IRS revokes a military-member association for private benefit and defective documents

Plain-English summary

The IRS revoked the Section 501(c)(3) status of an unincorporated association formed to promote camaraderie among assigned military personnel. Member dues paid for plaques and other departure gifts, monetary allowances, flowers, picnics, holiday parties, and similar functions. The organization also conducted fundraising but did not provide enough information to reconcile the related revenue and expenses or establish an exempt purpose. Its bylaws lacked a valid dissolution clause and described substantial social, recreational, and member-benefit purposes. The IRS concluded that the organization failed both the organizational and operational tests, had inaccurately attested to compliant documents on Form 1023-EZ, and did not satisfy recordkeeping and reporting requirements. Revocation was made effective as of the original exemption date.

Ruling snapshot

• Question: Could the association remain exempt under § 501(c)(3) when its documents permitted member-benefit and social activities, its funds paid member benefits, and its audit responses were incomplete?
• Outcome: Revocation of exempt status
• Key authorities: IRC §§ 170, 501(c)(3), 511, 6001, 6033, and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1(h)(2); Rev. Rul. 59-95; Rev. Rul. 77-366

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

Number: 202052029 Date: December 11, 2019
Release Date: 12/24/2020

UIL: 501.03-00 EIN:

Person to Contact:
Identification Number:

Telephone Number:

CERTIFIED MAIL — Return Receipt Requested Fax Number:
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 section 501(a) of the Internal Revenue Code (the “Code”) as an organization
described in section 501(c)(3), effective September 12, 20XX. Your determination letter
dated October 20, 20XX is revoked.

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

You have not established that you are organized and operated exclusively for
exempt purposes within the meaning of section 501(c)(3) of the Code.

Your organizing document does not limit your purposes to exempt purposes and
expressly empowers you to engage, to a substantial degree, in activities that are
not in furtherance of one or more exempt purposes.

You have not shown that you are operated for an exempt purpose. In addition, your
activities are in furtherance of social and recreational purposes to a substantial
degree. You are also operated in substantial part for the benefit of your members.
You have not shown that net earnings do not inure to the benefit of private
shareholders or individuals through your provision of benefits to your members.

Accordingly, you fail to meet the requirements of section 501(c)(3) of the
Code and Treasury Regulation section 1.501(c)(3)-1(a), in that you have not
established that you are organized and operated exclusively for exempt purposes
and that no part of your net earnings inures to the benefit of private shareholders or
individuals.

1

Organizations that are not exempt under section 501 of the Code 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.

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

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 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 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 Code.

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

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.

Enclosures: Sincerely,
Publication 892

[illegible signature]
Maria D. Hooke
Director, EO Examinations

2

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date:
June 17, 2019
Taxpayer Identification Number:

Form:
Tax Year(s) Ended:
Person to Contact:

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

Employee ID:
Telephone:
CERTIFIED MAIL — Return Receipt Requested Response Due Date:

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.

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,

Christopher Roper
for Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018
Form 4621-A
Pub 892
Pub 3498

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
April 30, 20XX

Issues:

1. Whether the exempt status of
   (the organization) under IRC § 501(c)(3) should be revoked,
   effective October 20, 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)?

2. Whether the organization continues to qualify for exemption under Section 501
   (c)(3) of the Internal Revenue Code.

Facts:

The organization applied for tax-exempt status by filing a Form 1023-EZ, Streamlined
Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue
Code, on November 29, 20XX and was granted tax-exempt status as a 501(c)(3) on
October 20, 20XX, with an effective date of September 12, 20XX.

An organization exempt under 501(c)(3) must be organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary or educational purposes or
to foster national and amateur sports competition.

The organization was selected for audit to ensure that its activities and operations
accomplish one or more exempt purposes as specified in the I.R.C. § 501(c)(3).

The organization partially responded to requests for information on two different
occasions with inadequate and incomplete information. As a result of the incomplete
responses, the organization failed to establish that its activities and operations
accomplish one or more exempt purposes as specified in I.R.C. § 501(c)(3). In addition
to the incomplete responses, the organization failed to respond to additional
information requests by Internal Revenue Service to obtain the necessary information to
perform an audit of Form 990-N for the tax year April 30, 20XX.

