IRS revokes 501(c)(3) status of a dormant family private foundation for failing the operational test

Plain-English summary

A private non-operating foundation had been set up as a grantmaking family
foundation, expected to fund charities chosen by its board. By the years the IRS
examined, it had gone completely dormant: no assets, no income, no qualifying
distributions, no grants, and no charitable activities. Its founder, president,
and sole director confirmed by phone that the foundation had no money, held no
bank accounts, and had done nothing for years. Because a 501(c)(3) organization
must actually engage in exempt-purpose activities (the operational test), and
this one had ceased all operations, the IRS revoked its exemption. Losing
501(c)(3) status does not end private-foundation status: the organization becomes
a taxable private foundation, still subject to the Chapter 42 excise taxes and
still required to file Form 990-PF (plus a corporate income tax return) until it
formally terminates that status under section 507.

Ruling snapshot

• Question: Does a private foundation still qualify under 501(c)(3) when it has no assets, income, or charitable activity for years?
• Outcome: Revocation (final adverse determination under Letter 6337); organization becomes a taxable private foundation
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(i); Rev. Rul. 58-617; Community Education Foundation v. Commissioner, T.C. Memo. 2016-223; IRC §§ 507, 509, 170; IRC § 7428

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: January 11, 2022
Taxpayer ID number:
Form:
Number: 202246013
Release Date: 11/18/2022
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
UIL: 501.03-00

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

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: You have not
demonstrated that you are both organized and operated exclusively for charitable, educational, or other exempt
purposes within the meaning of IRC Section 501(c)(3). You did not engage in any activity that accomplished
one or more exempt purposes under IRC Section 501(c)(3).

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.

Because you were a private foundation as of the effective date of the adverse determination, you are considered
to be a taxable private foundation until you terminate your private foundation status under IRC Section 507.

In addition to your income tax return, you must also continue to file Form , Return of Private Foundation
or Section 4947(a)(1) Trust Treated as Private Foundation, by the 15th day of the fifth month after the end of
your annual accounting period.

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 74808E

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:

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
Internal Revenue Service
Tax Exempt and Government Entities

Date: July 26, 2021
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:
Manager's contact information:
Name:
ID number:
Telephone:
Response due date:

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.

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

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn't apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
   Government Entities) if you feel the issue hasn't been addressed in published precedent
   or has been treated inconsistently by the IRS.

If you're considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal to
the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can
help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a
hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you
qualify for TAS assistance, which is always free, TAS will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

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,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Publications 892 & 3498

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

ISSUE:
Whether , continues to qualify for exemption as an
organization described in the Internal Revenue Code (IRC) Section 501(c)(3).

FACTS:

(hereinafter referred to as the " ") was incorporated in
the State of on
The Form , Application for Recognition of Exemption under Section 509(a),
was submitted on . In Part II, Activities and Operational Information, it
included the following: "The organization will be a "grantmaking family" . It is expected
that substantially all of the organization's financial support will come from and
family. The activities of the organization will consist of making contributions and grants to such
tax-exempt charitable, educational, religious and/or scientific organizations as shall be chosen by
the Board of Directors. is the founder of the

The received tax exemption under Internal Revenue Code (IRC) Section 501(c)(3) as
a Private Non-Operating Foundation as defined in section 509(a) of IRC with an effective date

The Form , Return of Private Foundation, for the year ending
was selected for audit. The return reported revenue of $ , expenses of $ and total
assets of $0. Part IX-A, Summary of Direct Charitable Activities, of the return lists no activities.
Part IX-B, Summary of Program-Related Investments, of the return lists no investments. For
the year ending the made no Qualifying Distributions, had no
Undistributed Income and made no grants or contributions.

inspection of the Form , Return of Private Foundation, for the year ending
indicated an identical financial position, with $ in reported revenue and
expenses, $ in assets and no indicated activity.

The Founder, President and sole Director, , during a telephone
discussion on , indicated that the "has had no money in over
years, holds no bank accounts and has had no activities for some time".

LAW:

Internal Revenue Code (IRC) Section 501(c)(3) exempts from federal income tax organizations
which are 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

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

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 opposition to) any candidate for public office.

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

Treasury Regulation 1.501(c)(3)-1(a)(1) 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.

Treasury Regulation 1.501(c)(3)-1(c)(1) provides that 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)

Revenue Ruling 58-617, 1958-2 CB 260, (Jan. 01, 1958) Rulings and determinations letters
granting exemption from federal income tax to an organization described in section 501(a) of the
Internal Revenue Code of 1954, to which contributions are deductible by donors in computing
their taxable income in the manner and to the extent provided by section 170 of the Code, are
effective only so long as there are no material changes in the character of the organization, the
purposes for which it was organized, or its methods of operation. Failure to comply with this
requirement may result in serious consequences to the organization for the reason that the ruling
or determination letter holding the organization exempt may be revoked retroactively to the date
of the changes affecting its exempt status, depending upon the circumstances involved, and
subject to the limitations on retroactivity of revocation found in section 503 of the Code.

In Community Education Foundation v. Commissioner T.C. Memo. 2016-223, revocation of the
petitioner's exemption was supported due to a long-extended period of inactivity. The petitioner
did not meet the operational test requirements for a section 501(c)(3) organization.

TAXPAYER'S POSITION:

Not known at this time

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

GOVERNMENT'S POSITION

In accordance with the above cited provisions of the Code and Regulations under IRC 501(c)(3),
organizations recognized as exempt from federal income tax under IRC 501(c)(3) must meet both
organizational and operational tests.

As demonstrated in Rev. Rul. 58-617, an organization's exempt status will remain in effect only
so long as there are no material changes in the character of the organization, the purposes for
which it was organized, or its methods of operation. In the case of
, the organization has had no exempt purpose activity for several years.

The has failed the operational test for a section 501(c)(3) organization for the year
under examination. It has ceased all operations since at least the year which includes the
year under examination. There were no activities, no income and no actual assets for the year
under examination.

The is like the petitioner in the
case wherein the court concluded that revocation was appropriate due to the organization's
inactivity.

Failure to Meet the Operational Test

The has failed to demonstrate that it meets the operational test for a § 501(c)(3)
organization for the year under examination. In order to meet the operational test, the
must show that 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 regarded as having met this
test if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Examination of the return for the year ending shows no assets,
no qualifying distributions and no indication of any exempt purpose activities. Inspection of the
previous year's return also does not indicate any exempt purpose activities. As such, the
does not operate for exempt purposes and revocation is proposed.

CONCLUSION:

has no assets, has conducted no exempt activities for some
time and fails to meet the operational requirements to continue its exemption status under IRC
501(c)(3).

Once , which is a private foundation, ceases to be described in
IRC Section 501(c)(3), it will not lose its private foundation status; rather, it will become a
taxable private foundation.

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

Taxable private foundations remain subject to Chapter 42 taxes and are required to file Form
, Return of Private Foundation, in addition to Form , U.S. Corporation Income Tax.

Form , U.S. Corporation Income Tax, should be filed for tax year ending
thereafter. Form , Return of Private Foundation, remains a required annual
return.

As a reminder, you have the right to file a protest if you disagree with this determination.

If you agree with this conclusion, please sign and return the enclosed Form 6018 by the
indicated response due date.

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