c) provides in part that 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.

Treas. Reg. 1.6001-1(d) provides in part that the district director may require any person, by notice served
upon him, to make such returns, render such statements, or keep such specific records as will enable the
district director to determine whether or not such person is liable for tax under Subtitle A of the Code.

Treas. Reg. 1.6001-1(e) provides in part 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 so
long as the contents thereof may become material in the administration of any internal revenue law.

Treas. Reg. 1.6033-2(i)(2) provides in part that every organization which is exempt from tax 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.

Revenue Ruling 59-95, 1959-1 C.B. 627 held that failure or inability to file the required information return
or otherwise to comply with the provision 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

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

Form 886-A Depariment of the Treasury — Internal Revenue Service Scheatle number
. or exhibi
(May 2017) Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

grounds that the organization has not established that it is observing the conditions required for the
continuation of an exempt status.

TAXPAYER’S POSITION
The Taxpayer has not provided a position.

GOVERNMENT’S POSITION

Issue #1: Whether the Taxpayer provided information verifying its continued qualification for exempt
status under Section 501(c)(3) of the Internal Revenue Code (IRC).

IRC Section 6033(a)(1) requires exempt organizations to file annual information returns (Form 990, Form
990 EZ, or Form 990 PF) with an exception for organizations with annual gross receipts not normally more
than $5,000. IRC Section 6033(a)(1) and Treas. Reg. 1.6001-1 require exempt organizations to keep
permanent books of account or records to substantiate the information reported on the annual information
returns, and to provide such records upon request from an authorized internal revenue agent.

No response has been received from the Taxpayer, via telephone, mail, nor electronic mail, to substantiate
its qualification for tax-exempt status as indicated on its , nor has any requests for extensions
of time to provide such information been received. The assigned agent made multiple attempts to contact the
Taxpayer via phone and mail, with no response.

, the return preparer, is not an authorized individual of the Taxpayer and therefore does not have
the authority to receive confidential tax information concerning the Taxpayer, represent the Taxpayer at
conferences with the IRS, or sign agreements on behalf of the Taxpayer. The return preparer stated that the
Taxpayer is not and has never been operational, the principal officer is deceased, and she does not have the
contact information of any current officer or authorized individual. The requests to file the on
behalf of the Taxpayer originate from , who is not an officer or
authorized individual himself. The Taxpayer has not provided information or testimony to assert its
qualification for tax exemption under IRC Section 501(c)(3)

Issue #2: Whether the Taxpayer engaged in nonexempt activities prohibited by IRC Section 501(c)(3).

Treas. Reg. 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for exempt
purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.
Treas. Reg. 1.501(c)(3)-1(d)(1)(ii) provides in part that an organization must establish it is not organized or
operated for the benefit of private interests such as the creator or their family. The bank statements for the
Taxpayer’s checking account show a $ payment made to an entity controlled by

. There is no evidence in the case file to indicate this payment
furthered the Taxpayer’s exempt purpose, and the Taxpayer has not provided documentation or explanation
to show as much. It is concluded that the expenditure served private, rather than public, interests in the
absence of evidence on the contrary, which is prohibited for organizations exempt from tax under IRC
Section 501(c)(3). As such, the Taxpayer has engaged in nonexempt activities barring continued
qualification for tax exemption under IRC Section 501(c)(3).

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

Form 886-A Department of the Treasury ~ Internal Revenue Service Schedule number
. or exhibi
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

Issue #3: Whether the Taxpayer’s exempt status should be revoked for engaging in nonexempt activities
and failing to provide information verifying its continued qualification for exempt status for the tax
period ending .

The Taxpayer has engaged in nonexempt activities and failed to provide documentation or testimony to
support its exempt status and therefore does not qualify for exempt status under IRC Section 501(c)(3). The
Taxpayer fails to qualify for tax exemption effective the first day of the tax year in which the prohibited
transaction occurred, or

CONCLUSION

The Taxpayer has engaged in nonexempt activities and failed to provide information verifying its continued
qualification for exempt status under IRC Section 501(c)(3) and should have its status revoked for the tax
period ending , effective

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