Charity loses exemption after withholding examination records

Plain-English summary

The IRS examined a section 501(c)(3) grant-making organization after its return reported grants and little or no public support. The organization supplied some information but repeatedly withheld requested donor, grant, revenue, expense, private-benefit, inurement, and public-support records, asserting that disclosure would violate health privacy law. The IRS responded that the organization was not a covered entity under that law and that sections 6001 and 6033 required adequate records and access for inspection. Without the requested documentation, the organization could not show that its grants served charitable purposes or that it operated exclusively for exempt purposes. The organization agreed to revocation, and the IRS revoked its exemption effective January 1 of the redacted year.

Ruling snapshot

• Question: Did the organization continue to qualify under section 501(c)(3) after declining to provide records needed for its examination?
• Outcome: revocation, effective January 1 of the redacted year
• Key authorities: IRC §§ 170, 501(c)(3), 6001, 6033, and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: August 31, 2016

Release Number: 201649014                        Form:
Release Date: 12/2/2016
UIL Code: 501.03-00                              Tax Year Ended:
                                                 December 31, 20XX
                                                 Person to Contact:

                                                 Identification Number:

                                                 Contact Telephone Number:
                                                 Telephone Number:
                                                 Fax:
                                                 EIN:

CERTIFIED MAIL – Return Receipt Requested

Dear           :

This is a final determination that your exempt status under section 501(c)(3) of the Internal Revenue
Code is revoked. Recognition of your exemption under Internal Revenue Code section 501(c)(3) is
revoked effective January 1, 20XX for the following reason(s):

You did not provide us with the information requested about your financial records and activities
necessary to complete our examination. Therefore, you have not demonstrated that you are operated
exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3).

As such, you failed to meet the requirements of Internal Revenue Code section 501(c)(3) and Treasury
Regulation Section 1.501(c)(3)-1(d), in that you failed to establish that you were operated exclusively for
an exempt purpose.

Contributions to your organization are no longer deductible under section 170 of the Internal Revenue
Code effective January 1, 20XX.

                                      1


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

Processing of income tax returns and assessment 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 in court, you must initiate a suit for declaratory judgment
in the United States Tax Court, the United States Claim Court or the District Court of the United
States for the District of Columbia before the 91st day after the date this determination was mailed
to you. Contact the clerk of the appropriate court for the rules for initiating suits for declaratory
judgment. Please contact the clerk of the respective court for rules and the appropriate forms
regarding filing petitions for declaratory judgment by referring to the enclosed Publication 892.
Please note that the United States Tax Court is the only one of these courts where a declaratory
judgment action can be pursued without the services of a lawyer. You may write to the courts at the
following addresses:

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

                              US Court of Federal Claims
                              717 Madison Place, NW
                              Washington, DC 20005

                         U. S. District Court for the District of Columbia
                              333 Constitution Ave., N.W.
                              Washington, DC 20001

You may call the IRS telephone number listed in your local directory. An IRS employee there may be
able to help you, but the contact person at the address shown on this letter is most familiar with your
case. You may also call the Internal Revenue Service Taxpayer Advocate.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect your taxpayer rights. We 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, we 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 yours,


Enclosures:                                      Margaret Von Lienen
    Publication 892                              Director, EO Examinations

                                      2


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

                                                 Date:
                                                 February 3, 2016
                                                 Taxpayer Identification Number:

                                                 Form:

                                                 Tax Year(s) Ended:
                                                 December 31, 20XX
                                                 Person to Contact/ID Number:

                                                 Contact Numbers:
                                                 Telephone:
                                                 Fax:

                                                 Manager’s name/ID number:

                                                 Manager’s contact number:

                                                 Response due date:
                                                 March 4, 30XX

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 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,

                                                 Paul A. Marmolejo
                                                 Acting Director, EO Examinations

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


Form 886-A
(Rev. January 1994)              EXPLANATIONS OF ITEMS

Name of taxpayer                 Tax Identification Number        Schedule number or exhibit
                                                                  Year/Period ended
                                                                  December 31, 20XX
                                                                  December 31, 20XX

