501(c)(3) exemption revoked back to day one because the articles never met the organizational test

Plain-English summary

To be a section 501(c)(3) charity, an organization must pass an "organizational test": its founding document (its articles of incorporation) must limit its purposes to exempt purposes and must include a clause dedicating its assets to another charity or the government if it dissolves. This organization was granted 501(c)(3) status, but the IRS later determined its original articles never contained the required purpose limitation or dissolution clause, and the state where it was formed does not supply a dissolution rule by operation of law. During processing of its application the IRS had asked it to amend the articles; the organization responded with bylaws containing the right clauses but never showed that its actual articles were amended and filed with the state. The organization later moved to dissolve and stopped responding, and mail came back undeliverable. Because it never had a compliant organizing document, and because the IRS found it had misrepresented that on its Form 1023, the IRS revoked the exemption retroactively to the original effective date (January 1 of the first year), not just going forward. Contributions are no longer deductible under section 170, and the organization must file Form 1120. This is a reminder that bylaws are not a substitute for properly amended articles, and that a defective organizing document can void an exemption from the very start.

Ruling snapshot

• Question: Should a 501(c)(3) exemption be revoked, retroactive to the original effective date, where the organization's articles never satisfied the organizational test (no exempt-purpose limitation or dissolution clause)?
• Outcome: revocation (exemption revoked retroactively to the date of exemption; Form 1120 required)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (b); Rev. Rul. 59-95; IRC § 6104(c)

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected and spaces the OCR dropped between words were restored (for example, "respondedonApril4" to "responded on April 4"); wording is otherwise verbatim, and redacted identifiers appear as the IRS released them.

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: OCT 152018
DIVISION
Number: 201909014 Person to Contact:
Release Date: 3/1/2019 Identification Number:
Telephone Number:
UIL: 501.03-00 In Reply Refer to:

LAST DATE FOR FILING A PETITION WITH
THE TAX COURT:

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). Our favorable determination letter to you dated April 20,
20XX, is hereby revoked and you are no longer exempt under section 501(a), as an
organization described in section 501(c)(3) of the IRC, effective January 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are organized exclusively for an exempt
purpose or that you have been engaged primarily in activities that accomplish
one or more exempt purposes within the meaning of IRC section 501(c)(3).

Contributions to your organization are no longer deductible under section 170 of the Code.

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
years thereafter.

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 Court of Federal Claims 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. 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.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

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

Sincerely yours,
Maria Hooke

Director, Exempt Organizations Examinations

Enclosures:
Publication 892


Department of the Treasury Date:
gH) Internal Revenue Service 08/29/2018
Tax Exempt and Government Entities Division Taxpayer ID number:
IRS Exempt Organizations Examination

Form:
Tax periods ended:

Person to contact:

Employee ID number:
Telephone number:
Fax:

Manager's contact information:

Employee ID number:
Telephone number:
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 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 "Il 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 6018

Form 4621-A Report of Examination
Form 886-A

Publication 892

Publication 3498-A

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


Form 886 A Department of the Treasury Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer EIN Year/Period Ended
20XX

Date of Notice: August 29, 20XX
issues:

Whether the exempt status of (the Organization)
under IRC § 501(c)(3) should be revoked, effective January 1, 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, Application for recognition of Exemption Under Section 501 (c)(3) of the
Internal Revenue Code, on October 14, 20XX, and was granted tax-exempt status as
a 501(c)(3) on April 20, 20XX, with an effective date of May 5, 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 checked the boxes on Form 1023, Part Ill, ensuring that when the
application was filed that the organization's organizing document contains the required
provisions to meet the organizational test.

Section 501(c)(3) requires that an organizing document must limit the organization's
purposes to one or more exempt purposes within section 501(c)(3) and also that their
organizing document contains the dissolution provision required under section 501(c)(3).

An organizing document may not need a dissolution because the organization relied on
the operation of state law in the state in which it was formed. Organization's formed in the
State of cannot rely on state law for dissolution clause purposes, so one needs

_ to be included in the organization's organizing document.

The original organizing documents that were obtained does not limit the purpose of the
organization to one or more exempt purposes or contain a proper dissolution clause.

Letter 1312 was sent to the organization on February 2, 20XX, during the processing of
the Form 1023, requesting the Articles of Incorporation to be amended to include a
purpose clause to limit the purpose to those specifically described in Section 501(c)(3)
and a dissolution clause.

The organization responded to Letter 1312 with a copy of their bylaws. The bylaws do
contain an appropriate purpose and dissolution clause that is required for an organizing
document to contain for a 501(c)(3) organization. No documentation that it was

Form 886-A(Rcv.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 EIN Year/Period Ended
20XX
submitted to the State of to be part of their Articles of Incorporation was

included.

Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization on February
20, 20XX with a response date of March 20, 20XX requesting their Articles of
Incorporation, description of activities, minutes, and financials.

Letter 5798 with attachments, was mailed to the organization on March 9, 20XX granting
an additional 10 days from the original due to respond. The letter also included
information that was needed due the organization indicating that they were dissolving.

Organization responded on April 4, 20XX with a signed statement that that they had no
assets all funds were used for the organization's expenses, along with Articles of
Dissolution. The articles indicate that the effective date of dissolution is December 05,
20XX.

No documentation was provided showing that the Articles of Dissolution were filed with
the State of

No documentation was provided showing that the by-laws were submitted, accepted, or
part of the Articles of Incorporation with the State of

Letter 3844-B (11-2015), with attachments, was mailed to

on July 25, 20XX, with a response date of August 08, 20XX. This letter included a
request for a complete copy of articles of dissolution; along with copies of the Form 1023,
Letter 947, Letter 1312, Letter 4423, and the organization's response to Letter 1312 that
was received/sent during the processing of the application. This letter was sent back by
the post office as being undeliverable

Letter 3844-B (1-2015), with attachments, was mailed to

, on August 10, 20XX, with a response date of August 24, 20XX. This letter included a
request for a complete copy of articles of dissolution; along with copies of the Form 1023,
Letter 947, Letter 1312, Articles of Incorporation from state website, Letter 4423, and the
organization's response to Letter 1312 that was received/sent during the processing of
the application.

The agent made several attempts to contact the organization to request verification that
it conformed its organizing documents with the State of

Form 886-A(Rcv.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 EIN Year/Period Ended
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
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

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 EIN Year/Period Ended
20XX

established that it is observing the conditions required for the continuation of exempt
status.

Organization's Position

Taxpayer's position is unknown at this time.

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, ora
proper dissolution clause that meets 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 and
subsequent correspondence, the revocation is effective as of the date of exemption,
January 1, 20XX.

Conclusion:

Based on the foregoing reasons, it is the IRS 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 January 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods
after December 31, 20XX.

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