Final adverse determination revoking a charity's 501(c)(3) exemption for not responding to an audit

Plain-English summary

A charity recognized under § 501(c)(3), which had described itself as running a summer camp program for abused, neglected, and abandoned teens, lost its tax-exempt status because it did not cooperate with an IRS examination. When the agency selected the organization for audit, it made roughly a dozen documented attempts over several months (letters, phone calls, certified mail, and a postal tracer) to reach an officer and obtain financial and activity records. The organization never provided the requested information, and its state corporate status had been suspended. Under § 6033 and the recordkeeping rules, an exempt organization must keep books and records and supply information so the IRS can confirm it still qualifies. Because the organization did not demonstrate that it was organized and operated exclusively for exempt purposes, the IRS (citing Rev. Rul. 59-95, which allows revocation when an organization cannot substantiate its exempt operations) proposed revocation and then, after no response, issued this final determination. The exemption was revoked effective January 1 of the examined year, contributions are no longer deductible under § 170, and the organization must file corporate income tax returns (Form 1120). This matters because it shows that ignoring an IRS audit is itself grounds to lose exemption, independent of what the organization actually does.

Ruling snapshot

• Question: Should the organization's § 501(c)(3) exemption be revoked when it failed to respond to the examination and did not substantiate that it operates exclusively for exempt purposes?
• Outcome: Revocation (final adverse determination; exemption revoked effective January 1 of the examined year, Form 1120 required, § 170 deductibility ends)
• Key authorities: IRC §§ 501(c)(3), 6033, 6001, 6020, 170; Treas. Reg. §§ 1.501(c)(3)-1(a), (c)(1), 1.6001-1, 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

This document is an OCR transcription of a scanned IRS release. Wording is preserved verbatim; obvious scanning misreads have been corrected, redaction gaps in the original are shown as written, and unreadable spots are marked [illegible].

[Page 1]

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
14100 Commerce Street, MC 4920DAL
Dallas, TX 75242

Date: AUG 08, 2019

EIN:

Number: 202151014 Person to Contact:

Release Date: 12/23/2021 Identification Number:

Telephone Number:
Fax:
UIL: 501.03-00

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 (the "Code") section 501(a) as an organization described in Code
section 501(c)(3), effective January 01, 20XX. Your determination letter dated September 06,
20XX is revoked.

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

You did not respond to our requests for information about your finances and
activities necessary to complete the examination. You have not demonstrated
that you are organized and operated exclusively for exempt purposes within the
meaning of Internal Revenue Code section 501(c)(3).

As such, you failed to meet the requirements of I.R.C. § 501(c)(3) and Treasury Regulation
§ 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 section 170 of the Internal
Revenue Code.

Organizations that are not exempt under 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.

Organizations that are not exempt under 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 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. Please refer to the enclosed Publication 892 for additional information. 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

[Page 2]

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 Internal Revenue 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.

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 yours,

Enclosures: Maria Hooke
Publication 892 Director, EO Examinations

[Page 3]

Internal Revenue Service
Tax Exempt and Government Entities Division Taxpayer ID number:
IRS Exempt Organizations Examination

Department of the Treasury Date: 08/24/2018

Form:
Tax periods ended:

Person to contact:

Employee ID:
Telephone number:
Fax:

Address:

Manager's contact information:

Employee ID number:
Telephone number:
Response due date:

CERTIFIED MAIL — Return Receipt Requested

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. 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.

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

[Page 4]

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

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

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Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer | Tax Identification Number (last 4 digits) | Year/Period ended
| December 31, 20XX

Issue
Whether (Organization) continues to qualify for exemption from
Federal income tax under Internal Revenue (IRC) section (Sec.) 501(c)(3).

Facts

The Organization's Form 1023- Application for Recognition of Exemption under Section 501(c)(3)
of the Internal Revenue Code was received by the Internal Revenue Service on May 9, 20XX. The
Organization stated on Form 1023, it was organized and operated exclusively for charitable and
educational purposes. Specifically, the organization will (a) combat juvenile delinquency, (b) instruct
and train youth for improving or developing their skills and capabilities and (c) providing relief to the
poor, distressed and underprivileged. The Organization received its determination letter dated
September 6, 20XX, granting the Organization exempt status under IRC Section 501(c)(3), with an
effective date of March 23, 20XX.

