IRS revokes an inactive educational private foundation and asserts a 4942 excise tax in the alternative

Plain-English summary

The IRS revoked the 501(c)(3) exemption of a nonprofit that had been organized to bring technology into schools (providing infrastructure, software, hardware, and support services to enhance educational resources for free). The organization was originally recognized as a public charity but was later reclassified as a private foundation because it lacked public funding. On examination, the IRS found that the organization had never actually operated: it conducted no substantial activity since inception, reported no qualifying distributions, and one of its supporting contracts stated it did not conduct any activities for the year under audit. Because an organization must be both organized and operated exclusively for exempt purposes, and the "operational test" requires it to engage primarily in exempt activities, the IRS concluded the foundation failed the operational test and revoked its exemption (citing Rev. Rul. 58-617). In the alternative, the report says that if the foundation somehow still qualified, it would owe first-tier and second-tier excise taxes under IRC § 4942 for failing to distribute its income. Because it was a private foundation, it remains a taxable private foundation until it terminates that status under § 507, and contributions are no longer deductible under § 170. The lesson: a private foundation that never gets off the ground can lose its exemption for inactivity, and separately face 4942 excise tax for not making required distributions.

Ruling snapshot

• Question: Does an educational private foundation that conducted no substantial activity since inception still qualify under IRC § 501(c)(3), and if so does it owe IRC § 4942 excise tax for undistributed income?
• Outcome: Revoked for failing the operational test (final determination; 90 days to seek declaratory judgment under IRC § 7428); 4942 excise tax asserted in the alternative
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d); IRC § 4942(a)-(d), (g), (j)(3); Treas. Reg. § 53.4942(a)-1; Rev. Rul. 58-617; IRC §§ 170, 507

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim. This release combines the final adverse determination (Letter 6337), the proposed revocation (Letter 3618), and the audit report (Form 886-A). Blanks where identifying details, amounts, and dates were redacted appear as gaps in the original.)

Department of the Treasury                    Date:
Internal Revenue Service                      February 23, 2023
Tax Exempt and Government Entities            Taxpayer ID number (last 4 digits):
Exempt Organizations Examinations
                                              Form:
                                              Tax periods ended:
Release Number: 202321011
Release Date: 5/26/2023                       Person to contact:
UIL Code: 501.03-00                           Name:
                                              ID number:
                                              Telephone:
                                              Fax:
Last day to file petition with United States
Tax Court: May 24, 2023

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: 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 were inactive for several years and did not engage
in any substantial 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 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
, 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 can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,
* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

United States Tax Court
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001
dcd.uscourts.gov

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.

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

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.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


Find tax forms or publications by visiting 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.

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.

Sincerely,

[illegible signature]
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


Department of the Treasury                    Date:
Internal Revenue Service                      10/17/2022
Tax Exempt and Government Entities
                                              IRS Taxpayer ID number:

CERTIFIED MAIL - Return Receipt Requested

Dear

Form:
Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:

Manager's contact information:
Name:
ID number:
Telephone:

Response due date:
November 16, 2022

Why you're receiving this letter

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(3) for the periods above.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.
2. Send any information you want us to consider.
3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
   information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after
   the meeting or after we consider the information.

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

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

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

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


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,
Larry D. Pugh [illegible]
for Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

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


Form 886-A   Department of the Treasury - Internal Revenue Service
Explanation of Items

Name of Taxpayer    Year/Period Ended

ISSUE:
Whether ( ) continues to qualify for exemption as a
private foundation described under Internal Revenue Code (IRC) Section 501(c)(3)
due to lack of operations or activity since inception which includes the tax year
ending .

ALTERNATIVE ISSUE:
If continues to qualify for exemption as a private foundation described under
IRC Section 501(c)(3), does qualifies as a private operating foundation
under IRC Section 4942(j)(3).

Whether made qualifying distributions for the tax year ending .

Whether owes excise taxes due to under payments of qualifying
distributions under IRC Section 4942.

FACTS:

was incorporated under the laws of the as a non-profit
corporation on , for the purpose of the following:

" ( ) is a non-profit organization incorporated in the state of
. The corporation is organized for the purpose of
. The
organization will be engaged in the following activity.

