IRS revokes a charity that failed the organizational and operational tests

Plain-English summary

The IRS revoked an organization's IRC § 501(c)(3) status after concluding that it failed both the organizational and operational tests. The organization promoted teddy bear artists through an annual event where artists sold their work, and part of the sales proceeds went to an endangered-species program. It did not provide adequate organizing documents after the IRS requested them, and the available filing showed a stock corporation without restrictions needed to protect charitable assets. The IRS also concluded that the event served the private interests of participating artists, relying on Revenue Ruling 76-152. The organization's president agreed with the revocation, which was effective as of the redacted date stated in the letter.

Ruling snapshot

• Question: Did the organization remain qualified for exemption under IRC § 501(c)(3)?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, and 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 76-152.

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 7, 2020

Taxpayer ID Number:
Number: 202052050

Release Date: 12/24/2020 Form:

UIL: 501.03-00 Tax Period(s) ended:
Person to Contact:
Identification Number:
Telephone Number:

Fax Number:

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

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 November 1, 20XX. Your determination letter dated August
30, 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 an
exempt purpose or that you have been engaged primarily in activities that
accomplish one or more exempt purposes within the meaning of IRC Section
501(c)(3).

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury
Regulations Section 1.501(c)(3)-1(c), in that you have not established that you were
operated exclusively for exempt purposes.

We previously provided you a report of examination explaining the proposed revocation of
your tax-exempt status. At that time, we informed you of your right to contact the Taxpayer
Advocate, as well as your appeal rights. On , you signed Form 6018,
Consent to Proposed Action — Section 7428, in which you agreed to the revocation of your
tax exempt status as described under IRC Section 501(c)(3). This is a final determination
letter with regards to your federal tax-exempt status under Section 501(a).

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 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., NW
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,
Enclosures:

Publication 892

Maria D. Hooke
Director, EO Examinations

2

Department of the Treasury Date:
Internal Revenue Service November 5, 2019
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.

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
Form 4621-A
Pub 892
Pub 3498-A
Form 1023-EZ
Letter 5436

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

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

OCTOBER 31, 2017XX

Date of Notice: November 5, 20XX
ISSUE

Should the tax-exempt status of (hereinafter known as the
organization) under Internal Revenue Code (IRC) § 501(c)(3) be revoked effective November 1,
20XX because it is not organized exclusively for exempt purposes within the meaning of IRC §
501(c)(3)?

FACTS

applied for tax-exempt status by filing the Form 1023-EZ,
Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, on August 24, 20XX, and was granted tax-exempt status as a 501(c)(3) on
August 30, 20XX, with an effective date of August 24, 20XX. A copy of these documents is
being provided to the organization with this report.

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

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

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

The organization provided our office with “Registration Statement for Charitable Organizations”
and a letter from explaining the Certificate of Incorporation was filed with the State of

. The Registration Statement for Charitable Organizations state the organization was formed
on a stock basis, with 0 shares of par value stock and a value of $.00 per share.

In the Information Document Request dated October 4, 20XX, our office asked the organization to
provide articles of organization with an adequate purpose clause and a dissolution clause.
Additionally, we advised the organization to either reorganize as a nonstock corporation or amend
their articles to restrict the transfer of stock and prohibit payments of dividends. The organization
failed to provide our office with their articles of organization.

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanations of Items exhibit

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

OCTOBER 31, 2017XX

Per Form 990-EZ Schedule O, the organization's primary tax-exempt purpose is to promote
teddy bear artists and raise funds for endangered species programs. The

is an annual . Participants pay a registration fee and other
fees for optional excursions. The fees are paid directly to the organization. Participants can pay
by either check or credit card.

During the annual event, artists set up tables to sell their artwork. Each artist creates one
diorama according to the theme of the event. The artists determine the sales price. A
percentage of the sale is donated to “ ”. The amount of the
donation is determined according to the date the artists’ registration form is received by the
organization. If the artist registers early, only 0% of their sales are donated. The amount is
increased to 0% if they register up to weeks before the invitational and 0% for artists who
register within weeks of the event.

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanations of Items exhibit
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
OCTOBER 31, 2017XX
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.

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 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.

Revenue Ruling 76-152 refers to a nonprofit organization formed by artists which selects
pieces to exhibit, exhibits the artwork, and sells the artwork of local artists. As its sole activity,
the organization selects modern art works of local artists for exhibit at its gallery and for
possible sale. The Internal Revenue Service determined the artists were directly benefited by
the exhibition and sale of their art pieces, with the result that a major activity of the organization
is serving the private interests of those artists whose works are displayed for sale.
Consequently, the nonprofit organization was not operated exclusively for tax-exempt purposes
and did not qualify for tax exemption under 501(c)(3).

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanations of Items exhibit

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

OCTOBER 31, 2017XX

ORGANIZATION’S POSITION

October 23, 20XX: TCO spoke with the organization’s president,
stated she misunderstood the requirements of Internal Revenue Code § 501(c)(3) when she
initially filed Form 1023-EZ. stated she agrees with the revocation.

GOVERNMENT’S POSITION

The tax-exempt status of under Internal Revenue Code (IRC)
§ 501(c)(3) should be revoked effective November 1, 20XX as it is not organized or operated
exclusively for exempt purposes within the meaning of IRC § 501(c)(3).

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 tax-exempt purposes specified in
IRC § 501(c)(3). If an organization fails to meet either the organizational test or the operational
test, it is not exempt. The organization failed to establish that it was organized and operated
exclusively for one or more tax-exempt purposes per IRC § 501(c)(3).

The organization failed to provide our office with their organizing documents; consequently,
they failed the organizational test and cannot be exempt.

Using the logic of Revenue Ruling 76-152, because the artists were directly benefited by the
exhibition and sale of their art pieces, the organization served the private interests of those artists
whose works were displayed for sale. The organization failed to establish they operated
exclusively for tax-exempt purposes; consequently, they failed the operational test and cannot be
exempt.

The organization failed the organizational test and the operational test; therefore, the
organization’s tax-exempt status should be revoked effective November 1, 20XX.

CONCLUSION:

Based on the foregoing reasons, it is the IRS's position that the organization failed to establish
that it meets the organizational test and operational test as required IRC §§ 501(c)(3) for it to be
exempt from federal income tax under IRC § 501(c)(3). Accordingly, the organization's exempt
status is revoked effective November 1, 20XX.

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

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)