Facility-rental organization loses 501(c)(3) status

Plain-English summary

An organization received 501(c)(3) status to promote economic and community development and support programs serving senior citizens and people with disabilities. An IRS examination found that the organization instead earned most of its income by renting its facility and spent most of its funds maintaining the property. It reported little or no activity related to its stated charitable mission, did not consistently file Form 990-T for the debt-financed rental activity, and failed the one-third public-support test for both examined years. The IRS concluded that operating the rental property was the organization's primary purpose and constituted an unrelated trade or business rather than an insubstantial activity supporting exempt purposes. It revoked the exemption effective at the start of the first examined year and stated that contributions were no longer deductible under section 170.

Ruling snapshot

• Question: Did the organization continue to operate primarily for exempt purposes under IRC § 501(c)(3)?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 509(a)(2), 513, and 514; Treas. Reg. §§ 1.501(c)(3)-1 and 1.509(a)-3

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 NOV 30 2016

GOVERNMENT ENTITIES Date:
DIVISION

Person to Contact:
Identification Number:
Telephone Number:

In Reply Refer to:

Release Number: 201710035
Release Date: 3/10/2017
UIL Code: 501.03-00

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: February 28, 20XX

CERTIFIED MAIL - Return Receipt Requested
Dear

This is a Final Adverse Determination Letter that your exempt status under section 501(c)(3)
of the Internal Revenue Code (IRC) is revoked. Recognition of your exemption under IRC
section 501(c)(3) is revoked effective October 1,20XX.

Our adverse determination was made for the following reason(s):

You have not established that you are operated exclusively for an exempt
purpose or that you have been engaged primarily in activities that accomplish
one or more exempt purposes within the meaning of IRC section 501(c)(3).

Contributions to your organization are not deductible under section 170 of the Internal
Revenue Code.

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 September 30, 20XX and for
all years thereafter.

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.

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.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

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

Sincerely yours,

for,
Mary A. Epps
Acting Director, Exempt Organizations Examinations

Enclosure:
Publication 892

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

Date:
January 4, 2016
Taxpayer Identification Number:

Form:

Tax Year(s) Ended:
September 30, 20XX & 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

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

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.

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.

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

SCHEDULE NO. OR

Form 886-A EXHIBIT
NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED
20XX09 / 20XX09
ISSUE:
Whether is operated exclusively for tax-exempt purposes and should be

considered tax-exempt under Internal Revenue Code section 501(c)(3).
FACTS:

was incorporated under the laws of the State of on November
21, 19XX as a non- profit domestic corporation.

Form 1023 was received by the Service on June 30, 20XX. In the answer to Part IV Narrative Description of Activities the
organization stated, “It was incorporated for the purpose of serving the public of counties in . The services to be
offered were to promote and facilitate economic and community development. The focus of revitalizing the will be to
enhance the capabilities of organizations delivering services to the senior citizens and the disabled of
counties. The , as a non-profit organization, will apply for grants for which a public agency is not eligible. These grants will
then be used to support and expand programs focused on health, housing, nutrition, care and other regional issues facing today’s
elderly, especially those with low incomes.”

According to the Determination letter the taxpayer was granted exemption as a 501(c)(3) organization with a public charity
status of 170(b)(1)(A)(vi) on April 13, 20XX. The effective date of exemption is November 21, 19XX.

During the examination of the organization, Agent discovered that the organization was actively engaged in the rental of its
facility from which it earns the major portion of its gross income. In addition, the majority of the expenditures of the organization
are for the purpose of maintaining the property. The organization did not file Form 990-T to report its rental income. The Forms for
the years of examination reports no expenses related to promoting and facilitating economic and community development.

During the course of the examination it was also discovered that the Form 990 (Schedule A) submitted by the taxpayer was
not correctly prepared. Agent used data provided by the organization to prepare corrected Schedule A. The taxpayer was unable to
pass the one-third support test in Part IIl of Form 990 Schedule A of any of the two years. The date used to compute the Public
Support Percentage was obtained from previously filed Forms 990 of the Taxpayer. Additionally the taxpayer has shown little or no
activity in the areas in which it applied for tax-exempt status.

LAW:

Section 501(c)(3) of the Code exempts from federal income tax organizations organized and operated exclusively for
charitable, educational, and other exempt purposes, provided that no part of the organization’s net earnings inures to the benefit of
any private shareholder or individual.

Treas. Reg. § 1.501(c)(3)-1(a) states that “In order to be exempt as an organization described in section 501(c)(3), 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.

