Status 36 Case Scenarios

Scenario 1

Status 36 Organization Qualifies

Facts and Instructions

Organization A has never applied for exemption with the IRS. A has filed Forms 990 for 2014 and 2015 self-declaring its exempt status under IRC 501(c)(7). The BMFOLO shows a current status code of "36" and subsection of 07. During the examination of 2014 and 2015 Forms 990, you determine that Adoes qualify for exemption under IRC 501(c)(7)for the tax years of examination. No other issues or defects were discovered in the examination. Prepare Letter 6049 TE/GE, No Change Letter. This letter is a closing letter issued by the examination group. Mail Letter 6049 to the taxpayer following group procedures. How do you proceed? Complete the RCCMS Closing Record. Use DC 52 (RCCMS 214), Change due to Correction of Operations, if the organization made corrections by applying for tax-exempt status on Form 1024 or 1024-A during the examination, or if there were other changes or corrections to operations. Use DC 02 (RCCMS 107), No Change, if there were no changes to the organization’s status and the organization did not make any corrections during the examination. Close the case to the Closing Unit.

For scenarios 2 through 6, there will reflect a disqualification. In each disqualification scenario, when completing your examination report on Form 4621-A, do not check any box in Item 12 until the Form is revised after publication of this manual to reflect the PATH Act. Instead, complete Item 13, Remarks, explaining the disqualification: "The nature of the proposed status change is denial of tax-exempt status effective for the tax periods under examination."

Scenario 2

Agreed Disqualification — Converted Return Form 1120 Secured

Facts and Instructions

Organization B has never applied for exemption with the IRS. B has filed Forms 990 for 2014 and 2015 self-declaring its exempt status under IRC 501(c)(6). The BMFOLO shows a current status code of "36" and subsection of 06. During the examination of 2014 and 2015 Forms 990, you determine that B does not qualify for tax-exempt status under IRC 501(c)(6) for the years of examination. Prepare Form 4621-A. Prepare Form 886-A if additional space is needed for facts, law and argument. Issue your examination report to B with a 30-day letter. B has declaratory judgment rights. After reviewing your examination report on Form 4621-AB signs Form 6018 agreeing that it does not qualify for tax-exemption. B also files delinquent Forms 1120 with you for the affected tax years. How to proceed after the taxpayer agrees with your report: Follow the converted tax return procedures in IRM 4.70.14.2.1.3.3, EO Conversion Returns, for the secured Form 1120. Prepare a secured converted return package. Don’t submit the Form 1120 package to the FAST Unit. Prepare Form 2363-A. Don’t submit Form 2363-A to the FAST. Agreed disqualifications in Status 36 cases are subject Mandatory Review. Keep Form 2363-A in the case file for both Mandatory Review and Appeals. Complete referral Form 5666 (or Form 5346) only if you are unsure the secured Forms 1120 are technically accurate, the return is too complex or it appears to be prepared incorrectly. Complete the RCCMS Closing Record. Use DC 05 (RCCMS 207), Delinquent Related Return Secured for Forms 990. You can’t use DC 13 (RCCMS 207), Referrals to Other Operating Divisions because DC 05 (RCCMS 207) is a higher priority disposal code. Close the case to Mandatory Review. Include the administrative record and the administrative record index.

Scenario 3

Agreed Disqualification — Form 5666 Prepared

Facts and Instructions

Organization C has never applied for exemption with the IRS. C has filed Forms 990 for 2014 and 2015 self-declaring its exempt status under IRC 501(c)(7). The BMFOLO shows a current status code of "36" and subsection of 07. During the examination of 2014 and 2015 Forms 990, you determine that C does not qualify for tax-exempt status under IRC 501(c)(7) for the years of examination. Prepare Form 4621-A. Prepare Form 886-A if additional space is needed for facts, law and argument. Issue your examination report to C with a 30-day letter. C has declaratory judgment rights. After reviewing your examination report on Form 4621-AC signs Form 6018 agreeing that it does not qualify for tax-exemption. C is not ready to file Forms 1120 for the affected tax years in time before you close your examination. How to proceed after the taxpayer agreed to your report: Prepare Form 2363-A. Don’t submit Form 2363-A to the FAST Unit. Agreed disqualifications in Status 36 cases are subject Mandatory Review. Keep Form 2363-A in the case file for both Mandatory Review and Appeals. Since you are not enforcing income tax on converted returns as described in IRM 4.70.14.2.1.3.3, EO Conversion Returns, prepare a referral on Form 5666 (or Form 5346) to inform SB/SE or LB&I that C is a taxable organization and has not filed its required tax returns on Form 1120 Complete the RCCMS Closing Record. Use DC 13 (RCCMS 207), Referrals to Other Operating Divisions for Forms 990. Close the case to Mandatory Review. Include the administrative record and the administrative record index.