The organization has not filed a Form 990 series return for the tax years ending April
30, 20XX and April 30, 20XX.

Several attempts were made to contact the organization to request that it establish that
its organizing documents meet the organizational requirements of Treas. Reg. §
1.501(c)(3)-1(b). Specifically, an agent attempted to contact the organization by letter
on 0 occasions. The letters were claimed, and inadequate and incomplete responses were
received.

Form 886-A (Rev.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 Year/Period Ended
April 30, 20XX

• Correspondence for the audit was as follows:

  • Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
    on June 14, 2017, with a response date of July 14, 20XX.

  • Letter 3844-B (Rev. 11-2015) with attachments, was mailed to on
    July 28, 20XX, with a response date of August 28, 20XX.

  • Letter 6017 (9-2017), was mailed certified to , on October 5,
    20XX. Article Number . Per the United States Postal
    Service (USPS) tracking, Letter was delivered on January 3, 20XX at 12:13
    pm. The PS Form 3811 was signed and dated by on January 3,
    20XX.

  • Letter 3844-A (12-2015), with attachments, was mailed certified to the
    President, on February 14, 20XX, with a response date of March 14, 20XX.
    Article Number . Per the United States Postal Service
    (USPS) tracking, Letter was delivered on February 27, 20XX at 1:20 pm.

Organizational Test

The organization indicated on the Form 1023-EZ, Part II, Line 1 that they were formed as
an Unincorporated Association on September 12, 20XX.

The organization attested on Form 1023-EZ, part II, box 2 that they have the organizing
document necessary for their organizational structure.

Section 501(c)(3) requires that an organizing document must limit your purposes to one or
more exempt purposes within section 501(c)(3). The organization attested that their
organizing document contains this limitation.

They also attested that their organizing document does not expressly empower it to
engage, otherwise than as an insubstantial part of your activities, in activities that in
themselves are not in furtherance of one or more exempt purposes.

The organization attested that their organizing document contains a dissolution provision
as required under section 501(c)(3) or that they did not need an express dissolution
provision in your organizing document because they rely on the operation of state law in
the state in which you are formed for your dissolution provision.

Form 886-A (Rev.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 Year/Period Ended
April 30, 20XX

On March 14, 20XX the organization responded with a statement acknowledging the
dissolution clause in their response and a copy of the Bylaws. The Bylaws were not dated
or amended to show the dissolution clause and the organization did not establish that it
was in the process to amend or correct their organization’s documents.

Operational Test - Specific Activities

The organization indicated on the Form 1023-EZ, Part III, that they are organized and
operated exclusively to further a Charitable purpose and that they have not conducted
and will not conduct prohibited activities under section 501(c)(3).

Specifically, the organization attested that it will:

• Ensure that your net earnings do not inure in whole or in part to the benefit of
  private shareholders or individuals.

• Not further non-exempt purpose (Such as purposes that benefit private interests)
  more than insubstantially.

• Not be organized or operated for the primary purpose of conducting a trade or
  business that is not related to your exempt purpose(s).

Per the Bylaws of the organization, the mission statement indicates the purpose of the
is to provide a means of camaraderie and unification of all
assigned to .

The Bylaws state membership and dues; that all assigned
to are eligible to be a member of the . To maintain
membership in good standing and eligibility for membership privileges, the annual or
monthly dues must be paid and up to date, members must participate in at least one
function per quarter and attend at least one meeting a month.

dues are 0.00 a month or 0.00 per year. Each member contributes an annual
fee. This money is used for departing members (transfers and retirement) to receive
plaques, paddles, shadow boxes and flags, for monetary allowance to members,
gifts/flowers, command picnics, holiday parties and other functions.

July 14, 20XX, the organization responded to the initial Letter 3606. The organization
did not provide a detailed description of the activities it conducted. A review of the
books and records indicated a substantial amount of the income is coming from
fundraising. The organization was unable or unwilling to substantiate that its activities
furthered an exempt purpose and failed to establish that the organization is operating
within the scope of section 501(c)(3) of the code.

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 Year/Period Ended
April 30, 20XX

On March 14, 20XX, the organization provided additional information which indicated
the organization was organized and operated, in more than an insubstantial amount, for
the benefit of private interests: members, sailors attached to
the , and specific members of the local community. During the tax year in
review, held approximately 0 fundraising events in support of zero
, one holiday party, and various community donations.

