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Tuesday December 6, 2022

Private Letter Ruling

Organization's Tax-Exempt Status Revoked

GiftLaw Note:
Organization requested and was recognized as exempt from federal income tax under Sec. 501(c)(3). Organization’s Articles of Incorporation state that Organization’s purpose was to provide relief to poor, underprivileged children. Organization planned to solicit support and funding from individual contributors in the general community. Organization’s funding for its activities would be from the donation and sale of automobiles, land, other motorized vehicles, electronic equipment and household furnishings. Organization planned to advertise its services and use volunteers for tutoring, transportation and leadership. Organization was selected for an audit to ensure that the activities and operations performed by Organization fall within their approved exempt status. Organization’s cancelled checks and bank statements revealed it did not give funds to organizations or donate to those in need. Organization failed to respond to IRS attempts to obtain information necessary for IRS to perform an audit. Additionally, Organization did not provide IRS with information establishing 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.

An organization seeking tax-exempt status under Sec.501(c)(3) must show it is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational proposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. Also, no part of its net earnings may inure to the benefit of a private individual. Under Reg. 1.501(c)(3)-1(a)(1), the organization must be both organized and operated exclusively for one or more exempt purposes. Under Reg. 1.501(c)(3)-1(c)(1), an organization is operated exclusively for an exempt purpose if it engages primarily in activities that accomplish one or more exempt purposes. If more than an insubstantial part of its activities is not in furtherance of an exempt purpose, it will fail the operational test. Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose of enabling the Internal Revenue Service to inquire further into its exempt status. Revenue Ruling 59-95 provides that an organization’s failure to provide requested information should result in the termination of exempt status. Here, Organization failed to provide records that establish 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. Therefore, Organization’s exempt status is revoked.
PLR 202240027 Organization’s Tax-Exempt Status Revoked

10/7/2022 (7/11/2022)

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.

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,

FOR Sean E. O'Reilly
Director, Exempt Organizations
Examinations

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

ISSUE


Whether * * * exemption under Internal Revenue Code (IRC) 501(c)(3) should be revoked since it does not meet the operational test and was unable to produce books and records?

FACTS


* * * has not provided documentation or testimony for the audit. All of information reviewed and discussed below came from the * * * Department of Justice (* * *), the internet, public records, etc.

* * * incorporated with the * * * Secretary of State on * * * with the directors listed as * * *, * * *, and * * *. The organization's articles of incorporation states that its purpose was to provide relief to poor, underprivileged children. * * * articles specify that the means of providing such relief includes, but not limited to, receiving funds from the general community by soliciting support from individual contributors.

* * * filed a Statement of Information with the Secretary of State of * * * reporting * * *, * * *, and * * * were officers for * * *on * * *. * * * dissolved on * * *.

On * * *, * * * filed and received authority from * * * Secretary of State to operate in * * *. * * * became the registered agent for * * * on * * *.

* * * filed Form * * * on * * * for * * *. Form * * *, Part 11, states that the organization's purpose is to provide relief to * * *, * * * and * * *. * * * planned to * * * by * * *, * * *, * * *, and payment of expenses and fees for recreational activities. The funding for above activity would be from donations of automobiles, land, other motorized vehicles, electronic equipment, and household furnishings. * * * would sell these items to the general public and the proceeds would be used to carry out the organization's purpose. * * * planned to advertise its services in newspapers, radio, billboards, fliers, TV. and selective mailings and would use volunteers for tutoring, providing transportation and leadership for * * *, soliciting individuals and businesses for donations, and doing miscellaneous errands. * * * received exemption under IRC 501(c)(3) as a public charity with an effective date of * * *.

FORM * * *

The * * * Form * * * had a due date of * * * filed the * * * Form * * * on * * *. The statute is * * *. No return has been filed for * * *.

The * * * Form * * * reported the following income and expenses:

Form * * *, Schedule * * *, states that the primary exempt purpose of * * * is to provide * * * and organizations that help those * * * with the things they need most. Also, on Schedule * * *, * * * discusses its program service accomplishments and states, * * *, * * * were given away. * * * operates a * * * program focused on receiving donated * * *, * * * them to working order and giving to * * *."

ADVERTISING VEHICLES

* * * advertises * * * on * * *, * * *, * * *, and * * *. Some of the ads on * * * state the * * * can be viewed at * * * in * * * and that money from the sale will be donated to non-profit * * * providing * * *, clothing and transportation to * * * in need. Other * * * ads state, "* * *. The ads on * * * states, "* * *".

* * * BANK ACCOUNT

On * * *, * * * became primary signer on * * * and * * * was removed as authorized signer on account. In * * *, some of the cancelled checks list * * * as the Payor instead of * * *.