ISSUE

1. Whether             continues to qualify for exemption under Section
   501(c)(3) of the Internal Revenue Code?

FACTS

The organization was granted tax-exempt status in November 18, 20XX under Internal Revenue
Code Section 501(a) as an organization described in Section 501(c)(3). According to its Articles of
incorporation dated April 7, 20XX, the purpose of the organization is as follows:

The exempt purpose of the organization as stated in the original application for exemption (Form
1023) is to:

The organization filed Form 990-EZ for the year December 31, 20XX on 05/15/20XX. The
originally filed Form 990-EZ for December 31, 20XX shows the following:

Income

Contributions                 $ XX,XXX
Investment Income             $      X
Total Income                  $ XX,XXX

Expenses

Grants                        $ XX,XXX
Professional Fees             $    XXX
Other                         $  X,XXX
Total Expenses                $ XX,XXX

Net Loss                      $(XX,XXX)

We began an examination on June 11, 20XX. We contacted the president,             , at
various phone numbers found in the case file and on the internet.             stated that he
needed to discuss the audit with the Vice President and Treasurer of the organization. We mailed
the Letter 3611 to the organization with the examination date and time. In addition to the Letter
3611 we issued a request for information (Information Document Request, or IDR) on June 23,
20XX. The request was for financial and organizational information for the year under
examination. The information was due back to us by July 28, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Form 886-A
(Rev. January 1994)              EXPLANATIONS OF ITEMS

Name of taxpayer                 Tax Identification Number        Schedule number or exhibit
                                                                  Year/Period ended
                                                                  December 31, 20XX
                                                                  December 31, 20XX

On July 1, 20XX, the Vice President of the organization (             ) responded to the L3611
and rescheduled the initial appointment for August 5, 20XX. Because of the rescheduling of the
examination, we issued Letter 3613 along with a revised IDR with a due date of August 5, 20XX.
After the meeting on August 5, 20XX, we issued IDR #2 requesting additional documentation to
address potential private benefit, inurement, and public support issues. IDR #2 was due on
September 14, 20XX. The organization provided a response to IDR #2 on September 23, 20XX.
However, the response was missing information requested for donors, grants, and payments
made to             .

We issued IDR #3 on September 29, 20XX with a due date of October 20, 20XX. The IDR #3 was
issued in an attempt to re-request the documents needed to address the potential private benefit,
inurement, and public support issues identified during the field examination. We did not receive a
response to the IDR #3 and as a result scheduled a subsequent field visit for December 8, 20XX.
We updated IDR #3 and re-mailed IDR #3 with a due date of December 8, 20XX.

We met with the Vice President of the organization and the designated power of attorney on
December 8, 20XX and found that the organization failed to provide any of the documentation
requested in IDR #3. We issued IDR #4 with a response due date of January 8, 20XX in a final
effort to obtain the documentation needed to properly develop the potential inurement, private
benefit, and public support issues noted during the examination. We received notification from the
representative of the organization that it did not intend to provide any of the requested donor or
grant information as it would be a violation of the Health Insurance Portability and Accountability
Act (HIPAA).

To date, we have not received the specific revenue and expense source documents requested to
determine the level of private benefit conferred though the organizations operations. Additionally,
we have not received the requested documentation to determine whether inurement transactions
have occurred or whether the organization passed the public support test for the year under
examination. All of which were requested in the information documents requests #2, #3, and #4.

LAW

Section 501(c)(3) of the Internal Revenue Code provides an exemption from federal 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 for the prevention of cruelty to children or animals. The exemption is available where:
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, and which does not participate in, or intervene in, any political campaign on
behalf of any candidate for public office.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Form 886-A
(Rev. January 1994)              EXPLANATIONS OF ITEMS

Name of taxpayer                 Tax Identification Number        Schedule number or exhibit
                                                                  Year/Period ended
                                                                  December 31, 20XX
                                                                  December 31, 20XX

Section 6001 of the Internal Revenue Code provides that every person liable for any tax imposed
by the IRC, 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 Internal Revenue Code provides that except as provided in IRC §
6033(a)(2), every organization exempt from tax under § 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. The Secretary may also prescribe by forms
or regulations the requirement of every organization to 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 Regulation Section 1.6001-1(c) states 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.

