IRS revokes an inactive nonprofit's 501(c)(3) status for failing the organizational and operational tests

Plain-English summary

This is a final IRS letter revoking a small nonprofit's tax exemption as a charity under Section 501(c)(3). On audit, the organization could not show it was doing any charitable work: it had lost its operating location, reported a theft of its property, had no gross receipts, accepted no donations, and produced no articles of incorporation or bylaws. Because a 501(c)(3) organization must be both "organized" and "operated" exclusively for exempt purposes, and this one was inactive and could not substantiate either test, the IRS concluded it no longer qualified. The organization's own board agreed to the revocation and chose not to appeal. As a result, the exemption is revoked, the group may now have to file federal income tax returns and pay tax, and contributions to it are no longer deductible under Section 170. The IRS also relied on the record-keeping and annual-filing duties in Sections 6001 and 6033: an organization that cannot produce records to prove it is meeting the conditions for exemption can lose that exemption.

Ruling snapshot

• Question: Should the organization's 501(c)(3) exemption be revoked for failing to substantiate that it is organized and operated exclusively for exempt purposes?
• Outcome: revocation (final adverse determination; organization consented and did not appeal)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c); IRC §§ 6001, 6033; Rev. Rul. 59-95

Full text (IRS public release)

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

                                        Date: 10/08/2024
                                        Taxpayer ID number (last 4 digits):
                                        Form:
                                        Tax periods ended:
Release Number: 202503015
Release Date: 1/17/2025                 Person to contact:
UIL Code: 501.03-00                       Name:
                                          ID number:
                                          Telephone:
                                          Fax:
                                        Last day to file petition with United States
                                        Tax Court: 01/06/2025

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 did not engage in any activity that accomplished one or more exempt purposes under IRC Section 501(c)(3). As such, you failed to meet the requirement of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a).

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.

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
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.

                                                Letter 6337 (Rev. 3-2024)
                                                Catalog Number 74808E

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.
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).
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 if 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. Visit TaxpayerAdvocate.IRS.gov/contact-us or call 877-777-4778 (TTY/TDD 800-829-4059) to find the location and phone number of your local advocate. Learn more about TAS and your rights under the Taxpayer Bill of Rights at TaxpayerAdvocate.IRS.gov. Do not send your Tax Court petition to TAS. Use the Tax Court address provided earlier in the letter. Contacting TAS does not extend the time to file a petition.
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 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.

                                                Letter 6337 (Rev. 3-2024)
                                                Catalog Number 74808E

Keep the original letter for your records.

                             Sincerely,
                             [signature]
                             Lynn A. Brinkley
                             Director, Exempt Organizations Examinations
Enclosures:
Publication 1
Publication 594

                                                Letter 6337 (Rev. 3-2024)
                                                Catalog Number 74808E

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

                                        Date: 01/05/2024
                                        Taxpayer ID number:
                                        Form:
                                        Tax periods ended:
                                        Person to contact:
                                          Name:
                                          ID number:
                                          Telephone:
                                          Fax:
                                          Address:
                                        Manager's contact information:
                                          Name:
CERTIFIED MAIL - Return Receipt Requested
                                          ID number:
                                          Telephone:
                                        Response due date: February 5, 2024

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.
       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. 8-2019)
                                                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,
                             [signature]
                             Lynn A. Brinkley
                             Director, Exempt Organizations Examinations
Enclosures:
Form 886-A
Form 6018
Form [illegible]
Publications 892 & 3498-A

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

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

Date of Notice: January 05, 2024

                                   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 failing to fully produce records to substantiate that the organization is meeting the organizational and operational tests?

                                    Facts

                                  applied for tax-exempt status by filing the Form                on                 , and was granted tax-exempt status as a 501(c)(3) on                                        , with an effective date of

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 amatuer sports competition.

Section 501(c)(3) requires that an organizing document must limit your purposes to one or more exempt purposes within section 501(c)(3). The organization attested on Form                that their organizing document contains this limitation.

The State of             does require a dissolution provision.

The organization filed Form                                                        for tax period ending

The organization was selected for audit to ensure that the activities and operations align with their approved exempt status, and eligibility to file Form

The organization responded to the        Information Document Request (IDR) issued on       . The response was received by the Internal Revenue Service on                , and attested the following information in the response:

    •   The organization lost the lease on their                                         utilized since
    •   The organization suffered a huge theft of                                        by another 501(c)(3) organization, which they reported to the
    •   No meeting minutes were provided, only meeting dates from                                        through
    •   The organization kept searching for a new operating location.
    •   The organization didn't have any gross receipts for the tax periods                            , and               ,      . The gross receipts for those tax periods were $ . , due to no regular charitable activities for those years, and no donations were accepted.
    •   There were no bank, credit, or investment account statements related to the organization.

No organizational documents were included in the response.

Based on the information provided in the organizations' response, there were no sources of income and no expenses related to their exempt purpose for the year under examination. It was determined that the organization is inactive, therefore not meeting the operational test.

Based on the conversation with the Director of the organization,                  , on                 , they suffered a theft of         in      and has been unable to operate since.                    stated the organization would like to terminate.

A    IDR was issued on              ,     , with a response due date of             , The         IDR requested        evidentiary documents required to properly conclude the examination as a termination. Items requested in the     IDR include:

    •    The Dissolution Document
    •    The Final Return, and
    •    A Written Statement of Disposition of Assets

A response of    IDR was received by fax on                                          . The response included the following documents:

    •    Statement of Disposition of Assets, signed by the President of the organization.
    •    A copy of the Board's Meeting Minutes dated

Within the meeting minutes, the board members discussed and agreed that their 501(c)(3) exempt status will be revoked by the IRS due to inactivity, and no board member will object, challenge, or appeal the revocation.

Letter                  IDR, and the Administrative File, was mailed certified to the organization, on                        , with a response date of

The Administrative File included:
   • Form
    •    Letter     , (DO/CG)
    •          Form

The organization has been inactive since

As of                   , per the State of                 website, it lists the organizations status as exists.

                                                        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 §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations.

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.

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 times 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 §1.6033-2(a)(1) of the Regulations provides, in part, that, except for certain exceptions not here applicable, every organization exempt from taxation under section 501(a) shall file an annual information return specifically setting forth its items of gross income, gross receipts and disbursements, and such other information as may be prescribed in the instructions issued with respect to the return.

Regulation §1.6033-2(i)(2) of the Regulations provides, in part, that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F, chapter 1 of subtitle A of the Code, section 6033, and chapter 42 of subtitle D of the Code.

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.

                                         Organization's Position

The organization agrees with revocation due to inactivity. Per meeting minutes on     /    /       , the organization will not object, disagree, or appeal the revocation.

                                         Government's Position

In accordance with the above-cited provisions of the Code, 501(c)(3) organizations recognized as exempt from federal income tax must be both organized and operated exclusively for one or more of the purposes specified in such section, and 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.

Based on the above facts,                                              is inactive and has been since      . The documents provided did not substantiate that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). Therefore, the organization does not meet the operational test.

No Articles of Incorporation or Bylaws were received from the organization. Therefore, we are unable to determine the organization meets the organizational test.

If an organization fails to meet either the organizational test or the operational test, it is not exempt.

Using the above rationale, the organizations failure to meet the organizational and operational tests should result in revocation of their 501(c)(3) 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                                            failed to meet the organizational and operational tests, under IRC §501(c)(3), required for the continuation of its exempt status. Accordingly, the organization's exempt status is revoked effective

Catalog Number 20810W                  Page 6                  www.irs.gov          Form 886-A (Rev. 5-2017)