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Part 4. Examining Process

Chapter 75. Exempt Organizations Examination Procedures

Section 32. Declaratory Judgment Cases and the Administrative Record

4.75.32  Declaratory Judgment Cases and the Administrative Record

4.75.32.1  (06-01-2006)
Introduction

  1. The procedures in this IRM must be followed on all unagreed examination cases subject to IRC § 7428 Declaratory Judgment actions. The examination case files must include a separate and complete "Administrative Record" file, and the examiner must prepare an index to the Administrative Record.

  2. Examiners do not need to prepare an Administrative Record in agreed revocation or foundation modification cases. If the case is agreed, the administrative workpaper file should be sent to Counsel along with the proposed letter, but an Administrative Record does not need to be prepared.

  3. The specific rules for Declaratory Judgment actions, including the contents of the Administrative Record, are found in Tax Court Rules 210-218.

    Note:

    The complete text of the Tax Court Rules (210-218) relating to Declaratory Judgments and the Administrative Record can be found on LEXIS. To retrieve this document under " Federal Tax Sources," use theCases and Court Rules, then "USCS - Rules of Practice and Procedure of the United States Tax Court." Then enter "title xxi declaratory judgments " as the search heading when prompted to do so.

  4. The Rules of the United States Tax Court are also available on the court’s web site at www.ustaxcourt.gov/notice.htm.

4.75.32.2  (06-01-2006)
Background Information

  1. Congress created the declaratory judgment remedy to enable the courts to give a speedy review to IRC § 501(c)(3) classification issues under IRC §§ 501(c)(3), 170(c)(2), 509(a), and 4942(j)(3).

  2. Congress designed the law with an emphasis on developing the case by exchanging documents at the administrative level.

  3. The courts' primary function in this regard is to review the Administrative Record created at the administrative level.

  4. Disposition of an action for declaratory judgment involving a revocation may be made on the basis of the Administrative Record alone only when the parties agree that such record contains all the relevant facts and that such facts are not in dispute. A full trial is available if there are disputed issues of fact. The court may, on the basis of the evidence presented, make findings of fact that differ from the Administrative Record.

4.75.32.3  (06-01-2006)
Cases Subject to Declaratory Judgment Actions

  1. IRC § 7428(a) provides authority for the U.S. Tax Court, the U.S. Court of Federal Claims, and the U.S. District Court for the District of Columbia to render a declaratory judgment in the case of an actual controversy involving a determination by the Service (or failure to make a determination) with respect to the initial or continuing qualification or classification of an organization as:

    1. An organization described in IRC § 501(c)(3);

    2. An organization described in IRC § 170(c)(2);

    3. A private foundation defined in IRC § 509(a); or

    4. A private operating foundation defined in IRC § 4942(j)(3).

      Note:

      "Continuing" qualification or classification of an organization refers to the revocation of, or other change in, a previously favorable ruling.

  2. IRC § 7428 does not grant jurisdiction in all cases where the parties disagree about an organization’s private foundation status. Rather, jurisdiction is limited to adverse determinations. Generally, receipt of a presently favorable ruling as to foundation status precludes court review of the basis of the ruling. But an adverse determination does include a determination on non-private foundation status that is not as favorable as that requested by the organization.

    Example:

    The Tax Court has jurisdiction under IRC § 7428 to render a declaratory judgment as to non-private foundation classification as a church under IRC §§ 509(a)(1) and 170(b)(1)(A)(i) where the petitioner already possesses non-private foundation classification as publicly supported under IRC §§ 509(a)(1) and 170(b)(1)(A)(vi).

  3. An adverse determination of an organization's foundation status occurs when the organization is:

    1. A private non-operating foundation (though it claimed to be a public charity or is currently classified as a public charity);

    2. A private operating foundation (though it claimed to be a public charity or is currently classified as a public charity);

    3. A private non-operating foundation (though it claimed to be a private operating foundation);

    4. Not a church (though it claimed to be a church);

    5. An IRC § 509(a)(3) organization (though it claimed to be a 509(a)(1) or 509(a)(2) organization); or

    6. Not described under IRC § 170(c)(2) (though it claimed to be so described).

  4. Declaratory judgment does not apply to any other type of adverse action.

    Example:

    If the case involves the revocation of an organization's exempt status under IRC § 501(c)(4), 501(c)(5), etc., the taxpayer does not have the right to a declaratory judgment as to its status. The taxpayer's remedy for contesting its exempt classification is to litigate the issue in the context of a deficiency or refund case, e.g., in a routine income tax or employment tax case.