Scenario 4

Agreed Disqualification — Income Tax Enforced

Facts and Instructions

Organization D has never applied for exemption with the IRS. D has filed Forms 990 for 2014 and 2015 self-declaring its exempt status under IRC 501(c)(4). The BMFOLO shows a current status code of "36" and subsection of 04. During the examination of 2014 and 2015 Forms 990, you determine that D does not qualify for tax-exempt status under IRC 501(c)(4) for the years of examination. Prepare Form 4621-A. Prepare Form 886-A if additional space is needed for facts, law and argument. Issue your examination report to D with a 30-day letter. D has declaratory judgment rights. After reviewing your examination report on Form 4621-AD signs Form 6018 agreeing that it does not qualify for tax-exemption. D is not ready to file Forms 1120 for the affected tax years in time before you close your examination. You decide to enforce the income tax on converted returns as described in IRM 4.70.14.2.1.3.3, EO Conversion Returns. How to proceed after the taxpayer agreed to your report: Prepare Form 2363-A. Don’t submit Form 2363-A to the FAST. Agreed disqualifications in Status 36 cases are subject Mandatory Review. Keep Form 2363-A in the case file for both Mandatory Review and Appeals. Since you are enforcing income tax on converted returns as described in IRM 4.70.14.2.1.3.3, EO Conversion Returns, there is no need to prepare a referral on Form 5666 (or Form 5346). After Form 2363-A posts, follow substitute for return procedures for Form 1120 like any other tax return. Complete the RCCMS Closing Record. Use DC 04 (RCCMS 205), Change to Related Return for Forms 990. You can’t use DC 13 (RCCMS 207), Referrals to Other Operating Divisions because DC 04 (RCCMS 205) is a higher priority disposal code. Close the case to Mandatory Review. Include the administrative record and the administrative record index.

Scenario 5

Unagreed Disqualification With Protest — Organization Requests Modification if Disqualification is Sustained — Form 5666 Prepared

Facts and Instructions

Organization E has never applied for exemption with the IRS. E has filed Forms 990 for 2014 and 2015 self-declaring its exempt status under IRC 501(c)(6). The BMFOLO shows a current status code of "36" and subsection of 06. During the examination of 2014 and 2015 Forms 990, you determine that E does not qualify for tax-exempt status under IRC 501(c)(6) for the years of examination. However, E appears to qualify for exemption under IRC 501(c)(5) instead. Prepare Form 4621-A. Prepare Form 886-A to present your facts, law and argument. Issue your examination report to E with a 30-day letter. E has declaratory judgment rights. After reviewing your examination report on Form 4621-A, E does not agree to the proposed disqualification of tax-exempt status. E submits a written protest to you, and also requests IRC 501(c)(5) status if the disqualification under IRC 501(c)(6) is sustained. You issue a rebuttal Letter 5918 to E, and you explain that E cannot modify a tax-exempt status citing IRC 7428(a). How to proceed after the taxpayer responds to your report: Prepare Form 2363-A. Don’t submit Form 2363-A to the FAST. Keep Form 2363-A in the case file for both Mandatory Review and Appeals. Since you are not enforcing income tax on converted returns as described in IRM 4.70.14.2.1.3.3, EO Conversion Returns, prepare a referral on Form 5666 (or Form 5346) to inform SB/SE or LB&I that C is a taxable organization and has not filed its required tax returns on Form 1120. Complete the RCCMS Closing Record. Use DC 07 (RCCMS 601), Unagreed-Protest to Appeals for the Forms 990. Close the case to Mandatory Review. Include the administrative record and the administrative record index.

Scenario 6

Unagreed Disqualification Without Protest — Income Tax Enforced

Facts and Instructions

Organization F has never applied for exemption with the IRS. F has filed Forms 990 for 2014 and 2015 self-declaring its exempt status under IRC 501(c)(6). The BMFOLO shows a current status code of 36 and subsection of 06. During the examination of 2014 and 2015 Forms 990, you determine that F does not qualify for tax-exempt status under IRC 501(c)(6) for the years of examination. Prepare Form 4621-A. Prepare Form 886-A to present your facts, law and argument. Issue your examination report to F with a 30-day letter. F has declaratory judgment rights. F defaults on the 30-day letter. How to proceed after the taxpayer responds to your report: Prepare Form 2363-A. Because the proposed disqualification is deemed unagreed, keep Form 2363-A in the case file for Mandatory Review. Since you are enforcing income tax on converted returns as described in IRM 4.70.14.2.1.3.3, EO Conversion Returns, there is no need to prepare a referral on Form 5666 (or Form 5346). You can’t enforce income tax until Form 2363-A posts. Form 2363-A won’t post until Mandatory Review agrees with the disqualification and issues a 90-day FADL, which may be 3 weeks to 3 months later. Consequently, you establish Form 1120 NMF controls to protect the revenue. Complete the RCCMS Closing Record. Use DC 10 (RCCMS 604), Unagreed - Without Protest for the Forms 990. Close the Form 990 case to Mandatory Review. Include the administrative record and the administrative record index. Also, transfer the Form 1120 NMF case file to Mandatory Review for AIMS Status 38 suspense pending Mandatory Review’s decision to sustain the disqualification. If the disqualification is sustained and Form 2363-A has posted, follow substitute for return procedures for Forms 1120 on AIMS Master File like any other tax return unless F files delinquent Forms 1120 voluntarily with you. Delete the Form 1120 NMF duplicate record.