Hospital exemption revoked after all assets were sold

Plain-English summary

A hospital had been recognized under section 501(c)(3) and was exempt from filing annual Forms 990 because it was affiliated with a government agency. It later sold all of its assets, stopped operating as a corporate entity, and ceased providing medical or other hospital services under its employer identification number. The hospital did not file articles of dissolution or notify the IRS that it intended to surrender its exempt status. The hospital agreed that it no longer had an exempt purpose and could not document a proper dissolution. The IRS revoked its section 501(c)(3) status effective October 1 of a redacted year because an inactive entity with no exempt activities does not satisfy the operational test.

Ruling snapshot

• Question: Should a hospital retain section 501(c)(3) status after selling all assets and ceasing every activity under its EIN?
• Outcome: revocation, because the hospital no longer operated for an exempt purpose and had not properly terminated its status
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(2)

Full text (IRS public release)

Transcriber's note: this document is an eight-page scan containing a final revocation letter, a proposed revocation letter, and an examination report. Obvious OCR errors in agency headings, names visible in signatures, citations, spacing, and punctuation were corrected by comparison with every page image. Redacted identifying fields are marked [redacted], while IRS-substituted dates and amounts remain 20XX and $0.00. Original grammatical irregularities are preserved. The wording is otherwise preserved verbatim.

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 202004013
Release Date: 1/24/2020
Date: October 9, 2019
UIL: 501.03-00

EIN: [redacted]
Person to Contact: [redacted]
Identification Number: [redacted]
Telephone Number: [redacted]

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
LAST DAY FOR FILING A PETITION WITH THE TAX
COURT: January 7, 2020

Dear [redacted]:

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 October 1, 20XX. Your determination letter dated April 19XX is
revoked.

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

You discontinued activities furthering charitable or educational purposes.
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 I.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 I.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
Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations Examination

Date:
12/06/2018
Taxpayer ID number: [redacted]
Form:
990
Tax periods ended: [redacted]
Person to contact: [redacted]
Employee ID number: [redacted]
Telephone number: [redacted]
Fax: [redacted]
Address: [redacted]
Manager’s contact information:
Employee ID number: [redacted]
Telephone number: [redacted]
Response due date: [redacted]

CERTIFIED MAIL — Return Receipt Requested

Dear [redacted]:

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.

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 the 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'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,

Michelle Henson
For Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A, Form 4621-A
Form 6018, Publications 3498 & 892

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

Schedule number or exhibit
2

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

Name of taxpayer Tax Identification Number Year/Period ended

September 30, 20XX

ISSUE:

Should the tax-exempt status under IRC §501(c)(3) for [redacted] be
revoked?

FACTS:

[redacted] (“the Hospital”) was incorporated in the State of [redacted]
on March 17, 19XX. The Hospital applied for tax exempt status under IRC §501(c)(3) on
February 3, 19XX and in April, 19XX the Hospital was determined to be exempt from taxation
under IRC §501(c)(3) with a foundation classification under IRC §509(a)(1) and 170(b)(1)(A)(iii).

While the Hospital was a separately incorporated entity, it fell under the province of the
government of [redacted], [redacted]. As an organization affiliated with a
governmental agency, the Hospital received exemption from filing annual Forms 990.

On April 2, 20XX the Hospital and [redacted] entered into a purchase agreement
with [redacted] (“[redacted]”). The Hospital and [redacted] were
the sellers and [redacted] was the purchaser.

The terms of the agreement included the purchase price of $0.00 which was adjusted down to
$0.00 after post-closing adjustments were made.

Upon the sale of all assets and property from the Hospital to [redacted], the Hospital did not operate
as a corporate entity and ceased to have an exempt purpose. However, the Hospital did not file
Articles of Dissolution with the State of [redacted] and did not inform the Internal Revenue
Service of its’ intent to dissolve and forfeit their tax-exempt status.

A search on the Secretary of State’s web site for [redacted] did not provide any record of
Articles of Dissolution having ever been filed. A conformed copy of the Articles of Dissolution
was requested from the Hospital, but the Hospital was unable to provide that document.

The Hospital was sold again in or around 20XX to the current owner, which is [redacted]. The transfer of records from [redacted] to the current owner in or around 20XX was
contentious, and all historical records were not transferred to the new owners.

LAW:

IRC §501(a) exempts organizations described in Section 501(c) of the Code from federal
income taxation.

