Dormant charity loses exemption for showing no activity or records

Plain-English summary

The IRS revoked a charity's section 501(c)(3) exemption because it did not substantiate any exempt operations. Its filed returns reported no revenue or expenses other than depreciation, later returns were not filed, and it produced no books, minutes, bank records, or financial information. The executive director said the organization had been mildly dormant and planned an animal sanctuary, but provided only cell-phone photographs of an empty field and no documents connecting the land to the organization. The IRS concluded that the charity failed the operational test and the recordkeeping and reporting requirements of sections 6001 and 6033. Contributions were no longer deductible under section 170, and the organization was required to file Form 1120.

Ruling snapshot

• Question: Did the organization remain exempt under section 501(c)(3) despite failing to show exempt activity or provide required records?
• Outcome: Revocation, effective July 1 of the redacted year.
• Key authorities: IRC §§ 501(c)(3), 170, 6001, and 6033(a)(1); Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1(h)(2)

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all nine page images. Obvious OCR misreads were corrected, redacted identifiers and dates are marked [redacted], and wording is otherwise verbatim.

Internal Revenue Service                         Department of the Treasury
Appeals Office
                                                 Employer Identification Number:
Date: NOV 08 2018                                [redacted]
                                                 Person to Contact:
                                                 [redacted]
                                                 Employee ID Number:
                                                 [redacted]
                                                 Tel: [redacted]
                                                 Fax: [redacted]
Number: 201905008
Release Date: 2/1/2019
                                                 UIL: 501.03-00

Certified Mail

Dear [redacted]:

This is a final adverse 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 Section 501(c)(3) of
the Code.

We have hereby revoked the favorable determination letter to you dated [redacted] and you are no longer exempt
under Section 501(a) of the Code effective [redacted].

We made the adverse determination for the following reason(s):

You did not demonstrate that you were operated exclusively for exempt purposes as required by Internal
Revenue Code section 501(c)(3) and Treasury Regulation section 1.501(c)(3)-1(c)(1).

Contributions to your organization are not deductible under section 170 of the Code.

You're required to file Federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return.
Mail your form to the appropriate Internal Revenue Service Center per the form’s instructions. You can
get forms and instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM
(800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Code section 6110 after deleting certain identifying information. We have provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents
attached that show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437.

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 either:

• United States Tax Court,
• The United States Court of Federal Claims,
• The United States District Court for the District of Columbia.

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed
this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate
forms for filing petitions for declaratory judgment. You can 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

Note: We will not delay processing income tax returns and assessing any taxes due even if you file
petition for declaratory judgment under section 7428 of the Code.

Please refer to the enclosed Publication 892, How to Appeals an IRS Determination on Tax -Exempt
Status, for more information about the Appeals process.

You also have the right to contact the Taxpayer Advocate Service (TAS). 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 need Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that
issued this letter. 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 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process.
TAS 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.

If you have any questions, contact the person at the top of this letter.

Sincerely,

Appeals Team Manager

Enclosure: Publication 892

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

Date: OCT 24 2017
Taxpayer ID number: [redacted]
Form: [redacted]
Tax periods ended: [redacted]
Person to contact: [redacted]
Employee ID number: [redacted]
Telephone number: [redacted]
E-Fax: [redacted]
Address: [redacted]

Manager's contact information:
[redacted]
Employee ID number: [redacted]
Telephone number: [redacted]
Response due date: [redacted]

CERTIFIED MAIL – Return Receipt Requested

Dear [redacted]:

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke
your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3).

If you agree

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(3) for the periods above.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
information as stated in 1 and 2, above, you’ll still be able to file a protest with IRS Appeals Office after
the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t
apply now that we’ve issued this letter.

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
if you feel the issue hasn’t been addressed in published precedent or has been treated inconsistently by the
IRS.

If you’re considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

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
adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

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 877-777-4778.

Additional information

You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Form 886A                  Department of the Treasury - Internal Revenue Service                  Schedule No. or
                                      Explanation of Items                                        Exhibit
Name of Taxpayer                                                                         Year/Period Ended
[redacted]                                                                               June 30, 20XX

ISSUE:

Whether [redacted] continues to qualify for exemption under
Section 501(c)(3) of the Internal Revenue Code.

