Youth ranch lost exemption for private benefit and inurement

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Plain-English summary

A nonprofit operated a residential ranch program for boys with emotional and behavioral problems and had held section 501(c)(3) status since 2007. The IRS found that the organization paid ranch, vehicle, legal, insurance, utility, and other expenses connected with property and for-profit businesses owned by its founder's family. Youths in the program also performed ranching and farming activities that benefited related commercial enterprises. The examination concluded that insiders controlled the organization's finances, its earnings and assets inured to private individuals, and a substantial part of its activities furthered private rather than exempt purposes. After considering the size, frequency, safeguards, and correction of the excess benefit transactions, the IRS revoked exemption effective January 1, 2008.

Ruling snapshot

• Question: Did the youth ranch continue to operate exclusively for exempt purposes without substantial private benefit or inurement to insiders and related businesses?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(3) and 4958; Treas. Reg. §§ 1.501(c)(3)-1(c), 1.501(c)(3)-1(d), and 1.501(c)(3)-1(f).

Full text (IRS public release)

Internal Revenue Service

Release Number: 201643025
Release Date: 10/21/2016
Date: July 25, 2016

UIL Code: 501.03-05

Department of the Treasury

Employer Identification Number:

Person to Contact:

Employee ID Number:

Tel:
Fax:

Certified Mail

Dear:

This is a final adverse 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 section 501(c)(3).

The favorable determination letter to you dated December 2007 is hereby revoked and you are no longer
exempt under section 501(a) of the Code effective January 1, 2008.

The adverse determination was made for the following reason(s):

You are not operated exclusively for charitable purposes.

Contributions to your organization are not deductible under section 170 of the Code.

You are required to file Federal income tax returns on Forms 1120. File your return with the appropriate
Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and

information please visit www.irs.gov.

You have agreed to waive your right to contest this determination under the declaratory judgment
provisions of Section 7428 of the Code.

If you have any questions, please contact the person whose name and telephone number are shown in
the heading of this letter.

Sincerely Yours,

Appeals Team Manager

Enclosure: Publication 892

Internal Revenue Service Department of the Treasury

Tax Exempt and Government Entities Division —
Exempt Organizations: Examinations

Date: May 27, 2015

Taxpayer Identification Number:

Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:
Manager's Name/ID Number:

Manager’s Contact Number:

Response due date:

Certified Mail — Return Receipt Requested
Dear:

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed

action.

What you need to do if you agree
If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed

Action - Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter = *
determining that you aren't an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

If we don't hear from you

If you don’t respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative

remedies.

Letter 3618 (Rev, 6-2012)
Catalog Number 34809F

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the

tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the. heading of this letter. You also
may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is Independent of the Exempt Organizations division and resolves most

disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process, Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
     requesting technical advice. If we issue a determination letter to you based on a technical .
     advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
     further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that .
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may

contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information
If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient .

time to call if we need to contact you.

2 Letter 3618 (Rev, 6-2012)
Catalog Number 34809F

Schedule number or oxhidit

eo ee i904 EXPLANATIONS OF ITEMS
Year/Perlod ended

Name of taxpayer Tax Identification Number

Issues: |
1) Whether the _ is operated exclusively for exempt
purposes within the scope of Internal Revenue Code section 501 (c){3).

2) Whether there is a substantial nonexempt commercial purpose served by the organization
in that the organization is also providing significant private benefit to the organization’s

insiders and contributors?

Facts:

was incorporated on | , as a non-profit corporation, having previously

operated as a for-profit organization. In December , the IRS recognized! —__ as tax-exempt
under IRC section 501(c)(3) and not as a private foundation as described in IRC §170(b)(1)(A)(vi).

The Articles of Incorporation state the purpose(s) of the organization as follows:

“to promote and operate a school and ranch program in: for children with
emotional and behavioral problems; to provide an environment where troubled youth can develop

socially, intellectually, emotionally, spiritually and physically so that they can find themselves and
be able to manage their personal lives to become successful well adjusted citizens; and to

transact any other lawful charitable activity’.

The preamble to the bylaws states that: was primarily staffed by the
and his wife, , own the (
), on which * is located and operates, Listed‘ assets are the.«

. cabin with cook house, vehicles, corrals, livestock, farmland, and crops—corn, alfalfa,
oats. ;
programs/activities:

was a licensed group home located on a and in

• served boys ages years old and promoted its program as offering

behavior modification, equine therapy, and experiential education to at-risk boys. served

boys exhibiting ADD, ADHD, depression, low self-esteem, emotionally-troubled, narcissistic

behavior, and underachievement. It was not, however, a treatment facility.

The number of boys was licensed to house at its facility was and: and for
'. The increase in the latter years was due to the creation of

which allowed | to apply for a second license. The following table shows the estimated

Form 886-A (1-1994) Catalog Number 20810W —-Page_ publish.no.irs,gov Department of he Treasury-Internal Revenue Service

Schodule number of exhibit

(on eee 1904) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identificaion Number Year/Period ended

q

number of youth attending . per month for each of the four years, This information is an
estimate compiled using primarily payments logs as many of the records were destroyed ina

flood.

| __dan. | Feb. | Mar. [Apr. [May | June [July [Aug. | Sept. | Oct. | Nov. | Dec.

