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Wednesday April 8, 2020

Private Letter Ruling

Organization with Incomplete Documentation Denied Exemption

GiftLaw Note:
An organization ("Organization") applied for tax-exempt status, filing Form 1023-EZ. Organization attested that it had the required organizational document limiting its purposes to one or more exempt purposes. Organization also attested that its organizing document does not expressly empower it to engage in activities that are not in furtherance of an exempt purpose. Organization attested that its organizing documents met the dissolution provision requirements of Sec. 501(c)(3). The Service obtained organizing documents from Organization that did not limit the organization to one or more exempt purposes and did not contain the proper dissolution clause. The Service corresponded with Organization by letter and telephone call multiple times regarding Organization's organizing documents.

Under Sec. 501(c)(3), an organization operated exclusively for charitable or educational purposes is exempt from federal income tax. Regulation 1.501(c)(3)-1 requires an exempt organization to be both organized and operated for one or more exempt purposes. Under Reg. 1.501(c)(3)-1(b)(1)(i), the organization is only organized exclusively for one or more exempt purposes if its articles of organization limit the purposes to one or more exempt purposes and do not empower the organization to engage in activities not in furtherance of one or more exempt purposes. Regulation 1.501(c)(3)-1(b)(4) requires an organization to be dedicated to an exempt purpose. This requires a dissolution clause that directs assets to be distributed for one or more exempt purposes or to the Federal Government or a state or local government for a public purpose or by a court to another organization. The Service determined that Organization failed to meet the organizational test, as its organizing documents did not conform to the requirements of Sec. 501(c)(3) and its regulations.
PLR 202001019 Organization with Incomplete Documentation Denied Exemption

1/3/2020 (5/16/2019)

Dear * * *

Form 886A Explanation of Items

Date of Notice: December 07, 20XX

Issues


Whether the exempt status of * * * (the Organization) under IRC 501(c)(3) should be revoked, effective July 01, 20XX because it is not organized exclusively for exempt purposes within the meaning of section 501(c)(3) and Treas. Reg 1.501(c)(3)-1(b)?

Facts


* * * applied for tax-exempt status by filing the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on November 12, 20XX, and was granted tax-exempt status as a 501(c)(3) on November 20, 20XX, with an effective date of July 01, 20XX.

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 amateur sports competition.

The organization attested on Form 1023-EZ, part II, box 2 that they have the organizing document necessary for their organizational structure.

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 that their organizing document contains this limitation.

They also attested that their organizing document does not expressly empower you to engage, otherwise than as an insubstantial part of your activities, in activities that in themselves are not in furtherance of one or more exempt purposes

The organization attested that their organizing document contains the dissolution provision required under section 501(c)(3) or that they did not need an express dissolution provision in your organizing document because they rely on the operation of state law in the state in which you are formed for your dissolution provision

The organizing documents that the agent obtained from the Organization do not contain a proper dissolution clause.

The organizing documents that the agent obtained from the Organization do not limit the purpose of the Organization to one or more exempt purposes.

The agent made several attempts to contact the Organization to request that it conform its organizing documents. Specifically, the agent attempted to contact Organization by letter on 4 occasions.

Correspondence for the audit was as follows:

Letter 3606 (Rev. 6 2012) with attachments, was mailed to the organization on January 24, 20XX with a response date of February 26, 20XX. This letter was not returned by the post office as being undeliverable

Received response from organization including answers to questions listed in the Information Document Request 0001; classification, activities, books and records and organizational documents.

Letter 3844-B (Rev11-2015) with attachments, was mailed to the organization, on August 2, 20XX, with a response date of September 3, 20XX, Article Number * * *. This letter was not returned by the post office as being undeliverable. Per the United States Post Office (USPS) tracking, this letter was delivered on August 31, 20XX at 9:20 am in * * *

Letter 3597 (Rev 12-2016) with attachments, was mailed to the Power of Attorney (POA) on August 2, 20XX, with a response date of September 3, 20XX, Article Number * * *. This letter was not returned by * * * the post office as being undeliverable. Per the USPS tracking, this letter was delivered to the Front desk/Reception/Mail Room on August 7, 20XX at 12:07 pm in * * *

Letter 5077-B (Rev 01-2017), TE/GE IDR Delinquency Notice, with attachments, mailed to the organization on November 2, 20XX, with a response date of November 16, 20XX, Article Number * * *. This letter was not returned by the post office as being undeliverable Per the USPS tracking, this letter was attempted to be delivered on November 9, 20XX A notice of delivery was left at the address of President's home.