To date, a detailed description of the organization’s activities has not been provided to
reconcile the revenue and expenses of the fundraising activities conducted by the
organization for the year under audit.

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.

IRC §6033(a)(1) of the Code provides, except as provided in 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.

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

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
April 30, 20XX

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.

Regulation 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be
regarded as “operated exclusively” for one or more exempt purposes described in section
501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance
of a 501(c)(3) purpose.

Regulation §1.6001-1(c) of the Code provides that such permanent books and records as
are required by paragraph (a) of this section with respect to the tax imposed by section
511 on 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. Such organizations shall also keep such books and
records as are required to substantiate the information required by section 6033. See
section 6033 and §§ 1.6033-1 through 1.6033-3.

Regulation §1.6001-1(e) of the Code provides that the books or records required by this
section shall be kept at all time 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.

Regulation §1.6033-1(h)(2) of the regulations 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 section 6033.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
April 30, 20XX

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

Rev. Proc. 2018-5, Sec 11.02 (3) Inaccurate information on request. A determination
letter issued to an organization that submitted a request in accordance with this revenue
procedure may not be relied upon by the organization submitting the request if it was
based on any inaccurate material information submitted by the organization. Inaccurate
material information includes an incorrect representation or attestation as to the
organization's organizational documents, the organization’s exempt purpose, the
organization's conduct of prohibited and restricted activities, or the organization’s eligibility
to file Form 1023-EZ.

I.R.S. P.L.R. 201731016, a stated purpose to strengthen and boost the morale of military
members and support their welfare by engaging in various social activities fails the
organizational test because the formation document does not limit its purposes to one or
more exempt purposes as required in Treas. Reg. Section 1.501(c)(3)-1(b)(1). Social and
recreational events are not considered activities which further exempt purposes under
Treas. Reg. Section 1.501(c)(3)-1(c)(1).

Rev. Rul. 77-366, 1977-2 C.B. 192, states that a nonprofit organization that arranges and
conducts winter-time ocean cruises during which activities to further religious and
educational purposes are provided in addition to extensive social and recreational
activities is not operated exclusively for exempt purposes and does not qualify for
exemption under Section 501(c)(3) of the Code.

Organization’s Position:

Taxpayer's position is unknown at this time.

Government’s Position:

Based on the above facts, the organization partially and incompletely responded to
requests to verify that they are organized and operated exclusively for one or more of
the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either
the organizational test or the operational test, it is not exempt.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
April 30, 20XX

The organization has not established that it had organizing documents limiting the purpose
of the organization to one or more exempt purposes, or a proper dissolution clause that
meet the organizational test under IRC section 501(c)(3), either currently or the time of
applying for tax exemption.

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. Furthermore, the organization fails the organizational test because its
articles of organization expressly empower it to engage, in more than an insubstantial
amount, in activities which themselves are not in furtherance of one or more exempt
purposes. Because the organization never established that it had an organizing
document that meets the requirements of section 501(c)(3), and because it
misrepresented that fact in its Form 1023-EZ, the revocation is effective as of the date
of exemption, October 20, 20XX.

Furthermore, the organization was unable or unwilling to substantiate what its activities
were or that its conducted activities furthered an exempt purpose. The organization
fails the operational test because it failed to establish that its activities and operations
accomplish one or more exempt purposes as specified in I.R.C. § 501(c)(3).

In accordance with the above-cited provisions of the Code and regulations under
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 sufficient 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.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations
shall submit additional information for the purpose on enabling the Internal Revenue
Service to inquire further into its exempt status.

Using the rationale that was developed in Revenue Ruling 59-95, the Organization's
failure to provide requested information should result in the termination of exempt
status.

Conclusion

Based on the foregoing reasons, the organization does not qualify for exemption under
section 501(c)(3) and its tax-exempt status should be revoked.

It is the IRS's position that the organization failed to establish that it meets the reporting

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
April 30, 20XX

requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal
income tax under IRC § 501(c)(3). Furthermore, the organization has not established
that it is observing the conditions required for the continuation of its exempt status or
that it is organized and operated exclusively for an exempt purpose. Accordingly, the
organization's exempt status is revoked effective October 20, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods
after May 1, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-