The organizational test states in that “An organization is organized exclusively for one or more exempt purposes only if its
articles of organization (referred to in this section as its articles) as defined in subparagraph (2) of this paragraph:

(a) Limit the purpose of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in
activities which in themselves are not in furtherance or one or more exempt purposes.” (Treas. Reg. §1.501(c)(3)-1(b))

The operational test 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 an insubstantial part of its activities is not in furtherance of an exempt purpose.”
(Treas. Reg. §1.501(c)(3)-1(c))

Treas. Reg. § 1.501(c)(3)-1(d)(i) states that “ An organization may be exempt as an organization described in section
501(c)(3) 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 (g) Prevention of cruelty to children or animals.”

Treas. Reg. § 1.501(c)(3) states that “An organization may meet the requirements of section 501(c)(3) although it operates a
trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the
organization’s exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying
on an unrelated traded or business, as defined in section 513. In determining the existence or nonexistence of such primary
purpose, all the circumstances must be considered, including the size and extent of the trade or business and extent of the activities

which are in furtherance of one or more exempt purposes. An organization which is organized and operated for the primary
, Purposes of carrying on an unrelated trade or business is not exempt under section 501(c)(3).”

IRC §513(a) states that an unrelated trade or business is one which is “any trade or business the conduct of which is not
substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the
exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its
exemption under section 501.”

Section 514(b)(1) provides, that for purposes of this section, the term "debt-financed property" means any property
which is held to produce income and with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at
any time during the taxable year. Section 514(c)(1) provides, that for purposes of this section, the term "acquisition
indebtedness" means, with respect to any debt-financed property, the unpaid amount of-(A) the indebtedness incurred by the
organization in acquiring or improving such property; (B) the indebtedness incurred before the acquisition or improvement of
such property if such indebtedness would not have been incurred but for such acquisition or improvement; and (C) the
indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been
incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the
time of such acquisition or improvement.

Treas. Reg. § 1.509(a)-3(a) states that “Section 509(a)(2) excludes certain types of broadly, publicly supported organizations
from private foundation status. An organization will be excluded under section 509(a)(2) if it meets the one-third support test under
section 509(a)(2)(A) and the not more-than-one-third support test under section 509(a)(2)(B).”

Treas. Reg. §1.509(a)-3(a)(2) state that “An organization will meet the one-third support test if it normally receives from
permitted sources more than one-third of its support in each taxable year from a combination of —

(i) Gifts, grants, contributions, or membership fees; and
(ii) Gross receipts from admissions, sales or merchandise, performance of services, or furnishing of

facilities, in an activity that is not an unrelated trade or business (within the meaning of section 513),
subject to certain limitations.”

Taxpayer’s Position:
Taxpayer’s position is unknown.

Government's Position:

A Taxpayer will meet the one-third support test if it normally receives more than one-third of its support from a
combination of gifts, grants, contributions or membership fees and gross receipts from admissions, sales of merchandise,
performance of services, or furnishings of facilities, in an activity that is not an unrelated trade or business, subject to certain
limitations.

Taxpayer claims to tax-exempt by virtue of being classified under IRC section 501(c)(3) and claims to receive more than 33
1/3% of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions-subject
to certain exceptions, and no more than 33 1/3% of its support from gross investment income and unrelated business taxable
income (less section 511 tax) from businesses acquired by the organization after June 30, 19XX.

As part of the examination of , the Agent recalculated the Form 990 Schedule A for the
tax years ending September 30, 20XX and September 30, 20XX (See Appendix 1). The data used to compute the Public Support
Percentage was obtained from the previously filed Forms 990 of the Taxpayer.

The taxpayer was unable to pass the one-third test in Part Ill of Form 990 Schedule A for any of the two years. The taxpayer
has shown little or no activity in the areas in which it applied for tax exempt status.

In order to pass the operational test, must be operated exclusively for tax exempt
purposes and any activities that are not in furtherance of an exempt purpose must be insubstantial as per Treas. Reg. §1.501(c)(3)-
1(c).

Organization has failed to consistently file Form 990-T to report its rental activities as the property is debt financed.

The lack of any financial support and the fact that there is no discussion of the organizations stated purpose shows that
there is little or no activity in conducting the main purpose for which the organization applied for exemption.

The facts have shown that the primary purpose of this organization is to operate a rental service of its property. Due to the
extent of rental activities, the lack of any activity or discussion of any non-profit services and the lack of funds geared toward
charitable activities it has been determined that the Taxpayer has failed to meet the test described in Treas. Reg. §1.501(c)(3)-1(e)
because the organization is “organized and operated for the primary purpose of carrying on an unrelated trade or business.”
cannot be considered to be exempt under section 501(c)(3) because its primary purpose is carrying on an unrelated trade or
business, the rental of property.

Conclusion:

Based on a review of the organizations books and records is not tax
exempt under IRC §501(c)(3). The tax exempt status for this organization should be revoked as of October 1, 20XX.

Form 886-A (Rev. 01-94) Page Cat No.20810W Department of the Treasury -Internal Revenue Service