Charity for disabled children's therapies revoked for stonewalling an audit and aiding the founder's family

Plain-English summary

The IRS revoked a small charity's section 501(c)(3) exemption after it repeatedly failed to respond to an audit and produce financial records. The organization had obtained exemption through the streamlined Form 1023-EZ and said its purpose was to help families with disabled children pay for therapies. During the audit the IRS found it had given funds to individuals, including the founder-president's own daughter (a disqualified person), had no established process for choosing recipients (it said it "just share the funds with children of family and friends"), produced no financial records, failed to file a required annual return, and never amended articles of incorporation that lacked the dissolution clause section 501(c)(3) requires. Over many months the IRS sent numerous letters and left many voicemails; the president spoke with the examiner by phone but never provided the records or the amendment. Because a tax-exempt organization must keep records and let the IRS verify its operations under sections 6001 and 6033, and because payments to a family member raised private-benefit and inurement concerns, the IRS revoked the exemption prospectively. Contributions are no longer deductible under section 170, and the organization must file Form 1120 going forward.

Ruling snapshot

• Question: Should a charity keep its section 501(c)(3) exemption when it fails to produce records for an audit and appears to distribute funds to the founder's family?
• Outcome: revocation (prospective; record-keeping failure under sections 6001 and 6033, with private-benefit concerns)
• Key authorities: IRC §§ 501(c)(3), 170, 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1; Rev. Rul. 59-95; Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo. 1986-348

Full text (IRS public release)

Internal Revenue Service
Tax Exempt and Government Entities

IRS Taxpayer ID number:

Form:

Department of the Treasury Date: February 26, 2021

Tax periods ended:

Release Number: 202221014 Person to contact.

Release Date: 5/27/2022 Name:

UIL Code: 501.03-00 ID number:
Telephone:
Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear

Why we are sending you this letter

This is a final determination that you don’t 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 1,20  . Your determination letter dated March 23,20, 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 from tax under IRC Section 501(a) must be both organized and
operated exclusively for exempt purposes. You have failed to produce documents or otherwise demonstrate that
you are operated exclusively for exempt purposes and that no part of your net earnings inure to the benefit of
private shareholders or individuals. You failed to respond to repeated requests to allow the Internal Revenue
Service to examine your records regarding your receipts, expenditures, or activities as required by IRC Sections
6001 and 6033(a)(1) and the regulations thereunder.

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.

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

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was

mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment
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.

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court US. Court of Federal Claims U.S. District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 Washington, DC 20001

Letter 6337 (12-2020)
Catalog Number 74808E

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).

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service
Taxpayer Advocate Office

Telephone,
Fax:

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Sincerely,
[signature illegible]
Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

***This report supersedes report dated

Date: May 11, 2020
Department of the Treasury
y Internal Revenue Service Taxpayer ID number:
IRS Tax Exempt and Government Entities
Form:

Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Manager’s contact information:
Name:
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.

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. 8-2019)
Catalog Number 34809F

3

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

Publication(s) 892 & 3498-A

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

***This report supersedes report dated

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

Date of Notice: May 11, 20
Issues:

Whether (the organization), which qualified for exemption from
Federal income tax under Section 501(c)(3) of the Internal Revenue Code, should be
revoked due to its failure to respond and produce records?

Whether (the organization} meets the organizational and operational
test for exemption from federal income tax under Section 501(c)(3) of the Internal Revenue
Code?

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 March 16, 20 __, and was granted tax-exempt status as a
501(c)(3) on March 23, 20, with an effective date of September 4, 20

An organization exempt under 501(c)(3) needs to be organized and operated exclusively
for religious, charitable, scientific, testing for public safety, literary or educational purposes
and to foster national and amateur sports competition.

The organization was selected for audit to ensure that the activities and operations align
with their approved exempt status.

The organization states their purpose is to support families with disabled children offering
them financial support to access the therapies they need for their children’s development.

