Long-inactive charity loses exemption

Plain-English summary

An organization obtained Section 501(c)(3) status through Form 1023-EZ but later told the IRS that it had never truly been active and had no plans to reactivate. It did not provide its organizing documents, despite having attested that they contained the required dissolution provisions. After repeated contacts, it claimed to have dissolved and filed a final Form 990-N, but did not provide official dissolution articles and the Form 990-N was not marked final. The IRS revoked exemption because the organization failed both the organizational and operational tests and did not meet its recordkeeping and reporting duties.

Ruling snapshot

• Question: Did a long-inactive organization remain eligible under Section 501(c)(3) without substantiating its organizing documents, activities, or final filings?
• Outcome: Revocation effective August 1 of the redacted year.
• Key authorities: IRC §§ 501(c)(3), 509(a)(2), 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

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: 202110029
Release Date: 3/12/2021
UIL: 501.03-00
Date: September 18, 2020
Taxpayer ID Number: [redacted]
Form: [redacted]
Tax Period(s) Ending: [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: [redacted]

Dear [redacted]:

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 December
11, 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.

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

I

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

Enclosures:
Publication 892

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

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

Date: 05/11/2020
Taxpayer ID number: [redacted]
Form: [redacted]
Tax periods ended: [redacted]

Person to contact:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Fax: [redacted]

Manager's contact information:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Response due date: [redacted]

CERTIFIED MAIL — Return Receipt Requested

Dear [redacted]:

Why you’re receiving this letter

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.
2.
3.

Request a meeting or telephone conference with the manager shown at the top of this letter.

Send any information you want us to consider.

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.

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

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,

for Maria Hooke

Director, Exempt Organizations Examinations
Enclosures:

Form 886-A Explanation of Items

Form 6018 Consent to Proposed Action

Form 4621-A Report of Examination

Publication 892 How to Appeal

Publication 3498-A The Examination Process

Copy of Original Form 1023EZ Application for Recognition of Exemption

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer: [redacted] Year/Period Ended
20XX

Issues:

Whether the exempt status of [redacted] under IRC § 501(c)(3)
should be revoked, effective January 01, 20XX because it has not proven it is organized
exclusively for exempt purposes within the meaning of section 501(c)(3) and Treas. Reg. §

1.501(c)(3)-1(b)?

Facts:

[redacted] 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 December 11, 20XX and was granted tax-exempt status as a
501(c)(3) on December 17, 20XX, with an effective date of October 29, 20XX.

The organization was selected for audit to ensure that the activities and operations align

with their approved exempt

status.

The organization failed to adequately respond to the Internal Revenue Service
attempts to obtain information to perform an audit of Form 990-EZ for the tax year

ended December 31, 20XX.

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

The organization further 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 your organizing document because they rely on the operation of
state law in the state in which you are formed for your dissolution provision. The
organization failed to provide a copy of its organizing document.

The Form 1023-EZ application did not list a contact phone number for [redacted].

However, the IRS agent made several attempts to contact [redacted]
to request that it conform its organizing and dissolving documents. Specifically,
the IRS agent made contact with the organization by letter on two occasions, by

email on two occasions, and by telephone on eleven occasions. All

correspondence was sent to the address on record: [redacted]

Chronology for the audit was as follows:

o June 07, 20XX: Letter 3606 (Rev. 6-2012) with attachments, was mailed to
the organization with a response due date of July 08, 20XX. This letter was
not returned by the post office as being undeliverable.

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: [redacted] Year/Period Ended
20XX

o July 09, 20XX: Received incoming telephone call from the President of
[redacted]; (formerly [redacted]) phone
number [redacted]. [redacted] stated [redacted] is
no longer active, was never truly active and has no plans to reactivate.
[redacted] was advised the IRS agent would research the best resolution to this case
with management and would contact her shortly.

o July 22, 20XX: Made outgoing call to President [redacted] phone #
[redacted]; there was no answer. The IRS agent left a message. The
purpose of the call was to request the organization file Articles of Dissolution
with the state of [redacted].

o July 25, 20XX: Letter 3844-B (Rev. 11-2015) with attachments, was mailed
certified to the President, [redacted], with a response due date of August
22, 20XX. The purpose of the Letter 3844-B was to request [redacted]
file a “final” Form 990-N and also Articles of Dissolution with the State of
[redacted] and provide the IRS with copies. Per the United States Postal Service
(USPS) tracking, this was returned with a signature on July 31, 20XX.

o July 29, 20XX: Made outgoing call to President [redacted] phone #
[redacted]; there was no answer. The IRS agent left a message. The purpose
of the call was to 1) see if the organization had received the Letter 3844-B,

and 2) to see if the President, [redacted], had received the email sent by
the IRS agent with links to the state website.
o August 26, 20XX: Made outgoing call to President [redacted] phone #

[redacted]; there was no answer. The IRS agent left a message. The
purpose of the call was to discuss the lack of response to the Letter 3844-B,
which was due August 22, 20XX.

o August 30, 20XX: Made outgoing call to President [redacted] phone #
[redacted]; there was no answer. The IRS agent left a message

requesting a return phone call.

o September 03, 20XX: Made outgoing call to President [redacted] phone # [redacted]; there was no answer. The IRS agent left a message.
The purpose of the call was to discuss the lack of response to the Letter
3844-B, which was due August 22, 20XX.

