Private Letter Rulings - Exempt Status Revoked for Failure to Produce Records
GiftLaw Note:
ORG was established with the purpose of funding burial and funeral costs to families who have suffered a Sudden Infant Death Syndrome loss and offer peer support in times of grief. In January 20XX, the Service requested information to determine if ORG was operated for exempt purposes and determine if ORG was required to file Form 990. ORG's March 3, 20XX response contained bank statements, showing purchases that appeared to be personal in nature and no supporting documentation was supplied to justify the expenses. On March 5, 20XX, the Service requested documentation related to funeral services and burial assistance ORG claimed it provided during the tax year. Also requested were copies of canceled checks and delinquent Form 990 for 20XX because ORG's gross receipts were over $ ***. On May 28, 20XX, a 90 day notice letter was mailed to ORG requesting the documentation to determine if the ORG was operating for exempt purposes. ORG failed to respond or file Form 990 for the tax period ending December 31, 20XX.
Under Sec. 6001, every person liable for tax must keep adequate records as the Secretary of the Treasury or his delegate may prescribe. Section 6033(a)(1) provides that tax-exempt organizations must file an annual return with items of gross income, receipts and disbursements and other information needed. Regs. 1.6001-1(a) and (c) state that tax-exempt organizations must keep sufficient records to substantiate the information required under Sec. 6033. Reg. 1.6033-1(h)(2) provides that every organization which is exempt from tax shall submit such additional information as may be required by the Service for the purpose of inquiring into its exempt status. In Rev. Rul. 59-95, 1959-1 C.B. 627, the Service held that an exempt organization's failure or inability to provide requested financial information may result in termination of exempt status because the organization has not established it is observing the conditions required for the continuation of exempt status. Based on ORG's failure to produce records, the Service held that ORG's exempt status was revoked.
Under Sec. 6001, every person liable for tax must keep adequate records as the Secretary of the Treasury or his delegate may prescribe. Section 6033(a)(1) provides that tax-exempt organizations must file an annual return with items of gross income, receipts and disbursements and other information needed. Regs. 1.6001-1(a) and (c) state that tax-exempt organizations must keep sufficient records to substantiate the information required under Sec. 6033. Reg. 1.6033-1(h)(2) provides that every organization which is exempt from tax shall submit such additional information as may be required by the Service for the purpose of inquiring into its exempt status. In Rev. Rul. 59-95, 1959-1 C.B. 627, the Service held that an exempt organization's failure or inability to provide requested financial information may result in termination of exempt status because the organization has not established it is observing the conditions required for the continuation of exempt status. Based on ORG's failure to produce records, the Service held that ORG's exempt status was revoked.
Dear * * *:
This is a final notice of adverse determination that your exempt status under section 501(c)(3) of the Internal Revenue Code is revoked. Recognition of your exemption under Internal Revenue Code section 501(c)(3) is revoked effective January 1, 20XX the following reason(s):
You have failed to produce documents to establish that you are operated exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3), and that no part of your net earnings inure to the benefit of private shareholders or individuals. Also, you have failed to keep adequate books and records as required by IRC section 6001 and the regulations there under. In our telephone conversation held on March 5, 20XX and in our letter dated May 28, 20XX, we requested information necessary to conduct an examination of your books and records for the year ended December 31, 20XX. We have not received the requested information.
You failed to file an annual return on Form 990 for the year ended December 31, 20XX. Our records also indicate you have not filed an annual return on Form 990 for years ending December 31, 20XX; December 31, 20XX; December 31, 20XX; and December 31, 20XX. IRC 6033(a)(1) provides that with certain exceptions, every organization exempt from taxation under IRC 501(a) shall file an annual return.
Section 1.6033-2(h)(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 purpose of inquiring into its exempt status. You have not provided the requested information.
You failed to meet the operational requirements for continued exemption under IRC 501(c)(3). You have not provided requested information. We hereby revoke your organization's exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code, effective January 1, 20XX.
Contributions to your organization are no longer deductible effective January 1, 20XX.
Since your exempt status has been revoked, you are required to file Form 1120, U.S. Corporation Income Tax Return, for all years beginning on or after January 1, 20XX.
Income tax returns for subsequent years are to be filed with the appropriate Service Center identified in the instructions for those returns.