4.75.32.4  (06-01-2006)
Administrative Record

  1. An Administrative Record is the written record of the administrative proceedings between the Service and the exempt organization.

  2. Under Tax Court Rule 210(b)(12), the Administrative Record is defined as follows:

    • The request for determination;

    • All documents submitted to the Internal Revenue Service by the applicant in respect of the request for determination;

    • All protests and related papers submitted to the Internal Revenue Service;

    • All written correspondence between the Internal Revenue Service and the applicant in respect of the request for determination of such protests;

    • All pertinent returns filed with Internal Revenue Service; and

    • The notice of determination by the Commissioner.

  3. No other documents can be included in the Administrative Record. If the Service, in making its determination, relies on factual material that is not available to the organization during the administrative process, that material is not part of the Administrative Record. Even if documents were provided to the organization by the Service or received by the Service from the organization, if they are not handled properly they may be excluded from the Administrative Record.

  4. Although not documents, items such as videotapes are considered physical evidence and as such fall within the intent of Tax Court Rule 210(b)(12) when transmitted between the parties. If a tape is transmitted by letter, the tape is deemed part of that written document. If a tape is received at a conference, the tape should be appropriately stamped and marked and then referenced in the examiner’s summary of the conference transmitted to the taxpayer.

    Caution:

    Any statements made in correspondence (by either side) will be taken as the truth if there is no conflicting or clarifying evidence. Therefore, if the organization sends or otherwise provides something that does not appear correct, the examiner must obtain written clarification. Clarification received by telephone should be confirmed either by requesting the information in writing or by sending a letter which sets forth what was discussed.

  5. Examples of documents included in the Administrative Record include the following:

    • Application for exemption and attachments in initial determination cases;

    • Copies of all pertinent information returns or tax returns;

    • Copies of all pertinent statute extensions;

    • All letters and attachments mailed to the organization by the examiner relating to the current examination;

      Note:

      Letters, e.g., a no-change advisory letter or other information provided to the organization during a prior examination, are not included in the Administrative Record;

    • All letters and attachments received by mail from the organization by the examiner or specialist relating to the current examination or determination;

    • A copy of the power of attorney for the organization submitted to the examiner or specialist;

    • Copies of newspaper articles or similar items provided to the examiner by the organization during the examination;

    • Copies of the organization's newsletters provided to the examiner by the organization during the examination. The newsletters are included regardless whether they contain information related to the exempt status determination or foundation status classification;

    • Audio and videotapes are not "documents," but they can be a part of the Administrative Record. If a tape is received, the tape should be appropriately marked; and

    • If the organization submits a copy of a document to the examiner on several different occasions during the examination, all copies submitted must be included in the Administrative Record file.

4.75.32.4.1  (06-01-2006)
Documents Not Included in the Administrative Record

  1. As a general rule, if a document is related to the Declaratory Judgment issue and the examiner is not sure whether it should be included in the Administrative Record, the examiner should mail or otherwise provide the document to the organization with a cover letter asking for comments.

  2. If the document is not related to the Declaratory Judgment issue, it should be included in the Administrative Record file with an explanation in a memo to the file. Area Counsel will make the determination as to whether the document should be included or excluded.

  3. Refer to Exhibit 4.75.32-2 for examples of documents not included In the Administrative Record and solutions for getting the documents or information included.

4.75.32.4.2  (06-01-2006)
Preparation of the Administrative Record

  1. The documents making up the Administrative Record will be organized in a separate file folder.

  2. Each item should be indexed serially, i.e., 1, 2, etc., with the number of pages set forth in parentheses following the description of each document.

  3. All attachments to cover letters should be clearly identified in the index. If it helps to clarify the index, multiple attachments to a cover letter could be given sub-numbers in an outline format.