o September 06, 20XX: Received incoming call from President [redacted]
phone # [redacted]. The purpose of the call was to advise the IRS of her
attempts to provide a copy of the “finalizing documents” the organization had
recently filed with the State of [redacted]. The organization also claimed to
have filed Articles of Dissolution and advised the IRS agent they could access

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: [redacted] Year/Period Ended
20XX
the [redacted] state website if a copy was needed. IRS agent requested [redacted]
provide IRS with a copy. [redacted] stated she would email or fax a copy in

the next few days.

o September 06, 20XX: Received incoming call from President [redacted]
phone # [redacted]. The purpose of the call was to advise the IRS of
her attempts to provide a copy of the “finalizing documents” the organization
had recently filed with the State of [redacted]. The organization also
claimed to have filed Articles of Dissolution and advised the IRS agent they
could access the [redacted] state website if a copy is needed.

o September 06, 20XX: Received two incoming emails from President
[redacted]. The first email contained a screenshot of a
filing the organization did with the state titled “Confirmation of Business
Ending Filing”. The second email contained a forwarded message from the
secretary of state website confirming the organization had filed an “Annual
Report for 20XX, Dissolution.”

o October 10, 20XX: Made outgoing call to President [redacted] phone #
[redacted]. Explained to [redacted] that the information emailed to the IRS

on September 06, 20XX is insufficient. The IRS needs a copy of official
Articles of Dissolution and a Form 990-N for the year ended December 31,
20XX marked “final”.

o November 29, 20XX: Received incoming email from President
[redacted]. The purpose of the email was to advise the IRS the
organization had filed a “final” Form 990-N for the year ended December 31,

20XX.
o February 07, 20XX: Made outgoing call to President [redacted] phone # [redacted]. There was no answer; the voicemail box stated the

mailbox was full and could not accept messages. The purpose of the call
was to advise the organization that the Form 990-N filed for 20XX was not, in
fact, marked final, and the organization will need to file a “final” Form 990-N for
20XX.

o February 13, 20XX: Made outgoing call to President [redacted] phone #

[redacted]. There was no answer; the voicemail box stated the mailbox was full
and could not accept messages. The purpose of the call was a second
attempt to advise the organization they need to file a “final” Form 990- N for
20XX.

o February 13, 20XX: Sent outgoing email to President [redacted]
containing links to irs.gov filing locations for online Form 990-N

filing.

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: [redacted] Year/Period Ended
20XX
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 §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11
on the unrelated business taxable income of certain tax-exempt organizations.

IRC §6001 of the Code provides that every person liable for any tax imposed by this title, or
for the collection thereof, shall keep such records, render such statements, make such
returns, and comply with such rules and regulations as the Secretary may from time to time
prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any
person, by notice served upon such person or by regulations, to make such returns, render
such statements, or keep such records, as the Secretary deems sufficient to show if such
person is liable for tax under this title.

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 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)(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

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: [redacted] Year/Period Ended
20XX

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. Accordingly, the organization does not qualify for exemption under
section 501(c)(3) of the Code.

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 if 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, if 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.

Regulation §1.61-1 of the regulations provides that Gross income means all income from
whatever source derived, unless excluded by law. Gross income includes income realized
in any form, whether in money, property, or services. Income may be realized, therefore, in
the form of services, meals, accommodations, stock, or other property, as well as in cash.

In Community Education Foundation v. Commissioner TC Memo. 2016-223, USTC,
revocation of an organization's exemption was supported due to a long, extended period of
inactivity. The organization did not meet the operational test in Treasury Regulations
1.501(c)(3)-1(c).

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

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: [redacted] Year/Period Ended
20XX

which implement it, may result in the termination of the exempt status of an organization
previously held exempt, because the organization has not established that it is observing
the conditions required for the continuation of exempt status.

Organization’s Position

Organization stated it was never truly active, is not currently active, and has no plans to
reactivate.

Government’s Position

Based on the above facts, the organization has not demonstrated that it is 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.

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.

Organization was difficult to contact due to the lack of contact information provided
on the application. Organization’s officer, when eventually reached, stated that the
Organization “is no longer active, was never truly active and has no plans to
reactivate.” After numerous written and oral communications regarding the
procedures to terminate the Organization’s existence and exempt status,
Organization verbally stated that it had filed Articles of Dissolution with the state of
[redacted] and filed a “final” 990-N with the IRS. However, Organization has not provided the
examination agent with a copy of the Articles of Dissolution and the 20XX Form
990-N filed with the IRS was not marked “final.”

Organization has not demonstrated that it is organized exclusively for exempt
purposes under section 501(c)(3) because it did not provide its organizational
documents to demonstrate that it met the requirements under 509(a)(2).

Further, Organization has not demonstrated that is operated exclusively for exempt
purposes as described in section 501(c)(3). Organization stated that it has never
operated and has no plans to commence operating. Organization is like the
organization Community Education Foundation, in that it did not over time
meaningfully allocate time or resources to any exempt activities.

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: [redacted] Year/Period Ended
20XX

Conclusion:

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 has not demonstrated that it is organized or
operated exclusively for exempt purposes as described in IRC § 501(c)(3). Accordingly,

the organization's exempt status is revoked effective August 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods

after January 1, 20XX.

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

Page: -7-