Letter 3597, (Rev 12-2016), with attachments, mailed to the organization on November 2, 20XX, with a response date of November 16, 20XX, Article Number * * *. This letter was not returned by the post office as being undeliverable Per the USPS tracking, this letter was delivered to the Front desk/Reception/Mail Room on November 9, 20XX at 11:21 am in * * *

Telephone contact for the audit was as follows:

February 1, 20XX Tax Compliance Officer (TCO) received a telephone call from the President, * * *. TCO discussed the letter 3606 and answered any questions the President had.

February 26, 20XX, Case was reassigned to another TCO Called President. She stated the first TCO had called her to inform her of the reassignment of the case and had given her my contact information She stated I will be getting the response from her soon. I informed her I will call her to let her know when I receive it.

April 3, 20XX, Received mailed response TCO called President to inform her of receipt of the mailed response received by Internal Revenue Service, Exempt Organization (IRS EO) on March 5, 20XX. TCO informed the President that the TCO will review her response and get back to her within the next 30 days if the TCO has any additional questions

June 20, 20XX, called the President. The * * * Secretary of State (SoS) website does not have the amended Articles of Incorporation (AOI) online The President informed the TCO that the amended AOI were returned by the * * * SoS as the amended AOI needed to be reworded. The President is working with their attorney/POA to reword the amended AOI. TCO asked for a faxed copy of the amended AOI when the President sends them to the * * * SoS within the next 30 days.

July 27, 20XX, called the President, received her * * *

voice message. Left a voice message for the President asking for a call back.

September 7, 20XX, President called asking if the TCO had received the voice message she had left the previous Friday. TCO informed her there had not been a voice message from her received President stated she received the last letter, 3844-B, and she had decided to close the organization. TCO asked her if she had contacted the state informing them of the * * * closing/termination of the organization. President stated she send the state a letter informing them of the closing of the organization. TCO asked her to send TCO a copy of the information sent to the state. TCO informed the President that the 20XX Form 990-N had not been filed and will need to be before the audit can be closed TCO asked the President to file the Form 990-N for the TY 20XX, fax the information sent to the state and include a state of dissolution of assets. President stated there are no assets

October 31, 20XX, called the President, received her voice message. Left a voice message for the President asking for a call back.

November 1, 20XX, President called stating the organization has been closed. She will not be amending the AOI. She has filed the Form 990-N for the tax year ending December 31, 20XX TCO verified the F 990-N has posted. TCO explained to the President that the original AOI did not have the required language including a purpose, power and dissolution clause and without the AOI being amended, the organization will have to be sent a proposed revocation. TCO informed the President that a certified letter, 5077-B, will be sent to the organization. If there isn't a response to that letter, TCO will continue with the proposed revocation.

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.

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(b)(1)(i) An organization is organized exclusively for one or more exempt purposes only if its articles of organization (a) Limit the purposes of such organization to one or more exempt purposes; and (b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

Regulation 1.501(c)(3)-1(b)(4) An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal Government, or to a State or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the organizational test if its articles or the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders.

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.

Rev. Proc. 2018-5, Sec 11.02(3) Inaccurate information on request. A determination letter issued to an organization that submitted a request in accordance with this revenue procedure may not be relied upon by the organization submitting the request if it was based on any inaccurate material information submitted by the organization. Inaccurate material information includes an incorrect representation or attestation as to the organization's organizational documents, the organization's exempt purpose, the organization's conduct of prohibited and restricted activities, or the organization's eligibility to file Form 1023-EZ.

Organization's Position


Taxpayer's position is the President of the organization has closed the non profit. The President has filed the missing Form 990 N for the tax year ending December 31, 20XX. The President has sent the * * * Secretary of State a letter informing the state of the closing of the organization. The President stated there are no assets as she has been paying for all expenses. The President has closed the bank account of the organization. The President does not plan to reactivate or reopen the organization

Government's Position

Based on the above facts, the Organization has not established that it had organizing documents limiting the purpose of the organization to one or more exempt purposes, or a proper dissolution clause that meet the organizational test under IRC section 501(c)(3). at the time of applying for tax exemption.

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

The Organization fails the organizational test because it did not establish that it had an organizing document that complied with section 501(c)(3) at the time of applying for tax exemption. Because it never had an organizing document that meets the requirements of section 501(c)(3), and because it misrepresented that fact in its Form 1023-EZ, the revocation is effective as of the date of exemption, July 1, 20XX.

Conclusion


Based on the foregoing reasons, it is the IRS's position that the organization failed to establish that it meets the organizational test as required IRC 501(c)(3) for it to be exempt from federal income tax under IRC 501(c)(3) Accordingly, the organization's exempt status is revoked effective July 1, 20XX.

Form 1120, U S. Corporation Income Tax Return, should be filed for the tax periods after July 1, 20XX.

Published January 24, 2020
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