Famsre wan +

SPA ARTA Fee oat!

S programs comprised the following

The boys were placed in the before entering any long term program. This

program was offered year round and generally lasted from — days to , although
some would stay up to . The program is described as a Christian-based wilderness
intervention and therapy program located in the

”. The program was based on an 1

Work by the boys included horse care, feeding baby calves, participating in cattle drives, building
fences and mechanics. The knowledge gained by the boys included survival skills, conservation

principles, range management, biology and plant identification, ecology, animal behavior and:
was replaced with

orientation and safe travel in the wilderness. In _ the:
the . , sometimes referred to as' 7
The offered vocational training and horsemanship. The boys were not

paid for their work and did not receive allowances.
The boys were also offered a home school program. Every year would graduate
boys. me ,

Tuition rate and fees:

in and. i, tuition for the \ was $: —-) per day, plus a one-time, non-
refundable, admission fee of $: to §$ , Tuition for the long term program was $ per
month, plus a one-time, non-refundable admission fee of $ ', Fees covered counseling;
tutoring; 24 hour supervision; room and board; academic classes; personal hygiene products; use
of horse, saddle and all.tack used; all bedding and laundry facilities; and use of all outdoor,

Form 886-A (1-1994) Catalog Number 20810W = Page__ 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule aumber or exhibit

om een 1094 EXPLANATIONS OF ITEMS
Year/Period ended

Name of laxpaver Tax identification Number

{

camping gear. In _ _ tuition was increased to$ . — per month, and the one-time, non-

refundable, admission fee to 4

did not ask bevs to leave the program in the event their parent(s) did not or were unable to
pay for the tuition. would work.with the parent(s) to agree to a discounted rate and/or a
payment plan in line with what the family could afford. In instances where the parent(s) did not
pay, the boy would participate in the program for free and would write off the unpaid portion.

• did not provide records showing when or how often this happened during the period,

Facility: |

assets consist of a | 7 panda ; The
and: _ Were constructed in: with funds provided bv the

The ‘isa square foot facility with three bedrooms containing four bunk beds

each. Capacity was limited to —_ boys per rules of’

There was also a staff bedroom, classroom space, administrative offices, storage rooms, furnace
room, washer/dryer room, two bedrooms for staff, living room, dining room, and. kitchen. One full-
time counselor and a mentor stayed with the youth around the clock.

square foot steel frame building with a basketball court, gymnasium,

The . isa
students. .

boxing ring, free weights and exercise equipment, and was used daily by

The isa square foot pole barn. The center was used to conduct

vocational and equestrian training for the students in the areas of equine therapy, horse training,
reining and roping classes, basic cattle management, veterinarian skills, branding, and calving.

Officers/Board members:

The articles of incorporation states that the affairs arid management of would be vested
in the board of directors consisting of four persons--President, Vice President, Secretary, and
Treasurer. In operation, the board of directors also served as officers of

The bylaws state that the board of directors consisted of three members and that the third
member must be the executive director of . The executive director oversees and is
responsible for all youth care. Additionally, the board of directors could only approve the
appointment of an executive director from among the _. The bylaws also state that
the officers of consisted of a President, Secretary, and Treasurer. The officers would hold a
one-year term. The bylaws state that the officers’ duties consisted of the following:
o President: will act as a liaison between the and the board of directors
o Secretary: will keep record of all meetings
o Treasurer: will maintain all financial dealings of

Form 886-A (1-1994) Catalog Number 208 10W Page_3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service .

Schedule number of exhildtl

en ee gos : EXPLANATIONS OF ITEMS

Year/Pariod ended

Name of taxpayer Tax Identification Number

, served as a director of the oraanization throitah at least ,

', founder of |
and served as an advisor to the board through ...... Prior to : was the
Vice President, Director, and house parent of! —. A review of . day-to-day operations

revealed that was still very much involved with running

_,- All reside on the acre parcel

Following are some of the members of the
and/or the family trusts.

owned by

1) is co-founder and the wife of | .. In previous
years, served as house parent of .

2) and” are the daughter and son-in-law of
' . In addition to other,. for-profit businesses, they own and operate the
which started in ; aught the credited course every Friday at

and handled the admission process at the ', She is also a certified marriage mentor,
a certified Christian counselor, family life’ and abstinence educator, a PSSP certified
breakthrough parenting instructor, and a home schooling mother of children.
Stated that . teaching position was paid for by ;
not by | .

stated that he was the project manager in and the executive director of
in subsequent years. His duties.and responsibilities included facilitating the ,
, and working with boys and their families. He did not draw compensation from
” but rather was paid from . ... ,. is also a certified
marriage mentor, and a family life coach. He has a Master of Arts Degree in education with a
focus on religious studies, and a Bachelor of Arts Degree in Physiology.

