Inactive disability-services organization loses its exemption

Plain-English summary

A section 501(c)(3) organization was formed to provide social services and education addressing the needs of people with mental or physical disabilities. It had provided residential treatment services, but its representative reported that it ceased business operations before the examined year. The organization had no plan to resume operations because it lacked assets, and it had not completed a termination plan, articles of dissolution, or the required explanation of how charitable assets would be distributed. The IRS concluded that inactivity prevented the organization from satisfying the section 501(c)(3) operational test. It revoked the exemption effective on a redacted date and ended the deductibility of contributions under section 170.

Ruling snapshot

• Question: May an inactive organization retain section 501(c)(3) status when it has ceased operations and has no plan to resume or formally terminate?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, 6033, and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6001-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: August 28, 2017

Release Date: 201752009
Release Date: 12/29/2017
UIL Code: 501.03-00

Tax Year Ending:

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:

Employee Telephone Number:

CERTIFIED MAIL — RETURN RECEIPT

Dear                 .:

This is a final determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section
501(c)(3) effective                 . Your determination letter dated                 is revoked.

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

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax
under section 501(a) must be both organized and operated exclusively for exempt purposes. You
have failed to provide information that you are organized and operated exclusively for exempt
purposes within the meaning of Internal Revenue Code section 501(c)(3) and that no part of your
net earning inure to the benefit of private shareholders or individuals. You did provide
information stating that your organization has been inactive for several prior years and that there
have been no operations or financial activities conducted or planned. As such, you fail to meet
the operational requirements for continued exemption under section 501(c)(3).

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

Organizations that are not exempt under section 501 generally are required to file federal income
tax returns and pay tax, where applicable. For further instructions, forms, and information, please
visit www.irs.gov.

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: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment
by referring to the enclosed Publication 892. You may write to the courts at the following
addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 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 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
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely,

Director, EO Examinations

Enclosure:
Publication 892


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

Taxpayer Identification Number:

Date:
03/01/2017

Form:
Tax year(s) ended:

Person to contact / ID number:
Contact numbers:

Phone Number:

Manager's name / ID number:

Manager's contact number:

Phone Number:

UPS Next-Day — Proof of Delivery provided to agent via
Email

Response due date:
03/31/20xx

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
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:

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,

Acting 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 Service
                          Explanation of Items — Proposed Revocation

Name of Taxpayer                                  Schedule No. or Exhibit
                                                  Exhibit #3
                                                  Page 1 of 4
                                                  Year/Period Ended

ISSUE:

Whether                 , an organization exempt from taxation under Internal Revenue
Code (IRC) section 501(c)(3), and which no longer functions in a manner sufficient to carry out or serve
its exempt purpose, should be permitted to retain its exempt status, or whether substantial evidence exists
to support revocation of an inactive organization. That is, where there is evidence to show that                 has
ceased its business operations, does such evidence support the conclusion that where an organization no
longer furthers an exempt purpose due to inactivity, should tax-exempt status be revoked?

FACTS:

The audited organization,                 , is recognized as tax-exempt under Internal Revenue Code section 501(c)(3).

Its Articles of Incorporation were filed on                 , the name of the organization prior to
the amendment filed on                 , changing the name to                 .

The examination/audit of                 was begun by Revenue Agent                 on 12/07/xx. The
responsibility for completing the examination/audit was transferred to Revenue Agent                 ,
the author of this report.                 had attempted to allow                 to survive an automatic
revocation by receipt of Form 990 returns for the periods ended                 . She had been
advised of an ongoing termination process.

                 notes in the agent’s work papers that “The purpose of the organization is to operate
exclusively to provide social services and for the charitable and educational purposes and, more
specifically, to meet the physical and psychological needs of persons diagnosed as being mentally
retarded and/or physically handicapped in the areas of social services, food, clothing, shelter, legal aid and
counseling… (and)…to provide services in conjunction with existing service organizations. They also
exist to instruct the public on subjects useful to the individual and beneficial to the community, in
particular to conduct educational programs through meetings, conferences, workshops and publications, to
foster understanding of the needs and problems of persons with mental retardation and/or physical
handicaps through community education.”

Form 990 for                 describes                 purpose as: To provide residential treatment services to
developmentally disabled persons under the                 Program.

The following returns were inspected                 . None of these returns is marked as final and
there is no indication of termination or dissolution as required of an organization that claims to be
terminating; nor is there a completed copy of Schedule N, Liquidation, Termination, Dissolution, or
Significant Disposition of Assets with required attachments to show that                 has prepared its articles of
dissolution. On termination, an organization exempt under section 501(c)(3) is required to show its
termination plan and how assets are to be transferred or distributed. None of these steps appear to have
been taken by                 , and no termination documents have been provided to the Internal Revenue Service
(IRS).

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 — Proposed Revocation

Name of Taxpayer                                  Schedule No. or Exhibit
                                                  Exhibit #3
                                                  Page 2 of 4
                                                  Year/Period Ended

On 02/27/xx,                 received a letter that was delivered by electronic facsimile (EFax) from the offices of
                .                 , is the representative with power-of-attorney for                 .                 letter advises that “Prior to the
audit, the taxpayer                 had ceased business operations”, and in a separate paragraph it identifies
cessation as occurring sometime prior to                 . These statements are being relied upon as
evidence that during the year examined                 no longer functioned to further an exempt
purpose.

