Exemption revoked after educational activities stopped

Plain-English summary

An exempt school lost its primary public-school funding and stopped serving students or conducting educational programs. It then rented parts of its property to food trucks, a day care center, and a weekly men's club to cover building expenses. The organization argued that it was still seeking funding and partners for future educational programs, but none of those ideas had become operational. The IRS concluded that maintaining and renting the building did not further an exempt purpose and revoked section 501(c)(3) status effective on the first day of the examined tax period.

Ruling snapshot

• Question: Did the organization continue to operate for educational or charitable purposes under section 501(c)(3)?
• Outcome: revocation
• Key authorities: IRC §§ 170 and 501(c)(3); 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
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: 10/20/2016
DIVISION

Taxpayer Identification Number:

Release Number: 201706022 Person to Contact:
Release Date: 2/10/2017
UIL Code: 501.03-00
Employee Identification Number:

Employee Telephone Number:

CERTIFIED MAIL — Return Receipt Requested
Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the code is hereby revoked effective July 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations described in I.R.C. § 501(c)(3) and exempt under section 501 (a)
must be both organized and operated exclusively for exempt purposes. You have
not demonstrated that you are operated exclusively for charitable, educational, or
other exempt purposes within the meaning of I.R.C. section 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. You have not established
that you have operated exclusively for an exempt purpose.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code.

You are required to file Federal income tax returns on Form 1120. If you have not already
filed these returns and the agent has not provided you instructions for converting your
previously filed Form 990 to Form 1120, you should file these income tax returns with the
appropriate Service Center for the tax year ending June 30, 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, you may file an action for declaratory judgment
under the provisions of section 7428 of the Code in one of the following three venues:

District Court for the District of Columbia. A petition or complaint in one of these three
courts must be filed before the 91st day after the date this determination was mailed to you
if you wish to seek review of our determination. 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

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect you 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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Publication 892


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

Date:
March 28, 2016

Taxpayer Identification Number:

Form:

Tax Year(s) Ended:
June 30, 20XX and June 30, 20XX
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager's Name/ID Number:

Manager's Contact Number:

Response due date:
April 27, 20XX

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.

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.

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


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.

Thank you for your cooperation.

Sincerely,

Paul A. Marmolejo
Acting Director, EO Examinations

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


Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
6/30/20XX
6/30/20XX
Issue:
Should tax exempt status under Section 501(c)(3) of the

Internal Revenue Code (Code) be revoked because it does not operate for an exempt purpose?

Facts:

was incorporated in on October 21, 19XX. amended its articles of
incorporation on February 10, 19XX to restate the purpose of the corporation. The amended
purpose is “

filed Form 1023, Exemption Application for use of organizations applying for exemption
under section 501(a) and described in section 501(c)(3) of the Internal Revenue Code, with the
Internal Revenue Service (Service) on December 21, 19XX. The information provided with the
application explained

• was formed to provide meaningful educational opportunities to economically
deprived persons who have failed to successfully adapt to the traditional public educational
programs.

• is the outgrowth of a local which
originally began the school program. later helped establish as the corporate
entity that would continue the school program as

• The school program provides reading, math, and writing programs specifically geared to the
learning challenges of “hard core” high school dropout populations.

• also offers counseling and work programs for the students.

received its favorable determination letter for exemption under Section 501(c)(3) of the
Code on February 19, 19XX. On March 11, 19XX, received an updated determination
letter that reflected its name change to . On January 13, 19XX,
received a determination that superseded the above determinations confirming the continued
exemption under Section 501(c)(3) of the Code and granting non-private foundation by meeting
the public support classification under Section 170(b)(1)(A)(vi) of the Code. Finally, on November
21, 19XX, received a determination letter that superseded all prior determinations and
confirmed the continued exemption under Section 501(c)(3) of the Code and changed the non-
private foundation classification from publicly supported to that of a school under Section
170(b)(1)(A)(ii) of the Code.

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


Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

6/30/20XX
6/30/20XX

filed a Form 990-N for the tax year ended June 30, 20XX and Forms 990 and 990-T for
the tax year ended June 30, 20XX.

The Form 990-N filed for June 30, 20XX is a postcard and does not contain financial information.
The Form 990 for the tax year ending June 30, 20XX reported the following revenue:

Contributions: $ X,XXX
Food Cart: $XX,XXX
Space Rental: $ X,XXX

The food cart and space rental revenues were also reported on Form 990-T.

