Inactive organization loses exemption after failing to substantiate operations

Plain-English summary

The IRS revoked an organization's section 501(c)(3) exemption after the organization reported that it had conducted no activities or financial transactions since formation and had no bank account or financial records. Although its exemption application described planned educational and informational projects, the examination found no operations supporting those purposes. The IRS concluded that the organization failed the operational test and did not establish that its earnings did not benefit private interests. The final letter also states that the IRS could not examine the organization's receipts, expenditures, or activities as required by sections 6001 and 6033(a)(1). Revocation was effective January 1 of a redacted year, contributions were no longer deductible, and Form 1120 returns were required.

Ruling snapshot

• Question: Did the inactive organization establish that it operated exclusively for section 501(c)(3) purposes?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 6001, 6033(a)(1), 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations

1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: March 29, 2017
DIVISION

Taxpayer Identification Number:

Release Number: 201742026
Release Date: 10/20/2017 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 section 501(c)(3) of the Code and exempt under
section 501(a) of the Code must be both organized and operated exclusively
for exempt purposes. You have failed to produce documents or otherwise
establish that you are operated exclusively for exempt purposes and that no
part of your net earnings inures to the benefit of private shareholders or
individuals. The Internal Revenue Service was unable to examine your
records regarding your receipts, expenditures, or activities as required by
sections 6001 and 6033(a)(1) of the Code and Rev. Rul. 59-95, 1959-1 C.B.
627.

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

The Taxpayer Advocate Service (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 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,

for

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Publication 892


Department of the Treasury Date:
Internal Revenue Service October 20, 2016

Tax Exempt and Government Entities Division Taxpayer Identification Number:
Exempt Organizations Examinations

Form:
Tax year(s) ended:

Person to contact / ID number:

Contact numbers:
Phone Number:

Fax Number:
Manager's name / ID number:

Manager's contact number:
Phone 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 also may file a protest with the

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


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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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


Form 886A Department of the Treasury - Internal Revenue Schedule No. or
Service Exhibit
Explanation of Items
Name of Taxpayer Year/Period
Ended
December 31, 20xx

ISSUE:
Whether [redacted] is operating for exempt purposes
described within Internal Revenue Code section 501(c)(3)?

FACTS:

Form 1023 — Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue code.

On February 19, 20xx, [redacted], hereinafter,
”[redacted]” or “organization”, filed Form 1023 with the Internal Revenue Service, hereinafter
“IRS” or the “Service”. The application described their primary mission to operate for the
advancement of charitable, religious, educational, and scientific purposes through various
projects. Examples were the following:

• Disseminating educational materials in several areas:

- Providing informational materials for the injured and disable with regard to
their varying options under the current legal system.

- Educating young people pursuant to character building philosophy by
advocating that physical force should be limited to self-defense.

- Providing the structural relationship necessary for student and teacher mentor
relationships based on the realization that character and effective skills may
best be learned by observation and evaluation.

• Disseminating informational materials in several areas:

- Providing a registry of environmentally polluted sites, as well as providing an
overview of the different issues and concerns regarding manmade pollution and
its effects on human health and the environment.

- Providing information and examples of circumstances where the lives of
innocent victims are transformed by wrongful accusations or “false light”
portrayals. The significant impact of false allegations on the lives of the
innocent will be examined.

- Providing information and education about resolving potentially serious health
problems, which may be aggravated by long term exposure to stress.

In a letter dated June 24, 20xx, [redacted] was recognized as an organization described in
section 501(c)(3) of the Internal Revenue Code.

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

Since their recognition, organization has been filing Form 990-N Postcard. Organization
status is Active as a [redacted] Not For Profit Corporation in the [redacted].

Examination

In a letter dated August 22, 20xx, [redacted] was notified that organization had been
selected for examination for tax year ended December 31, 20xx.

In the first communication with the organization, on September 6, 20xx, representative stated
that organization had not had any activities and/or financial transactions since its formation.
Organization hasn’t been operating. Their activities have not been provided and organization
does not have any bank account or financial documentation. This information was confirmed
during a meeting with the representative on September 20, 20xx.

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.

Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an
organization described in section 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. If
an organization fails to meet either the organizational test or the operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the regulations provides 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.

TAXPAYER’S POSITION:
The exempt organization’s position has not been determined.

GOVERNMENT'S POSITION:

Section 1.501(c)(3)-1(a)(1) of the regulations stated that in order to be exempt as an organization
described in section 501(c)(3) of the Code, the organization must be one that is both organized

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

Page: -2-


Form 886A Department of the Treasury - Internal Revenue Schedule No. or
Service Exhibit
Explanation of Items
Name of Taxpayer Year/Period
Ended
December 31, 20xx

and operated exclusively for one or more of the purposes specified in that section. If an
organization fails to meet either the organizational test or the operational test, it is not exempt.

[Redacted] failed to establish their compliance with the operational test in order to maintain their
501(c)(3) exemption.

CONCLUSION:

It is the IRS's position that the organization does not qualify as exempt from Federal income tax
under section 501(c)(3) of the Internal Revenue Code.

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

Page: -3-