FACTS:

[redacted] was incorporated under the laws of the State of [redacted]
as a non-profit corporation on June 26, 20XX for the following purposes as stated in
the Articles of Incorporation:

“Said corporation is organized exclusively for charitable, religious, educational, and
scientific purposes, including, for such purposes, the making of distributions to
organizations that qualify as exempt organizations under section 501(c)(3) of the
Internal Revenue Code, or the corresponding section of any future federal tax code.”

“The Corporation shall form to provide safe, clean, nurturing and appropriate
temporary housing to individuals, such as young adults who have aged out of foster
care with no current employment, shelter nor options as well as homeless veterans
and war heroes, who are in desperate need in [redacted] State. The ultimate goal of
the corporation will be permanent placement in suitable homes coupled with
employment and migration into independent living within mainstream society. “

Our letter dated August 3, 20XX granted [redacted] exempt
status under section 501 (c)(3) of the Internal Revenue Code as an organization
described under section 509(a)(1) and 170(b)(1)(A)(vi).

A review of the organization's 990 returns for tax year ended June 30, 20XX and
June 30, 20XX revealed that there were no revenues and expenses reported except
for depreciation expense shown on the returns. It was also determined during the
examination that organization did not file 990 returns for tax years ended June 30,
20XX and June 30, 20XX.

In an Information Document Request (IDR) dated March 16, 20XX, the organization
was asked whether it was operating and to provide a detailed description of its
activities, minutes of meetings, bank statements and cancelled checks to
substantiate that it is operating within the scope of 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                  Schedule No. or
                                      Explanation of Items                                        Exhibit
Name of Taxpayer                                                                         Year/Period Ended
[redacted]                                                                               June 30, 20XX

The organization’s Executive Director provided a written response stated as follows:
“1. The organization still operates. There are no revenues or expenses on the 20XX
return because we were unable to raise any funds and therefore unable to spend any
funds. We do, however, plan to raise funds to install an animal sanctuary on a parcel
of land we are able to utilize, several acres in a [redacted] suburb. While we did not
manage to do this during the year ended 6/30/20XX we are most assuredly doing it
now.

2.The board members are [redacted] and [redacted]. At
this time no one signs checks as there is no active bank account.

3.There have been no minutes taken at this time.

4. There is no printed material for our organization. We do, however, plan to start a
website. We own the domain [redacted] and intend to use it.

5.The general ledger for this period contains no transactions.

6.The trial balances, minimal as they are, are on Form 990-EZ.

7.There are no adjusting entries.

8.There was no bank account during the fiscal year ended 6/30/20XX and therefore
no documents to provide. We do, however, intend to open a bank account as soon
as fundraising efforts begin.”

In our Information Document Requested dated September 5, 20XX, the Service
granted the organization another opportunity to provide a detailed description of its
activities and supporting documents to substantiate the activities for tax years ended
June 30, 20XX through June 30, 20XX. On September 19, 20XX, the Executive
Director provided the following written response prior to the scheduled appointment:

“You have asked about the entity's operations. It has always operated despite a
period of time when it was mildly dormant. It is now thoroughly active as I have
secured acreage where we plan to situate an animal sanctuary for purposes of
rescue missions. Our main focus will be to harbor all dogs in “overflow” status at local
shelters including, but not limited to, [redacted] located in nearby
[redacted]. The parcel is seven acres and one full acre of flat, usable land is being
sectioned off for our purpose. We have also already secured a donation $0 to begin
fundraising efforts for fencing, access to water, food storage and other related costs.

As of this date we have not yet filed the return (Form 990-EZ) for the year ended
June 30, 20XX because a motor vehicle donated during that time is pending sale.
We will not know the final number until the sale is complete and, as such, have
refrained from filing such that the return may be fully accurate when submitted.

