IRS revokes 501(c)(3) status of a charity that never actually operated

Plain-English summary

A nonprofit had received IRS recognition as a § 501(c)(3) public charity, proposing an ambitious slate of programs (peer support and independent-living services, financial literacy for young adults, environmentally friendly affordable housing, safe housing for foster-care youth and veterans). On audit, the IRS found the organization did essentially nothing. Its Forms 990 reported no revenue and a single expense (a software purchase) across the examined years; its board consisted of one man, his wife, and his son; and its address was that man's personal residence. The CPA said there had been minimal activity since inception, and the responsible officer could not be reached. Under the § 501(c)(3) "operational test" (Treas. Reg. § 1.501(c)(3)-1(c)(1)), an organization must actually engage primarily in exempt activities; an inactive organization fails. Because the taxpayer could not show it operated exclusively for exempt purposes, the IRS revoked its exemption. The organization must now file Form 1120 as a taxable corporation, and contributions to it are no longer deductible under § 170. This release bundles the final revocation letter (Letter 6337), the earlier proposed revocation (Letter 3618), and the Form 886-A audit report explaining the findings.

Ruling snapshot

• Question: Can a charity keep its § 501(c)(3) exemption when it reports no revenue, no programs, and essentially no activity?
• Outcome: Revocation (final adverse determination; operational test failed)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(i); IRC § 170

Full text (IRS public release)

Department of the Treasury                    Date: March 3, 2021
Internal Revenue Service
Tax Exempt and Government Entities            Taxpayer ID number:
                                              Form:
                                              Tax periods ended:
Number: 202226013
Release Date: 7/1/2022                        Person to contact:
                                               Name:
                                               ID number:
                                               Telephone:
                                               Fax:
UIL: 501.03-00

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
                 . Your determination letter dated               , 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 failed to show that you met the operational test for an IRC Section 501(c)(3) organization for the year
under examination. In order to meet the operational test, you must show that you engage primarily in activities
which accomplish one or more of such exempt purposes specified in IRC Section 501(c)(3).

Forms     filed for the years    through      indicated no support for exempt operations. The answers and
documents provided during our examination support the position that you are an inactive organization.

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 operated exclusively for exempt purposes.

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.

                                              Letter 6337 (12-2020)
                                              Catalog Number 74808OE

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       U.S. 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

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

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,

                                              Sean E. O'Reilly
                                              Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892
                                              Letter 6337 (12-2020)
                                              Catalog Number 74808E

Department of the Treasury                    Date: 04/01/2020
Internal Revenue Service
Tax Exempt and Government Entities            Taxpayer ID number:
                                              Form:
                                              Tax periods ended:
                                              Person to contact:
                                               Name:
                                               ID number:
                                               Telephone:
                                               Fax:
                                               Address:
                                              Manager's contact Information:
CERTIFIED MAIL - Return Receipt Requested      Name:
                                               ID number:
                                               Telephone:
                                              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.

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

      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 4621-A
Form 886-A
Form 6018
Publication 892
Publication 3498

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

Form 886-A (May 2017)   Department of the Treasury - Internal Revenue Service
Explanation of Items

ISSUES:

Whether the exemption status, under Section 501(c)(3) of the Internal Revenue Code (unless
specified, all Sections in this report refer to Internal Revenue Code) should be revoked due to lack
of activities in line with any charitable purpose.

FACTS:

Background
                       ("     ") was Incorporated In                     on February           , 20     . Specific purposes
stated in its Articles of Incorporation are as follows:

            1. To provide peer support; information and referral; systems and self-advocacy; independent
           living skills training; and other independent living services.
            2. To engage in education and any other purposes of a charitable nature ...

                     ,     President, submitted a Form 1023, Application for Recognition of
Exemption under Section 501(c)(3) of the Internal Revenue Code, on April , 20 . During the
application process,                  provided additional information regarding its activities, as
summarized below:

    •    .. .support the independent living of elders, people with disabilities and caregivers..
    •    ... teaching basic financial literacy to young adults...
    •    Supporting community initiatives in developing environmentally friendly affordable housing
         resources
    •    Providing a safe living environment for... emancipated from the foster care system and
         veterans.

