Stalled housing charity loses its exemption

Plain-English summary

A section 501(c)(3) organization was examined to determine whether its activities matched its approved exempt status. Its sole officer said the organization had received a redacted amount of revenue, spent all of it on advertising, and never got its housing program operating. The organization sent one response that did not answer the examiner's questions, repeatedly promised further materials, and did not claim two certified letters delivered to its address. It therefore failed to provide the financial and activity records needed to establish continued qualification and compliance with sections 6001 and 6033. The IRS revoked its exemption effective on a redacted date.

Ruling snapshot

• Question: Does the organization remain exempt when its housing program never began and it does not provide requested examination records?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033(a)(1); Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: JUL 20, 2017

Number: 201751018 Person to Contact:
Release Date: 12/22/2017

Identification Number:

Contact Telephone Number:
Telephone Number:
Fax:

EIN:

UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a final determination that your exempt status under section 501(c)(3) of the Internal Revenue
Code is revoked. Recognition of your exemption under Internal Revenue Code section 501(c)(3) is
revoked effective for the following reason(s):

You did not respond to our requests for information about your financial records and activities
necessary to complete our examination. Therefore, you have not demonstrated that you are operated
exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3).

As such, you failed to meet the requirements of Internal Revenue Code section 501(c)(3) and Treasury
Regulation Section 1.501(c)(3)-1 (d), in that you failed to establish that you were operated exclusively for

an exempt purpose.

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

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 , and for all subsequent years.


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. 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

You may call the IRS telephone number listed in your local directory. An IRS employee there may be
able to help you, but the contact person at the address shown on this letter is most familiar with your
case. You may also call the Internal Revenue Service Taxpayer Advocate.

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.

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

Sincerely yours,

Enclosures:
Publication 892 Director, EO Examinations


Department of the Treasury Date:
: August 5, 2016
Internal Revenue Service Taxpayer Identification Number:

Exempt Organizations Examinations

Form:
Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager's Name/ID Number:

Manager's Contact Number:

Certified Mail-Return Receipt Requested Response due date:
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:

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, ,

£

Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498
Administrative Record

3 Letter 3618 (Rev. 6-201 2)
Catalog Number 34809F


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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

Issues:

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

Facts:

The Taxpayer filed Form 1023 on March 28, 20xx, and was granted tax exemption under
IRC §501(c)(3) on July 21, 20xx, with an effective date of exemption of .

An organization exempt under IRC §501(c)(3) needs to be organized and operated exclusively
for religious, charitable, scientific, testing for public safety, literary or educational purposes or to
foster national or international amateur sports competition.

The Taxpayer was selected for audit to ensure that the Taxpayer's examined activities and
operations align with their approved tax exempt status.

The Taxpayer failed to respond to the Internal Revenue Service attempts to obtain
information to perform an audit of Form 990-N for the above mentioned tax period.

e Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments was mailed to the Taxpayer on
December 7, 20xx, with a response date of January 4, 20xx. The letter was
mailed to the Taxpayer’s addresses of record and to the address provided by
, the Taxpayer’s sole officer:

o Letter 0000 (with copies of prior correspondence and form 4564) was mailed to
the Taxpayer on February 26, 20xx, with a response date of March 11, 20xx. A
copy of the letter was mailed to the following addresses:

o A letter dated March 29, 20xx, was submitted by the Taxpayer in response to
letter 3606 dated December 7, 20xx. The response included a copy of form
8879-EO and did not address the questions posed in form 4564.

o Revised form 4564 was mailed to the Taxpayer on March 29, 20xx, with a
response date of April 18, 20xx. The form 4564 was mailed to the following

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

Page: -1-


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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

addresses:

o Letter 0000 (with copies of prior correspondence and form 4564) was mailed to
the Taxpayer on May 20, 20xx, with a response date of June 3, 20xx. This letter
was mailed to the address provided by . He indicated that they are
closing the P.O. Box and that the mailing address for the Taxpayer should be
permanently changed to:

o Form 4759 was mailed to the Postmaster on June 3, 20xx, to verify the
Taxpayer's mailing address at . The form 4759 was returned
to the IRS office on June 17, 20xx, verifying that mail for the Taxpayer is

delivered to the address provided.

o Letter 0000 (with copies of prior correspondence and form 4564) was mailed
certified to the Taxpayer on June 6, 20xx, with a response date of July 5, 20xx.
The letter and attachments were sent to the following addresses:

Two of the letters were returned undeliverable. The letter sent to '
was the only one that was successfully delivered to the Taxpayer, but, there was no
one available to sign for the document. The letter remained at the local post office
and no one claimed it. As a result, it was returned to the IRS office in on
July 19, 20xx.

o A second copy of Letter 0000 dated June 6, 20xx, (with copies of prior
correspondence and form 4564) was mailed certified to the Taxpayer on July 8,
20xx. The letter was sent to the following address: . The
letter was delivered to the Taxpayer on July 11, 20xx, however, no one was
available to sign for the documents. The letter was returned to the IRS office in
on August 4, 20xx, because no one claimed it.