Treasury Regulation Section 1.6001-1(e) states that the books or records required by this section
shall be kept at all times available for inspection by authorized Internal Revenue Service officers
or employees, and shall be retained as long as the contents thereof may be material in the
administration of any Internal Revenue law.

In accordance with the above cited provisions of the Code and Regulations under IRC § 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 the purposes for which it was granted tax-exempt
status.

Revenue Ruling 59-95, 1959-1 C.B. 627, concerns an exempt organization asked to produce
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 Internal Revenue
Service held that the failure or inability to file the required information return or otherwise to
comply with the provisions of IRC § 6033 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.

GOVERNMENT'S POSITION

1. Failure to Meet the Operational Test

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Form 886-A
(Rev. January 1994)              EXPLANATIONS OF ITEMS

Name of taxpayer                 Tax Identification Number        Schedule number or exhibit
                                                                  Year/Period ended
                                                                  December 31, 20XX
                                                                  December 31, 20XX

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 little or no support for exempt operations. The originally filed Form 990-EZ for December
31, 20XX provides that the organization is not publicly supported. It shows that the organization
spent $XX,XXX on their exempt function program services. However, the EO has failed to provide
any documentation showing that the amounts paid in grants were for charitable purposes and not
for private benefit. Accordingly, we are proposing revocation because the organization does not
operate for exempt purposes.

Failure to Provide Records

The EO has failed to provide records as is required in Code § 6033(a)(1) and Regulation §
1.6033-1(h)(2). They failed to provide any organizational or financial information that we
requested during the examination. We attempted to obtain these records numerous times by mail
and phone.

The organization has failed to provide records to verify that they are operating according to the
exempt purpose for which they were granted exemption. Our position is that the organization,
then, is not operating for exempt purposes, as they have provided no evidence to the contrary.

In accordance with the above cited provisions of the Code and regulations under IRC §§ 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 the purposes for which it was granted tax-exempt
status and to determine its liability for any unrelated business income tax.

The Organization has failed repeatedly to respond to the Service’s request for information in
contrast to section 1.6033-1(h)(2) of the regulations which require an organization to provide such
information as requested to allow the Service to make a determination of that organization’s
exempt status.

It is the Service's position that the organization failed to meet the reporting requirements under
IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC §
501(c)(3). Accordingly, we propose that the organization's exempt status be revoked effective
January 1, 20XX.

TAXPAYER'S POSITION

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Form 886-A
(Rev. January 1994)              EXPLANATIONS OF ITEMS

Name of taxpayer                 Tax Identification Number        Schedule number or exhibit
                                                                  Year/Period ended
                                                                  December 31, 20XX
                                                                  December 31, 20XX

The taxpayer's has stated that it is not required to provide the documentation requested with
respect to the specific donor and grant transactions of the organization. The taxpayer has stated
that it is protected from providing this information under the Health Insurance Portability and
Accountability Act.

The taxpayer has also stated that it agrees to revocation of exempt status as it is not able to verify
that its activities further its stated exempt purposes under Section 501(c)(3) of the Internal
Revenue Code.

REBUTTAL TO THE TAXPAYER’S POSITION

It is the position of the government that the organization is not subject to HIPPA laws as it is not a
covered entity (health care clearinghouses, employer sponsored health plans, health insurers, and
medical service providers that engage in certain transactions). The organization is a grant making
organization, which makes grants to health care providers but does not operate as one.

CONCLUSION

Failure to comply with the Code and Regulations, the organization has jeopardized its exempt
status. They failed to provide required documentation, thereby failing to be compliant with the
Code, and failing 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 January 1, 20XX.

Since the organization will no longer have tax-exempt status beginning January 1, 20XX, they are
required to file Form 1120, U.S. Corporation Income Tax Return, as of that date.

It is the Services position that the Organization does not qualify for exemption from federal income
tax under IRC §501(c)( ). The proposed date of the revocation is January 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service