  4. Refer to Exhibit 4.75.32-1 for a sample of an Administrative Record index.

4.75.32.4.3  (06-01-2006)
Administrative Record File Assembly

  1. In examination cases, the documents making up the Administrative Record should be assembled as follows:

    1. A special handling notice (Form 3198A) will be stapled securely to the front of the file folder. It will be labeled "Administrative Record" in the top margin. The following information must be included on the special handling notice:
      Organization's name
      Organization's TIN
      MFT
      Year(s)

    2. An AIMS address label should be placed in the bottom right-hand corner of the outside of the file folder. If an AIMS label is not available, information should be entered on the file folder by hand.

  2. If the case file is relatively small, e.g., it can fit in one ordinary size folder, all documents in the Administrative Record should be photocopied for the workpaper file. The originals should be placed on the right-hand side of the Administrative Record file folder in the order in which the documents were received or sent, most recent dates on top.

  3. If the case files are voluminous or if the case otherwise requires special handling, the examiner may organize the files in a way that is logical and facilitates locating items in the record.

    Example:

    In a revocation case with extensive records, items may be organized by type of document, such as a volume of organizational and bylaw documents, a volume of tax returns, a volume of minutes of the organization, a volume of contracts, a volume of publications, a volume of correspondence, etc.

  4. An Index to the Administrative Record will be placed on top of the documents included in the Administrative Record file.

4.75.32.5  (06-01-2006)
Examiner's Responsibility

  1. The examiner will prepare the Administrative Record for all unagreed adverse cases subject to Declaratory Judgment action before the case is closed from the group.

  2. Tax Court Rule 217 imposes short deadlines for filing the Administrative Record. Further, all adverse determinations subject to Declaratory Judgment are reviewed by Counsel prior to issuance of the final adverse letter. Having the examiner prepare the Administrative Record file will assist Counsel in their review.

  3. For purposes of determining when an Administrative Record must be prepared by the examiner, an agreed case will be one in which the taxpayer has communicated to the examiner, either verbally or through written correspondence, its agreement to the proposed action, usually by signing Form 6018. In these cases, an Administrative Record is not necessary.

    Note:

    A signed Form 6018 does not waive the 501(c)(3) organization's right to seek Appeals consideration or to file a petition under IRC § 7428. However, it is deemed to be sufficient to forego the preparation of an Administrative Record. In those rare situations when an organization "changes its mind," the Administrative Record will be prepared before the case is closed to Appeals.

  4. The examiner will use the Case Chronology Record (CCR) in all cases to record in a clear, legible form, a complete and factual accounting of all conferences with the applicant and/or representative.

  5. Since the Administrative Record in Declaratory Judgment cases consists only of the documentation, which was submitted in writing and exchanged between the parties, discussions and conferences recorded on the CCR will be sent to the applicant in letter format when appropriate.

  6. Although, the court normally considers only the Administrative Record and generally will not permit introduction of evidence into the record after the final adverse letter is issued, the CCR will be useful in demonstrating that the Service was not negligent in making a determination and in preparing an index of the Administrative Record.

4.75.32.5.1  (06-01-2006)
Handling Documents Received from the Organization

  1. It is the examiner’s responsibility to ensure the documents needed to support the Service's position can be included in the Administrative Record. Therefore, the file must provide evidence the examiner has provided all of the documents supporting the Service's position to the organization or that the documents were received directly from the organization.

  2. The Administrative Record must include documents that are not related to initial classification, initial foundation status classification, the revocation of exempt status, or the reclassification of foundation status, but were provided to or received from the organization during the examination process.

  3. If records received from the organization are not handled properly, they may be excluded from the Administrative Record. Therefore, it is important to take the following steps to preserve the documents received during the examination:

    1. No information except that noted in item (c) below should be entered on documents received from the organization;

      Caution:

      Documents received from the organization should not be defaced in any manner (by writing, highlighting, noting, or scribbling, etc.). If the examiner needs to write information on a document, a copy should be made for that purpose. The copy will be placed in the workpaper file rather than in the Administrative Record file. A note will be made on the altered copy of the document stating, "Comments and emphasis entered by (Examiner Name) on (Date)." This will ensure the integrity of documents.

    2. The exhibit numbers from the "Index to the Administrative Record" should NOT be entered in permanent form on the documents placed in the Administrative Record file as the final index will be prepared by Area Counsel and the final exhibit numbers will be placed on the documents at that time.

