Educational flight organization loses Section 501(c)(3) status

Plain-English summary

An organization had received Section 501(c)(3) status after describing educational flight training for children, teenagers, adults, and a low-income community. During an audit, it did not provide requested records showing its activities. Its president said that he had funded all expenses, that the organization had few assets, and that he had applied for exemption so he could bring passengers onto his plane. He later said that he wanted to close the operation and agreed to revocation. The IRS revoked the exemption because the organization did not establish that it operated exclusively for exempt purposes or maintain and provide the records needed to verify continued qualification.

Ruling snapshot

• Question: Did the organization establish that it continued to operate exclusively for exempt purposes under Section 501(c)(3)?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 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: 202117015 Date:

Release Date: 4/30/2021 September 23, 2020
Taxpayer ID Number:

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

CERTIFIED MAIL – Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear

This is a final determination that you do not qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC
Section 501(c)(3), effective January 1, 20XX. Your determination letter dated August 12,
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.

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.

Sincerely,

Enclosures:
Publication 892

Sean E. O’Reilly
Director, Exempt Organizations Examinations

Department of the Treasury
Internal Revenue Service Date:
Tax Exempt and Government Entities Division 07/24/2019
Exempt Organizations Examination Taxpayer ID number:

Form:

Tax periods ended:

Person to contact:

Employee ID number:
Telephone number:
Fax:

Address:

Manager’s contact information:

Employee ID number:
Telephone number:

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.

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
Publication 892

Publication 3498-A

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

Date of Notice: July 12, 20XX
Issues:

Whether the exempt status of [redacted] (the Organization)
under IRC § 501(c)(3) should be revoked, effective January 1, 20XX because it does not
operate exclusively for exempt purposes within the meaning of section 501(c)(3) and Treas.
Reg. § 1.501(c)(3)-1(b).

Facts:
Background

The Organization 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 July 30, 20XX, and was granted tax-exempt status as a 501(c)(3) on August 12,
20XX, with an effective date of July 30, 20XX.

The Organization was incorporated in the State of [redacted], and the purpose clause in
the Articles of Incorporation states, “This Corporation is a nonprofit PUBLIC BENEFIT
CORPORATION and is not organized for the private gain of any person. It is organized
under the Nonprofit Public Benefit Corporation Law for: public and charitable purposes.
The specific purpose of this corporation is to: Educational flying training for children,
teenagers and adults to remain out of [redacted], educate and promote education
skill to low income community.”

The organization did not respond with documentation to the Internal Revenue Service
attempts to obtain information to perform an audit of Form 990 for the tax year
December 31, 20XX.

• Correspondence for the audit was as follows:

○ Letter 3606 with attachments, was mailed to the organization on March
8, 20XX, with a response date of April 8, 20XX. This letter was not return by
the post office as being undeliverable.

• Telephone contact for the audit was as follows:

○ On March 25, 20XX the President of the Organization, [redacted]
called to advise he received Letter 3606, Form 4564, Information
Document Request (IDR), and Publication 1.

During this conversation the President stated [redacted].

The President stated, the entity was organized for educational purpose, but
mainly because [redacted]
unless he was a 501(c)3. President stated he applied for the exempt status,
so he could bring passengers onto his plane.

The Organization never received any funding from anyone other than the
President and he paid all of the expenses. He said he has no assets
other than [redacted]. President paid [redacted].

○ On May 3, 20XX Tax Compliance Officer (TCO) called [redacted],
President to advise that no documentation has been received.

The President stated he really does not have any documents to send in
and just wants to close the operation of the organization. President stated
again that he only applied for the tax-exempt status, so the [redacted].
TCO asked the President if he would like
me to revoke his exemption status and he said “yes, just send me the
paperwork to get it done.”

Law:

Internal Revenue Code (IRC)

IRC Sec. 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 Sec. 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 whether or not such person is liable for tax under this title.

IRC Sec. 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 (Treas. Reg.)

Treas. Reg. Sec. 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).

Treas. Reg. Sec. 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.

Treas. Reg. Sec. 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.

Treas. Reg. Sec. 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.

Treas. Reg. Sec.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.

Revenue Rulings (Rev. Rul.)

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.

Organization’s Position

The Taxpayer has indicated by phone that he will agree with revocation of the
Organization’s exempt status.

Government’s Position

It is the Government’s position; the [redacted], does not
meet the Operational Test, and does not continue to qualify for exemption from Federal
income tax under IRC Sec. 501(c)(3).

Under Treas. Reg. Sec. 1.501(c)(3)-1(c) the organization must meet the required
Operational Test to operate as a IRC Sec. 501(c)(3). The test states, an organization
must be operated exclusively for one or more of the purposes specified in the section.
(religious, charitable, scientific, testing for public safety, literary or educational)

Further, Treas. Reg. Sec. 1.6033-1(h)(2) specifically state that exempt organizations
shall submit additional information for the purpose of enabling the Internal Revenue
Service to inquire further into its exempt status.

On March 8, 20XX the TCO mailed Letter 3606 with Information Document Request
number one to the Organization requesting documents to verify the Organization's
activities (e.g. board meeting minutes, detailed description of the Organization’s
activities, copies of publications, brochures, and other printed material). On March 25,
20XX the President called and confirmed he received this mailing.

On May 3. 20XX, the Organization had provided no documents, and the
President stated the Organization really does not keep any books or records.

Therefore, the Organization did not verify they meet the Operational Test under IRC
Sec. 501(c)(3), and they should not retain their exempt status.

Conclusion

It has been determined the Organization did not meet the Operational Test under IRC
Sec. 501(c)(3), and they should not retain its exempt status. Accordingly, the
Organization’s exempt status should be revoked as of January 1, 20XX. Form 1120, U.S.
Corporation Income Tax Return, should be filed for the tax periods starting January 1,
20XX.