Failure to provide audit records led to exemption revocation

Plain-English summary

The IRS revoked a private foundation's exemption under IRC § 501(c)(3). The organization had stopped operating, had not filed required Form 990-PF returns for multiple years, and did not provide the records requested for an audit. The IRS sent several letters and made repeated telephone contacts. The organization's president eventually responded, requested more time, and said someone else planned to restart the organization, but the requested information was not supplied. Without records showing continued compliance with the operational and reporting requirements, the organization could not establish that it remained entitled to exemption.

Ruling snapshot

• Question: Did the organization establish continued qualification under IRC § 501(c)(3) when it failed to file returns and provide requested audit records?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 511, 6001, and 6033; 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
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: Dec. 02 2016

Release Number: 201716047 Taxpayer Identification Number:
Release Date: 4/21/2017
Person to Contact:

                                         Employee Identification Number:

                                         Employee Telephone Number:

                                         UIL: 501.03-00

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 January 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 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, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: United States
Tax Court, the United States Court of Federal Claims, or the United States 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

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

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,

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

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

Date:
August 18, 2016
Taxpayer Identification Number:

Form:

Tax year(s) ended:

Person to contact/ ID number:

Contact numbers:
Long Distance

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.

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.

Letter 3618 (06-2012)
Catalog Number 34809F

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

Phone Number:

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,

Margaret Von Lienen
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
Schedule No. or Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

Date of Notice: August 18, 20XX

Issues:

Whether the organization continues to qualify for exemption from Federal income tax
under Section 501(c)(3) of the Internal Revenue Code.

Facts:

[Redacted] applied for tax-exempt status by filing the Form 1023 on April
23, 20XX, and was granted tax-exempt status as a 501(c)(3) on July 07, 20XX, with
an effective date of May 15, 20XX.

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 amatuer sports competition.

[Redacted] was selected for audit to ensure that the activities and operations align with their
approved exempt status.

[Redacted] failed to respond to the Internal Revenue Service attempts to obtain information to
perform an audit of Form 990-PF, Return of Private Foundation, for the tax year
December 31, 20XX.

[Redacted] has not filed a Form 990-PF series return for the tax years December 31, 20XX
through December 31, 20XX tax year.

The Form 1023 application list the phone number of XXX-XXX-XXXX for the president of
[redacted].

Per the State of [redacted] web-site, [redacted] status has been cancelled/failure to file/statement
cont. existence on 05/21/20XX, copy attached from state web-site.

• Correspondence for the audit was as follows:

○ Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
on January 14, 20XX, with a response date of February 16, 20XX. This letter
was return by the post office on January 19, 20XX; with the statement
“Forward Time Exp Rtn To Send:”

○ Letter 3606 (Rev. 6-2012) with attachments, was mailed to the address
[redacted]; January 21, 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
Schedule No. or Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

○ Letter 3844-A (12-2015) with attachments, was mailed certified to the
organization/president located at [redacted],
on March 11, 20XX, with a response date of April, 20XX, Article Number
[redacted]. Per the United States Postal Service (USPS) tracking, this was returned on
April 6, 20XX at 4:37 pm as unclaimed/max hold time expired. This letter was
received back at the Internal Revenue Service on April 14, 20XX.

○ Letter 3844-A (12-2015), with attachments, was mailed certified to the
Director ([redacted]), per Form 1023 application, on April 26, 20XX,
with a respond date of May 26, 20XX. Article Number
[redacted]. Per USPS tracking this was delivered, individual picked up at postal facility
on April 29, 20XX at 6:52 AM. This letter was received back at the Internal
Revenue Service on May 16, 20XX with the word “RTS No Longer here”.

○ Letter 3844-A (12-2015), with attachments, was mailed certified to the
organization/President, located at [redacted],
on April 26, 20XX, with a respond date of May 26, 20XX. Article Number
[redacted]. This letter was return by the post office on April 29, 20XX at 8:40 am as
“return to sender no such number unable to forward”.

This letter was received back at the Internal Revenue Service on May 06,
20XX.

○ Letter 3844-A (12-2015), with attachments, was mailed to the
organization/President, located at [redacted];
on May 25, 20XX, with a respond date of June 22, 20XX. This letter was not
returned.

• Telephone contact for the audit was as follows:

○ May 25, 20XX, called the phone number listed on the Form 1023
application for the President of XXX-XXX-XXXX; when this phone number
is called, a message says this is not a valid number.

○ May 25, 20XX, per Google research located a phone number of XXX-XX-
XXX; however, when calling this number the call will not go through.

○ June 22, 20XX, Tax Compliance Officer (TCO) received a phone call from the
President, [redacted] XXX-XXX-XXXX. The President had received the
letter mailed on May 25, 20XX. The following information was also provided
by the president during this phone call:

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

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

▪ The President stated that the organization quit operating in 20XX.