    3. Documents and other items received from the taxpayer may be marked with workpaper designations and a "Received" stamp on the cover memo or first page showing all of the following information:

      Date Received_______ Number of Pages____
      Received by_________ Received from_______

    4. If it is necessary to make other notations regarding what was received (or not received), such notations should be made on a separate piece of paper.

      Example:

      If a document is received indicating that it has attachments, but the attachments are missing, that should be noted separately. In appropriate circumstances the examiner should follow up with a letter to the taxpayer, noting that attachments are missing and requesting that they be provided.

4.75.32.5.2  (06-01-2006)
Handling Documents Provided to the Organization by the Service

  1. The copies of correspondence and enclosures prepared by the examiner that are included in the Administrative Record file may be photocopies, printed copies, or preprinted versions.

  2. If printed copies of correspondence or attachments are used, they must be exact copies of the correspondence or attachments sent to the taxpayer, including dates and signatures.

  3. If preprinted copies are used, the copies must be identical to the correspondence or attachments sent to the taxpayer.

    Example:

    In the opening appointment letter, the examiner normally encloses IRS Pub. 1, Your Rights as a Taxpayer. The Administrative Record should contain a photocopy or another preprinted version of Pub. 1. If a preprinted version is used, the examiner must ensure that the Pub. 1 included in the Administrative Record is the same revision of Pub. 1 that had been provided to the taxpayer.

4.75.32.5.3  (06-01-2006)
Copying Requirements

  1. The examiner must photocopy all documents in the Administrative Record for the administrative workpaper file.

  2. Photocopying is imperative because files moving frequently between Mandatory Review and various Counsel offices, as well as between other IRS offices, may be lost. Requiring the examiner to establish two sets of files also eliminates unnecessary delays.

  3. Non-documentary submissions such as books, magazines, videotapes, audiotapes, and similar materials should be listed in the index and kept with the Administrative Record files. There is no need to copy such materials.

  4. If making a duplicate of all items in the record is impossible or impractical due to the volume of the records, the original administrative workpaper file documents should be indexed and organized in accordance with the principles set out in this manual. This procedure should be used only in extremely unusual or rare instances as it is generally required that a separate workpaper file be maintained. The examiner should consult with Counsel when there is concern about the volume of records.

4.75.32.6  (06-01-2006)
Group Manager's Responsibility

  1. The group manager will ensure the following:

    1. The Administrative Record is properly prepared and indexed according to the procedures in this IRM;

    2. The case is flagged for Mandatory Review; and

    3. All processing delays are fully explained on the Case Chronology Record.

4.75.32.7  (06-01-2006)
Review Staff's Responsibility

  1. Mandatory Review will review the Administrative Record and ensure it is properly prepared and it contains all the required documents.

  2. Mandatory Review will forward the entire administrative file, which includes the workpaper file and Administrative Record, to the appropriate Area Counsel office.

Exhibit 4.75.32-1  (06-01-2006)
Sample Administrative Record Index

Exhibit Description
A Letter from the Internal Revenue Service to ABC Charity, Inc., dated April 9, 2002 (5 pages) with 3 attachments: Form 4621, Report of Examination - Exempt Organizations, and Forms 886-A, Explanation of Items (20 pages); Form 6018, Consent to Proposed Adverse Action (1 page); Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues (4 pages).
B Letter to ABC Charity, Inc., from the examiner summarizing the items discussed at the group manager's conference on March 26,2002. Mailed on March 27, 2002 (2 pages).
C Letter from the examiner to ABC Charity, Inc., scheduling a date for a group manager's conference. Mailed on March 10, 2002 (1 page).
D Letter from ABC Charity's representative to Internal Revenue Service, dated March 2, 2002 (14 pages).
E Letter from ABC Charity, Inc., to Internal Revenue Service, dated February 23, 2002 (4 pages) with 2 attachments: Forms 941 (4 pages), Response to questions (8 pages).
F Information Document Request, Form 4564, from Internal Revenue Service to ABC Charity, Inc., dated February 9, 2002 (2 pages).
G Brochure entitled "Summer Performances 2000" received by Internal Revenue Service from ABC Charity, Inc., on February 9, 2002 (8 pages).
H Copies of ABC Charity's cancelled checks numbered: 20013; 20022; 20045; 20046; 20047; 21055; 20156; 20157; 20158; 20203; 20204; 20205; 20288; 20289; 20335; 20421; 20551; and 20611, received by Internal Revenue Service from ABC Charity, Inc., on February 6, 2002 (18 pages).
I Minutes of the Board of Directors of ABC Charity, Inc., dated January 5, 2000; February 1, 2000; March 10, 2001; April 5, 2000; May 3, 2000; June 7, 2000; June 25, 2000; July 12, 2000; August 2, 2000; September 2, 2000; October 4, 2000; November 8, 2000; December 6, 2000, received by Internal Revenue Service from ABC Charity, Inc., on February 6, 2002 (30 pages).
J Letter from ABC Charity, Inc., to Internal Revenue Service dated January 14, 2002, with attachment Form 2848, Power of Attorney, received by the Internal Revenue Service on January 16, 2002 (2 pages).
L Letter scheduling initial appointment from Internal Revenue Service to ABC Charity, Inc., dated January 9, 2002 (2 pages).
M Form 990, Return of Organization Exempt from Tax, for the year ended December 31, 2000, received by the Internal Revenue Service on May 15, 2001 (25 pages).

