IRS revokes an inactive charity's exemption for failing the operational test

Plain-English summary

The IRS revoked an organization's IRC § 501(c)(3) exemption after finding it had not consistently operated and had shown no concrete plans or reasonable steps to begin operating, so it failed the operational test. The organization also repeatedly failed to respond to the IRS's requests for documents supporting its exemption and provided no minutes. Citing the recordkeeping and reporting duties in IRC §§ 6001 and 6033 and Revenue Ruling 59-95 (failure to comply with § 6033 can terminate exempt status), the IRS concluded the group no longer qualified. The taxpayer agreed verbally to the revocation. Exemption was revoked effective a redacted year-end date, so contributions are no longer deductible under IRC § 170 and the organization must file federal income tax returns.

Ruling snapshot

• Question: Does the inactive organization still qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation (taxpayer agreed verbally).
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 6001, 6033, and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1; Rev. Rul. 59-95.

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: August 11, 2020

Taxpayer ID Number:
Number: 202052017

Release Date: 12/24/2020 Form:

UIL: 501.03-00 Tax Period(s) Ending:

Person to Contact:

Identification Number:

Telephone Number:

Fax Number:

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 (IRC) Section 501(a) as an organization described in IRC
Section 501(c)(3), effective January 1, 20XX. Your determination letter dated February 20XX
is revoked.

Our adverse determination as to your exempt status was made for the following reason(s):

Organizations described in IRC Section 501(c)(3) and exempt under section
501(a) must be both organized and operated exclusively for exempt
purposes, and no part of their net earnings may inure to the benefit of private
shareholders or individuals. You have not consistently operated since 20XX
and have shown no concrete plans to operate. You have shown no
reasonable acts or steps to begin operation. Consequently, you failed the
operational test that is required under section 501(c)(3) of the Code.

As such, you failed to meet the requirements of IRC Section 501(c)(3) and
Treasury Regulations Section 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 net earnings inured to the benefit of private
shareholders or individuals.

Contributions to your organization are no longer deductible under IRC Section 170.

Organizations that are not exempt under IRC 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 IRC Section 7428 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 by referring to the enclosed Publication 892. 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 20439

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 IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501(c)(3).

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.

Taxpayer Advocate assistance can't be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have
been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

If you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Sean E. O'Reilly
Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury Date:
Internal Revenue Service January 22, 2020
IRS Tax Exempt and Government Entities Taxpayer ID number:

Form:
Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Manager's contact information:
Name:
ID number:

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.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

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.

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,
For Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number | Year/Period ended
20XX

Issue:
Whether the (__) qualifies for exemption
under section 501(c)(3) of the Internal Revenue Code.

Facts:

Exhibit A provides copies of the Internal Revenue Service ("IRS") correspondence
requesting provided documents to support the exemption under Section 501(c)(3) of the Code. failed to respond to correspondence from the IRS.
Furthermore, has not consistently operated since and shown no concrete
plans to operate. has provided no minutes. It has shown no reasonable acts or
steps to begin operation. Consequently, the entity failed the operational test that is
required under section 501(c)(3) of the Code.

Law:

Regulation 1.501(c)(3) 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 such exempt purposes specified 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 exempt purpose

IRC section 6001 provides that every person liable for any tax imposed by the IRC, or
for the collection thereof, shall keep adequate records as the Secretary of the Treasury
or his delegate may from time to time prescribe.

IRC section 6033(a)(1) provides that, except as provided in IRC section 6033(a)(2),
every organization exempt from tax under section 501(a) shall file an annual return,
stating specifically the items of gross income, receipts and disbursements, and such
other information for the purposes of carrying out the internal revenue laws as the
Secretary may by forms or regulations prescribe, and keep such records, render under
oath such statements, make such other returns, and comply with such rules and
regulations as the Secretary may from time to time prescribe.

Treas. Reg. section 1.6001-1(a) in conjunction with Treas. Reg. section 1.6001-1(c)
provides that every organization exempt from tax under IRC section 501(a) and subject
to the tax imposed by IRC section 511 on its unrelated business income must keep
such permanent books or accounts or records, including inventories, as are sufficient to
establish the amount of gross income, deduction, credits, or other matters required to
be shown by such person in any return of such tax. Such organization shall also keep

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

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number | Year/Period ended
20XX

such books and records as are required to substantiate the information required by
IRC section 6033.

Treas. Reg. section 1.6001-1(e) states that the books or records required by this section
shall always be kept available for inspection by authorized internal revenue officers or
employees and shall be retained if the contents thereof may be material in the
administration of any internal revenue law.

Treas. Reg section 1.6033-1(h)(2) provides that every organization which has
established its right to exemption from tax, whether or not it is required to file an annual
return of information, shall submit such additional information as may be required by the
district director for the purpose of enabling him to inquire further into its exempt status
and to administer the provisions of subchapter F (section 501 and the following),
chapter 1 of the Code and IRC section 6033.

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 IRC section 6033 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.

Government's Position:

In accordance with the above cited provisions of the Code and regulations under
IRC sections 6001 and 6033, organizations recognized as exempt from federal
income tax must meet certain reporting requirements. These requirements relate to
the filing of a complete and accurate annual information (and other required federal
tax forms) and the retention of records enough to determine whether such entity is
operated for the purposes for which it was granted tax-exempt status and to
determine its liability for any unrelated business income tax.

The Organization has failed repeatedly to respond to the Service's request for
information in contrast to section 1.6033-1(h)(2) of the regulations which require an
organization to provide such information as requested to allow the Service to decide
of that organization's exempt status.

It is the Service's position that the organization failed to meet the reporting
requirements under IRC sections 6001 and 6033 to be recognized as exempt from

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

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number | Year/Period ended
20XX

federal income tax under IRC section 501(c)(3). Accordingly, it is proposed that the
organization's exempt status be revoked effective 12/31/20XX, the last day of the tax
year in which is under examination.

Taxpayer's Position:

Taxpayer agreed verbally to the exemption revocation.

Conclusion:
It is the Service's position that the Organization does not qualify for exemption from
federal income tax under IRC section 501(c)(3). The proposed date of the revocation
is 12/31/20XX.

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