According to the Articles of incorporation and Bylaws, the organization's specific purpose is to
provide a summer camp program for abused, neglected and abandoned teens.

Address Information

The Organization's website states the Organization's address is

The Form 990 for the periods ending December 31, 20XX & 20XX show the Organization's address
as . Internal Revenue Service internal information confirms
the Organization's address as the same stated on the Organization's website and Forms 990.

According to the Secretary of State website, status is
suspended as of April 26, 20XX. The Secretary of State website states "Suspended"
means, the business entity's powers, rights and privileges which include the right to use the entity's
name in , were suspended or forfeited in the

The Organization was selected for audit to ensure the organization's activities and operations align
with its approved exempt status. The Organization failed to respond to the Internal Revenue service
attempts to obtain information to perform an audit on Form 990 for period ending December 31,
20XX. The following are the Agent's attempts to contact the Organization.

1. On July 17, 20XX, the Agent mailed Letter 3611 (initial contact letter), Information Document
   Request and Publication 1 to .

2. On July 26, 20XX the Agent was unable to contact an officer of the Organization, so, the Agent
   called the management company that prepared the 20XX Form 990 (to obtain officer contact
   information only). The Organization states on its 20XX Form 990, the management company has

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

[Page 6]

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer | Tax Identification Number (last 4 digits) | Year/Period ended
| December 31, 20XX

permission to discuss Form 990. An individual at the management company stated they no longer
work with the Organization and did not provide any contact information.

3. On July 26, 20XX, the Agent called the phone number listed on foundation's website and left a
   message for the Organization's president, .

4. On September 27, 20XX, the Agent resent Letter 3611, Information Document Request and
   Publication 1 by mail to . Additionally, Form 4759-postal
   tracer was sent to the Postmaster in for verification of the address.

5. On October 5, 20XX, the Agent called the phone number shown on the organization's website
   and left a message for the Organization's President, . The Agent received a telephone
   call by an unidentified individual who asked for the Agent's IRS identification number and hung up.
   The Agent called the number shown on the caller ID; the Agent's call went directly to
   voicemail. So, the Agent left another voicemail and stated, "I am with the Internal Revenue Service,
   please give me a call back to discuss the initial contact letter and IDR sent to
   I will provide you with the IRS phone number to verify my identification number and employee
   status". The Agent received no response from the president.

6. On October 10, 20XX, Form 4759-postal tracer (see item 4 above) was returned and confirmed
   the mail was delivered to the address given. Additionally, the Form 4759-postal tracer provided the
   boxholder's street address, it is .

7. On October 23, 20XX, the Agent called the number on the organization's website and then left
   another message to discuss an initial interview location, time and information needed.

8. On October 24, 20XX, the Agent mailed Letter 3611, Information Document Request and
   Publication 1 to the address.

9. On October 29, 20XX, the mail (See item 8) sent to was
   returned and stated undeliverable, unable to forward and return to sender.

10. On November 8, 20XX, the Agent mailed Letter 3611, Information Document Request and
    Publication 1, by Certified Mail to and to

11. On November 16, 20XX, a U.S. Postal Services Certified Mail Receipt was returned and signed
    by confirming receipt and delivery of Letter 3611, Information Document request and
    Publication 1 to . (see item 10 above)

12. On November 17, 20XX, Letter 3611, Information Document Request and Publication 1 sent to
    were returned, unable to forward and refused. (see item 10)

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

[Page 7]

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer | Tax Identification Number (last 4 digits) | Year/Period ended
December 31, 20XX

No further communication was made and no information was provided by Organization or its
President. The Organization did not provide evidence to support its conducting activities in
furtherance of its exempt purpose.

Law

Internal Revenue Code Section (IRC Sec.) 501(c)(3) 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. 11(a) imposes a tax for each taxable year on the taxable income of every corporation.