e Telephone contact for the audit was as follows:

o December 7, 20xx, Agent called the phone number listed on the Form 1023
application for ; asked that a copy of the
letter 3606 and form 4564 be sent to his home address: in
addition to the other mailing addresses listed for the Taxpayer. Agent went over

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


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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

Letter 3606, form 4564 and Publication 1 and let know that the
response due date on the letter was January 4, 20xx.

o February 9, 20xx, Agent contacted to follow-up on the
response to letter 3606. explained that he thought his

accountant had prepared and mailed in the response. He said he would check
with the accountant and call Agent back in a few days.

o February 18, 20xx, Agent contacted to follow-up on the
response to letter 3606. explained that he would fax the
response next week.

o March 16, 20xx, Agent contacted and left a voicemail
message.

o March 22, 20xx, Agent contacted to follow-up on the response
to the Letter 0000 dated February 26, 20xx. explained that he
filed the 990-N and that he was filing Articles of Dissolution this week. Agent
informed that since he is dissolving the corporation, an updated form

4564 would be issued.

o May 10, 20xx, Agent contacted to follow-up on the response to the
form 4564 which was due on April 18, 20xx. explained that
he had been having health issues. He said that he was working on the response
and would have the response mailed in to me no later than May 19, 20xx.

o May 20, 20xx, Agent contacted to follow-up on the response to
form 4564 issued March 28, 20xx. Agent left a voicemail message for

o ~©May 27, 20xx, Agent contacted to follow-up on the response to form
4564 issued March 28, 20xx. Agent left a voicemail message for

o June 6, 20xx, Agent had not received a return phone call or correspondence from

the Taxpayer. Agent contacted . He answered and said he
needed to call the Agent right back. did not return the call.

o July 7, 20xx, called the Agent and left voicemail message.

o July 8, 20xx, Agent returned call. explained

that he had been in the hospital and he requested that the Agent send him
another copy of all correspondence. He indicated that he wanted to change the
mailing address for the Taxpayer to: . Agent
mailed a copy of the requested correspondence via certified mail to

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

Page: -3-


Form 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

agreed to contact the Agent no later than July 12, 20xx, to
let the Agent know when the response would be submitted.

o July 15, 20xx, Agent contacted had
not contacted the Agent on July 12, 20xx. explained that the
agent had called at an inopportune time and that he would contact the Agent on
July 18, 20xx, between the hours of 11:00a.m. and 2:00 p.m. He said he would
have all of the information relating to his response prepared at that time.

o July 22, 20xx, Agent contacted as he had failed to contact
the Agent on July 18, 20xx. Agent explained that not responding to IRS letters
may result in the examination ending in an adverse action. explained
that he has a new accountant. He said that the Taxpayer received a total of $
in revenues and that all of it was spent on advertising. Per
the Taxpayer never got the housing program off the ground.

Law:

IRC §501(c)(3) 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 imposes a tax at corporate rates under section 11 on the unrelated business taxable
income of certain tax-exempt organizations, including those described in section 501(c)(3).

IRC §6001 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) 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.

Income Tax Regulation (ITR) §1.501(c)(3)-1(a) states in order to be exempt under IRC
§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).

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

Form 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

ITR §1.501(c)(3)-1(a)(1) 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.

ITR §1.501(c)(3)-1(c)(1) 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.

ITR §1.61-1 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.

ITR §1.6001-1(c) 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 IRC Section 6033. See IRC Section 6033 and Regulation §1.6033-1
through 1.6033-3.

ITR §1.6001-1(e) 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.

ITR §6033(a)(1) 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.

ITR §1.6033-1(h)(2) 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.

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


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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

Revenue Ruling 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.

Taxpayer’s Position

The Taxpayer has failed to respond to almost all attempts to contact them. The Taxpayer has
refused to return numerous phone calls placed by the Agent. In addition, the Taxpayer has
refused to claim two certified letters that were delivered to their address by the U.S. Postal
Service. During the audit, the only correspondence received from the Taxpayer was a letter
dated March 29, 20xx, which did not include a response to any of the questions posed in form
4564.

Government’s Position

Based on the above facts, the Taxpayer did not respond to verify that it is organized and
operated exclusively for one or more of the purposes specified in IRC § 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 Internal Revenue Code and Income Tax
Regulations under §’s 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.

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

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

Conclusion:

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

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

Page: -6-


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

It is the Service's position that the Taxpayer failed to meet the reporting requirements under
IRC §’s 6001 and 6033 to be recognized as exempt from federal income tax under
IRC §501(c)(3) of the Internal Revenue Code. Accordingly, the Taxpayer's tax exempt

status is revoked effective

Form 1120 returns should be filed for the tax periods after

Form 886-A (Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -7-