▪ The President thought that the CFO had filed the final Form 990-PF.

▪ The President requested additional time to provide the information
requested in Letter 3606 and Form 4564. An extension was granted to
July 22, 20XX.

▪ The President stated that [redacted], is
the correct mailing address for the President.

▪ The President stated the address at [redacted]
, no longer existed and the building had been torn down.

▪ The President also stated the address at [redacted]
is no longer a good address for the organization

▪ The President also stated that someone else is taking over the
organization and will be starting it back up.

○ July 26, 20XX, I received a voice message system (VMS) from the
President stating:

▪ The bank provided the incorrect information. The President had called
the bank and it will take a week or so for the bank to provide the
correct information.

▪ The President wanted to know the correct address to send the
response to. He stated a return envelope was not provided.

○ July 26, 20XX, TCO return the President phone call and received VMS.

▪ TCO thanked the president for letting the TCO know there was a
problem with the information received from the bank.

▪ TCO provided the mailing address to send the response to.

▪ TCO granted an extension to August 09, 20XX.

○ August 16, 20XX, TCO called the president at 10:20 AM MST and received
VMS. A message was left that a reply had not been received from the
organization and to call the TCO and provide an update. A return phone call
was not received.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

Law:

Internal Revenue Code (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.

IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11
on the unrelated business taxable income of certain tax-exempt organizations.

IRC §6001 of the Code provides that every person liable for any tax imposed by this title,
or for the collection thereof, shall keep such records, render such statements, make such
returns, and comply with such rules and regulations as the Secretary may from time to
time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require
any person, by notice served upon such person or by regulations, to make such returns,
render such statements, or keep such records, as the Secretary deems sufficient to show
whether or not such person is liable for tax under this title.

IRC §6033(a)(1) of the Code provides, except as provided in section 6033(a)(2), every
organization exempt from tax under section 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 as the Secretary may
by forms or regulations prescribe, and 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 Regulations (Regulation) 1.501(c)(3)-1 In order to be exempt under
§501(c)(3) the organization must be both organized and operated exclusively for one or
more of the purposes specified in the section. (religious, charitable, scientific, testing for
public safety, literary or educational).

Regulation §1.501(c)(3)-1(a)(1) of the regulations 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.

Regulation 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be
regarded as "operated exclusively" for one or more exempt purposes described in section
501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance
of a 501(c)(3) purpose. Accordingly, the organization does not qualify for exemption under
section 501(c)(3) of the Code.

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

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

Regulation §1.6001-1(c) of the Code provides that such permanent books and records as
are required by paragraph (a) of this section with respect to the tax imposed by section
511 on unrelated business income of certain exempt organizations, 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. See
section 6033 and §§ 1.6033-1 through 1.6033-3.

Regulation §1.6001-1(e) of the Code provides that the books or records required by this
section shall be kept at all time available for inspection by authorized internal revenue
officers or employees, and shall be retained as long as the contents thereof may be
material in the administration of any internal revenue law.

Regulation §1.6033-1(h)(2) of the regulations provides that every organization which has
established its right to exemption from tax, whether or not it is required to file an annual
return of information, shall submit such additional information as may be required by the
district director for the purpose of enabling him to inquire further into its exempt status and
to administer the provisions of subchapter F (section 501 and the following), chapter 1 of
the Code and section 6033.

Regulation §1.61-1 of the regulations provides that Gross income means all income from
whatever source derived, unless excluded by law. Gross income includes income realized
in any form, whether in money, property, or services. Income may be realized, therefore, in
the form of services, meals, accommodations, stock, or other property, as well as in cash.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to
produce a 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 Service held that the failure or inability to file the required information
return or otherwise to comply with the provisions of section 6033 of the Code 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.

Organizations Position

The organization has failed to respond to all attempts to contact them

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

Governments Position

Based on the above facts, the organization did not respond to verify that they are
organized and operated exclusively for one or more of the purposes specified in IRC
Section 501(c)(3). If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

In accordance with the above-cited provisions of the Code and regulations under
sections 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.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations
shall submit additional information for the purpose on enabling the Internal Revenue
Service to inquire further into its exempt status.

Using the rationale that was developed in Revenue Ruling 59-95, the Organization’s
failure to provide requested information should result in the termination of exempt
status.

Conclusion:

Based on the foregoing reasons, the organization does not qualify for exemption under
section 501(c)(3) and its tax exempt status should be revoked.

It is the IRS's position that the organization failed to meet the reporting requirements
under sections 6001 and 6033 to be recognized as exempt from federal income tax
under 501(c)(3) of the Internal Revenue Code. Accordingly, the organization's exempt
status is revoked effective January 1, 20XX.

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-