IRC Sec. 11(b)(1) provides the amount of the tax imposed by subsection (a), which shall be the sum
of:

— IRC Sec. 11(b)(1)(A) 15 percent of so much of the taxable income as does not exceed $50,000,

— IRC Sec. 11(b)(1)(B) 25 percent of so much of the taxable income as exceeds $50,000 but does
not exceed $75,000,

— IRC Sec. 11(b)(1)(C) 34 percent of so much of the taxable income as exceeds $75,000 but does
not exceed $10,000,000, and

— IRC Sec. 11(b)(1)(D) 35 percent of so much of the taxable income as exceeds $10,000,000.

IRC Sec. 511 imposes a tax at corporate rates under Section 11 on the unrelated business taxable
income of certain tax-exempt organizations, including those described in section 501(c)(3).

IRC Sec. 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including:

— IRC Sec. 162(a)(1) - a reasonable allowance for salaries or other compensation for personal
services actually rendered;

— IRC Sec. 162(a)(2) - traveling expenses (including amounts expended for meals and lodging
other than amounts which are lavish or extravagant under the circumstances) while away from
home in the pursuit of a trade or business; and

— IRC Sec. 162(a)(3) - rentals or other payments required to be made as a condition to the
continued use or possession, for purposes of the trade or business, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity.

IRC Sec. 6001 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.

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

[Page 8]

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer | Tax Identification Number (last 4 digits) | Year/Period ended
December 31, 20XX

IRC Sec. 6020(a) states that if any person shall fail to make a return required by this title or by
regulations prescribed thereunder, but shall consent to disclose all information necessary for the
preparation thereof, then, and in that case, the Secretary may prepare such return which being
signed by such person, may be received by the Secretary as the return of such person.

IRC Sec. 6020(b)(1) states that if any person fails to make any return required by any Internal
Revenue law or regulation made thereunder at the time prescribed therefore, or makes, willfully or
otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge
and from such information as he can obtain through testimony or otherwise.

IRC Sec. 6020(b)(2) states that any return so made and subscribed by the Secretary shall be prima
facie good and sufficient for all legal purposes.

IRC Sec. 6033(a)(1) 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 Regulation Section (Regulation Sec.) 1.501(c)(3)-1(a) states 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 Sec. 1.501(c)(3)-1(a)(1) 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 Sec. 1.501(c)(3)-1(c)(1) 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 Sec. 1.61-1 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.

Regulation Sec. 1.6001-1(c) 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

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

[Page 9]

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer | Tax Identification Number (last 4 digits) | Year/Period ended
December 31, 20XX

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 IRC Sec. 6033 and Regulation Sec. 1.6033-1 through 1.6033-3.

Regulation Sec. 1.6001-1(e) provides that the books or records required by this section shall be
kept at all times available for inspection by authorized Internal Revenue Service 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 Sec. 1.6033-1(h)(2) 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 and Section 6033 of the Code.

Revenue Ruling 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 Organization failed to provide information as requested through correspondence and during a
conversation with the President.

Government's Position

The Organization failed to provide information and/or documentation to support that it is conducting
activities in furtherance of its exempt status, which was requested by correspondences. Therefore,
exempt status of Organization should be revoked and Form 1120, U.S. Corporation Income Tax
Return, should be filed for 20XX and each year thereafter as long as the organization remains
subject to Federal income tax. If the proposed revocation becomes final, appropriate State officials
will be notified of such action in accordance with Section 6104(c) of the Internal Revenue Code.

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

[Page 10]

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer | Tax Identification Number (last 4 digits) | Year/Period ended
December 31, 20XX

Conclusion

Since the organization was not operating exclusively for the exempt purpose under IRC Section
501(c)(3), for which it obtained its exempt status, its Federal tax-exempt status under such section
should be revoked effective January 1, 20XX. is liable for filing Form
1120 U.S. Corporation Income Tax Return for the tax year ended December 31, 20XX and all years
thereafter.

Catalog Number 20810W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)