Private Letter Ruling
IRS Revoked Community Service Organizations Exemption
Organization was granted tax-exempt status under Sec. 501(c)(3). The founding purpose of Organization was to serve low-income and minority populations through community service, civic engagement and economic development. Organization offered workshops and other activities designed to mentor low income and minority youth. Organization operated for some time as an exempt organization. Organization ceased all operations on Date due to operating losses.
To be tax-exempt under Sec. 501(c)(3), an organization must be operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes with no part of net earnings inuring to the benefit of a private shareholder or individual. Reg. 1.501(c)(3)-1(a)(1) requires an organization to be both organized and operated exclusively for one or more exempt purpose. Under Reg. 1.501(c)(3)-1(c)(1), an organization will fail the operational test if more than an insubstantial part of its activities are not in furtherance of an exempt purpose. The Service cited Rev. Rul. 58-617, 1958-2 CB 260, (Jan. 01, 1958), which states that tax exempt status remains so long as there are no material changes to the character of the organization, purpose of the organization or the method of operation. Here, the Service held that because Organization had ceased all operational and financial activities it was no longer operating for an exempt purpose. Therefore, the Service determined that Organization was not operating exclusively for an exempt purpose and revoked its exempt status.
Dear * * *:
This is a Final Adverse Determination Letter that your exempt status under section 501(c)(3) of the Internal Revenue Code (IRC) is revoked. Recognition of your exemption under IRC section 501(c)(3) is revoked effective December 31, 20xx.
Our adverse determination was made for the following reason(s):
You have not established that you are operated exclusively for an exempt purpose or that you have been engaged primarily in activities that accomplish one or more exempt purposes within the meaning of IRC section 501(c)(3).
Contributions to your organization are not deductible under section 170 of the Internal Revenue Code.
You are required to file Federal income tax returns on Form 1120. These returns should be filed with the appropriate Service Center for the year ending December 31, 20xx and for all years thereafter.
Processing of income tax returns and assessment of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.
If you decide to contest this determination in court, you must initiate a suit for declaratory judgment in the United States Tax Court, the United States Claim Court or the District Court of the United States for the District of Columbia before the 91st day after the date this determination was mailed to you. Contact the clerk of the appropriate court for the rules for initiating suits for declaratory judgment.
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. We 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 our assistance, which is always free, we will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.
We will notify the appropriate State Officials of this action, as required by section 6104(c) of the Internal Revenue Code.
If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.
Director, Exempt Organizations Examinations
Whether * * *, continues to qualify for exemption as an organization described in the Internal Revenue Code (IRC) Section 501(c)(3) because of no operation or activity since July 20xx which includes the year of examination.
* * * (Hereafter * * *) was incorporated under the laws of the State of * * * as a non-profit corporation on May 13, 20xx for the purpose of the following:
* * * SPECIFICALLY FOCUS ON LOW-INCOME AND MINORITY POPULATIONS WITH A COMMITMENT TO COMMUNITY SERVICE, CIVIC ENGAGEMENT AND ECONOMIC DEVELOPMENT
On April 28, 20xx * * * was recognized to be exempt from federal income tax as an organization described in IRC Section 501(c)(3).
* * * has operated to provide mentoring to low income and minority youth through workshops and other activities. In July 20xx the organization ceased operations due to operating losses. The organization has not been activity since July 20xx.
IRC § 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.
Tax Reg. § 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.
Tax Reg. § 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.
Tax Reg. § 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)
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.
The organization's representative declared that the organization has no operational or financial activities since July 20xx. Agent discussed revocation with the organization's representative on August 16, 20xx and he agreed to the proposed revocation as organization is no longer operating for an exempt purpose.
GOVERNMENT'S POSITION AND CONCLUSION
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 been inactive for since July 20xx and has no plans for future activities. The sole financial activity is from payment of outstanding debts. As such, * * * fails to meet the operational requirements to continue its exemption status under IRC 501(c)(3). Therefore the effective revocation date will be December 31, 20xx.
It was determined the organization does not meet the requirements under 501(c)(3) or 501(c)(3) of the code.
Forms 1120, U.S. Corporation Income Tax Return should be obtained for the fiscal years December 31, 20xx to the present.
If this proposed revocation becomes final, appropriate State officials will be advised of the action in accordance with Internal Revenue Code Section 6104(c) and applicable regulations. The organization may re-apply for tax exemption as long as it can be determined their activities meets the section's exempt purpose.