Inactive private foundation loses section 501(c)(3) status

Plain-English summary

A private foundation reported no income or expenses on its annual returns, made no charitable contributions, and never carried out its planned scholarships, small-business assistance, or grants to other exempt organizations. Houses transferred to it continued to be operated and reported through a for-profit entity, while money in a foundation bank account was described as the president's personal money and was used for personal loans, a vehicle, property-transfer fees, and other expenses. The president also lived in one of the foundation's homes. The foundation said it could not raise contributions, lacked time to operate properly, expected no future exempt activity, and agreed to revocation. The IRS revoked its section 501(c)(3) status effective on the redacted January 1 date because it was not operated exclusively for exempt purposes and had not established that its earnings did not benefit private persons.

Ruling snapshot

• Question: Was the foundation operated exclusively for exempt purposes and primarily engaged in activities that accomplished an exempt purpose?
• Outcome: revocation, effective January 1 of the redacted year
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a), (c), and (d)

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: AUG 29 2019

EIN:
Number: 202001025 Person to Contact:

Release Date: 1/3/2020
Identification Number:

UIL: 501.03-00 Telephone Number:

Fax:

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

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 January 1, 20XX. Your determination letter dated May 18, 20XX is
revoked.

Our adverse determination as to your exempt status was made for the following reasons:

Organizations described in I.R.C. § 501(c)(3) and exempt under section 501(a) must
be both organized and operated exclusively for exempt purposes. You have not
demonstrated that you are operated exclusively for charitable, educational, or other
exempt purposes within the meaning of 1.R.C. section 501(c)(3). An organization will
not be so regarded if more than an insubstantial part of its activities is not in
furtherance of 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 1.R.C. § 501(c)(3) and Treasury Regulation
§1.501(c)(3)-1(a), in that you have not established that you were organized and operated
exclusively for exempt purposes and that no part of your earnings inured to the benefit of private
shareholders or individuals.

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


Organizations that are not exempt under section 501 generally are required to file federal
income tax returns and pay tax, where applicable. For further instructions, forms, and
information please visit www.irs.gov.

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 was mailed to you. Please contact the clerk
of the appropriate court for rules and the appropriate forms for filing petitions for declaratory
judgment. Please refer to the enclosed Publication 892 for additional information. You may
write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

U. S. 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

Processing of income tax returns and assessments of any taxes due will not be delayed if you
file a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

You may be eligible for help from 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 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 yours,

Maria Hooke
Director, EO Examinations
Enclosures:
Publication 892

Department of the Treasury Date: May 17, 2018

Internal Revenue Service
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
sign a consent to extend the period of limitations for assessing tax. This is to allow the

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


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.

(Revenue Procedure 80-27 requires that, in the event your tax-exempt status is revoked, your
group exemption will also be revoked. If that occurs, none of your subordinates will be able to
rely on the group ruling for tax-exempt status. You should notify each subordinate of this
proposed action.]

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 Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

ISSUES:

Whether is operated exclusively for exempt purposes described
within Internal Revenue Code section 501(c)(3)?

Whether is engaged primarily in activities that accomplish an
exempt purpose?

FACTS:
Background:
On June 27, 20XX, hereinafter, “Foundation”, Inc. filed articles
of incorporation with the Secretary of State. The articles of incorporation provided that its -

purpose was to organize exclusively for charitable, education, and scientific purposes. Also, to
make distributions to qualified organizations exempt under section 501(c)(3) of the IRC. To
improve the quality of life in by granting funds to small businesses to improve
their infrastructure. The articles also state the corporation may receive contributions, gift, bequest
from persons. To contribute and distribute the funds as the Board of the Directors may determine.

Form 1023 Application:

On November 19, 20XX, filed a Form 1023, Application for
Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, with the Internal
Revenue Service. The Foundation was recognized as a tax exempt private foundation under
501(c)(3) of the Internal Revenue Code in letter dated May 18, 20XX. The Foundation is currently
located at .

In 20XX, zero (0) houses (owned by , president and , mother)
were transferred to the private foundation for the purpose of renting the houses out and generating
income. Documents show no monies were exchanged between the parties and no part of the
transactions were treated as charitable contribution. All operations relative to the houses were
conducted under a for-profit entity under which the houses had previously operated before its
transfer. All the financial data was reported on the for-profit entity’s books and returns.

In 20XX, the president opened a bank account at in the Foundation’s name.
According to the president, the bank account was open for the purpose of establishing a line of
credit in the Foundation’s name. He further stated that the money in the account is not the
Foundation money but the president's personal money. Copies of documents that show source of
deposits were provided. No charitable deduction was taken relative to the amount deposited.

During the analysis of bank statements and canceled checks the money was used to make
personal loans to a friend, purchase and repair vehicle, to pay property transfer fees and other
expenses. Questions regarding these transactions were raised; and explanations were provided.

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

The Form 990-PF is filed annually and does not report any income and expenses. The Foundation
has not made any charitable contributions to date. The president, a disqualified lives’ in one of
homes owned by the Foundation.

To date, no exempt activities have been carried on. They have not granted scholarships, assist
small businesses, or make contributions to other exempt organizations.

During an interview with , president, he states the Foundation has been unable
to raise any contributions from the public. Based on the requirements to operate a private
foundation, it will not survive to exist in the future. He does not have the time to properly operate
the foundation. The Foundation agrees to the revocation because they are inactive and do not
foresee any future activities that further their exempt purpose. The Foundation believes they
should ceased operations as an exempt organization.

LAW:

Internal Revenue Code Section 501(c)(3) exempts from Federal income tax “Corporations and any
community chest, fund, or foundation 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 all or 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 distribution of statements), and political
campaign on behalf of (or in opposition to) any candidate for public office.”

Federal Regulations Section 1.501(c)(3)-1(c)(1) states, “Primary Activities. 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).
An organization will not be so regarded if more than an insubstantial part of its activities as not in
furtherance of an exempt purpose.”

Federal Regulations section 1.501(c)(3)-1(c)(2) provides that an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals. The words ‘private shareholders or individual” refer
to persons having a personal and private interest in the activities of the organization. The term
“private shareholder or individual’ is defined in regulation section 1.501(a)-1(c).

Regulation section 1.501(c)(3)-1(d)(1)(ii) provides an organization is not organized or operated

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

exclusively for one or more exempt purposes unless it serves a public rather than a private
interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to
establish that it is not organized or operated for the benefit of private interests such as the creator
or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such
private interests.

TAXPAYER’S POSITION:

Based has verbally agreed to cease operations as a private

foundation.

Taxpayer indicated that he will sign Form 6018, Consent to Proposed Action, agreeing to the

proposed revocation of their exemption, effective the first day of the examination periods, January
1, 20XX. They do not wish to contest the revocation.

GOVERNMENT’S POSITION:

Based on information gathered, the Service has determined that does
not qualify for exemption as a private foundation described in IRC §501(c)(3). The Foundation is
not planning to perform any exempt activities in the future.

CONCLUSION

verbally agrees to revocation because they are inactive and have no
future to operate.

It is recommended that tax-exempt status be revoked effective
January 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service