IRS revokes a charity that did not substantiate educational or charitable operations

Plain-English summary

A section 501(c)(3) organization told the IRS that it would carry on educational activities, but an audit found no educational opportunities or defined charitable class. The organization provided some financial records after repeated requests but did not adequately explain how its activities served an educational or charitable purpose. It then stopped responding before supplying the remaining information. The IRS concluded that the organization failed the operational test and did not meet the recordkeeping and information requirements under sections 6001 and 6033. It revoked the organization's exemption and stated that contributions were no longer deductible under section 170. The organization could challenge the final determination by seeking declaratory judgment under section 7428.

Ruling snapshot

• Question: Did the organization continue to qualify under IRC § 501(c)(3) when it did not substantiate educational or charitable activities or fully respond to the audit?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), and 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Release Number: 202243017 Date:
Release Date: 10/28/2022 September 23, 2020
UIL Code: 501.03-00 Taxpayer ID Number:

Form:
Tax Period(s) Ending:

Person to Contact:

Identification Number:

Telephone 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 . 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) of the Code 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.

1

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 20005

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 about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter.

Sincerely,
Enclosures:

Publication 892
Sean E. O'Reilly

Director, Exempt Organizations Examinations

2

Date:

Department of the Treasury 02/07/2020
Internal Revenue Service Taxpayer ID number:
Tax Exempt and Government Entities Division
IRS Exempt Organizations Examination Form:
Tax periods ended:
Person to contact:

Employee ID number:
Telephone number:

Fax:
Manager's contact Information:

Employee ID Number:
Telephone number:

Response due date:
March 09, 2020

CERTIFIED MAIL — Return Receipt Requested

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.

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

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 Report of Examination

Publication 892 How to Appeal

Publication 3498-A The Examination Process

Copy of Original Form [illegible] nd IRS Determinations File

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

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

1. Whether which qualified for exemption from federal income tax

under Section 501(c)(3) of the Internal Revenue Code, should be revoked effective

due to its failure to carry out exempt activities and pursue its’
educational purpose within the meaning of section 509(a)(2) and Treas. Reg. §
1.501(c)(3)-1(b)?

2. Whether the organization continues to qualify for exemption under Section 501(c)(3)
   of the Internal Revenue Code.

Facts:

applied for tax-exempt status by filing the Form
Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, on , and was granted tax-exempt status as a
501(c)(3) on , with an effective date of . The
organization was selected for audit to ensure that the activities and operations align with
their approved exempt status.

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, or to foster national and amateur sports competition.

The organization partially responded to requests for information on three different
occasions with inadequate and incomplete information. As a result of the incomplete
responses, the organization failed to establish that its activities and operations
accomplish one or more exempt purposes as specified in IRC § 501(c)(3).

Per the Form Application for Recognition of Exemption, Part III line 2, the
purpose of request for tax exemption is to carry on educational
activities. After thorough examination of your organization, it is determined that no
educational opportunities are furnished. Furthermore, a definitive charitable class is not
purported, rather a public access business model is delivered.

The phone number for the president of , , is
. The phone number for the Power of Attorney, , is

• Correspondence and telephone contact for the audit was as follows:

○ Letter 3606 and an attached Information Document Request (IDR), was

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

mailed to the organization on with a response due date of
. This letter was not returned by the post office as being
undeliverable. The president, , called on to
request an additional days to provide a response; this was verbally
granted.

○ contacted the IRS on via telephone and faxed

a Form 2848 Power of Attorney Authorization and also the organization’s first
response to the Information Document Request (IDR).

○ Telephone discussion was held with on regarding
missing information that had not been provided by the organization on
, such as a Profit & Loss Statement, a list of active board members, and
explanation for the compensation expenditures, a description of any

educational or charitable activities, etc. requested a call-back in
two weeks.

○ Outgoing phone call was made to on to discuss

unresolved issues regarding leased employees, rental/membership income,
loan from officer, and lack of charitable class or educational/charitable
activities. requested a written request from the IRS outlining the
specific unresolved issues.

○ Letter 3844-B with an attached second IDR regarding the unresolved issues
pursuant to the telephone conversation was mailed to
. and a copy to the Power of Attorney, , on
with a response date of . Per the United States Postal
Service, this was not returned as undeliverable.

○ Called on when no response was received to the
Letter 3844-B by the due date. stated a response would be
provided .

○ Received written response to the Letter 3844-B. Response contained
adequate financial documents. However, the organization still did not provide
information explaining how their activities serve an educational, charitable
purpose.

○ Letter 5077-A Pre-Summons IDR Delinquency Notice, with copies of all prior
was mailed to and to the Power of Attorney,
, on with a response date of
. Per the United States Postal Service (USPS) tracking system, this was
received by both the Power of Attorney and the organization on

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

○ contacted the IRS via telephone on
requested additional time to gather data regarding any possible
educational activities and purpose. stated information could be
provided to IRS via fax by . However, no further response
from the organization was received.

Law:

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.

Regulation §1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be
regarded as operated exclusively for exempt purposes if it engages primarily in activities
that accomplish exempt purpose as specified in in section 501(c)(3) of the Code. An
organization will not be so regarded if more than and insubstantial part of its activities is
not in furtherance of an exempt purpose.

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.

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279
(1945), the Supreme Court determined that the presence of a single non-exempt
purpose, if substantial in nature, will destroy exemption under Section 501(c)(3)
regardless of the number or importance of any other exempt purposes.

In Haswell v. United States, 500 F.2d 1133, (Ct. Cl. 1974), cert denied, 419 US 1107
(1975), the court held that 16.6% to 20.5% over a two-year period was a strong
indication of substantiality but that the method of measurement was only one
acceptable method of measurement.

In Malat V. Riddle, 383 U.S. 569 (1966), the court held that the term “primary” means
more than 50%.

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

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

Based on the above facts, the organization was unable or unwilling to substantiate that
its conducted activities furthered an exempt (educational and charitable) purpose. The
organization fails the operational test because it failed to establish that its activities and
operations accomplish one or more exempt purposes as specified in IRC § 501(c)(3).
The organization did not respond 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 IRC
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.

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

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 .

Form , U.S. Corporation Income Tax Return, should be filed for the tax periods
after .
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -4-