Art foundation lost exemption after failing to verify its activities

Plain-English summary

A private foundation was recognized as tax-exempt based on plans to present art exhibitions and provide art to museums. The examination report said the foundation claimed only one domestic exhibition over many years and did not provide requested records verifying the exhibition, purchases, or other exempt activities. The foundation said records had been lost and relied on statements, letters, and emails to explain its operations. The IRS concluded that the foundation did not verify substantial activity furthering its exempt purpose and revoked its section 501(c)(3) status. Contributions were no longer deductible under section 170, and the organization was required to file corporate income tax returns.

Ruling snapshot

• Question: Did the private foundation operate primarily for its stated educational and charitable purposes?
• Outcome: exemption revoked beginning on the redacted effective date
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 509(a), 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals

Address any reply to:

Appeals Office

Royal Palm One, Suite 350

1000 South Pine Island Road
Plantation, FL 33324

Employer Identification Number:

Number: 201731019
Release Date: 8/4/2017

Date: May 9, 2017
Person to Contact:

A = Name Contact Telephone Number:

B = Address
Fax Number:

UIL: 7428.00-00

Certified Mail
Name =A
Address = B
EIN =C
POA =D

Dear

This is our final adverse determination with respect to your exempt status under section 501(a) of
the Internal Revenue Code (“Code”). Recognition of your exemption under Code section 501(c)(3)
is revoked beginning January 1, 20XX.

The revocation of your exempt status was made for the following reason:

is not operated exclusively for exempt purposes. Under Treasury Reg. § 1.501(c)(3)-
1(c)(1), 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 such 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.

Contributions to your organization are no longer deductible under IRC §170.

You are required to file income tax returns on Form 1120. These returns should be filed 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 under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the


district court of the United States for the District of Columbia must be filed before the 91st Day after
the date this determination was mailed to you. Please contact the clerk of the appropriate court for
rules regarding filing petitions for declaratory judgment. To secure a petition from the United
States Tax Court, write to the following address:

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

You also have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal Appeals
process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or
extend the time fixed by law that you have to file a petition in a United States court. The
Taxpayer Advocate can, however, see that a tax matter that may not have 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:

Taxpayer Advocate Service
Dallas Area Office
4050 Alpha Road, Room 924
MS 3000 NDAL
Dallas, TX 75244
(469) 801-0830

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

Sincerely yours,

Appeals Team Manager

CC:


Date:

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

Taxpayer Identification Number:

Form:
Tax Year(s) Ended:

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

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

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


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

2 Letter 3618 (Rev. 6-2012)
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,

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


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

Name of Taxpayer Year/Period Ended
20XX
Issue 1
Whether conducted and verified activities in furtherance of the

exempt purpose of the private foundation or should the foundation be
revoked for failing to carrying out the exempt purpose.

Facts

is a 501(c)(3) organization that received exemption as a private
foundation under section 509(a) of the Internal Revenue Code based
on the activities to be conducted as the exempt purpose submitted on
the application for exemption. is currently a 501(c)(3) private
foundation established and incorporated in May 14, 19XX. The
foundation applied for exemption in April 27, 19XX. The exempt
purpose per the application for exemption: To present exposition of
objects belonging to the corporation. To negotiate contracts with
museums and other organizations to organize expositions. To
promote by exhibits through the corporation itself or through
museums. The organization stated their fundraising program is
private exposition open to the public, sales for the benefit of other
organizations with the same objective, publications of articles as well
as textbooks and films.

On August 31, 19XX the organization submitted an additional letter
stating the organization plans to have exhibits of the art. This will be
treated as any other type of museum exhibit. Tickets will be sold to
view the exhibition. Application also stated, T-shirts, knick knacks
and books about artifacts and the history of the artifacts in the
exhibition will be sold. Proceeds will be used to finance the exhibition
itself and then used exclusively to fund other exhibitions and to
acquire artifacts to further the purpose of the organization. Therefore
no private benefit will result in these transactions as all of the
proceeds after expenses will be used for the purpose of the
organization.

The organization exempt purpose is stated in the application
conducting Art Exhibits and providing Art for exhibits in the
U.S. and Europe, Art that is property of the corporation.


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

Year/Period Ended

Name of Taxpayer
20XX

received a letter from the Internal Revenue Service dated
September 08, 19XX, which stated Based on the information you
supplied and assuming your operation will be as stated in your
application for recognition of exemption, we have determined you are
exempt from federal income tax under section 501(a) of the Internal
Revenue code as an organization described in section 501(c) (3).