3) ran the as manager. He is - and
occasional employee of He is the owner/operator of and
hasa .% interest in the |

4) | ‘also ran the : . He is and was
executive director of. . In previous years, he served as counselor, ranch

manager, and vocational director. Hehasa % interest in the
5) is 1, He worked at the teen boot camp and

. She did the bookkeeping, general

6) iS «
per year.

help, ran errands, and answered phones. Her compensation was about ¢

Form 886~A (1-1994) Catalog Number 20810W — Paga__ 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS

(Rev. January 1994)
Year/Period ended

Name of taxpayer Tax Identification Number

£

7) _ is In , she was brought in to be the
business manager and bookkeeper w1

Minutes of the Board:
The board members of also served as the organization's officers. The minutes show that

officers/board members consist of three board/officers and three advisors from the .
. The * members were not listed as officers or board members of

Contracts:

Contracts between and mnt

The lease agreement between | , dated July
States that the agreed to lease to the premises located at « ;
. The premises includes the main ranch residence and any subsequent dwellings, all

outbuildings, all lands titled to the , all equipment and vehicles, all interior furnishings,

all recreational equipment, together with ail appurtenances, fora year term to commence on
and end on . The rental fee was $.,.. . per month.

Per an “Agreement” dated | ,between... .
', certain agreements and statements by the parties were

nt, in its entirety, outlines the understanding that

set forth in the document. The docume
pay for and operate cattle ranching operations on behalf of

had a duty and responsibility to
and for the benefit of the .

2, Consideration. in consideration of this Agreement. the net proceeds of sale (determined

as sales price less expenses to ship and sell) of all and | intended for
slaughter raised from the ranching operation. uoon the premises during the term of this

Agreement shall be divided to the based on} and to
based on In addition to its obligation to maintain

numbers as herein required, ‘ shall during the term hereof have the continuing
duty

3. Operating Costs. shall have the duty to pay and discharge all charges
   either directly. or by reimbursement to . upon demand, for (1) all repairs and
   maintenance charges to any farm equipment and machinery and (2) all charges of any kind
   made by any public or private utility or other for gas, electric power, or other services
   furnished to or placed upon the premises during the term hereof, including charges made
   for livestock feed delivered to the premises by third parties and charges for gasoline and

diesel fuels used in the ranching operation.

Form 886-A (1-1994) Catalog Number 20810W —Page_& publish.no.irs.gov Depariment of the Treasury-Internal Revenue Service

Schedule number or exhib

oor ee 08 EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

5. Purpose. The purpose of this agreement is to allow | continued use of the
   properties in order to achieve its charitable non-profit purpose in helping the troubled youth

accepted into its program with vocational experience, outdoor activities, animal care and
training and involvement in ranch operations. . .

8. Net Agreement. Itis the intention of . that the
   consideration payable to pursuant to this Agreement shall be net to

and that all costs, expenses, obligations, taxes and assessments, utilities and charges of
every kind or nature relating to the properties (except as may be otherwise specifically
provided in this Agreement) and the ranching operation which arise or become due during

the term of this Agreement, including the cost to register, record and maintain the
upon the premises, shall be paid by

directly, or by reimbursement tc upon demand, and that: -are hereby
indemnified by __, against all of such costs, expenses and obligations.

9. Repairand Maintenance. _. | _ shall be responsible for all necessary costs of

maintenance and repair of the properties, including, without limitation, all farm equipment
and the improvements to the deeded real estate listed in Exhibit “A” during the term of this
Agreement. In this regard, and without limiting the generality of the foregoing,
shall, at its own expense, pay or provide for all necessary services on
control the c , maintain fences and water sources, maintain

facilities and equipment, including tack, herd ‘and trail all cattle and protect livestock from

predators.
Contrary to the agreements entered into, and based upon all available information, it appears that
ever reaped the benefit of income from the set forth in the
Consideration section of the Agreement. It does appear, however. that . bore

all of the expenses outlined in the other sections of the Agreement. was able to

fund the expenses through tuition charged for youths attending the program.

Additionally, the contract states that the andi can continue to |

reside on the and to engage in the family livestock and agricultural business.
family members may aiso at any time be hired as staff members of

In a proposed Long Term Lease Agreement provided to the examining agent in this case in |
_ the family enterprise is described as follows.

‘

WHEREAS, THE operates a located outside

' . 1 is operated on approximately ! vhich

are owned, or leased, by the ‘bv and through the The
2perations,

property is used for various purposes including | _ .

Form 886-A (14-1994) Catalog Number 20810W Page 6 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schaduke number or exhidit

Form 886-A
(Rev. denuary 1994) EXPLANATIONS OF ITEMS

Year/Period ended

Nama af faynavar Tax identification Number

the families’ primary residences, and for the charitable and educational programs
conducted by and described below in greater detail. The area is a rugged and remote

wilderness region in _ near the

In the next paragraph of the document, it states the following about the students.

... During their two to twelve month stay at , the students matriculate through an
intensive four-phase curriculum that combines the daily life and work activities of a
traditional ranch cowboy with .. . life skills and vocational training opportunities.