A review of bank statements and deposited items shows that * * * deposited checks from selling autos to * * * and made cash deposits ranging from $* * * to $* * * in * * *. The deposits per bank statements totaled $* * * in * * *. The income reported on the return totaled $* * *. It's unknown what the difference is for, however, * * * advertised and sold cars at * * * and used the services of * * * individuals who were not compensated by * * *.

A review of cancelled checks showed that * * * did not make any contributions to * * * charities or * * *.

ATTEMPTS TO CONTACT

Sent letter 3611, Form 4564, and Publication 1 on * * *. The letter was returned as undeliverable. A postal tracer was sent to * * *, and the post office indicated that * * * moved and left no forwarding address.

On * * *, the agent called the last known telephone number listed on * * * for * * * and left a message for * * * to call me. The call was not returned. Letter 3611 was sent on * * * to * * * via regular and certified mail. The certified card was signed and returned on * * *. The tracking information on * * * Service website, shows that the letter was delivered on * * * and left with an individual. * * * was the deadline to respond to letter 3611. A response was not received from * * *.

On * * *, the agent talked to * * * of * * *. * * * stated * * * does not have any documentation to verify income, expenses or contribution of vehicles to needy families The agent informed * * * that * * * exempt status will be revoked because it was not operating for an exempt purpose. * * * orally agreed to the revocation.

LAW


IRC Section 501(c)(3) exempts from taxation any corporation 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, or for the prevention of cruelty to children or animals, provided no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization described in IRC Section 501(c)(3), an organization must be both 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 or operational test, it is not exempt.

Treas. Reg. 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). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

IRC § 6001 provides that every person liable for any tax imposed by the IRC, 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.

Treas. Reg. 1.6001-1(a) states that any person subject to tax under subtitle A of the Code or any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information.

Treas. Reg. 6001-1(e) states 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.

IRC 6033(a)(1) provides, except as provided in IRC § 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.

Treas. Reg. 6033-1(h)(2) 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 IRC § 6033.

Section 1.6033-2(i)(2) of the Income Tax Regulations provides, in part, that every organization which is exempt from tax shall submit such additional information as may be required by the Internal Revenue Service for the purposes of inquiring into its exempt status.

Revenue Ruling 59-95, 1959-1 CB 627, provides that a failure to file required information return or comply with the provision 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 an exempt status.

GOVERNMENT'S POSITION


In order to qualify for exemption under IRC 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in that section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas. Reg. § 1.501(c)(3)-1(a)(1). * * * has shown it met the organizational test.

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. * * * exempt purpose was to provide relief to the poor, underprivileged, and * * * or organizations by providing food, clothing, * * *, and payment of fees and expenses for recreational activities or to provide * * * to families in need. A review of cancelled checks and bank statements from * * * showed that * * * did not give funds to organizations. Also, * * * has not shown it donated * * * in need. * * * did not provide any documentation to verify that it operated exclusively for exempt purposes under IRC 501(c)(3), therefore, it failed the operational test and is not exempt under IRC 501(c)(3).

IRC 6001 requires * * * to keep records and file returns, Treas. Reg. 1.6001-1(a) requires * * * to keep permanent books of accounts or records to establish income, deductions, credits, etc., * * * Treas. Reg. 1.6001-1(e) requires * * * to have books available for inspection by IRS employees, and Treas. Reg. 1.6033-1(h)(2) requires * * * to submit information as requested for purposes of inquiring about its exempt status. We attempted to obtain these records numerous times by mail and telephone. * * * failed to provide records as is required in these sections. In Rev. Rul. 59-95, an organization's failure or inability to file required information returns or otherwise to comply with the provisions of IRC 6033 and the regulations which implement it, may result in the termination of the organization's exempt status based on the grounds that the organization has not established that it is observing the conditions that are required for the continuation of its exempt status. * * * has not complied with IRC 6001 or 6033 and the corresponding regulations, * * * therefore, * * * exempt status should be revoked as of * * *.

TAXPAYER'S POSITION


* * *, CEO of * * *, does not have any records to support income, expenses or contribution of * * * to needy * * * and orally agreed to the revocation.

CONCLUSION


By not complying with the Code and Regulations, the organization has jeopardized its exempt status. * * * has failed to provide required documentation, thereby failing to be complaint with the Code, and failing to show any evidence of its exempt activities. We have no reason to believe that * * * is operating for exempt purposes.

As a result of the examination, we have determined that * * * is not operating for exempt purposes as a § 501(c)(3) organization. They have not provided any information to the contrary. Accordingly, since the organization failed to operate primarily for exempt purposes, we are proposing revocation of their tax-exempt status with an effective date of * * *.

Since the organization will no longer have tax-exempt status beginning in * * *, they are liable for filing Form * * *, * * * Income Tax Return, as of that date.

Published October 14, 2022
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