501(c)(3) exemption revoked; articles never limited purpose to exempt purposes

Plain-English summary

A § 501(c)(3) organization must be "organized exclusively" for exempt
purposes, which means its founding document (here, its articles of
incorporation) has to limit the organization to charitable or other exempt
purposes and dedicate its assets to those purposes on dissolution. This group
obtained exemption through the short-form Form 1023-EZ, attesting that its
organizing document met these requirements. When the IRS pulled the actual
articles from the state, it found they contained no purpose clause and no
dissolution clause; the group later amended the articles to add a dissolution
clause but still never added a purpose or powers clause limiting it to exempt
activities. Because the organization never had a qualifying organizing document
and its Form 1023-EZ attestation was therefore inaccurate, it failed the
organizational test from the beginning. The IRS revoked the exemption
retroactively to the original effective date, ending deductibility of
contributions under § 170 and requiring corporate income tax returns going
forward. The organization had already dissolved with the state. It may contest
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. Rul. 59-95; Rev. Proc. 2018-5; IRC §§ 170, 7428

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES

DIVISION
Date: NOV 07 2018

Release Number: 201908022

Release Date: 2/22/2019
UIL: 501.03-00

Person to Contact:
Identification Number:

Contact Telephone Number:
Telephone Number:
Fax:

EIN:

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 March 27, 20XX for the following reason(s):

You have not demonstrated that you are operated exclusively for charitable, educational, or
other exempt purposes within the meaning of I.R.C. section 501(c)(3). Organizations that
are described in I.R.C. section 501(c)(3) and section 501(a) must be organized and
operated exclusively for an exempt purpose.

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 March 27, 20XX.

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 December 31, 20XX,
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

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: Maria Hooke
Publication 892 Director, EO Examinations

Department of the Treasury Date:

internal Revenue Service August 28, 2018 Taxpayer

Tax Exempt and Government Entities Division ORUNber
IRS Exempt Organizations Examination

Form:
990-N

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:
September 28, 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.

. 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,
Carel, Miner. Kava?

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:

Form 886-A

Certificate of Termination

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
Name of Taxpayer Year/Period Ended
20XX
Date of Notice: August 28, 20XX
Issues:
Whether the exempt status of (the Organization) under IRC §

501(c)(3) should be revoked, effective March 27, 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 October 2, 20XX, and was granted tax-exempt status as a 501(c)(3)
on November 20, 20XX, with an effective date of March 27, 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 organizing documents that the agent obtained from the State of does not limit
the purpose of the Organization to one or more exempt purposes.

The organization's original Articles of Incorporation did not include a purpose, power or
dissolution clause. The organization amended their Articles of Incorporation on October 22,
20XX to include a dissolution clause but a purpose and power clause are _ still missing.

Per the State of web-site, the Organization has terminated as of June 8, 20XX.

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
20XX

See copy attached from state web-site.

The organizations purpose as stated in their Articles of Incorporation, "Via corporate and
individual donations will help those in need, while presenting ones' own culture and
heritage."

The organizing documents that the agent obtained from the Secretary of State
website do not limit the purpose of the Organization to one or more exempt purposes
within the meaning of IRC section 501(c)(3). The agent has sent a copy of the
organization's original and amended Articles of Incorporation to the organization with the
Letter 5077-B dated August 9, 20XX.

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

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
20XX

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. Rul. 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.

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.

Organization's Position

Taxpayer's position is the founders of the organization have terminated the organization
with the Secretary of State on June 8, 20XX. The organization decided to terminate
the organization due to personal unforeseen circumstances and lack of commitment.

Government's Position

Based on the above facts, the Organization has not established that it had organizing
documents limiting the purpose and power of the organization to one or more exempt
purposes 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

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

Page: -3-

x" Form 886A Department of the Treasury — Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX

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, March 27, 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 March 27, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods
after March 27, 20XX.

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