EO Examples — Internal Revenue Manual Part 4. Examining

The following examples of caveats can be used to explain the reasons for the adverse action. Every caveat must be tailored to fit the unique facts and circumstances of particular situations.

Revocation of IRC 501(c)(3), Failure to Provide Books and Records

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 thereunder.
In our letter(s) dated Month, DD, YYYY and Month DD, YYYY, we requested information necessary to conduct an examination of your Form 990 for the year ended Month, DD, YYYY. We have not received the requested information. Section 1.6033-2(i)(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. Since you have not provided the requested information, you have failed 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.

Revocation of IRC 501(c)(3), Operational Test – including failure to provide Books and Records.

You have failed to provide documents to establish that you are organized and 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 I.R.C. section 6001 and the regulations thereunder.

Revocation of IRC 501(c)(3), Operational Test.

Your primary activity since your inception has consisted of the operation of bingo games, which is an activity not accomplishing an exempt purpose. In addition, your executives unlawfully appropriated funds for their personal use, which is a means by which net earnings of your organization have inured to your private shareholders or individuals. I.R.C. 501(c)(3) requires organizations to operate exclusively for an exempt purpose, which includes having a primary activity accomplishing exempt purposes. See Treas. Reg. 1.501(c)(3)-1(a). Section 501(c)(3) precludes Federal income tax exemption if net earnings inure to the benefit of private shareholders or individuals. See Treas. Reg. 1.501(c)(3)-1(c)(2). As such, you are not an organization described in section 501(c)(3).
You paid over $100,000 in compensation to your Chief Executive Officer during each of the tax years ended December 31, 2015 and 2016, pursuant to an employment contract approved by your board of directors. During 2015 and 2016, you received only $125,000 and $117,000, respectively, in monetary donations. You did not in either year fund acquisitions for your collection of natural history exhibits. You also cut back the hours of the museum from 6 days a week to weekends only. In addition, you turned down a large bequest from a private donor because you did not have the funds to pay for storing, cataloging or displaying the donated items. You did make two $10,000 grants to CEO Foundation, an organization set up by your CEO’s step-son to rescue retired greyhounds, and guaranteed a note from CEO Foundation to ABC Bank, the proceeds of which were used to build a state-of-the art kennel on your CEO’s property (CEO Foundation conducted its rescue operation at CEO’s ranch).

I.R.C. 501(c)(3) precludes federal income tax exemption if net earnings inure to the benefit of private shareholders or individuals and if it is operated for the benefit of private interests. Because I.R.C. 501(c)(3) prohibits inurement of earnings and you operated for the benefit of private interests more than insubstantially, your exempt status is hereby revoked.

As a result of our examination of your activities and financial records for the year ending October 31, we have determined that your organization has been inactive for several prior years and that there have been no operations or financial activities conducted or planned. As such, you fail to meet the operational requirements for continued exemption under IRC 501(c)(3).

Unrelated Business Income Tax

During the tax year ending December 31, 2015 and 2016, while described as a tax exempt organization under I.R.C. 501(c)(6), you received gross income of $75,000 and $100,000, respectively, for engaging in the business of providing management services, for a market-priced fee, on a regular basis.

I.R.C. 511 imposes a tax on the unrelated business taxable income of exempt organizations. I.R.C. 513 provides that an unrelated trade or business is any trade or business not substantially related (aside from the need of such organization for income) to the exercise or performance by such organization of its exempt purpose or function constituting the basis for its exemption.

Because the provision of management services, for a market-priced fee, on a regular basis, is not substantially related to and does not contribute importantly to the accomplishment of the purposes for which tax exemption was granted (aside for the need to produce income), you received unrelated business taxable income in the amounts of $50,000 and $30,000 in taxable years 2015 and 2016 respectively. Accordingly, you are subject to unrelated business income tax in the amount of $7,500 and $4,500 for the tax years ending December 31, 2015 and 2016, respectively.

[Set forth any applicable penalties and their explanations in separate paragraphs.]