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
2

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

Name of taxpayer Tax Identification Number Year/Period ended

September 30, 20XX

IRC §501(c)(3) exempts from federal income tax organizations organized and operated
exclusively for charitable, educational, and other exempt purposes, provided that no part of the
organization's net earnings inures to the benefit of any private shareholder or individual.

Treas. Reg. § 1.501(c)(3)-1(a)(1) 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. If an
organization fails to meet either the organizational test or the operational test, it is not exempt.

Treas. Reg. §1.501(c)(3)-1(c)(1) 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) of the Code. An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Treas. Reg. §1.501(c)(3)-1(d)(2) defines the term "charitable" for 501(c)(3) purposes, in part, as
including relief of the poor and distressed or of the underprivileged; advancement of religion;
advancement of education or science; and lessening of the burdens of Government.

Treas. Reg. §1.6001-1(c) provides that for exempt organizations, in addition to such permanent
books and records required by section 1.6001-1(a) with respect to the tax imposed by section
511 on the unrelated business income of certain exempt organizations, every organization
exempt from tax under section 501(a) shall keep such permanent books of account or records,
including inventories, as are sufficient to show specifically the items of gross income, receipts
and disbursements.

Treas. Reg. §1.6001-1(e) provides that the books or records required by this section shall be
kept at all times available for inspection by authorized internal revenue officers or employees,
and shall be retained as long as the contents thereof may be material in the administration of
any internal revenue law.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court ruled that the
existence of a single nonexempt purpose, if substantial in nature, will cause failure of the
operational test, regardless of the number or importance of truly exempt purposes.

In United States v. Wells Fargo Bank, 485 U.S. 351, 108 S. Ct. 1179, 99 L. Ed. 2d 368 (1900)
the Supreme Court held that an organization must prove unambiguously that it qualifies for a tax
exemption.

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
2

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

Name of taxpayer Tax Identification Number Year/Period ended

September 30, 20XX

TAXPAYER’S POSITION:

[redacted] acknowledges that the corporate identity associated with this
entity ceased to exist on April 2, 20XX when all assets were purchased by [redacted]. The Hospital
understands that without an exempt purpose after the transfer of assets to [redacted], they no longer
qualified as a tax-exempt organization.

The Hospital also acknowledges that they did not correctly terminate their tax-exempt status in
20XX and they state that they are unable to determine of Articles of Dissolution were ever filed
with the State of [redacted].

The Hospital understands that without a conformed copy of the Articles of Dissolution, the only
way to terminate an organization’s tax-exempt status with the IRS is for the IRS to propose the
revocation of that status.

GOVERNMENT’S POSITION:

The Hospital and the government of [redacted], [redacted] sold the assets
associated with [redacted] on April 2, 20XX. Once the transfer of assets to
the new owner was completed, the hospital under Employer Identification Number (EIN) [redacted] did not provide medical and other hospital related services. The physical hospital
facilities remained, but the medical services were provided by the successor hospital
organization.

After April 2, 20XX [redacted] did not conduct any exempt function activities
under their EIN, and in fact did not conduct any activities. Treas. Reg. §1.501(c)(3)-1(c)(1)
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) of the Code. An organization will not be so regarded if
more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

With a lack of activities conducted after the sale of all assets in 20XX, the Hospital could not
have been considered to have operated exclusively for an exempt purpose because there was
no primary activity. The Hospital failed to qualify for continued exemption under IRC §501(c)(3)
once they terminated the operation of the hospital under their EIN.

In 20XX the Board of Trustees for [redacted] failed to file Articles of
Dissolution with the state of [redacted] to dissolve their corporate identity and they failed to
provide a conformed copy of the Articles of Dissolution to the IRS to terminate the tax-exempt
status of the Hospital.

Consequently, we are revoking the Hospital’s section 501(c)(3) status.

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


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

Schedule number or exhibit
2

Name of taxpayer Tax Identification Number

Year/Period ended

September 30, 20XX

CONCLUSION:

[redacted] ceased being a viable tax-exempt organization upon the sale of
their assets in 20XX. The Hospital failed to terminate their tax-exempt status properly after the
sale of their assets in 20XX and since 20XX they have not operated exclusively for a tax-exempt
purpose as required to maintain exemption under IRC §501(c)(3). As a result, the Hospital’s
section 501(c)(3) tax-exempt status is being revoked, with an effective date of October 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service