Contracts between and of clients: a

‘Examination of the financial contract between and the of participating

boys revealed a dual contract between and |

(hereinto known as the ‘ or' ) and the of .
would be responsible for in

participating boys. The contract shows what costs the
addition to tuition. For example:

• % of cost incurred for finding the student when the student runs away from the

• Responsible for all medical and hospital expenses of the boys.

• [illegible] needs to repurchase equipment if student’s equipment was destroyed
through neglect or abuse. |
• Financially responsible for replacing or repairing |

_damages the property.

• Responsible for cost of transporting the boys to [illegible] from [illegible]. The cost is $ ~ during business hours and $ for non-business hours.

There was no charge if the transport was from ( during business hours,
• Responsible for any additional costs incurred for staffing, medical, mental health treatment

and consultation that may not be covered by insurance.
• Responsible for payment of tuition. Interest would be assessed on any balance overdue

by 30 days each month until balance is paid in full. There’s no refund if the boys are to
withdraw early.

property if the boys. destroys or

During examination of the organization books and records, the examining agent obtained a copy
of the! profit and loss statement. The profit and loss statement shows that in the

\ reported receiving income of $

Related for-profit entities:

During the examination, disclosed the following related for profit entities:

Form 886+A (1-1994) Catalog Number 20810W = Page_ 7 publish.no.irs.gov Department of the Treasury-internal Revenue Service

Schedule number or exhibit

{hor Jarwary 1904 EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Pertod ended
1°

2. :
   3.
   4,
   5.
   6.
   7.
   8.
   9,
   10.
   __ advertises itself as-raising high quality registered + . It is a
   for-profit commercial operation. The ranch contains the primary residences of the and

families.

Form 886-A (1-1994) Catalog Number 20810W ~—s Page_ 8 publish.no.irs.gov

Department of the Treasury-internal Revenue Service

Schedule number o7 exhidk

Form 886-A
(Rev. danwery 1994) EXPLANATIONS OF ITEMS

Year/Perlod ended

Name of taxpayer Tax Identification Number

7 are trustees of the |
. These two revocable trusts own the approximately

and the
of property upon which many of the following entities are operated.
was the founder of . _ are named as Directors
of a OWNS a % interest, owns a
_..~% interest and owns'a:. %interestin ‘ shares facilities with
and uses assets to conduct its business.

is a young adult program for menaged to years old. The program is for young men
overcoming substance abuse, anger issues, and negative and potentially destructive behavior
patterns. The handbook states that will help young men in their school work, but that
parents will have to cover the cost of curriculum and credits. All other educational materials are
included in enrollment cost and covered under the admission fee. Rules for | are the same

rules as for

Occasionally, young men would be mixed with the younger boys, but under heavy ~
supervision (i.e., ). workdays and ail other activities are

separate from the younger boys program--housing, meals, etc.

The is the sole proprietorship of
(i ). In response to Information Document Request (IDR)
dated. ; , the POA stated that | owns the cattle. The cattle were
purchased in and are used in the operations of the as well as by ;

, and the entities in conducting their activities. youth

participate i in cattle drives and work with the cows several times a year when they are brought into
corrals.

is also a cattle business and the sole proprietorship of | , of

“owned from The
lease permit for the

activity held two, leases anda
: (referred to as the "). The lease permits were transferred to
and . The leases permit a total of

to be held on the land. youth participated in cattle drives on the

Form 886~A (41-1994) Catalog Number 20810W ~ Page 9 publish.no.irs.gov Department of the Treasury-internal Revenue Service

• Schodule numbes or exhibit

Form 886-A P
(Rev. January 1904) EXPLANATIONS OF ITEMS |
YaarlParind andad

Name of taxpayer Tax Idenilfication Number

. properties while working with ; and | Additionally, organized
outings tothe ..__...... where the youth participated in recreational activities.

owns a of property near the and operates a seed
business. Itis owned . % by | ‘and °% by

‘was owned % by and % by
from through part of . The corporation was administratively dissolvedin: 1. I
operated a | program in which the | youth were initially enrolled.

During , the activities were taken over by , a subsidiary of |

"sa subsidiary of ; created to act as a second group home under the

• direction of It was created in order to provide services to _. additional youth as the
  was unable to license two group homes to the same |

entity.

isa for-profit corporation that was formed by (
The corporation has taken over all operations of beginning in. . is the
Director and incorporator. - : .