On December 17, 20XX, the organization sent a letter to the Internal
Revenue Service stating there has been no activity for the
organization for the past years since the application for exemption.
The letter further stated the organization was set up to provide

to various museums throughout the United States and possibly

Europe. A significant amount of has been purchased over
the years and is in the possession of . The total cost of the
purchases is well over $0. The letter also stated that has not

purchased any art because they did not have the funds to purchase
Art.

operations from 19XX to present in the U.S. included one
exhibit in ; duration stated in a letter from as 2to3
years. This was the only exhibit stated as held in the United States.
Documents were requested to verify the operation of the exhibit, the
cost, the duration of the exhibit, and the items included in the exhibit,
the shipping and return shipping documents to help verify duration of
the exhibit. provided copies of programs stating the exhibit
would start on August 9, 19XX. provided statements of other
attempts to hold exhibits but stated the hosts declined due to
foundation inability to authenticate the . The
organization has been in operation from 19XX to present a total of 0

years.

The submitted statement and letters as verification of the
purchase of the $0 listed on Form 990-PF return line 25.

Several Document request were submitted to the to provide an
opportunity for the organization to verify and prove operations in
keeping with the exempt purpose of the organization. In lieu of

2


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

Year/Period Ended

Name of Taxpayer
20XX

cancelled checks, cashier check, loan agreements, repayment
schedules, check register, deposit slips, invoices, billing statements,
or customs documents, the organization provided written statements
and a list of Artifacts which stated they were passed through customs
with no customs certification, stamps or signatures. The statements
and copies of emails were provided as verification of furtherance of
foundation exempt purpose activities.

Law and Argument

1.501(c)(3)-1 Organizations, organized and operated for religious,
charitable, scientific, testing for public safety, literary, or educational
purposes, or for the prevention of cruelty

to children or animals.

(a) Organizational and Operational tests.

(1) 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 or operational
test, it is not exempt.

(2) The term exempt purpose or purposes, as used in this section,
means any purpose or purposes specified in section 501(c)(3).

(b) Organizational Test. (1) In general, (i) An Organization is
organized exclusively for one or more exempt purposes only if its
articles of organization:

(a) Limit the purposes 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 of one or more exempt

purposes.


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

Year/Period Ended

Name of Taxpayer
20XX

(c) Operational Test. (1) Primary activities. An organization will be
regarded as exclusively for one or more exempt purposes only if it
engages primarily in activities which accomplish one or more of such
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.

ii) An organization is not organized or operated exclusively for one or
more of the purposes specified in subdivision (i) of this subparagraph
unless it serves a public rather a private interest. Thus, to meet the
requirement of this subdivision, it is necessary for an organization to
establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family,
shareholders of the organization or persons controlled, directly or
indirectly, by such private interest.

The exempt purpose of as stated in the articles of incorporation,
exhibiting art as museums and providing art to other museums would
be classified as educational as a 501(c)(3) foundations.

(3) Educational defined--(i) In general. The term educational, as used
in section 501(c)(3) [26 USCS § 501(c)(3)], relates to:

(a) The instruction or training of the individual for the purpose of
improving or developing his capabilities; or

(b) The instruction of the public on subjects useful to the individual
and beneficial to the community.

(ii) Examples of educational organizations. The following are
examples of organizations which, if they otherwise meet the
requirements of this section, are educational:

Example 1. An organization, such as a primary or secondary school,
a college, or a professional or trade school, which has a regularly
scheduled curriculum, a regular faculty, and a regularly enrolled body
of students in attendance at a place where the educational activities

are regularly carried on.


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

Year/Period Ended

Name of Taxpayer
20XX

Example 2. An organization whose activities consist of presenting
public discussion groups, forums, panels, lectures, or other similar
programs. Such programs may be on radio or television.

Example 3. An organization which presents a course of instruction by
means of correspondence or through the utilization of television or

radio.

Example 4. Museums, zoos, planetariums, symphony orchestras,
and other similar organizations.

In Christian Manner International Inc. V. Commissioner, 71. T.C. 661,
exemption denied because principle activity not verified as in
furtherance of exempt purpose. Principle activity not an education
purpose activity.

Taxpayer’s Position

The requested records were lost in the 0 years of the organizations
operations. The statements and letters provided explained the
operation of the organization where in furtherance of the exempt

purpose.

Government’s Position

was granted exemption for the exempt purpose of exhibiting
and providing to Museums for exhibition in the U.S.

and possibly Europe. In excess of 0 years of operation the
foundation claims to have had one exhibition with 2 to 3 year duration
in the U.S., ; . The exhibition in ; duration
was not verified. One exhibit of 2 to 3 years does not qualify as
carrying out an exempt purpose for O plus years of operations. The
foundation stated they are paying several expenses for


Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer

Year/Period Ended
20XX

Archaeologists for carbon dusting in
the archaeologist, but the exempt purpose is supplying

museums in the U.S. and possibly Europe.

Conclusion:

, and the living expenses of

to

did not verify the conduct of substantial activities

in furtherance of the foundation exempt purpose and therefore should

be revoked.