The return for the period ended June 30, 20XX is still pending as well. It will also
report several small donations. We anticipate our organization to be fully active with
the facility complete and thoroughly functioning prior to the end of the current fiscal

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
Name of Taxpayer                                                                         Year/Period Ended
[redacted]                                                                               June 30, 20XX

year, June 30, 20XX.”

During the examination, the organization did not provide books or records to
substantiate that it was operating within the scope of section 501 (c)(3) of the Code.
The Executive Director did present at the audit anonymous pictures of a parcel of
land shown on his cell-phone which he purported was in use or to be used by the
organization’s activities. The picture was simply a field of grass and dirt. There were
no indication of any activity or structures shown in the pictures. There were no
identifying signs, marks that would identify the land as belonging to this organization
or in use by this organization. The Executive Director offered no deeds, titles or other
legal documents to indicate ownership or location of this property at this meeting.
The only thing brought to the scheduled appointment were these few pictures on a
cell-phone.

LAW:

IRC § 501(c)(3) exempts from federal income tax organizations which are 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.

Tax Reg. § 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an
organization described in 501(c)(3) if it is organized and operated exclusively for one
or more of the following purposes: religious, charitable, scientific, testing for public
safety, literary, educational, or prevention of cruelty to children or animals.

Tax Reg. § 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.

Tax Reg. § 1.501(c)(3)-1(c)(1) of the regulations provides that 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 of such exempt
purposes specified in section 501(c)(3).

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
Name of Taxpayer                                                                         Year/Period Ended
[redacted]                                                                               June 30, 20XX

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the
collection thereof, shall keep adequate records as the Secretary of the Treasury or his
delegate may from time to time prescribe.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization
exempt from tax under § 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. The Secretary may also prescribe
by forms or regulations the requirement of every organization to 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.

Treas. Reg. § 1.6001-1(c) states that in addition to 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 -3.

Treas. Reg. § 1.6001-1(e) states that the books or records required by this section shall
be kept at all times available for inspection by authorized Internal Revenue Service
officers or employees, and shall be retained as long as the contents thereof may be
material in the administration of any Internal Revenue law.

In accordance with the above cited provisions of the Code and Regulations under IRC §
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.

TAXPAYER’S POSITION:

The taxpayer's position is a matter of unsubstantiated claims. The Executive Director
has stated, “It has always operated despite a period of time when it was mildly
dormant. It is now thoroughly active as I have secured acreage where we plan to
situate an animal sanctuary for purposes of rescue missions.” The organization has
not substantiated any of his claims that the organization is operational.

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
Name of Taxpayer                                                                         Year/Period Ended
[redacted]                                                                               June 30, 20XX

GOVERNMENT'S POSITION:

The organization has failed to show us that they meet the operational test of section
501(c)(3) for the year under examination or in subsequent year. To meet the
operational test, they must show that they engage primarily in activities which
accomplish one or more of such exempt purposes specified in section 501(c)(3). We
cannot regard an organization as having met this test if more than an insubstantial
part of its activities is not in furtherance of an exempt purpose.

As evidence of their failure to operate for exempt purposes, we reviewed the Form
990 returns filed for tax year ended June 30, 20XX and June 30, 20XX and found no
revenues and expenses to support their exempt activities. In fact, the returns only
showed depreciation expense. The subsequent year 990 returns were not filed and
there were no records provided to substantiate that they were operating during the
subsequent years.

The organization has failed to provide records as is required in Code 6033(a)(1) and
Regulation 1.6033-1(h)(2) to substantiate they met the operational test by operating
for exempt purposes. They failed to provide any financial information that we
requested during the examination. Without the organization’s records, we cannot
verify that they are operating for exempt purposes. Our position is that the
organization is not operating for exempt purposes.

CONCLUSION:

It is the position of the Internal Revenue Service that the organization failed to
demonstrate it continues to operate exclusively for IRC 501(c)(3) purposes. By not
supplying pertinent information required by IRC sections 6001 and 6033 we were
unable to determine whether [redacted], Inc was operating for exempt
purposes. Accordingly, we are proposing that the organization’s exempt status be
revoked effective July 1, 20XX.

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