During the year under examination the organization provided funds in the amount of

$ to individuals, and . The organization has

failed to provide financial records to support the amounts distributed to each individual.
is the daughter of the organization’s founder/President, and therefore is

a disqualified individual.

The organization was asked to describe their recipient selection process. The response
received October 4, 20 specifically states they do not have an established process
and they “just share the funds with children of family and friends’.

The organization failed to provide any financial records requested during the audit of
for the tax year ending

The organization has not filed a series return for the tax year ending

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 1

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

. Tax Compliance Office (TCO) solicited 20 in
Information Document Request dated September 5,20 . The organization provided
an unsigned and has failed to provide a signed copy of the return for
processing.

The organization filed Articles of Incorporation with Secretary of State of , which
did not contain a dissolution clause as required by Section 501(c)(3). The organization
responded with a copy of the fillable form required by Secretary of State of anda
copy of a check written out to State of . The Secretary of State of website
does not show an amendment has been filed or accepted.

e Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012), EO Examination Appointment and Information
Document Request Transmittal, with attachments, was mailed to the
organization on June 21, 20 , with a response date of July 9, 20 . The
organization was requested to provide details regarding their organizational
and operational activities, as well as books and records to reconcile

. The organization was also asked to amend the Articles of
Incorporation to include a dissolution clause and provide a complete
for the delinquent tax year ending . This letter was
returned by the post office as being undeliverable on August 7, 20

o Letter 3844-A (Rev. 12-2015), Correspondence Audit Follow Up, with
attachments, was mailed certified to the organization on July 22, 20 with a
response date of August 6, 20 Article Number
Per the United States Postal Service (USPS) tracking, this was returned to

on August 20, 20

o Letter 3844-A (Rev. 12-2015), Correspondence Audit Follow Up, with
attachments, was mailed certified to the president of the organization on July
22, 20 with a response date of August 6, 20 Article Number

. Per the United States Postal Service (USPS)
tracking, this was delivered August 13, 20

o Letter 3844-A (Rev. 12-2015), Correspondence Audit Follow Up, with
attachments, was mailed certified to a different address found on tax return
for the organization on August 8, 20 with a response date of September 6,
20 = Article Number . Per the United States Postal
Service (USPS) tracking, this was delivered August 19, 20

o Letter 5798 (Rev. 10-2016), Extension Notice, with Information Document
Request, was mailed to the organization September 10, 20 with a response
date of September 27, 20

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 2

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

o TCO received response from organization October 4,20 . The response
was reviewed and TCO determined the response was incomplete. The items
missing included financial books and records, signed copy of for
delinquent tax year 20, and the amended organizing document.

o Letter 5077-B (Rev. 1-2017), TE/GE IDR Delinquency Notice, with original
Information Document Request, Administrative File, and Explanation of Items
(detailing the organizational requirements) was mailed to the organization on
October 31, 20 with a response date of November 22, 20 Article Number

. Per USPS tracking, this item has not been
delivered.

o Letter 5077-B (Rev. 1-2017), TE/GE IDR Delinquency Notice, with original
Information Document Request, Administrative File, and Explanation of Items
(detailing the organizational requirements) was re-mailed to the organization
due to non-receipt of previously mailed letter on November 26, 20 with a
response date of December 17, 20 Article Number

. Per USPS tracking, this item was delivered on
December 6, 20

o Letter 5798 (Rev. 10-2016), Extension Notice, with attachments, was mailed

to the organization January 7,20 with a response date of January 28,
20

• Telephone contact for the audit was as follows:

o July 9, 20 —TCO attempted phone call to number found
on for tax year ending . Phone call was
answered by voicemail service without any identifying information. TCO
left generic voicemail asking for a call back.

o July 12, 20 —TCO attempted second phone call to the above number
and again reached voicemail service and left a generic message. TCO
researched Form 1023-EZ and found phone number and
again reached voicemail service without identifying information and left a
generic voicemail.

