Section 501(c)(3) status is revoked after no exempt activity

Plain-English summary

An organization had received recognition under section 501(c)(3), but its representative later stated that a scammer had induced the filing and that the organization never intended to apply for tax-exempt status. The organization reported that it never formed a governing body, elected committees, filed articles of incorporation, or conducted activity beyond putting personal money into a bank account. It signed a consent to the proposed revocation. The IRS concluded that the organization was not organized or operated exclusively for charitable, educational, or religious purposes and revoked its exemption effective January 1 of the redacted year. Contributions were no longer deductible under section 170 from that date.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under section 501(c)(3)?
• Outcome: revocation, effective January 1 of the redacted year
• Key authorities: IRC §§ 170, 501(c)(3), 509(a)(1), and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: August 31, 2016

Release Number: 201649015                        Person to Contact:
Release Date: 12/2/2016
UIL Code: 501.03-00                              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):

IRC §501(c)(3) of the Code provides that an organization organized and operated exclusively for
charitable or educational purposes is exempt from Federal income tax, provided no part of its net
earnings inures to the benefit of any private shareholder or individual.

Treasury Regulation §1.501(c)(3)-1(c)(1) states 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 exempt purposes specified in Section 501(c)(3). An organization will
not be so regarded if more than in insubstantial part of its activities is not in furtherance of an
exempt purpose.

On December 30, 20XX, your representative provided a letter to us dated December 29, 20XX
stating that, “No activity outside of funding a bank account with personal monies occurred.
No monies outside of personal funds were used. No governing body and no committees were
elected or formed. No Articles of Incorporation were ever filed with the Secretary of State.”
The organization did not intend to apply for recognition of tax exempt status.

                                      1


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.

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, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. 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. 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 also be eligible for help from the Taxpayer Advocate Service (TAS). 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 1-877-777-4778.

                                      2


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
    Envelope

                                      3


Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
31 Hopkins Plaza Rm 920
Baltimore, MD 21201

                                                 Date:
                                                 April 8, 2016
                                                 Taxpayer Identification Number:

                                                 Form:
                                                 990N
                                                 Tax year(s) ended:
                                                 December 31, 20XX
                                                 Person to contact/ ID number:

                                                 Contact numbers:
                                                 Phone Number:

                                                 Fax Number:
                                                 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 (06-2012)
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
may also 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

Letter 3618 (06-2012)
Catalog Number 34809F


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.

Thank you for your cooperation.

                                                 Sincerely,


                                                 Paul A. Marmolejo
                                                 Acting Director, Exempt Organizations Examinations

Enclosures:
Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (06-2012)
Catalog Number 34809F


Form 886A                       Department of the Treasury - Internal Revenue Service
                                      Explanation of Items
Name of Taxpayer                             Schedule No. or
                                             Exhibit 1
                                             Year/Period Ended
                                             20XX12

Date of Notice:

Issues:

Does the organization continue to qualify as an organization exempt from Federal income tax
under Section 501(c)(3) of the Internal Revenue Code (IRC)?

Facts:

The organization filed Form 1023 for exemption on April 11, 20XX and was granted
exemption as within the meaning of Section 501(c)(3) on July 29, 20XX with an effective
date of exemption of March 20, 20XX.

The organization was classified as a public charity within the meaning of Sections 509(a)(1)
and 170(b)(1)(A)(vi).

An organization exempt under 501(c)(3) needs to be organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary or educational purposes and to
foster national and amateur sports competition.

The organization was selected for audit to ensure that the examined organization’s activities
and operations align with its approved exempt status.

The organization was sent Letter 3606 on November 6, 20XX with a response due date of
December 6, 20XX. A second letter was mailed December 10, 20XX. Organization
provided a response by fax on December 30, 20XX.

The response dated December 30, 20XX contained Form 2848 which was forwarded for
processing, and a narrative.

Organization’s response states “This entity was created as the result of a scam artist taking
advantage of my client.             met my client at a yard sale and advised my client
that she could open her own thrift store if she obtained a particular “license”.
            convinced my client she could file all the necessary paperwork for this so-called “license”.
My client paid the             $X,XXX.XX for the so-called “license”. My client then received a
letter from the IRS showing a tax-exempt status.             then advised my client to
take that letter and open a bank account to be completely “licensed”. My client did as
instructed and funded the account with her personal money. After discovering the “license”
was in fact a non-profit designation that required incorporation documents to be filed with the
Secretary of State my client began the steps to undo what             had done. No
activity outside of funding a bank account with personal monies occurred.”

Organization and its’ representative were sent Proposed Revocation Letter and Form 6018
on April 1, 20XX.

Organization returned signed 6018 by fax on April 5, 20XX.

Form 886-A (Rev.4-68)          Department of the Treasury - Internal Revenue Service
                                                               Page: -1-


Form 886A                       Department of the Treasury - Internal Revenue Service
                                      Explanation of Items
Name of Taxpayer                             Schedule No. or
                                             Exhibit 1
                                             Year/Period Ended
                                             20XX12

Law:

IRC §501(c)(3) of the Code provides that an organization organized and operated exclusively
for charitable or educational purposes is exempt from Federal income tax, provided no part of
its net earnings inures to the benefit of any private shareholder or individual.

Treasury Regulation 1.501(c)(3)-1(a)(1) provides “In order to be exempt as an organization
described §501(c)(3) of the Code, the organization must be one that is both organized and
operated exclusively for one or more of the purposes specified in that section.”

Treasury Regulation §1.501(c)(3)-1(c)(1) states 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 exempt purposes specified in Section 501(c)(3). An
organization will not be so regarded if more than in insubstantial part of its activities is not in
furtherance of an exempt purpose.

Organizations Position

The organization recognizes that it was duped and formed as part of a tax scam. The
organization did not intend to apply for recognition of tax exempt status. The organization has
not conducted any activities.

Governments Position

It is the government's position that the organization should be revoked as it is not organized or
operated for exclusively charitable, educational or religious purposes within the meaning of
Section 501(c)(3).

Conclusion:

Based on the foregoing reasons, the organization does not qualify for exemption under
Section 501(c)(3) and is revoked effective January 1, 20XX.

Form 886-A (Rev.4-68)          Department of the Treasury - Internal Revenue Service
                                                               Page: -2-