Youth participation in for-profit entities

POA, , provided the following description of youth activities in the for-profit activities.

youth participated in the farming and ranching activities of the above entities based upon
‘seasonal demands. In general, youths spent an average of three to four hours per day
outside in the summer, and one to two hours in.the winter. No records were kept to substantiate
time spent by youths or the paid employees of these activities. Employees were paid wages
to assist with the following activities; however, the were not compensated
for labor performed in carrying out any of the following activities.
From . ‘(: ), youths participated in the following:
Horsemanship: Youths were taught basic horsemanship skills including grooming, saddling,
riding, feeding, and appropriate comportment around horses. Since leisure time is also spent
riding, it is difficult to quantify the time spent on this activity, but was estimated at three to ten

hours per week. paid all wages relating to this activity except for
who were compensated by the ° and | was not compensated for

Form 886-A (1-1994) Catalog Number 20810W — Page_ 10 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule ournber or exhibit

Se oe 1904 EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended

this activitv from any entity. The horses, horse related equipment and land were owned by the
use of assets is governed by the agreements between | and the ‘

Fence Building. youths participated in repairing fence as needed on the
property. Estimated time was three to five hours per week. paid all wages relating to this
Activity except for : who were paid by the and

did not receive any compensation for this activity from any entity.

The POA claimed that for every hour of work | youths put in, one to two hours of additional

work was often performed to undo and redo the work. This
time was not compensated for by ; the costs were absorbed by the

also paid for repairs and replacement costs of entity-owned equipment pursuant to the
Agreement. did not compensate the entities for time lost due to equipment repairs.

According to the POA; all materials used in this activity were paid for by the

The POA stated that fence building provided by : youths, was-not a benefit to any of the
related entities. While over time some of the youths became more proficient, the men who trained
and supervised youth could have.done the iob in a fraction of the time. As a result, fence
repair came at a cost of workers (specifically and

) spending more time on fence building than would have been otherwise needed,

and a general loss in productivity to the for-profit entities.

Farming: youth participated in farming activities by learning to use tractors and various
farming implements including levels, roller harrows, and discs to prepare the fields for planting.
Because these activities involve heavy machinery posing significant safety risks, : farming activities -
are used as an incentive and reward for good behavior.

A trainer would spend a minimum of two days (one to two hours per day) in a tractor teaching how -
to safely operate the equipment, how to ensure that proper levels of oil, etc., were maintained, and
how to correctly prepare the land. When the trainer felt the youth was ready, the youth would be.
allowed to drive the tractor with the trainer in the cab. This direct supervision went on for several
“days. During the entire time that was in operation, only five boys were allowed to operate
the machinery totally on their own. | __ paid all wages relating to this activity except for |

who were compensated by the . . did

not receive compensation for this activity from any entity.

~ According to the POA, did not receive compensation from the for-profit entities for the work
conducted by the youth, nor did or the “receive any compensation for the use of
equipment. did pay for repairs and replacement of equipment pursuant to the agreement

between and the © a

Form 886-A (1-1994) Catalog Number 20810W — Page_{4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number of exhiot

Form 886-A ; . ;
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended

{ [

Irrigation. _ . youth participated in cutting troughs from ditches out into a field. This usually
required between 30 to 45 minutes of work per field. The estimated time spent by youths was
approximately one hour per day. paid all wages relating to this activity except for
, who were compensated by the did
did not receive any compensation for this activity from any entity. According to the POA, by allowing
. youth to participate in this activity it decreased the productivity of the because of

faulty and sub-par work that had to be redone by - employees.

Working with Cows: Several times a year, the cattle were brought to the corrals and moved
through loading chutes for general management tasks. This included administering medication,
treatment for parasites, and basic doctoring. youths participated by helping to ring the
animals to the corrals and push them through the loading chutes; but did not directly treat the —
cows. This was done three to five times each summer. and lasted from a few hours to a full day.

paid all wages relating to this activity except for who |
were compensated by the did not receive any compensation for this

activity from any entity.

According to the POA, jobs were created for the youths so they could participate even though their
help was not needed. This resulted in wasted time and facility repairs. The activity involved about
_ cows and could have been completed by four to five skilled adult men but with youth, ten

to fifteen workers were needed.

Cattle Drives: Once or twice per Summer, the cattle owned by ©
were moved from the to the . Moving cattle covers miles and

requires the oversight of four adult skilled men. When youth participated in the cattle drive,
the operation took a full two days (much longer than if the youth were not involved) and did not

decrease the number of skilled cowboys required. paid all wages relating to this activitv
except for who were compensated by the

did not receive any compensation for this activity from any entity.

Mechanic Work: youth assisted in working on tractors, vehicles and other equipment.
Generally, they worked on equipment/vehicles, and occasionally worked on machinery
owned by the or other entities. In general, youth observed and provided very basic

assistance. paid all wages relating to the training and supervision of this activity. did
not receive any compensation for this activity from any other entity.

Feeding: Feeding ranch animals was the primary outside activity engaged in by youths
during the winter. Feeding the animals involved using a. tractor with a feed wagon
attached. One boy operated the tractor while the other operated the loader and dumped hay, beet
tailings, and corn silage into the wagon that mixed the feed. The boys then drove the tractor to the

corral to feed the animals. Estimated time spent was one hour per day. paid all wages
relating to this activity except for .. who were compensated

Form 886-A (1-1994) Catalog Number 20810W —-Page_12 publish.no.Irs.gov Deparment of the Treasury-internal Revenue Service

Schaduls number oF exhibit

Form BB 6-A ot EXPLANATIONS OF ITEMS

Tax identification Numbor Year/Pariod ended

by the . : did not receive any compensation for this activity from any -
other entity.