, the director of , was interviewed on March 2, 20XX. He stated that
lost its funding from Public Schools in June of 20XX. This had been the majority of
revenue. In 20XX had approximately XX students enrolled in its educational program.
Once it lost its funding, all of its programs essentially stopped and they ceased operating as a
school. 20XX was the last year that served students.

stated that the sources of income since 20XX have primarily been from rental sources.
They rent space on the outside south side of their property to four food trucks; the rental fees
include amounts attributable to water and electricity use. They also rent two modular units on the
east side of their property to a day care center. They also rent out their general and classroom
spaces to a men’s club that meets once a week. Food truck rents are $XXX a month, but can vary
depending on the season and utility use. The day care pays $XXX a month and the men’s club
pays $XXX a month. explained that they had to rent out the property to meet the utility
expenses, repairs and maintenance, and property taxes on the building.

still receives a small amount of revenue from two contributors:
and

provided a file of invoices and bills of the organization. Invoices were for various utilities,
repair and upgrade expenses, and property tax payments. also provided several years of
bank statements. The bank statements for tax years ending June 30, 20XX and June 30, 20XX
were analyzed during the examination. Regular monthly withdrawals included payments for
telephone, internet, electricity, water, trash, insurance and bank charges. No invoices or
withdrawals related to the conduct of educational programs.

In a letter dated April 25, 20XX, revoked property tax
exemption for not using the property for exempt purposes. The letter stated their property would

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

: Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
6/30/20XX
6/30/20XX
become XXX% taxable beginning with the 20XX/XX assessment year. made property tax

payments in 20XX and in 20XX.

The facility is located at . The facility is currently
storing left over classroom instruction material, equipment, computers, furniture and supplies.

also allows its tenants to store their equipment and supplies in and on the property. The tour of
the facility found no indications that any current or recent educational programs are conducted at
the facility.

stated that since 20XX, when they lost the funding from the Public Schools,
has been trying to find funding and other educational programs to conduct. They have also been
trying to find other organizations that they could collaborate with to conduct other educational
programs. They were recently working with . However, the board of
directors just recently voted against this collaborative partnership. They have also been talking
with about conducting an aerospace program for youth at their
facility. However, no set plans have been made. Despite these efforts, has not conducted
any educational programs since June of 20XX.

Law:

Section 501(c)(3) of the Code provides, in part, exemption from federal income tax to
organizations that are organized and operated exclusively for religious, charitable, scientific,
literary, or educational purposes, as long as no part of the organization’s net earnings inures to the
benefit of any private shareholder or individual.

Federal Tax Regulations (Regulations) Section 1.501(c)(3)-1(a)(1) provides that in order to be
exempt as an organization described in section 501(c)(3) of the Code, the organization must be
both organized and operated exclusively for one or more of the purposes specified in that section.

Regulations Section 1.501(c)(3)-1(c)(1) states 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) of the Code. The
Regulations further clarifies that an organization will not be regarded as operated exclusively for
exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt
purposes.

Regulations Section 1.501(c)(3)-1(d)(1)(ii) provides that in order to meet the operational test, an
organization must be engaged in activities furthering “public” purposes rather than private
interests. The organization must not be operated for the benefit of designated individuals or the
persons who created it.

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

6/30/20XX
6/30/20XX

Government’s Position:

tax exempt status under Section 501(c)(3) of the Code should be revoked since it has not
conducted exempt activities nor operated for exempt purposes since June 20XX.

Maintaining its building and allowing others to rent space on its property does not further any
exempt purposes under Section 501(c)(3) of the Code. Although attempts at finding other
educational programs have been made, no educational programs or partnerships have been
found or conducted in the last years. Any ideas or projects discussed have not come to
fruition and have only remained in the conceptual stages. Simply having discussions with others
about proposed programs or activities does not constitute operating for a charitable or educational
purpose as required by Section 501(c)(3) of the Code.

cannot retain its exempt status simply because it may have a charitable purpose in the
future. In fact, this precludes it from tax exempt status. An organization with no exempt activities
is not operating for an exempt purpose. It cannot meet the requirements of Section 501(c)(3) of
the Code which requires an organization to be organized and operated exclusively for exempt
purposes. does not operate for exempt purposes as required by Section 501(c)(3) of the
Code.

Taxpayer’s Position:

suggests with its ongoing efforts to search for other educational programs for the youth in
the area that it continues to further its original exempt educational and charitable purposes. The
rental activity is only conducted to help pay for the upkeep and maintenance of the facility so that it
remains ready to open its doors with the next educational program. requests additional
time to find new programs and/or new partners to assist them in conducting new educational
programs and to find funding sources for these programs. In this regard, they disagree with the
Government's Position that they do not conduct activities that further exempt purposes.

Conclusion:

does not meet the requirements to remain exempt under Section 501(c)(3) of the Code
because it is not operating for exempt educational or charitable purposes. tax exempt
status under Section 501(c)(3) of the code should be revoked. The effective date for this
revocation is July 1, 20XX, the first day of the tax period under examination.

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