EO Declaratory Judgement Cases

With respect to the initial or continuing qualification of an organization as exempt from federal income tax, Section 406 of the PATH Act expanded declaratory judgment rights under IRC 7428 to all IRC 501(c) organizations regardless of paragraph and to IRC 501(d) organizations.

As a result of these expanded rights, examiners may not modify a tax-exempt status (such as modifying a recognized IRC 501(c)(4) exemption to an IRC 501(c)(7)).

Rather, the revocation procedures in place for IRC 501(c)(3) organizations have been expanded to all IRC 501(c) and (d) organizations.

Thus, the IRS must revoke (or treat as a revocation for declaratory judgment purposes) any organization that no longer qualifies under the IRC code section for which tax-exemption was granted or self-declared.

A revoked organization is free to apply or reapply for recognition of exemption under a different IRC section.

Revocations or disqualifications of organizations exempt under other than IRC 501(c)(3), IRC 501(c)(9) and IRC 501(c)(17), will not have an effective date. These organizations will be revoked (or treated as revoked in the case of disqualifications) for the specified tax years they failed to qualify.

Declaratory judgment rights also applies to disqualifications of organizations described under IRC 501(c)(12) or IRC 501(c)(15) that fail their respective 85 percent member income test or gross receipts test for specified tax years. These cases will be treated as a revocation for declaratory judgment purposes for the failed tax years only.

IRC 7428 continues to apply to IRC 501(c)(3) organizations the same way it did prior to the PATH Act when proposing:

A loss of tax-exempt status.

Adverse reclassification of an organization’s foundation status for IRC 501(c)(3) organizations.

Before closing a declaratory judgment case, refer to IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment and the Administrative Record.

All declaratory judgment cases require an administrative record.

Unagreed declaratory judgment cases also require a completed index to the administrative record.

The review function or Appeals will issue 90-day FADL for these cases, which are subject to review by the U.S. Tax Court.