Private foundation lost exemption after five years without exempt activity

Plain-English summary

A nonoperating private foundation was examined after reporting no operational or financial activity for five years. Its president said the organization lacked funding and resources and expected a related business to generate future funding. Bank statements and a noncash-contribution form showed a bank balance and donated art that had not been reported on the foundation's return, and the art remained in storage for possible future research use. The foundation had no income, distributions, assets, liabilities, or current charitable programs during the examined period. The IRS concluded that it failed the Section 501(c)(3) operational test because it did not engage primarily in activities accomplishing an exempt purpose. The president and representative agreed that the organization had no operational or financial activity and agreed to the proposed revocation. The IRS revoked exemption and explained that private-foundation status and related filing and excise-tax obligations continue until separately terminated under Section 507.

Ruling snapshot

• Question: Did a private foundation with no operational or financial activity for five years continue to qualify under IRC Section 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 507, 4941, 4942; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 58-617

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date:
August 26, 2024

Taxpayer ID number (last 4 digits):

Form:

Release Number: 202447017
Release Date: 11/22/2024
UIL Code: 501.03-00

Tax periods ended:

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

Last day to file petition with United States
Tax Court: November 24, 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: You have not
demonstrated that you are both organized and operated exclusively for charitable, educational, or other exempt
purposes within the meaning of IRC Section 501(c)(3). You did not engage in any activity that accomplished
one or more exempt purposes under IRC Section 501(c)(3). As such, you failed to meet the requirement of IRC
Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a).

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.

Because you were a private foundation as of the effective date of the adverse determination, you are considered
to be a taxable private foundation until you terminate your private foundation status under IRC Section 507.
In addition to your income tax return, you must also continue to file Form 990-PF, Return of Private Foundation
or Section 4947(a)(1) Trust Treated as Private Foundation, by the 15th day of the fifth month after the end of
your annual accounting period.

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. 3-2024)
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).

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 if 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. Visit TaxpayerAdvocate.IRS.gov/contact-us or call 877-777-4778 (TTY/TDD 800-829-4059)
to find the location and phone number of your local advocate. Learn more about TAS and your rights under the
Taxpayer Bill of Rights at TaxpayerAdvocate.IRS.gov. Do not send your Tax Court petition to TAS. Use the
Tax Court address provided earlier in the letter. Contacting TAS does not extend the time to file a petition.

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.

Letter 6337 (Rev. 3-2024)
Catalog Number 74808E

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

cc:

Letter 6337 (Rev. 3-2024)
Catalog Number 74808E

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date:
03/12/2024

Taxpayer ID number:

Form:

Tax periods ended:

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

Manager's contact information:
Name:
ID number:
Telephone:

CERTIFIED MAIL -- Return Receipt Requested

Response due date:
04/11/2024

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.

   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.

Letter 3618 (Rev. 3-2024)
Catalog Number 34809F

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.

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,

Hilda Rodriquez
Group Manager

Enclosures:
Form 886-A
Form 6018

cc:

Letter 3618 (Rev. 3-2024)
Catalog Number 34809F

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanation of Items

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

ISSUE:

Whether                 , continues to qualify for exemption from
Federal income tax under § 501(a) of the Internal Revenue Code (Code) as a charitable
organization described in § 501(c)(3) of the Code.

FACTS:

                 was incorporated under the laws of the State of                 as a non-profit corporation in
                 .

As noted in the                 current Articles of Incorporation, the organization’s purpose is as follows:

On                 ,                 was granted exemption under 501(c)(3) sections 509(a)(1) and
170(b)(1)(A)(vi). They were given advance rulings from                 to                 and
later                 became nonoperating private foundation.

In                 , the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected for
examination the Form 990 return filed by                 for the                 calendar year. The notice of
examination package issued to                 is dated                 , and consists of IRS letter #6031,
Form 4564, Information Document Request (IDR), Publication 1, Your Rights as a Taxpayer, and
Notice 609, Privacy Act Notice.

Form 886-A (May 2017) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanation of Items

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

IDR #1 issued to                 on                 , requests copies of the following records and
information covering the                 calendar year under examination:

• Copy of bank, credit card and investment statements for                 through                 .

• Copy of the transaction register for PayPal, Venmo, cryptocurrency or other virtual
  payment for                 through                 (if applicable).

• Copies of financial records maintained electronically or in hard copy format including:
  a. Chart of Accounts
  b. Trial Balance (Beginning, Ending and Adjusted)
  c. General Ledger

• Copy of auditor’s report (if applicable).

• Written statement describing your exempt purpose(s) and current activities.

• Minute books showing any recorded meetings of your governing body (officers,
  directors, or trustees), including committee meetings.

• Copies of pamphlets, brochures, newsletters or other printed literature or advertising
  regarding your organization and its activities.

                 was not able to produce any financial information as they did not have any activities.
Initial interview was held on                 , at
                 ,                 , president’s office location. Identified below are the persons interviewed,
and their titles:

                 , President (TP)
                 , Comptroller
                 , The organization’s representative (POA)

During the interview, IRS examiner asked TP that during the response to IDR, organization
provided bank statements which had bank balance as of end of year $                 and Form 8283,
Noncash Charitable Contributions noted that organization received $                 worth of Arts.
However, these were not included in the 990-PF return. TP admitted these should be reported.
                 relied on previous accountant and was not aware of these requirements. Currently, the arts
are in the storage room for future usage.