On August ,20 ,          received its exemption status under Section 501(c)(3), as a publicly
supported charity under Section 170(b)(1)(A)(vi).

Activity History
Despite the broad range of services and activities proposed in           Form 1023 application, no
program activity was reported on its Form 990, Return of Organization Exempt from Income Tax,
filed for calendar years 20 through 20 .           reported that it had failed the public support test
on Schedules A, Public Charity Status and Public Support. Nevertheless,            continued to file
Forms 990.

       reported no revenue in 20 through 20 and only one expense in 20 for purchasing
 software.        balance sheet from 20 through 20 , indicate there was a grant receivable
 asset and there was a discrepancy with the beginning and ending balances. The following table
 summarizes the financial information reported on Form    :

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

                                                           12/31/20    12/31/20    12/31/20    12/31/20
   Part VIII, Line 12 - Total revenue                             0           0           0           0
   Part IX, Line 24 Total expenses                                0           0                       0
   Part X, Line 3 - Pledges and grants receivable, net
      Beginning balance                                           0           0
      Ending balance                                              0

Examination
On September 20, 20 , the IRS initiated an examination of            Form     , for the period ending
                    . Shortly after, the assigned agent received a Form 2848, Power of Attorney and
Declaration of Representative, for                     , CPA (the "CPA"). When scheduling the
phone interview, the assigned agent was informed that                     planned to be out of the
country and would be unable to participate. The assigned agent advised the CPA that the interview
should include an individual familiar with        operations. However, the CPA declined to
reschedule the phone interview to another date.

In response to the assigned agent's request, the CPA faxed a response that contained the
following:
     • organizing documents
     • Policies & procedures manuals
     • Board member job descriptions
     • Form        filed for 20 ,20 ,20     (not requested by the agent)
     • Annual meeting minutes from 20 to 20 .

Most of the documents appeared to be generic and gave no indication of           mission or
activities, the annual meeting minutes were brief. Although, the meetings lasted an hour each, the
only activity mentioned was the $    purchase of the "                           " software.

The response did not include       financials, bank statements, and description of activities
undertaken in the year under examination.

Phone Interview
On October 15, 20 , the assigned agent notified the CPA that the initial response received was
incomplete. During the interview the CPA stated that:
    • had prepared the 20       Form 990 without consulting the CPA.
    • To the CPA's knowledge, there had been minimal activity since inception.
    • board consisted of                            , his wife, and his son.
    • The address listed on the Form 990 was                          personal residence.
    • The CPA had no knowledge of any specific activities undertaken by            and would have to

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

        consult                to obtain that information.
    •   The CPA did not know how the software purchase fulfilled                            exempt purpose.

After the interview, the CPA faxed      bank statements for one account that had a $        ending
balance as of March 20 . No other financials or description of activities were included with this
second response.

Missing Information
The assigned agent repeated the request for information regarding              activities and the CPA
sent a fax on January , 20 . The fax contained the same documents that were sent before and
the following answers from
    • There was no fundraising event in 20 , therefore, no activities took place in 20 . He
        provided no explanation on what activities had been or planned to be undertaken by
    • They were unable to provide requested records of account for 20 due to the crashing of
                           software.
    • An April 20     bank statement showed             account had been closed and funds
        withdrawn. No explanation provided on what had happened to the withdrawn funds.
    • received a $        donation check on May , 20 from                                      . [See
        Grant Receivable below]
    •works for                                   .; as a result of his efforts      received a $
        grant from the company's foundation in May 20 . [See Grant Receivable below]
    • On July 20                         spent $      to purchase a lifetime access to a website titled
        "                         ", that purports to find targeted properties for donation. [See
        Software Expense below]

On January , 20 , the assigned agent contacted the CPA to obtain additional information
regarding the answers provided by                . The CPA was unable to answer the assigned
agent's questions and provided                  phone number. The assigned agent called the
provided phone number twice and received no answer; the voicemail was too full to receive any
new messages.

