501(c)(3) exemption revoked for having no valid organizing document

Plain-English summary

To be tax-exempt under Internal Revenue Code § 501(c)(3), an organization must
pass both an "organizational test" (its founding document must limit it to
exempt purposes and dedicate its assets to those purposes) and an "operational
test." This organization had obtained exemption by filing Form 1023-EZ, the
short streamlined application, on which it attested that it had a proper
organizing document. On audit, the IRS found the organization in fact had no
organizing document at all and had never registered with its state, so the
attestation on the Form 1023-EZ was inaccurate. Because the group never had a
qualifying organizing document, it failed the organizational test from the
start. The IRS revoked its exempt status retroactively to the original
effective date, meaning contributions are no longer deductible under § 170 as
of that date and the organization should file corporate income tax returns
going forward. The letter notes the organization had already voluntarily wound
down and transferred its assets to another entity. The organization may
challenge the revocation through a § 7428 declaratory judgment action.

Ruling snapshot

• Question: Should the organization's § 501(c)(3) exemption be revoked for
  failing the organizational test, retroactive to its effective date?
• Outcome: Revocation (exemption revoked retroactively)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(b);
  Rev. Proc. 2018-5; IRC §§ 170, 7428

Full text (IRS public release)

DEPARTMENT OF THE TREASURY .-
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: November 9, 2018
Release Number: 201908021
Release Date: 2/22/2019
UIL: 501.03-00

Tax Year Ending:
December 31, 20XX
Taxpayer Identification Number:

Person to Contact:
Employee Identification Number:

Employee Telephone Number:
(Phone)

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 September 22, 20XX. Your determination letter dated November 6, 20XX 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
failed the organizational test because you did not establish that you had an organizing document
that complied with section 501(c)(3) at the time of applying for tax exemption. Because you never
had an organizing document that meets the requirements of section 501(c)(3), and because you
misrepresented that fact in your Form 1023-EZ, the revocation is effective as of the date of
exemption, September 22, 20XX.

Contributions to your organization are no longer deductible under IRC §170 after September 22,
20XX.

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

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,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

“> Department of the Treasury Date:
Internal Revenue Service Apri
eas oes pril 25, 2018
Tax Exempt and Government Entities Division Taxpayer ID number:
IRS Exempt Organizations Examination

O00 PE
990-
UIL: 501.03-00 Tax periods ended:

December 31, 20XX
Person to contact:

Employee ID number:
Telephone number:
Fax:

Address:

Manager's contact information:

Employee iD number:
Telephone number:
Response due date:

May 25, 2018

CERTIFIED MAIL — Return Receipt Requested
Dear

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.

After we issue the final adverse determination letter, we’ ll announce that your organization is no longer eligible
to receive tax deductible contributions under IRC Section 170.

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.

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


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

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 . .
[f 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,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:

Form 886-A

Form 6018

Form 4621-A Report of Examination
Publication 892

Publication 3498-A

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


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

Year/Period Ended

December 31, 20XX

Name of Taxpayer

Date of Notice: April 25, 20XX

Issues:

Whether the exempt status of (the Organization) under IRC
§ 501(c)(3) should be revoked, effective September 22, 20XX because it is not organized
exclusively for exempt purposes within the meaning of section 501(c)(3) and Treas. Reg. §

1.501(c)(3)-1(b)?
Facts:

applied for tax-exempt status by filing the Form 1023-EZ,
Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, on September 22, 20XX, and was granted tax-exempt status as
a 501(c)(3) on November 06, 20XX, with an effective date of September 22, 20XX.

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

The organization attested on Form 1023-EZ, part Il, box 2 that they have the organizing
document necessary for their organizational structure.

Section 501(c)(3) requires that an organizing document must limit your purposes to one or
more exempt purposes within section 501(c)(3). The organization attested that their
organizing document contains this limitation.

They also attested that their organizing document does not expressly empower you to
engage, otherwise than as an insubstantial part of your activities, in activities that in
themselves are not in furtherance of one or more exempt purposes.

The organization attested that their organizing document contains the dissolution provision
required under section 501(c)(3) or that they did not need an express dissolution provision
in your organizing document because they rely on the operation of state law in the state in
which you are formed for your dissolution provision.

The Organization does not appear to have any organizing documents. The agent

was informed by the representative of the organization there are no organizing
documents and the organization has never filed with the Secretary of State for
tax exempt status. The organization has filed a final Form 990-PF for the tax period
ending December 31, 20XX. The organization has provided proof that all assets, the
organization's bank account, has been transferred to another organization, a 501(c)(19)

entity.

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
December 31, 20XX

Name of Taxpayer

Law:

Internal Revenue Code (IRC) §501(c)(3) of the Code 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.

Treasury Regulations (Regulation) 1.501(c)(3)-1 In order to be exempt under
§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).

Regulation §1.501(c)(3)-1(a)(1) of the regulations 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.

Regulation §1.501(c)(3)-1(b)(1)(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.

Regulation 1.501(c)(3)-1(b)(4) An organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization's
assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution,
such assets would, by reason of a provision in the organization's articles or by operation of
law, be distributed for one or more exempt purposes, or to the Federal Government, or to a
State or local government, for a public purpose, or would be distributed by a court to another
organization to be used in such manner as in the judgment of the court will best accomplish
the general purposes for which the dissolved organization was organized. However, an
organization does not meet the organizational test if its articles or the law of the State in which
it was created provide that its assets would, upon dissolution, be distributed to its members or

shareholders.

Rev. Proc. 2018-5, Sec 11.02 (3) Inaccurate information on request. A determination letter
issued to an organization that submitted a request in accordance with this revenue procedure
may not be relied upon by the organization submitting the request if it was based on any
inaccurate material information submitted by the organization. Inaccurate material information
includes an incorrect representation or attestation as to the organization's organizational
documents, the organization's exempt purpose, the organization's conduct of prohibited and
restricted activities, or the organization's eligibility to file Form 1023-EZ.

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

December 31, 20XX

Name of Taxpayer

Organization's Position

Taxpayer's position is the organization admitted the application should not have been filed.
The organization does not have any organizing documentation nor did they file with the

Secretary of State requesting tax exempt status

The organization has voluntarily terminated their tax-exempt organization. The organization
has filed a final Form 990-PF for the tax period ending December 31, 20XX. As the
organization has filed the Final Form 990-PF, there are no filing requirements for any tax

forms.

Government's Position

Based on the above facts, the Organization has not established that it had organizing
documents limiting the purpose of the organization to one or more exempt purposes, or a
proper dissolution clause that meet the organizational test under IRC section 501(c)(3), at the

time of applying for tax exemption.

If an organization fails to meet either the organizational test or the operational test, it is not
exempt.

The Organization fails the organizational test because it did not establish that it had an
organizing document that complied with section 501(c)(3) at the time of applying for tax
exemption. Because it never had an organizing document that meets the requirements of
section 501(c)(3), and because it misrepresented that fact in its Form 1023-EZ, the
revocation is effective as of the date of exemption, September 22, 20XX.

Conclusion:

Based on the foregoing reasons, it is the IRS's position that the organization failed to establish
that it meets the organizational test as required IRC §§ 501(c)(3) for it to be exempt from federal
income tax under IRC § 501(c)(3). Accordingly, the organization's exempt status is revoked

effective September 22, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods after
September 22, 20XX.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-