In addition to the authority provided in the Internal Revenue Code (IRC) and the related Treasury
Regulations, an agent will rely on procedural guidance in the Internal Revenue Manual (IRM). IRM
sections 4.75.13.9 and 4.75.15.8.10 both address the proper treatment of Inactive Organizations. In each
section, it is evident that, where an organization (exempt under section 501(c)(3)) is no longer active and
cannot pass the operational test (see Treasury Regulation section 1.501(c)(3)-1(a) below), its tax-exempt
status must be revoked.

An inspection of the Form 990 or 990-EZ returns filed from 20xx to 20xx will show that                 operated
at a net loss. That is to say that, on conversion of these information returns to tax returns, the tax liability
is zero. For that reason, the agent will not convert these returns (convert information returns into tax
returns). However, on revocation, the process will automatically generate a Form 1120 filing
requirement.

LAW:

Applicable Internal Revenue Code Sections

Authority to grant tax-exempt status

IRC section 501(c)(3) — Corporations, and any community chest, fund, or foundation, 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 (but only if no part of its
activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to
children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or
individual, no substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not
participate in, or intervene in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public office.

Authority to require an annual return

IRC section 6033(a)(1) — holds, in general that , except as provided in paragraph (3), 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 purpose of carrying out the
internal revenue laws as the Secretary may by forms or regulations prescribe, and shall 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; except that, in the discretion of the Secretary, any
organization described in section 401(a) may be relieved from stating in its return any information which
is reported in returns filed by the employer which established such organization.

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 — Proposed Revocation

Name of Taxpayer                                  Schedule No. or Exhibit
                                                  Exhibit #3
                                                  Page 3 of 4
                                                  Year/Period Ended

Authority to impose recordkeeping requirements

IRC section 6001 - holds 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.

Authority to revoke exempt status

IRC section 6033(j)(1) In general. — If an organization described in subsection (a)(1) or (i) fails to file an
annual return or notice required under either subsection for 3 consecutive years, such organization's status
as an organization exempt from tax under section 501(a) shall be considered revoked on and after the date
set by the Secretary for the filing of the third annual return or notice. The Secretary shall publish and
maintain a list of any organization the status of which is so revoked.

IRC section 6033(j)(2) Application necessary for reinstatement. — Any organization the tax-exempt
status of which is revoked under paragraph (1) must apply in order to obtain reinstatement of such status
regardless of whether such organization was originally required to make such an application.

Taxpayer’s right to Declaratory Judgment

IRC section 7428 provides for the judicial review of certain final adverse EO determinations by the
United States Tax Court, the United States Court of Federal Claims, and the United States District Court
for the District of Columbia.

Applicable Treasury Regulations

Authority regarding the organizational and operational tests under section 501(c)(3)

Treasury Regulation section 1.501(c)(3)-1(a) — provides in general 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. Where an organization no longer
operates to further an exempt purpose, it fails the operational test.

Authority regarding record-keeping requirements

Treasury Regulation section 1.6001-1(a) — provides in general that, except as provided in paragraph (b) of
this section, any person subject to tax under subtitle A of the Code (including a qualified State individual
income tax which is treated pursuant to section 6361(a) as if it were imposed by chapter 1 of subtitle A),
or any person required to file a return of information with respect to income, shall keep such permanent
books of account or records, including inventories, as are sufficient to establish the amount of gross
income, deductions, credits, or other matters required to be shown by such person in any return of such
tax or information

Treasury Regulation section 1.6001-1(c) - 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

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 — Proposed Revocation

Name of Taxpayer                                  Schedule No. or Exhibit
                                                  Exhibit #3
                                                  Page 4 of 4
                                                  Year/Period Ended

such books and records as are required to substantiate the information required by section 6033. See
section 6033 and §§1.6033-1 through -3.

Treasury Regulation section 1.6001-1(e) - The books or records required by this section shall be kept at all
times available for inspection by authorized internal revenue officers or employees, and shall be retained
so long as the contents thereof may become material in the administration of any internal revenue law

Citable U.S. Tax Court Cases

The COUNCIL FOR EDUCATION, Petitioner v. Commissioner of the Internal Revenue Service,
Respondent, No. 17890—11X. Dec. 16, 2013.

The Tax Court held that the corporation failed to establish it would be operated exclusively for a
charitable purpose. Decision for IRS.

PARTNERS IN CHARITY v. Commissioner of the Internal Revenue Service, 141 T.C. No. 2, 2013 WL
4516112

The Tax Court held that: (1) taxpayer's program was not operated to serve charitable purpose, and (2) IRS
acted within its discretion in retroactively revoking its recognition of taxpayer's tax-exempt status.
Decision for IRS.

TAXPAYER’S POSITION:

The taxpayer’s representative,                 , has indicated that the organization has no plan to
continue operations.

GOVERNMENT’S POSITION:

The IRS finds that where                 has ceased business operations since a point in time prior to July
20xx, and has no plan to either continue (due to lack of assets) or terminate, then revocation is required as
provided in the Regulations.

CONCLUSION:

This report has been issued under cover of Letter 3618, also known as a 30-Day Letter. The agent
proposes final revocation of exempt status. Agreement may be demonstrated by the signature, on Form
6018, of someone empowered to bind the organization in such agreements. A copy of Form 6018,
Consent to Proposed Action - Section 7428, is provided as an attachment to this report. The signed,
original copy must be returned to the examining agent, as shown below.

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