Form 886-A (May 2017) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanation of Items

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

During the interview, TP declared that the organization had no operational nor financial activities
for the year ended                 . During the review of 990-PF returns, it was noted no
activities for last five years                 . Analysis of Revenue and Expenses, and Balance Sheets
had zero balances. TP responded that                 did not have enough funding and resources. Funding
was intended to be provided by the profit generated by the                 . It is only in very
recently that the                 is beginning to reach a growth level to enable funding to
commence in the near future.                 had no incomes, no distributions, no assets and no liabilities
for last five years. Therefore,                 did not operate in furtherance of charitable purposes or
satisfy the operational test described in the regulations under Code § 501(c)(3).                 President
agreed in principle with the IRS examiner. The organization was unable to provide any court
opinions or other published precedent which provides support for its exempt status based on its
current operations.

Moreover, agent asked about how                 is related to                 . Agent was concerned
about possible self-dealing under IRC 4941, and agent warned TP about the taxes on self-dealing
under IRC 4941. See Treas. Reg. § 53.4941(d)-2(d) & (f). TP noted funding for                 was
intended to be provided by the profit generated by the                 . Agent asked about the
arts donated to                 shared with                 . TP stated arts were not shared with
                 and that they are in a storage room for future usage.                 and TP stated that                 intends to
use its arts to conduct studies and research on the ever-evolving human sexuality in conjunction
with various institutions such as the                 .

LAW

IRC § 501(c)(3) exempts from federal income tax organizations which are 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 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.

Federal Tax Regulations (“Regulations”) § 1.501(c)(3)-1(a)(1) of the Treasury Regulations states
that to be exempt as an organization described in § 501(c)(3), an organization must be both
organized and operated exclusively for one or more of the purposes specified in such section -
charitable, religious, educational, scientific, literary, testing for public safety, or for the

Form 886-A (May 2017) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanation of Items

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

prevention of cruelty to children or animals. If an organization fails to meet either the
organizational test or the operational test, it is not exempt.

Regulations § 1.501(c)(3)-1(c) of the regulations describes the operational test requirements for
501(c)(3) exemption. The operational test focuses on how the organization is actually operated,
regardless of whether it is properly organized for tax-exempt purposes.

Regulations § 1.501(c)(3)-1(c)(1) of the regulations 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 § 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. This is referred to as the “primary activities” test.

Revenue Ruling 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 § 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.

GOVERNMENT'S POSITION

The EO has failed to show us that they meet the operational test for a § 501(c)(3) organization
for the year under examination. In order to meet the operational test, they must show that they
engage primarily in activities which accomplish one or more of such exempt purposes specified
in section § 501(c)(3). We will not regard an organization as having met this test if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

As evidence of their failure to operate for exempt purposes, we reviewed the Form 990 filings
and found no support for exempt operations. The originally filed Form 990-PF for year ended
                 , did not show any operational or financial activities. In fact, they explicitly
stated in Part I & Part II that all the line items were zeros. Same followed for previous years.
Last five years                 , organization had no activities. The prior year returns also do not
show any exempt purpose activities. Clearly, they have not been performing exempt purpose
activities, which is required for a §501(c)(3) organization to keep their tax-exempt status.
Accordingly, we are proposing revocation because they do not operate for exempt purposes.

Form 886-A (May 2017) Department of the Treasury - Internal Revenue Service
Page: -4-

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanation of Items

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

TAXPAYER'S POSITION

The organization’s president and organization’s representative agreed that the organization
has no operational or financial activities. Agent discussed revocation with the organization’s
president and organization’s representative on                 , and they agreed to the proposed
revocation as organization was not operating for an exempt purpose.

CONCLUSION

By not complying with the Code and Regulations, the organization has jeopardized its exempt
status. They failed to show that they were operating for exempt purposes. They have failed to
show any evidence of their exempt activities. We have no reason to believe that the EO is
operating for exempt purposes.

As a result of the examination, we have determined that the EO is not operating for exempt
purposes as a §501(c)(3) organization. They have not provided any information to the contrary.
Accordingly, since the organization failed to operate primarily for exempt purposes, we are
proposing revocation of their tax-exempt status, effective                 .

IRC 507 provides the exclusive method of termination of private foundation status. Until your
private foundation status is terminated, excise taxes under Chapter 42 of the Code, including the
taxes imposed under IRC 4941 and 4942, are still applicable.

Since the organization will no longer have tax-exempt status beginning                 , they are
liable for filing Form 1120, U.S. Corporation Income Tax Return, and Form 990-PF, Return of
Private Foundation, as of that date.

Please note that this Form 886-A, Explanation of Items, which is also known as the revenue
agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer
to the attached letter #3618 for additional information including appeals rights and other options
available to the organization and, the instructions for how to respond.

If you agree to this conclusion, please sign the attached Form.

If you disagree, please submit a statement of your position.

Form 886-A (May 2017) Department of the Treasury - Internal Revenue Service
Page: -5-