Private Letter Rulings - Organization Loses Exemption for Failure to Communicate
GiftLaw Note:
Organization filed for and was granted tax-exempt status. Sometime after being granted exemption, Organization was selected for audit in order to ensure that Organization's activities and operations aligned with its exempt status. However, Organization repeatedly failed to respond to the Service's attempts to obtain information for the audit. Specifically, the Service sent six letters and attempted to contact Organization by phone five times. Because of Organization's failure to respond and produce any documentation substantiating its operation as a tax-exempt entity, the Service underwent the process of revoking Organization's exempt status.
In order to be tax-exempt, an organization must be organized and operated exclusively for exempt purposes with no part of its net earnings inuring the benefit of any private shareholder or individual. Sec. 501(c)(3). Under Sec. 6033(a)(1), exempt organizations must file annual information returns. In addition, pursuant to Reg. 1.6033-1(h)(2), an exempt organization shall submit additional information as the Service may require in order to substantiate its exempt status. In Rev. Rul. 59-95, the Service revoked the exempt status of an organization that failed to provide the required information necessary for the Service to determine that the organization was operating for exempt purposes. Here, the Service revoked Organization's exempt status for this reason because it failed to respond to the Service's requests for information to substantiate the claim that it was operating for exempt purposes.
In order to be tax-exempt, an organization must be organized and operated exclusively for exempt purposes with no part of its net earnings inuring the benefit of any private shareholder or individual. Sec. 501(c)(3). Under Sec. 6033(a)(1), exempt organizations must file annual information returns. In addition, pursuant to Reg. 1.6033-1(h)(2), an exempt organization shall submit additional information as the Service may require in order to substantiate its exempt status. In Rev. Rul. 59-95, the Service revoked the exempt status of an organization that failed to provide the required information necessary for the Service to determine that the organization was operating for exempt purposes. Here, the Service revoked Organization's exempt status for this reason because it failed to respond to the Service's requests for information to substantiate the claim that it was operating for exempt purposes.
4/28/2017 (12/29/2016)
Dear * * *:
* * *
Issues
Should * * * a 501(c)(3) exempt organization be revoked due to failure to respond and failure to produce records?
Facts
The organization filed Form 1023 for exemption on April, 22, 20XX and was granted exemption as a 501(c)(3) on July 10, 20XX with an effective date of April 18, 20XX.
A 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 was selected for audit to ensure that the examined organization's activities and operations align with its approved exempt status.
The organization failed to respond to the Internal Revenue Service attempts to obtain information to perform an audit of Form 990-N for the above mentioned tax period.
Correspondence for the audit was as follows:
- Letter 3606 (Rev. 6-2012) with attachments were mailed to the organization on January 5, 20XX, with a response date of February 5, 20XX.
- Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed certified to the Director on March 1, 20XX; with a response date of March 29, 20XX. Article Number * * *. Per the United States Postal Service (USPS) tracking this was unclaimed and returned to the Internal Revenue Service on March 28, 20XX.
- Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed certified to * * * the Vice President on April 7, 20XX; with a response date of April 21, 20XX. Article Number * * *. Per USPS tracking this was unclaimed and returned to the Internal Revenue Service on April 11, 20XX.
- Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed certified to * * * the Vice President on April 7, 20XX; with a response date of April 21, 20XX. Article Number * * *. Per USPS tracking this was unclaimed and returned to the Internal Revenue Service on May 9, 20XX.
- Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed certified to * * * the Secretary on April 7, 20XX; with a response date of April 21, 20XX. Article Number * * *. Per USPS tracking, this was delivered on April 16, 20XX at X:XX PM. Also, received PS Form 3811, with the signature of * * *.
- Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed certified to * * * the Treasurer on April 7, 20XX; with a response ate of April 21, 20XX. Article Number * * *. Per USPS tracking, this was delivered on April 11, 20XX at XX; XX AM. Also, received PS Form 3811, with the signature of the Treasurer, reflecting a signature date of April 11, 20XX.
Telephone contacts for the audit was as follows:
- January 1, 20XX, Tax Compliance Officer (TCO), called the phone number listed on the Form 1023 application for the organization at XXX-XXX-XXXX. TCO reached the voice mail for * * * the Director and left a message for an officer to return the phone call.
- February 18, 20XX, TCO called the Director at XXX-XXX-XXXX and received voice mail. TCO left a message for * * * the Director to return the phone call. The call was not returned.
- April 5, 20XX, TCO called the Director at XXX-XXX-XXXX. Call did not ring to voice mail; TCO was unable to leave a voice mail.
- May 13, 20XX, TCO called the Director at XXX-XXX-XXXX; TCO left a message for a return call. The call was not returned.
- May 13, 20XX, TCO called the Secretary * * * at XXX-XXX-XXXX; this number was not in service.
Law
Internal Revenue Code (IRC) § 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 cash.
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, including those described in section 501(c)(3).
IRC § 6001 of the Code provides that every person liable for any tax imposed by the Code, or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time prescribe.
IRC § 1.6001-1(e) of the regulations states that the books or records required by this section shall be kept at all-time 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) 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.
Federal Tax Regulations (FTR) § 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.
FTR § 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.
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.
Section 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.
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 Position
The organization has failed to respond to all attempts to contact them. The taxpayer's position on the issue(s) is currently unknown at this time.
Government Position
Based on the above facts, the organization did not respond to verify that they are 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 test or the operational test, it is not exempt.
In accordance with the above-cited provisions of the Code and regulations under sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax.
Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status. Using the rationale that was developed in Revenue Ruling 59-95, the Organization's failure to provide requested information should result in the termination of 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 the organization failed to meet the reporting requirements under sections 6001 and 6033 to be recognized as exempt from federal income tax under 501(c)(3) of the Internal Revenue Code. Accordingly, the organization's exempt status is revoked effective January 1, 20XX.
Form 1120 returns should be filed for the tax periods after January 1, 20XX.