Form 990, Return of Organization Exempt From Income Tax:

signed the Form 990 in ' signed the Form 990 in

and signed the return in.

On the Form 990, Part ll, Schedule L, | _ reported a loan from
: , (a for-profit entity). The Form 990.reported that the loan was to meet payroll expense

-needs. The loan amount was $ and was not documented in a written agreement.

Schedule L also shows two other loans. One from of § and
. The return indicated that both of the loans had no written agreements and

were approved by the board. Part IV of Schedule L indicated that business transactions involving
interested persons were “still under review’.

Form 4562, Depreciation and Amortization, did not reflect any vehicles owned by

The organization’s Form 990 reported its primary revenue source deriving from program service

revenues and grants. The primary revenues for. “ * are shown below:
| TY TY, TY TY

Contributions, gifts, grants: $ $ a:

Program service revenue: $ _$ $.
_ TOTAL REVENUE $é $ $
The organization's program service revenues consisted solely of tuition fees. The primary arant
donor in vas from the | ofS, ‘ofS,
and from : of $ ire the parents of one of

the participating boys in the program.

The organization's Form 990 listed its primary expense items as follows:

TY: TY TY. TY

Other salaries/wages $ $: $:. $.
Payroll taxes $ $i $ —§$
Occupancy $: $

Student housing/util . $
Student food ¢
Operations & rent $:
Occupancy | $

Form 886-A (1-1994) Catalog Number 20810W —— Page_.13 publish.no.irs.gov Department of the Treasury-internal Revenue Service

Schadule aumbder of exhibit

Form 886-A
(Rev. January 1994) , EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

Bad debts $.
‘Fees for service: other $
Benefits paid to/for members $:
Supplies $ $ $. $
Depreciation $ $
Insurance $: $ $ $

• Fuel $: $ $
  Repair $ 4 $
  Vet expense $.
  Tax/license $ $
  Chemicais ¥
  Freight $
  Seed $ ]
  Other expenses $i 4 {
  Financial Information:
  Examination of source documents indicates expenses were either authorized bv
  The source documents also show that ana
  signed for all of | expenses. . .
  ‘The following are examples of expenses that were paid by _—sfor use of the
  ‘assets:
  1) Sampling of fuel expenses shows that primarily . Signed.
  the checks for fuel expenses. The payments were for diesel for | =
  semi/truck/trailing cattle. Payments were also made for gas to fill the mini van,

Datson, white van, and blue van, ete.

-2) Sampling of seed expenses reveal that the expenses were for the

agricultural business. The seed expenses were charged to account. Review of
the account invoices and monthly/yearly statements revealed that the purchases and

payments were made for machine parts, shop work, labor. and others. Review of invoices and
cancelled checks show that the checks were signed by and the funds were
coming from ‘main checking account.

received no income from the sale of the seeds and did not use these seeds.

3) Sampling of repair and maintenance expenses reveal that the expenditures were for
parts, labor, saddle repairs, shop work for the | .

Form 886A (1-1994) Catalog Number 20810W — Page__14. _publish.no.irs.gov Department of the Treasury:internal Revenue Service

Schedule aumbar or exhibit

_ Form 886-A , .
(Rev. January 1994) EXPLANATIONS OF ITEMS

Year/Pertod ended

Name of taxpayer Tax !dentification Number

4) Sampling of veterinary expenses shows payments for horses, cattle, dogs, cats, etc.
owned by the ;
5) Review of the . . . - billing statements shows that the services nrovided by Attorney ;
of $ was for services related to s for-profit partnersnip
business,
6) In , there were payments going to the owned vehicles.
The following are examples of those expense items:
• general ledger reported : paying its related organization,
Ascent, $. . for accounting and legal fees, on ., check #

• Taxes and license expenses associated with the vehicle fees and

property taxes.

: paid for telephone and utility expenses of the personal residences.

• charged : a monthly lease for use of . The lease
payments were f°”

insurance. The insurance was for liability (for commercial

7) .. .~ paid for
use) and commercial auto insurance from .
Under the it was a package policy for

and

A review of the Certificate of Insurance named the insured as:
and and the certificate holder name was shown

'. Sometimes the certificate holder was shown for

for:
and and
1 as the additional insurer. -
A review of auto insurance policies shows coverage for the following vehicles which were not

listed as assets of

©0090 000)

Form 886-A (1-1994) Catalog Number 20810W Page_15 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedute number or exhibly

Form 886-A ; EXPLANATIONS OF ITEMS
(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

0oo0 00

8) Review of books and records shows that has been paying $: and $: per
month for auto loan.

