501(c)(3) exemption revoked after the organization went dormant for years

Plain-English summary

A nonprofit that had been recognized as tax-exempt under section 501(c)(3) lost that status because it stopped operating. The organization was originally formed to provide dental care and to train dental residents, funded by another exempt organization. When that funding ended, the group became inactive and conducted no exempt activities for several years, its only remaining money coming from interest and investment income. To keep 501(c)(3) status an organization must actually be operated for an exempt purpose, and Revenue Ruling 58-617 says an exemption stands only so long as there is no material change in the organization's character, purposes, or methods of operation. Because the organization was dormant, the IRS found it no longer met the operational test and revoked its exemption effective July 1 of the year in issue. Contributions are no longer deductible under section 170 as of that date, and the organization must now file corporate income tax returns on Form 1120. The document includes the final adverse determination letter, the proposed-revocation letter (Letter 3618), and the Form 886-A audit report. It illustrates that simply ceasing activity, without formally dissolving, can cost a charity its tax-exempt status.

Ruling snapshot

• Question: Does an organization that has been inactive for years, conducting no exempt activities, still qualify for exemption under section 501(c)(3)?
• Outcome: revocation (exemption revoked effective July 1 of the year in issue; Form 1120 required going forward)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c), (d); Rev. Rul. 58-617

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected (for example, "Sel vice" restored to "Service" and "arc" to "are"); wording is otherwise verbatim, an unreadable handwritten signature is marked [illegible], and redacted identifiers appear as the IRS released them.

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: Oct 18 2018
Person to Contact:
Number: 201909012

Release Date: 3/1/2019 Identification Number:
UIL Code: 501.03-00 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 July 1, 20XX for the following reason(s):

You have made a material change in your organization's purpose and activities. Rev. Rul. 58-617
provides that an organization's exempt status will remain in effect only so long as there are no material
changes in the character of the organization, the purposes for which it was organized, or its methods of
operation. As such fails to meet the operational requirements to continue

its exemption status under IRC 501(c)(3).

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. You have not established that you have 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 July 1, 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 June 30, 20XX, and for all subsequent years.

It


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

judgement. 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,

[signature illegible]

Enclosures: Maria Hooke
Publication 892 Director, EO Examinations
Envelope


Date:
Department of the Treasury
¥9) Internal Revenue Service May 18,2018 Number-
IRS Tax Exempt and Government Entities Taxpayer Identification Number:

Exempt Organizations Examinations
Form:

Tax Year(s) Ended:
Person to Contact:

Employee ID:
Telephone:
Fax:
Manager's Contact Information:

Employee ID:
Telephone:
Response Due Date:

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

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


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.

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.

For 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 Hook

Director, EO Examinations
Enclosures:
Form 886-A
Form 6018

Publication 3498
Publication 892

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


Form 886 A Department of the Treasury - Internal Revenue Service ADDENDUM
Explanation of Items

Name of Taxpayer Year/Period Ended
June 30, 20XX
ISSUES
Whether ( ) continues to qualify for

exemption as an organization described in the Internal Revenue Code (IRC) Section
501(c)(3) because of no operation or activity since 20XX which includes the year of
examination.

FACTS

was incorporated under the laws of the State of
as a non-profit corporation on June 24, 19XX and amended on August 5,
19XX for the purposes of the following:

To provide dental care to all the sick and injured who may come to it for diagnosis,
treatment and care, without regard to race, color, creed, sex or age.

To engage as a professional service corporation in the practice of the profession of
dentistry as authorized by Article 15 of the Business Corporation Law.

To carry on any activities whatsoever that this corporation deem proper or
convenient in connection with the foregoing purpose, or that it may deem calculated,
directly or indirectly, to improve the interests thereof, and to have to exercise all
powers conferred by the laws of the State of on corporations formed
under the laws pursuant to which and under which this corporation is formed, as
such laws are now in effect or may at any time hereafter be amended, and to do any
and all things hereinabove set forth to the same extent and as fully as natural
persons might or could do alone or in connection with other persons, firms,
associations, or corporations, and in any part of the world.

On February 17, 19XX was recognized to be
exempt from federal income tax as an organization described in IRC Section
501(c)(3).

Per review of Articles of Incorporation and F1023 Application for Recognition of
Exemption Financial Support, Attachment B enclosed in the EO’s determination file.
The sole source of the organization’s financial support is the

( ), which is an exempt organization under
IRC 501(c)(3) and a governmental unit under IRC 170(c)(1). funds the
organization’s annual budget, which is subject to the approval of and

includes the funds solely for the payment of salaries and related benefits to the
organizations employees.

In letter dated May 4, 20XX, the organization wrote, “During the years between 19XX

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

Page: -1-


Form 886 A - Department of the Treasury - Internal Revenue Service ADDENDUM
Explanation of Items

Name of Taxpayer Year/ Period Ended
June 30, 20XX
and approximately 20XX received continuous
funding from to employ attending dentists who provided patient care and
trained dental residents at . That funding ceased in approximately 20XX”.

During discussion on May 9, 20XX, the organization’s President stated the
has ceased to receive funding from the
in 20XX and has been inactive since 20XX.

According to the § Department of State Division of Corporations the organization is still
active.

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)

Revenue Ruling 58-617, 1958-2 CB 260, (Jan. 01, 1958) Rulings and determinations
letters granting exemption from federal income tax to an organization described in

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


Form 8 86 A Department of the Treasury - Internal Revenue Service ADDENDUM
Explanation of Items

Year/Period Ended
June 30, 20XX

Name of Taxpayer

section 501(a) of the Internal Revenue Code of 1954, to which contributions are
deductible by donors in computing their taxable income in the manner and to the extent
provided by section 170 of the Code, are effective only so long as there are no material
changes in the character of the organization, the purposes for which it was organized,
or its methods of operation. Failure to comply with this requirement may result in
serious consequences to the organization for the reason that the ruling or determination
letter holding the organization exempt may be revoked retroactively to the date of the
changes affecting its exempt status, depending upon the circumstances involved, and
subject to the limitations on retroactivity of revocation found in section 503 of the Code.

TAXPAYER'S POSITION
The organization’s President declared that the organization has no operational or
financial activities. During the years between 19XX and approximately 20XX

( ) received continuous funding from
( ) to employ attending dentists who provided patient care and trained dental
residents at . That funding ceased in approximately 20XX.

GOVERNMENT'S POSITION AND CONCLUSION

As demonstrated in Rev. Rul. 58-617, an organization’s exempt status will remain in
effect only so long as there are no material changes in the character of the
organization, the purposes for which it was organized, or its methods of operation. In
the case of the organization has been inactive
for several years and there have been no activities conducted. The sole financial
activity is from the remaining interest income and investment income of the EO. As
such, fails to meet the operational requirements
to continue its exemption status under IRC 501(c)(3). Therefore, the effective
revocation date will be July 1, 20XX.

On May 4, 20XX agent discussed proposed revocation of the organization's exempt
status as organization is no longer operating for an exempt purpose.

If you agree to this conclusion please sign the attached Forms.

If you disagree please submit a statement of your position.

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

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