Grant Receivable
                 is an employee of                 which set up                        to serve as a
donor-advised fund for its employees. After contributing   service hours,                 employees
can recommend a Section 501(c)(3) organization to receive a donation, up to $         , from
                                  is the sponsoring organization that distributes donations on behalf
of

Due to                    service hours, he was able to recommend that
donate up to $      to      . In the provided documents, it states that recipient charities should not
treat this recommendation as a grant receivable or as a pledge; upon receipt it is a donation.

It is unknown how the $       check was deposited since                         bank account was closed the prior

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

month. Also, no explanation provided as to why                chose not to report this donation
as income on the Form 990 filed for the period ended December , 20 .

Software Expense
The only reported expense on            Form 990, filed for the period ended December , 20 , was
a lifetime access to a website for $                         claimed that the website, listed below,
assisted in finding and locating targeted properties for donation.

The assigned agent was unable to verify this claim due to firewalls preventing access to the
website. It is also unknown how     was able to make this online purchase.

Officer Contact
At the beginning of the examination, the assigned agent was notified that the sole officer listed on
        Form 990,           , would be unavailable and out of the country. However, the
CPA was limited in his knowledge of          operations and provided                        phone
number for further questions.

     •   January , 20 -The assigned agent called the provided phone number twice and received
         no answer each time. Voicemail was full. The assigned agent was unable to leave a
         message.

     •   January , 20 -                       left a voicemail stating he was aware that the assigned
         agent was trying to reach him and left a phone number (same as the one provided by the
         CPA). The assigned agent called him back multiple times at the provided phone number. No
         one answered the calls and the voicemail would not receive any new messages.

     •   February , 20 -The assigned agent tried to contact                         again, but
         received no answer and voicemail was full. The assigned agent notified the CPA about being
         unable to reach

LAW:

Section 501(c)(3) exempts from Federal income tax corporations, and any community chest, fund,
or foundation, organized and operated exclusively for religious, charitable, scientific, testing for
public safety, literary, or educational purposes, or to foster national or international amateur sports
competition (but only if no part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of
which inures to the benefit of any private shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or otherwise attempting, to influence legislation
(except as otherwise provided in subsection (h)), and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf of (or in

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

opposition to) any candidate for public office.

Section 1.501(c)(3)-1(a)(1) of the Federal Tax Regulations (the "Regulations") provides 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.

Section 1.501(c)(3)-1(c)(1) of the Regulations states an organization will be regarded as operated
exclusively for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more of such exempt purposes specified in 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.

Section 1.501(c)(3)-1(d)(1)(i) of the Regulations states an organization may be exempt as an
organization described in Section 501(c)(3) if it is organized and operated exclusively for one or
more of the following purposes: (a) religious, (b) charitable, (c) scientific, (d) testing for public safety,
(e) literary, (f) education, or (g) prevention of cruelty to children or animals.

TAXPAYER'S POSITION:

Unknown at this time.

GOVERNMENT'S POSITION:

       exempt status should be revoked because it failed to meet the operational test as required
under Section 1.501(c)(3) of the Regulations.

        failed to show that it met the operational test for a Section 501(c)(3) organization for the year
under examination. In order to meet the operational test, it must show that It engages primarily In
activities which accomplish one or more of such exempt purposes specified in Section 501(c)(3).

Forms 990 filed for the years 20 through 20 indicated no support for exempt operations. The
answers and documents provided during our examination support the position that     is an
inactive organization.

CONCLUSION:

       failed to meet the operational test under Section 1.501(c)(3)-1 of the Regulations. Hence, it
 should no longer be exempt under Section 501(c)(3). Accordingly, the government proposes to
 revoke its exempt status under Section 501(c)(3) effective January , 20 .

 If this revocation becomes final,    will be liable for filing Form 1120, U.S. Corporation Income
 Tax Return, for the year ending December , 20 and for all subsequent years for which
 remains subject to Federal Income Tax

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