The table below is a summary schedule showing total expenses paid by for use of the

T TY ysis

Insurance $ € . § $
Fuel $i

Repair & maintenance $ .
Vet expense $. $ $
Occupancy . $
Tax/license : $ $ $ $
Legal — $: $ .
Owner's draw , $
Utilities $ $ $
Freight $
Chemicals $
_ Supplies

Advertising&promo $C $: { w
Telephone/telecommunication
Farm & supply ‘
Ranchlease ($ $%. ) §$
Ranch equipment $
Personal loan
Property taxes a $
Loan $i ;
Total $ $ § $

In addition to the direct payment of ranching expenses of the various 7 enterprises,
an analysis of labor costs for the various family enterprises show that it incurred a very small

percentage of labor costs for its ranching operations, as opposed to whose labor
costs were generally in excess of % each year. Combining all family operations, their labor

costs as a percentage of receipts were generally less than % each year.

Form 886-A (1-1994) Catalog Number 20810W — Page 16 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedvte number or oxhioll

oe Eee co) _ EXPLANATIONS OF ITEMS
Year/Perlod ended

Name of taxpayer Tax identification Number

Further, given the fact that a number of paid staff was unrelated to ranching
activities (i.e. administrative, teaching or housekeeping and food preparation), we can only
surmise that a great deal of the labor needed to work the ranching overations came
from the youths themselves, This was all accomplished under the auspices of

teaching of life skills and vocational training by combining the daily life and work activities of a

traditional ranch cowboy.

Law:

IRC section 501(c)(3) describes certain organizations exempt from taxation under section 501(a)
of the Code and reads as follows:

Corporations, and any community chest, fund, or foundation, organized and operated
exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or for the prevention of cruelty to children or animals, no part of the
net earnings of which inures to the benefit of any private shareholder or individual, no
substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation, and which does not participate in, or intervene in
{including the publishing or distributing of statements), any political campaign on behalf of

any candidate for public office.

Section 1.501(c)(3)-1(a)(1) of the Regulations 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 or operational test, it is not exempt.

. Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will not be regarded

as operated exclusively for exempt purposes if more than an insubstantial part of its activities is
not in furtherance of exempt purposes. The organization will not qualify for exemption if a
nonexempt activity is more than an insubstantial part of its activities, or if an activity of the
organization has more than an insubstantial nonexempt purpose.

Section 1.501(c)(3)-1(c)(2) of the Regulations provides that an organization is not operated
exclusively for one. or more exempt purposes if its net earnings inure in whole or in part to the.
benefit of private shareholders or individuals. Section 1.501(a)-1(c) states that the word “private
shareholder or individual” refer to persons having a personal and private interest in the activities of

the organization.

Section 1.501(c)(3)-1(d)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a

Form 886-A (1-1994) Catalog Number 20810W = Paga_ 17 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule numbers or axhiok

(aoe Saree 1904) EXPLANATIONS OF ITEMS

Name of laxpayer Tax identification Number Year/Period ended

private interest. Thus, it is necessary for an organization to establish that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator or his
family, shareholders of the organization, or persons controlled, directly or indirectly, by such

private interests.

Section 1.501(c)-1(d)(3) of the regulations defines the term “educational” as including the _
instruction or training of the individual for the purpose of improving or developing his capabilities,
or the instruction of the public on subjects useful to the individual and beneficial to the community.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court held that regardless of
the number of truly exempt purposes, the presence of a single substantial non-exempt purpose

will preclude exemption under section 501(c)(3).

In Living Faith: Inc. v. Commissioner, 950 F.2d 365, a nonprofit organization which operated

restaurants and health food stores in accordance with the doctrines of the Seventh-day Adventist
substantial commercial

Church. The court found that Living Faith conducted its operations with a
purpose, and therefore does not qualify as a tax-exempt organization.
Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1072 (6th Cir. 1974), the court holds that
the transfer of funds directly to the disqualified persons and to their business served the financial -
interests of the disqualified persons and/or their business.

Church by Mail, Inc. v. Commissioner, 769 F.2d 1387 (9th Cir. 1985) and est of Hawaii v.

Commissioner, 71 T.C. 1067 (1979) states that an organization has a substantial commercial
purpose that serves a private rather public interests, it will not be recognized as exempt,

Taxpayer’s Position:

POA, stated in a letter dated that was willing to agree to
revocation and properly dispose of its assets in order to prevent additional excess benefit

transactions under IRC section 4958. ,

_., a& this is believed to

However, : will not agree to a ‘retroactive revocation to .
and the examining agents.

be doubly punitive and based on misunderstandings between
The taxpayer has requested relief from retroactive revocation.

Government’s Position:

Based on the facts and circumstances described above, it is the government's position that

does not qualify as an organization exempt from tax because. did not operate exclusively for
purposes described under IRC 501(c)(3). Therefore, the government is proposing the revocation
of the organization’s tax-exempt status under IRC section 501(c)(3).

Form 886-A (1-1994) Catalog Number 208i0W — Page_18 publish.no.irs.gov Depariment of the Treasury-Internal Revenue Service

Schedule number or exhidlt

(ee Jemezay 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period anded

The facts show that was paying for the expenses of the assets and that the

vouths were indirectly being used for their services for the benefit of the privately owned
business. Reg. 1.501(c)(3)-1(c)(2) states that an organization is not

operated exclusively for exempt purposes if its net earnings inured to the benefit of private

individuals.

