IRS revokes an inactive supporting organization that never received funding

Plain-English summary

The IRS revoked the Section 501(c)(3) status of a Type I supporting organization that had never become operational. The organization was formed to make charitable distributions and grants to a specified foundation, but it expected a large donation that never arrived. It continued filing Form 990-series returns solely to maintain exemption while waiting for funding, admitted that it had conducted no activities, and had no formal plan to secure funds. The IRS concluded that an organization cannot satisfy the operational test without engaging in activities that accomplish an exempt purpose. Because this organization remained inactive for the entire period described in the report, it no longer qualified for exemption.

Ruling snapshot

• Question: Can a § 501(c)(3) supporting organization satisfy the operational test when it has never conducted activities and has no concrete funding plan?
• Outcome: Revocation of exempt status
• Key authorities: IRC §§ 170, 501(c)(3), 509(a)(3), and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.509(a)-4(e)(1)

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: May 8, 2020

Taxpayer ID Number:

Number: 202052030
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 February 1, 20XX. Your determination letter dated August 5,
20XX is revoked.

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

Organizations described in IRC Section 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 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 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 earnings
inured to the benefit of private shareholders or individuals.

1

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

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

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

Sincerely,

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

Enclosures:
Publication 892

2

Department of the Treasury Date:
Internal Revenue Service 11/18/2019
Tax Exempt and Government Entities Taxpayer ID number:

Form:

Tax periods ended:

Person to contact:
ID number:
Telephone:

Fax:
Address:

Manager's contact
Information:

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.

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. 8-2019)
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,

Denise Gonzalez for
Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Publication 892
Publication 3498

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

Form 886-A Department of the Treasury — Internal Revenue Service Form:
(May 2017) Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
January 31, 20XX

ISSUE:

Whether continues to qualify for exemption as an organization
described in the Internal Revenue Code (IRC) Section 501(c)(3).

FACTS:

was incorporated under the laws of the State of as a non-profit
corporation on March 10, 20XX for the purpose of the following:

“The organization is organized, and at all times hereafter shall be operated, exclusively for the
benefit of, to perform the functions of, or to carry out the purposes of the
Foundation. The Corporation shall make periodic charitable distributions and grants exclusively
to the

On August 5, 20XX, was recognized to be exempt from federal
income tax as an organization described in IRC Section 501(c)(3). The organization was
classified under 509(a)(3) as a Type I supporting organization.

During an interview on October 4, 20XX, the organization’s confirmed the following:

• The organization was expecting a large donation in order for the organization to become
  operational
• The donation was never actually received
• The organization continues to file the appropriate Form 990 series return in order to
  maintain exemption
• The organization has never been operational due to lack of funding
• The organization would like to continue to keep its exemption status until funding is
  secured
• No formal plan is in place to secure funding

LAW:

IRC § 501(c)(3) exempts from federal income tax organizations which are 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 no 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 distributing of statements), any political campaign on behalf of (or in opposition to)
any candidate for public office.

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Form:
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

January 31, 20XX

IRC § 509(a)(3) of the Code provides, in part, that the term "private foundation" does not include
an organization which is organized, and at all times thereafter is operated, exclusively for the
benefit of, to perform the functions of, or to carry out the purposes of one or more specified
exempt organizations described in sections 509(a)(1) and 509(a)(2) of the Code; and is operated,
supervised, or controlled by or in connection with one or more organizations described in sections
509(a)(1) and 509(a)(2).

Treasury Regulations § 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an
organization described in 501(c)(3) if it is organized and operated exclusively for one or more of
the following purposes: religious, charitable, scientific, testing for public safety, literary,
educational, or prevention of cruelty to children or animals.

Treasury Regulations § 1.501(c)(3)-1(a)(1) of the regulations 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.

Treasury Regulations § 1.501(c)(3)-1(b) of the regulations provides that in order to be exempt
as an organization described in section 501(c)(3) of the Code, the organization must pass the
organizational test. The organizational test requires an appropriate purpose and dissolution
statement limited to the organization’s exempt purpose.

Treasury Regulations § 1.501(c)(3)-1(c)(1) of the regulations 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).

Section 1.509(a)-4(e)(1) of the regulations provides that a supporting organization will be regarded
as "operated exclusively" to support one or more specified publicly supported organizations only if
it engages solely in activities which support or benefit the specified publicly supported
organizations. Such activities may include making payments to or for the use of, or providing
services or facilities for, individual members of the charitable class benefited by the specified
publicly supported organization.

In Make a Joyful Noise, Inc. v. Commissioner, 56 T.C.M. 1003 (1989), the Court concluded that
the petitioner was not described in IRC 501(c)(3). The petitioner was organized in order to operate
a camp for disadvantaged children and elderly citizens. While the organization maintained this
goal, during its more than five years of operation, no progress was made towards its
accomplishment. Initially the organization conducted its own bingo games. In response to a
change in state law, the organization conducted bingo games on behalf of other organizations.
The Court found that the petitioner was principally engaged in the conduct of bingo games and did
not meet its burden of proof to show that it operated exclusively for the exempt purposes
described in IRC Section 501(c)(3).

Catalog Number 20810W Page 2 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Form:
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

January 31, 20XX

In Community Education Foundation v Commissioner of Internal Revenue, the Court concluded
that the petitioner was not described in IRC 501(c)(3). The petitioner was organized to hold
town hall meetings, national workshops and congressional forums. However, the petitioner did
not meaningfully organize or allocate resources for any of those activities. Since the
organization failed to engage in activities in accordance with its exempt purpose, the
organization’s tax exempt status was revoked.

TAXPAYER’S POSITION:

Taxpayer's position has not been provided.

GOVERNMENT'S POSITION:

Treasury Regulations § 1.501(c)(3)-1(c)(1) of the regulations 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).

The organization cannot operate exclusively for one or more exempt purpose if it is not
engaging in any activity. The organization has not been operational for about 0 years. There is
no formal plan in place to establish funding to make the organization operational.

The organization cannot pass the operational test when the organization is inactive or not
operational.

CONCLUSION:

no longer qualifies for exemption under 501(c)(3) of the Code
because it does not pass the operational test.

The effective revocation date will be February 1, 20XX.

If you agree to this conclusion, please sign the attached Forms.

If you disagree please submit a statement of your position.

Catalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)