Exempt Status Lost Due to Failure to Actually Undertake Exempt Activities for 11 Years

In the case of Community Education Foundation v. Commissioner, T.C. Memo. 2016-223 the taxpayer was contesting the IRS’s revocation of the organization’s tax exempt status under IRC §501(c)(3).  The IRS was not alleging that the organization carried on something that wasn’t in line with its exempt purpose, but rather simply that the organization was actually carrying on any purpose.

In 2001 the organization filed for exempt status with the IRS.  The organization described its purpose as:

The ABF Educational Foundation, Inc. (the “Foundation”) is a conservative research and educational institute focusing on public policy issues that have particular impact on African Americans, Hispanic Americans, Asian Americans, Native Americans, and heritage groups (the “Target Groups”). The Foundation's guiding principle is to encourage open inquiry about public policy issues that are of particular interest and educational value for the Target Groups and the public in general and to provide programs that highlight and educate the Target Groups and the public about these germane subjects and/or public policy issues.

(Note-the organization changed its names multiple times during its life, so ABF Educational Foundation, Inc. is the entity that eventually was named the Community Education Foundation.)

To accomplish these purposes the organization provided the following detailed plan for its operation:

1. Town hall meetings: The Foundation will sponsor a minimum of twenty televised or non-televised town hall meetings on university campuses across the United States to the general public, particularly [*4] minorities in the education profession, health care profession, legal profession, business and civic leaders, religious leaders, labor union members, college and university students. Each town hall meeting will discuss the reformation of tax, education, social security, health care, racial profiling, business and economic development. The purpose of these town hall meetings is to help the American public, particularly minorities, have a better understanding of conservative public policy initiatives. The Foundation's staff and consultants will work to develop and conduct these monthly town hall meetings that are scheduled to start in September 2001. This activity will account for roughly 25 percent of the Foundation's resources and time in any given year.

2. National workshops: The Foundation will sponsor twenty national workshops in high school auditoriums, college campuses, convention centers, church auditoriums and hotels across the United States * * *. The Foundation's staff and consultants will work to develop and organize these national workshops that are scheduled to start in October 2001. This activity will account for roughly 55 percent of the Foundation's resources and time in any given year.

3. Congressional forums: The Foundation will sponsor quarterly educational forums for public officials, non-profits, opinion pollsters, business leaders and the media to better understand minorities and their perception on certain public policy initiatives that impact their daily lives. The Foundation's staff will work to develop and organize these congressional forums that are scheduled to start in November 2001. This activity will account for roughly 10 percent of the Foundation's resources and time in any given year.

4. Media/Communication: As part of the Foundation's efforts to raise awareness and understanding of the conservative public policy initiatives to the minorities and the general public, the Foundation will communicate these policy initiatives across the country via billboards, radio, televisions, etc. The Foundation staff and consultants will work to develop the messages to be advertised. This activity will account for roughly 10 percent of the Foundation's resources and time in any given year.

Based on this information contained in the organization’s Form 1023 the IRS granted the organization tax-exempt status under IRC §501(c)(3) and private foundation status under IRC §§509(a)(1) and 170(b)(1)(A)(vi).

The IRS in 2012 took a look at the organization and discovered that, in fact, it had conducted none of the above activities in the prior eleven years, among other issues.  The IRS determined that revocation of the exempt status was appropriate:

Respondent determined that petitioner: (1) failed to establish that it was operated exclusively for exempt purposes under section 501(c)(3) and section 1.501(c)(3)-1(d), Income Tax Regs.; (2) failed to maintain or produce any books [*7] or records setting forth its revenue, expenses, assets, and activities or programs; and (3) admitted to a significant period of inactivity and failed to demonstrate that it engaged in activities furthering purposes described in section 501(c)(3). In a companion final adverse determination also dated October 22, 2013, respondent modified petitioner's private foundation status "from classification as a [tax-exempt] public charity to classification as a [taxable] private foundation effective January 1, 2008".

The taxpayer asserted that, in fact, it should still retain its exempt status.

…[P]etitioner admitted that it was inactive from September 2001 through December 2008; however, it asserted that it tried, but failed, to host various events in 2009 and 2010. Thus, according to petitioner, it attempted to organize a “Presidential Inaugural Ball” to honor veterans (Veterans’ Inaugural Ball) in 2009, as well as a series of town hall meetings and benefit concerts in 2010, generally oriented towards veterans.

The Tax Court notes that in order to retain exempt status, the organization must meet an operational test, noting “[a]n organization will satisfy the operational test if it engages primarily in activities that accomplish one or more of the exempt purposes in section 501(c)(3).”

To meet that test an organization must actually engage in an activity, and the Tax Court agreed with the IRS that this organization simply failed to do so for a rather extended period. 

The Court notes:

According to its application petitioner intended to further its exempt purpose by organizing monthly town hall meetings, 20 national workshops yearly, and quarterly congressional forums in addition to a nationwide media campaign. The application allocates petitioner's time and resources as follows: (1) 25% to town hall meetings, beginning September 2001; (2) 55% to national workshops, beginning October 2001; (3) 10% to congressional forums, beginning November 2001; and (4) 10% to its nationwide media campaign. Notably, petitioner did not over time meaningfully organize or allocate resources to any of the aforementioned activities. Accordingly, on the basis of the record before us, the Court concludes that petitioner failed to satisfy the operational test because it did not engage in any activity that accomplished one or more of the exempt purposes in section 501(c)(3).