Support Services: ( %) will go into schools and
educational institutions in the area and provide infrastructure, software,
hardware, systems and support services to enhance educational resources at that
educational facility to improve their ability to serve their students and faculty, expanding
their resources for technological improvement and functions. will build a
for recipient target schools to improve the students' learning
environment by
services. When invited to go into an educational facility, will
access the needs of that facility, discuss the programs of the school with the facility
managers and put into place technological systems that will enhance the delivery of that
organization's mission and improve the educational environment for their students.
These services are offered free to the educational organization as a supplement to
already restricted budgets facing schools around our country. will hire an Executive
Director to oversee the day-to-day management of the organization and staff. This
position is to begin in . will hire Program Manager to begin
in . The Program Manager will oversee program facility
management and program services delivery. Additional staff is projected to be hired
over the of activity, as the organization ramps up to impact its
community. The organization is targeting to serve any school interested in the
community, as funding is available. will advertise through the local chamber of
commerce, word of mouth and direct contact with local school districts, superintendents,
and university heads."

On was recognized to be exempt from federal income
tax as an organization described in IRC Section 501(c)(3). In
exempt status was amended to a private foundation due to lack of public
funding.

The IRS received for tax year ending , on
, reporting assets of $ in
checked "No" on Part VII-A, Line 9 stating that they are not claiming status
as a . reported Qualifying distributions of
; did not . did not . drew a
line through on the

stated in response to Information Document Request # 3, response # 5,
that "no receipts as did not with
." However, reported $ in expenses on the
to

In the Contracts Assigned by , stated in part,
that "

did not conduct any activities for the year ending .

LAW:

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 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.

IRC Section 4942(a) states, there is hereby imposed on the undistributed income of a
private foundation for any taxable year, which has not been distributed before the first
day of the second (or any succeeding) taxable year following such taxable year (if
such first day falls within the taxable period), a tax equal to 30 percent of the amount
of such income remaining undistributed at the beginning of such second (or
succeeding) taxable year.

IRC Section 4942(b) states, in any case in which an initial tax is imposed under
subsection (a) on the undistributed income of a private foundation for any taxable
year, if any portion of such income remains undistributed at the close of the taxable
period, there is hereby imposed a tax equal to 100 percent of the amount remaining
undistributed at such time.

IRC Section 4942(c) states, for purposes of this section, the term "undistributed
income" means, with respect to any private foundation for any taxable year as of any
time, the amount by which—
(1) the distributable amount for such taxable year, exceeds
(2) the qualifying distributions made before such time out of such distributable
amount.

IRC Section 4942(d) states, for purposes of this section, the term "distributable amount"
means, with respect to any foundation for any taxable year, an amount equal to—
(1) the sum of the minimum investment return plus the amounts described in
subsection (f)(2)(C), reduced by
(2) the sum of the taxes imposed on such private foundation for the taxable year
under subtitle A and section 4940.

IRC Section 4942(g)(1) states, for purposes of this section, the term "qualifying
distribution" means—

(A) any amount (including that portion of reasonable and necessary administrative
expenses) paid to accomplish one or more purposes described in section
170(c)(2)(B), other than any contribution to (i) an organization controlled (directly
or indirectly) by the foundation or one or more disqualified persons (as defined
in section 4946) with respect to the foundation, except as provided in paragraph
(3), or (ii) a private foundation which is not an operating foundation (as defined in
subsection (j)(3)), except as provided in paragraph (3), or

(B) any amount paid to acquire an asset used (or held for use) directly in carrying out
one or more purposes described in section 170(c)(2)(B).

IRC Section 4942(j)(3) states, for purposes of this section, the term "operating
foundation" means any organization—

IRC Section 4942(j)(3)(A) states, which makes qualifying distributions (within the
meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of
the activities constituting the purpose or function for which it is organized and
operated equal to substantially all of the lesser of—
(i) its adjusted net income (as defined in subsection (f)), or
(ii) its minimum investment return; and

IRC Section 4942(j)(3)(B)(i) substantially more than half of the assets of which are
devoted directly to such activities or to functionally related businesses (as defined in
paragraph (4)), or to both, or are stock of a corporation which is controlled by the
foundation and substantially all of the assets of which are so devoted,

IRC Section 4942(j)(3)(B)(ii) which normally makes qualifying distributions (within the
meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the
activities constituting the purpose or function for which it is organized and operated in
an amount not less than two-thirds of its minimum investment return (as defined in
subsection (e)), or

IRC Section 4942(j)(3)(B)(iii) substantially all of the support (other than gross
investment income as defined in section 509(e)) of which is normally received from the
general public and from 5 or more exempt organizations which are not described in
section 4946(a)(1)(H) with respect to each other or the recipient foundation; not more
than 25 percent of the support (other than gross investment income) of which is
normally received from any one such exempt organization; and not more than half of the
support of which is normally received from gross investment income.