o July 19, 20 —TCO attempted third phone call to and left
another generic voicemail asking for a call back.

o August 16,20 —TCO received a voicemail from (
). TCO attempted to call back and left generic voicemail to

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 3

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

please call back.

o August 21,20 —TCO attempted again to reach (

) and left a voicemail to call back. called back
same day and confirmed she is the current president of the organization.
TCO and president discussed the Information Document request in detail
and president confirmed she could respond by due date September 6,

20
o September 6, 20 —TCO received voicemail from president stating they
were dealing with a hurricane in and she would need additional

time to respond. TCO contacted president to confirm extension request
had been elevated for manager approval.

o September 10,20 -—TCO contacted EO to confirm extension was
granted with new due date of September 27, 20

o October1,20  —TCO received voicemails from president asking if she
could email the response. TCO called back and advised cannot email,
can mail or fax the documents.

o October 11, 20 —TCO called president and left a voicemail to please
call back.

o October 29,20 —TCO received voicemail from president. TCO called
back and explained the missing items from the initial response. President
did not understand what “dissolution clause” was needed. TCO explained
the organizational requirements of Section 501(c)(3).

o November 26, 20 —TCO received voicemail from president that she had
not received the letter discussed on October 29, 20 . TCO called back
and left a message advising a new letter would be mailed out.

o December 10,20  -—TCO received voicemail from president. She stated
she is still confused about what information is needed. TCO called back
and left a voicemail attempting to explain the items needed.

o December 17,20  -—TCO received a voicemail from president stating
she still does not understand what is required. She also states she is
leaving the country and will not return until January 9, 20

o January 28,20 —TCOcontacted president. President still does not
seem to understand amending the organizing document. TCO had a
coworker who speaks Spanish (presidents first language) explain the

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

items needed, in case the language barrier was causing the confusion.
President advised coworker she would get the amendment done.

o February 5,20 —TCO received another voicemail from president stating
she does not know how to amend the organizing document.

o February 19,20 —TCO called President and left voicemail stating she
would need to contact her state in order to amend the organizing
document and to please call back if any further questions.

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 §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 §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 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.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 5

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

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 as long as 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, 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.

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.

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.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 6

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

In Wendy L. Parker Rehabilitation Foundation, Inc. v. C.I.R., T.C. Memo. 1986-348,
the Tax Court upheld the Service's position that a foundation formed to aid coma victims,
including a family member of the founders, was not entitled to recognition of exemption.
Approximately 30% of the organization's net income was expected to be distributed to aid
the family coma victim. The Court found that the family coma victim was a substantial
beneficiary of the foundation's funds. It also noted that such distributions relieved the
family of the economic burden of providing medical and rehabilitation care for their family
member and, therefore, constituted inurement to the benefit of private individuals.

Taxpayers position:
Taxpayer’s position is unknown at this time.
Government’s Position:

Based on the above facts, the organization failed to verify that they are 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.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall
submit additional information for the purpose on enabling the Internal Revenue Service to
inquire further into its exempt status.

Similar to the organization described in Wendy L. Parker Rehabilitation Foundation, Inc.
v. C.I.R., T.C. Memo. 1986-348, has provided financial medical assistance
to a family member. Furthermore, the organization has failed to provide documentation to
show that this assistance was insubstantial in nature and has failed to demonstrate that
the distribution of funds benefitted a public, rather than a private, interest.

Using the rationale that was developed in Revenue Ruling 59-95, the Organization’s
failure to provide requested information should result in the revocation of exempt status.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 7

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

Based on the foregoing reasons, 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 failed to establish that it meets the reporting
requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal
income tax under IRC § 501(c)(3). Furthermore, the organization has not established
that it is observing the conditions required for the continuation of its exempt status or
that it is organized and operated exclusively for an exempt purpose. Accordingly, the
organization's exempt status is revoked effective January 1, 20

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

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 8