It is further determined that your failure to file a written appeal constitutes a failure to exhaust your available administrative remedies. However, 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 Claims Court, or the district court of the United States for the District of Columbia before the (ninety-first) 91st day after the date that this determination was mailed to you. Contact the clerk of the appropriate court for rules for initiating suits for declaratory judgment. To secure a petition form, write to the following address: * * *
Please understand that filing a petition for a declaratory judgment under IRC section 7428 will not delay the processing of subsequent income tax returns and assessment of any taxes due.
You also have the right to contact the Office of the Taxpayer Advocate. However, you should first contact the person whose name and telephone number are shown above since this person can access you tax information and can help you get answers. You can call 1-877-777-4778, and ask for the Taxpayer Advocate assistance or you can contact the Advocate from the site where this issue was determined by writing to: * * *
Taxpayer Advocate assistance cannot be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling.
This letter should be kept within your permanent records.
If you have any questions, please contact the person whose name and telephone number are shown above.
Sincerely,
Nanette M. Downing, Director, EO Examinations
* * * * *
October 25, 2010
Dear * * *:
We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.
If you accept our findings, take no further action. We will issue a final revocation letter.
If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office consideration within 30 days from the date of this letter to protest our decision. Your protest should include a statement of the facts, the applicable law, and arguments in support of your position.
An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues, explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.
You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue a determination letter to you based on technical advice, no further administrative appeal is available to you within the IRS regarding the issue that was the subject of the technical advice.
If we do not hear from you within 30 days from the date of this letter, we will process your case based on the recommendations shown in the report of examination. If you do not protest this proposed determination within 30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for the District of Columbia determines that the organization involved has exhausted its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter. We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the Code.
You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at: * * *
If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.
Thank you for your cooperation.
Sincerely,
Nanette M. Downing, Director, EO Examinations
* * * * *
LEGEND:
Whether ORG qualifies for exemption under Section 501(c)(3) of the Internal Revenue Code.
FACTS
On May 31, 20XX, ORG, Inc. filed Articles of Incorporation with the state of State. The Articles of Incorporation provided that its purpose was to fund burial and funeral costs to families who have suffered a Sudden Infant Death Syndrome (SIDS) loss and offer peer support during the time of grief.
On January 7, 20XX, an initial appointment letter and an Information Document Request (Exhibit 1) was mailed the ORG to determine if the organization was operated for exempt purposes and determine if it was required to file Forms 990. The organization's response was received on March 3, 20XX. The correspondence from ORG only contained documentation related to its fundraising and bank statements (Exhibit 2). A majority of the purchases listed on the bank statements appeared to be personal in nature and no supporting documentation to justify the expenses were provided.
During a telephone conversation with the organization on March 5, 20XX, the Revenue Agent requested documentation relating to funeral services and burial assistance the organization stated it provided during the tax year ended December 31, 20XX. Revenue Agent also requested copies of cancelled checks and delinquent Form 990 for 20XX because gross receipts were over $* * * based on a review of the bank statements. On May 28, 20XX a 90 day notice letter and an Information Document Request was mailed to organization requesting the missing documentation in order to determine if the organization is operating for exempt purposes. ORG. failed to respond to the correspondence or file the Form 990 for the tax period ending December 31, 20XX.
LAW
Internal Revenue Code Section 6001 provides that every person liable for any tax imposed by the Internal Revenue 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.
Internal Revenue Code Section 6033(a)(1) provides, except as provided in IRC 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 for carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, an 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 Regulation Section 1.6001-1(a) in conjunction with Treasury Regulations Section 1.6001-1(c) provides that every organization exempt from tax under IRC Section 501(a) and subject to the tax imposed by IRC Section 511 on its unrelated business income must keep such permanent books or accounts or records, including inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters required to be shown by such person in any return of such tax. Such organization shall also keep such books and records as are required to substantiate the information required by IRC Section 6033.
Treasury Regulation Section 1.6001-1(e) states that the books and 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.
Treasury Regulation Section 1.6033-1(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 Internal Revenue Code Section 6033.
Revenue Ruling 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 Internal Revenue Code Section 6033 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.
In accordance with the above cited provisions of the Code and regulations under Internal Revenue Code Section 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 (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.
CONCLUSION
It is the Internal Revenue Service's position that ORG failed to meet the reporting requirements under Internal Revenue Code Sections 6001 and 6033 to be recognized as exempt from federal income tax under Internal Revenue Code Section 501(c)(3). Accordingly, the organization's exempt status is revoked effective January 1, 20XX. Any contributions to ORG are no longer deductible as charitable contributions.
ORG will be required to file Form 1120 for the tax period ending December 31, 20XX and all subsequent tax periods.