Sunday May 31, 2020
Private Letter Ruling
IRS Revokes Hospital's Exemption
Hospital was granted exempt status under Sec. 501(c)(3) and operated a Sec. 509(a)(1) foundation. Because Hospital was affiliated with a governmental agency, it was exempt from filing annual Forms 990. Hospital at a later time entered into an agreement to sell all of its assets and property to Purchaser. Hospital ceased to operate as a nonprofit entity and ended its exempt purpose. Hospital was unable to provide proof that it filed Articles of Dissolution with the State. Hospital failed to inform the IRS that it ceased to operate for an exempt purpose.
To be exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for religious, charitable, scientific, testing for public safety literary or educational purposes, to foster amateur sports competition or the prevention of cruelty to children or animals, no part of the earnings of which inures to the benefit of a private individual. Under Reg. 1.501(c)(3)-1(a)(1), an organization must meet both the organizational and operational tests to be tax exempt. Regulation 1.501(c)(3)-1(c)(1) states that an organization will be operated exclusively for an exempt purpose only if it engages primarily in activities in furtherance of an exempt purpose. If more than an insubstantial part of its activities are not in furtherance of an exempt purpose, the organization will fail the operational test. Regulation 1.501(c)(3)-1(d)(ii) states that an organization must serve a public rather than private interest. Here, Hospital did not provide proof of dissolution and has ceased operating for an exempt purpose, thus the IRS revoked Hospital’s exempt status.
Dear * * *:
This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section 501(c)(3), effective October 1, 20XX. Your determination letter dated April 19XX is revoked.
Our adverse determination as to your exempt status was made for the following reasons:
You discontinued activities furthering charitable or educational purposes. Organizations described in I.R.C. § 501(c)(3) and exempt under section 501(a) must be both organized and operated exclusively for exempt purposes. You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of I.R.C. section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. You have not established that you have operated exclusively for an exempt purpose.
As such, you failed to meet the requirements of I.R.C. § 501(c)(3) and Treasury Regulation §1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes and that no part of your earnings inured to the benefit of private shareholders or individuals.
Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code.
Organizations that are not exempt under section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov.
If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment. Please refer to the enclosed Publication 892 for additional information. You may write to the courts at the following addresses:
United States Tax Court
400 Second Street, NW
Washington, DC 20217
U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005
U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001
Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code.
You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.
If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter.
Director, EO Examinations
Should the tax-exempt status under IRC §501(c)(3) for * * * be revoked?
* * * (“the Hospital”) was incorporated in the State of * * * on March 17, 19XX. The Hospital applied for tax exempt status under IRC §501(c)(3) on February 3, 19XX and in April, 19XX the Hospital was determined to be exempt from taxation under IRC §501(c)(3) with a foundation classification under IRC §509(a)(1) and 170(b)(1)(A)(iii).
While the Hospital was a separately incorporated entity, it fell under the province of the government of * * *, * * *. As an organization affiliated with a governmental agency, the Hospital received exemption from filing annual Forms 990.
On April 2, 20XX the Hospital and * * * entered into a purchase agreement with * * * (“* * *”). The Hospital and * * * were the sellers and * * * was the purchaser.
The terms of the agreement included the purchase price of $0.00 which was adjusted down to $0.00 after post-closing adjustments were made.
Upon the sale of all assets and property from the Hospital to * * *, the Hospital did not operate as a corporate entity and ceased to have an exempt purpose. However, the Hospital did not file Articles of Dissolution with the State of * * * and did not inform the Internal Revenue Service of its' intent to dissolve and forfeit their tax-exempt status.
A search on the Secretary of State's web site for * * * did not provide any record of Articles of Dissolution having ever been filed. A conformed copy of the Articles of Dissolution was requested from the Hospital, but the Hospital was unable to provide that document.
The Hospital was sold again in or around 20XX to the current owner, which is * * *. The transfer of records from * * * to the current owner in or around 20XX was contentious, and all historical records were not transferred to the new owners.
IRC §501(a) exempts organizations described in Section 501(c) of the Code from federal income taxation.
IRC §501(c)(3) exempts from federal income tax organizations organized and operated exclusively for charitable, educational, and other exempt purposes, provided that no part of the organization's net earnings inures to the benefit of any private shareholder or individual.
Treas. Reg. §1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization described in section 501(c)(3) of the Code, the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section. If an organization fails to meet either the organizational test or the operational test, it is not exempt.
Treas. Reg. §1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated exclusively” for one or more exempt purposes, only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Treas. Reg. §1.501(c)(3)-1(d)(2) defines the term "charitable" for 501(c)(3) purposes, in part, as including relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; and lessening of the burdens of Government.
Treas. Reg. §1.6001-1(c) provides that for exempt organizations, in addition to such permanent books and records required by section 1.6001-1(a) with respect to the tax imposed by section 511 on the unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements.
Treas. Reg. §1.6001-1(e) provides that the books or records required by this section shall be kept at all times 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.
In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court ruled that the existence of a single nonexempt purpose, if substantial in nature, will cause failure of the operational test, regardless of the number or importance of truly exempt purposes.
In United States v. Wells Fargo Bank, 485 U.S. 351, 108 S. Ct. 1179, 99 L. Ed. 2d 368 (1900) the Supreme Court held that an organization must prove unambiguously that it qualifies for a tax exemption.
* * * acknowledges that the corporate identity associated with this entity ceased to exist on April 2, 20XX when all assets were purchased by * * *. The Hospital understands that without an exempt purpose after the transfer of assets to * * *, they no longer qualified as a tax-exempt organization.
The Hospital also acknowledges that they did not correctly terminate their tax-exempt status in 20XX and they state that they are unable to determine of Articles of Dissolution were ever filed with the State of * * *.
The Hospital understands that without a conformed copy of the Articles of Dissolution, the only way to terminate an organization's tax-exempt status with the IRS is for the IRS to propose the revocation of that status.
The Hospital and the government of * * *, * * * sold the assets associated with * * * on April 2, 20XX. Once the transfer of assets to the new owner was completed, the hospital under Employer Identification Number (EIN) * * * did not provide medical and other hospital related services. The physical hospital facilities remained, but the medical services were provided by the successor hospital organization.
After April 2, 20XX * * * did not conduct any exempt function activities under their EIN, and in fact did not conduct any activities. Treas. Reg. §1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated exclusively” for one or more exempt purposes, only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
With a lack of activities conducted after the sale of all assets in 20XX, the Hospital could not have been considered to have operated exclusively for an exempt purpose because there was no primary activity. The Hospital failed to qualify for continued exemption under IRC §501(c)(3) once they terminated the operation of the hospital under their EIN.
In 20XX the Board of Trustees for * * * failed to file Articles of Dissolution with the state of * * * to dissolve their corporate identity and they failed to provide a conformed copy of the Articles of Dissolution to the IRS to terminate the tax-exempt status of the Hospital.
Consequently, we are revoking the Hospital's section 501(c)(3) status.
* * * ceased being a viable tax-exempt organization upon the sale of their assets in 20XX. The Hospital failed to terminate their tax-exempt status properly after the sale of their assets in 20XX and since 20XX they have not operated exclusively for a tax-exempt purpose as required to maintain exemption under IRC §501(c)(3). As a result, the Hospital's section 501(c)(3) tax-exempt status is being revoked, with an effective date of October 1, 20XX.