Notwithstanding the provisions of subparagraph (A), if the qualifying distributions (within
the meaning of paragraph (1) or (2) of subsection (g)) of an organization for the taxable
year exceed the minimum investment return for the taxable year, clause (ii) of
subparagraph (A) shall not apply unless substantially all of such qualifying
distributions are made directly for the active conduct of the activities constituting the
purpose or function for which it is organized and operated.

Treas. Reg. Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be
exempt as an organization described in section 501(c)(3) of the Code, the
organization must be one that is both organized and operated exclusively for one or
more of the purposes specified in that section.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) of the regulations 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)

Treas. Reg. Section 1.501(c)(3)-1(d)(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.

Treas. Reg. Section 53.4942(a)-1(a)(1) provides, except as provided in paragraph (b) of
this section, section 4942(a) imposes an excise tax of 15 percent on the undistributed
income (as defined in paragraph (a) of Section 53.4942(a)-2) of a private foundation for
any taxable year which has not been distributed before the first day of the second (or
any succeeding) taxable year following such taxable year (if such first day falls within
the taxable period as defined in paragraph (c)(1) of this section). For purposes of
Section 4942 and this section, the term distributed means distributed as qualifying
distributions under Section 4942(g). See paragraph (d)(2) of Section 53.4942(a)-3 with
respect to correction of deficient distributions for prior taxable years.

Treas. Reg. Section 53.4942(a)-1(a)(2) provides, in any case in which an initial excise
tax is imposed by Section 4942(a) on the undistributed income of a private
foundation for any taxable year, Section 4942(b) imposes an additional excise tax on
any portion of such income remaining undistributed at the close of the correction
period (as defined in paragraph (c)(1) of this section). The tax imposed by Section
4942(b) is equal to 100 percent of the amount remaining undistributed at the close of
the taxable period.

Treas. Reg. Section 53.4942(a)-1(a)(3) states, payment of the excise taxes imposed by
Section 4942 (a) or (b) is in addition to, and not in lieu of, making the distribution of such
undistributed income as required by Section 4942. See section 507(a)(2) and the
regulations thereunder.

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.

TAXPAYER'S POSITION:
has ( ) days to provide their response.

TAXPAYER'S ALTERNATIVE POSITION:
has ( ) days to provide their response.

GOVERNMENT'S POSITION AND CONCLUSION:

failed to conduct any activities since inception. reported the
as $ but didn't that would provide
any value to the , therefore their assets were improperly valued.

As demonstrated in Rev. Rul. 58-617, an organization's exempt status will remain in
effect only so long as there are organized and operated for exempt purpose. In the
case of , the organization has been inactive for several years and there have
been no activities conducted. As such, fails to meet the operational
requirements to continue its exemption status under IRC 501(c)(3). Therefore, the
effective revocation date is .

GOVERNMENT'S ALTERNATIVE POSITION AND CONCLUSION:

If still qualifies for exemption, owes excise taxes due to
undistributed income under IRC Section 4942. is required to pay
( %) of their assets annual in qualified distributions. failed to make
qualifying distributions by the end of the second year, therefore, owes
( %) excise taxes. Since didn't make correction timely, the
organization owes ( %) excise taxes.
stated their assets were $ . Qualifying distribution of
( %) of assets equal $ ; qualifying
distribution were $ .

owes first tier excise taxes of ( %) for undistributed
distributions.
Required Qualifying distribution amount
Qualified distribution amount
Undistributed income
First Tier Excise Taxes ( %)

owes second tier excise taxes of ( %) for
undistributed distributions.

Required Qualifying distribution amount $
Qualified distribution amount $
Undistributed income $
Second Tier Excise Taxes ( %) $

If you agree to this conclusion, please sign the attached Forms.

If you disagree, please submit a statement of your position.

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