Exhibit 4.75.32-2  (06-01-2006)
Examples of Documents Not Included in the Administrative Record and Solutions for Inclusion of the Documents or Information

Documents Not Included in the Administrative Record Solutions For Inclusion in the Administrative Record
1. Examiner's case chronological record. If the CCR reflects information such as notes from a telephone call that were relied on in the examiner's decision process, the information should be incorporated in a letter to the organization with a request for confirmation or comment.
2. Notes taken by the examiner during interviews or conferences with the organization. Reduce the interview or conference to writing and provide a copy to the organization with a cover letter or Information Document Request (IDR) requesting confirmation of the contents. If the information is hand delivered to the organization with an IDR, the person receiving the IDR should be asked to sign the IDR, acknowledging receipt.
3. Newspaper articles concerning the organization provided to the examiner by a third party. Provide copies of the newspaper articles to the organization with a cover letter or IDR requesting comments on the accuracy of the articles. If a letter is used to send copies to the organization, it should be sent certified. If the information is hand delivered to the organization with an IDR, the person receiving the IDR should be asked to sign the IDR acknowledging receipt. In all instances when documents secured from third parties are provided to the organization, extreme care should be used to avoid disclosing a confidential source or making an unauthorized disclosure.
4. Newspaper articles concerning the organization clipped from the paper by the examiner. Same as in item number 3.
5. Copies of the organization's cancelled checks provided to the examiner by a former employee of the organization. To protect the identity of the former employee, the examiner should make a written request for the organization to provide him/her with copies of the cancelled checks.
6. A copy of a rental agreement between the organization and a related IRC § 501(c)(3) organization for the use of the organization's facilities provided to the examiner by the related organization. Request a copy of the contract from the organization or provide a copy to the organization with a written request that the organization confirm that it is a true copy of the contract.
7. A letter sent to the Internal Revenue Service by the organization a week after the final adverse determination letter was mailed to the organization. None. There is no way to include documents received after the issuance of the final adverse determination letter in the Administrative Record. However, the letter should be forwarded for association with the files in the case.
8. Documents that substantiate the revocation and enhance the Service's chances of sustaining the issue that were submitted to the Internal Revenue Service by a third party the day after a final revocation letter was mailed to the organization. None. There is no way to include documents received after the issuance of the final adverse determination letter in the Administrative Record. The information should be collected and attention called to it by memo or otherwise.
9. Workpapers and computations prepared by the examiner. There are two methods that can be utilized to include workpapers in the Administrative Record:
(a) Mail the workpapers to the organization with a cover letter requesting comments.
(b) Provide the original workpaper and a copy to the organization during the examination with a request that the receipt of the copy be acknowledged.
10. Examiner’s notes concerning records the organization failed to produce. The examiner may write to the taxpayer, reminding the taxpayer of what had been said and noting the failure to produce the documents. The examiner's letter, along with the taxpayer's verbal representations and failures to produce, would then be part of the record. Of course, any written response from the taxpayer would also be a part of the record.

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