Closed private school loses exemption

Plain-English summary

The IRS revoked the exemption of a private school that had educated children from pre-kindergarten through eighth grade. The school experienced financial difficulties as enrollment declined, served a reduced number of students, and closed in June of the redacted year. It filed a final return and closed all bank accounts in October, but it did not file articles of dissolution. The organization also lacked its governing documents, and IRS records showed a different full name from the names used on its returns. The IRS concluded that the organization no longer met the operational test for exemption and had not completed its termination process. The chief financial officer orally agreed with revocation, effective November 1 of the redacted year.

Ruling snapshot

• Question: Did the closed private school continue to satisfy the organizational and operational requirements of section 501(c)(3)?
• Outcome: Revocation effective November 1 of the redacted year
• Key authorities: IRC §§ 170 and 501; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION October 16, 2015

Taxpayer Identification Number:
Release Number: 201603038

Release Date: 1/15/2016

UIL Code: 501.03-00 Person to Contact:

Identification Number:

Contact Telephone Number:

CERTIFIED MAIL
Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated October 1993 is hereby revoked and you are no longer exempt under
section 501(a) of the Code effective November 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

You are not operating for any charitable, religious, educational, or other exempt
purpose. Our examination, for the tax years ended December 31, 20XX and December
31, 20XX, reveals that you are not engaged primarily in activities which accomplish
religious, charitable, educational or other exempt purposes as required by Treas. Req.
section 1.501(c)(3)-1(c)(1). Moreover, you failed the organizational test for exemption
because your corporate status has been suspended; therefore, you are not a
corporation, community chest, fund, or foundation as required by I.R.C. section
501(c)(3).

Contributions to your organization are no longer deductible under IRC §170 after
November 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the tax year ending December 31, 20XX
and for all tax years thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st Day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgments by referring to the enclosed Publication 892. You may write to
these courts at the following addresses:

United States Tax Court United States Court of Federal Claims
400 Second Street, NW 717 Madison Place, NW
Washington, D.C. 20217 Washington, D.C. 20005

United States District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, D.C. 20001

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 our assistance, which is always free,
TAS will do everything possible to help you. Visit taxpayeradvocate.irs.gov or
call 1-877-777-4778.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,
Margaret Von Lienen
Director, EO Examinations

Enclosure:
Publication 892

Letter 3607(04-2002)
Catalog Number: 34198J

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

Exempt Organizations: Examinations

1100 Commerce Street MS 4900-DAL

Dallas, TX 75242-1027

Date:
April 23, 2015
Taxpayer Identification Number:

Form:

990 & 990EZ
Tax Year(s) Ended:

December 31, 20XX and 20XX
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s name/ID number:

Manager’s contact number:

Response due date:

Certified Mail — Return Receipt Requested
Dear

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action — Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren’t an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

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 revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also
may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
     requesting technical advice. If we issue a determination letter to you based on a technical
     advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
     further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Thank you for your cooperation.

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended
December 31, 20XX
and 20XX

Issue:

Whether the tax exempt status of (“ ”) should be revoked as of

November 1, 20XX, for failing to comply with the operational test within the meaning of Section
501(c)(3) of the Internal Revenue Code (“Code”) and the regulations thereunder.

Facts:

Organizational information:

was incorporated in the State of on August 7, 19XX. no longer has any
governing instruments: Articles of Incorporation, bylaws, application form for recognition of
exemption, and the determination letter. We were unable to obtain the archived copies of these
documents from the IRS’s Records Unit. Nevertheless, IRS records indicate that received its
exempt status under Sections 501(c)(3) and 170(b)(1)(A)(ii) of the Code in October 19XX.

The name shown on all returns that filed are slightly different from the name within IRS records.
The Form 990, Return of Organization Exempt From Income Tax, filed for the year ending
December 31, 20XX had the name “

”. The unabbreviated version of this name is ;

d.b.a. . The State of website indicated name
as “ ” However, full name within the IRS records is

, without “ ” or doing business as name. Without governing instruments, and without any
records indicating requested a name change, we were not able to determine the cause of these

differences. To indicate all these variations of names represent the same entity, we included them all
in the header of this report.

Operational information:

We audited the Form 990 for the year ending December 31, 20XX, Form 990-EZ, Short Form, Return
of Organization Exempt From Income Tax, for the year ending December 31, 20XX, and the activities
of

The mission was “Education of children from kindergarten through Grade 8” on both returns. In 20XX,

reported $ program service expenses and stated its accomplishment as “During the year the
organization served approximately 22 students in its academic, extracurricular and other programs and
activities.” In 20XX, reported $ program service fee and stated that “During the spring

semester the Organization served approximately 12 students. School closed in June 20XX.”

Agent interviewed the chief financial officer (“CFO”) on July 29, 20XX. The CFO started working for
in October 20XX as a bookkeeper, but she did the books at home. Therefore, she was not familiar
with activities and operations. According to her, was a regular Pre-K through 8th grade private

Form 886-A (1-1994) Page 1 of 3 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended
December 31, 20XX
and 20XX
school that offered academic programs to students. It might have operated after-school programs, but she
was not sure. experienced financial difficulties since 20XX due to lack of enrolled students.
According to the financial statements, generated income from donations, tuitions, material fees,

summer school, and fundraising events.

filed its final return for the year ending December 31, 20XX, and checked the box

“Terminated.” Bank statements showed that closed all its bank accounts in October 20XX.
However, had not officially terminated its status. hadn't filed the Articles of Dissolution.
The CFO stated that had some difficulties in filing the Articles of Dissolution without providing

specific reasons.
LAW

Organizational and Operational Requirements for Exemption:

Section 501(c)(3) of the Code provides that an organization must be organized and operated
exclusively for a “charitable” or other exempt purpose. For an entity to be organized for an exempt
purpose, it must be a corporation, community chest, fund or foundation.

Section 1.501(c)(3)-1(a)(1) of Federal Tax Regulations (“Regulations”) provides that, in order to be
exempt as an organization described in Section 501(c)(3) of the Code, 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.

Section 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 that
accomplish one or more of such exempt purposes specified in Section 501(c)(3) of the Code. An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose. The existence of a substantial nonexempt purpose, regardless of
the number or importance of exempt purposes, will cause failure of the operational test.

Section 1.501(c)(3)-1(d)(1)(i) of the Regulations provides that an organization may be exempt as an
organization described in Section 501(c)(3) of the Code if it is organized and operated exclusively for
one or more of the following purposes:

(a) Religious,

(b) Charitable

(c) Scientific,

(d) Testing for public safety,
(e) Literary

(f) Educational, or

Form 886-A (1-1994) Page 2 of 3 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

December 31, 20XX
and 20XX

(g) Prevention of cruelty to children or animals.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides, in part, that the organization must establish
it is not organized or operated for the benefit of private interests, “such as designated individuals, the
creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by
such private interests.”

Government’s Position

For an organization to maintain its exempt status, it must meet both organizational and operational
tests under Section 501(c)(3) of the Code and Section 1.501(c)(3)-1(a)(1) of the Regulations. The
operational test generally requires that an organization operates consistently within the requirements
of the Code. Otherwise, the organization is not operated exclusively for charitable purposes, and will
lose its tax exempt status.

stopped its operation in June 20XX. completed winding down all matters in October
20XX when it closed all its bank accounts. The documents we observed confirmed these statements.

has not carried on any exempt activity since October 20XX. Accordingly, stopped
meeting the operational test since October 20XX within the meaning of the Regulations Section
1.501(c)(3)-1(d). Nevertheless, failed to complete its termination process, because it did not
officially dissolve its status with the State of . Therefore, we propose to revoke its exempt
status under Sections 501(c)(3) and 170(b)(1)(A)(vi) of the Code, effective November 1, 20XX.

To indicate that name variations represent the same entity, we will be using “
” on the revocation agreement Form 6018, Consent to
Proposed Action-Section 7428.

Taxpayer’s Position

The CFO orally agreed with the revocation to exempt status.
Conclusion:

failed the operational test because it stopped operating in October 20XX. The exempt status
of should be revoked effective November 1, 20XX.

is required to file Forms 1120, U.S. Corporation Income Tax Return, from November 1, 20XX
and all the subsequent years, if applicable.

Form 886-A (1-1994) Page 3 of 3 Department of the Treasury-Internal Revenue Service