The organization’s website and handbook advertised the to the parents
and guardians of participating youth and to the general public as the

and the assets used in the ranch were advertised as belonging to

For examole, the ‘handbook gave the appearance that the ranch equipment and vehicles
were [illegible]. In actual operation, the ranch equipments and vehicles belonged to the
The is actually made up of five or more for-profit entities. The examining agent discovered
several other. for-profit family ranches within the which then disclosed.
_ The assets used in conducting activities belonged to the
has no assets other than the : . _, and

center. All three assets are improvements to the land owned by
During the second visitation to _., it was discovered that the farm equipment,
supplies, livestock, and assets were also used by participating boys from the or-
profit businesses. For example, sampling of fuel expenses disclosed that has been paying.
for the business. signed the checks
for fuel expenses used to pay for diesel for semi/truck/trailing cattle.

and the ! indicate

Review of the parent/guardian financial contract between
that the parents/guardian of participating youths had already paid for the use of the
assets through its tuition costs. In addition, the contracts primarily benefitted (
— for-profit businesses rather than the , as the youth were to initially enroll in the
first and then migrate over to the program. ;

In the years under examination, it was revealed that ; earnings have inured to the benefit of
its insiders. The insider is in a position to exercise control over the organization’s earnings as if
thev were his/her own by using them-at will rather than within limitations. The facts show that

and other : members were able to use the
arcanization's funds as if they were their own. and controlled
operations and financial affairs. The board members listed on the Form 990 were mere
founded and has made decisions for

-figureheads with no authorities,
The governing body was not required to approve the expenditures of

Form 886A (1-1994) Catalog Number 20810W Page 49 _publish.no.irs.gov Department of the Treasury-nternal Revenue Service

Schedule number or exhibit

oe oe cos) EXPLANATIONS OF ITEMS

Yeart/Perlod ended

Name of taxpayer Tax Identification Number

4

The examination determined that a substantial amount of the expenditures were for the personal
use of ° , and their commercial businesses. The

_ family members wrote and signed ail the checks. There were no signatures by the officers/board

members. The officers/board members did not authorize any expense vouchers.
and .. . signed all returns, checks, and controlled all bank accounts.

Furthermore, the labor services provided by the youths benefited the _ as well as

the . for-profit commercial agricultural businesses.

When an organization operates for the benefit of private interests, such as designated individuals,
the creator or his family, or persons directly or indirectly controlled by such private interest, the
organization by definition does not operate exclusively for exempt purposes. Section 1.501(c)(3)-

1(d)(1)(ii).

Treas. Reg. section 1.501(c)(3)-1(f)(2) application

Following is a discussion of the five factors contemplated in §1.501(c)(3)-1(f)(2)(ii) of the Treasury
Regulations for revoking 501(c)(3) status on the grounds of inurement when the inurement also
constitutes excess benefit transactions (“EBTs”):

Factor #1: Size and scope of activities furthering exempt purposes before and after EBTs —

has engaged in regular and ongoing activities that further exempt purposes until
has continuously provided a home for troubled boys prior to and during the EBTs explained in this

report. During a ceased operating and the founder, started a for profit
entity, , which took over ail activities previously conducted by |
1 is currently.using all assets owned by.
estimated, based on their records that itserved boys in yin ‘in and
in ; . was allowed tohave boys at a time during ‘and; In. "and
, the number was increased tc _ by adding a second license under the
subsidiary. Based on available records, the table below estimates how many
boys served each month. .

SS aaa

aed

Form 886-A (14-1994) Catalog Number 20810W Page 20 publish.no.irs.gov Department of the Treasury-internat Revenue Service

Schedule number or axhinly

(foe Jarvany 1904 EXPLANATIONS OF ITEMS

YaariParind endad

Nanie of taxpayer Tax identification Number

While the number of boys allowed to attend the ranch at any given time is limited by the State
licenses, the cost of attendance is also a hindrance for the families of many troubled youth in aur
society. To attend the , the family was expected to pay tuition, room and board of $

per month. This limits attendance to families that have the.means and ability to pay the fees.

During the four years under examination, served approximately boys for the entire
period. Given the number of boys that received services by over the years, the well-being of
our society will not unreasonably suffer if is not operating as a tax-exempt organization in the
future. Additionally, in light of the fact that activities have been taken over by a for-profit
corporation, which provides the same services to troubled boys, consideration of this first factor
weighs in favor of revocation. ;

Factor #2: Size and scope of the EBTs in relation to the size and scope of activities furtherin

exempt purposes

• As explained in. the facts, the boys worked in the for profit entities owned by the founder, as part of
  their rehabilitation, which provided a benefit to the entities. Therefore, even though the boys were

being provided rehabilitation. there was still private benefit being provided to the for profit entities

in addition to the EBTs. $ activities of providing a home for troubled boys do not lessen the

instances of inurement detailed in this report.

The number and amount of EBTs is significant in relationship to the organization's exempt
activities. As you can see from the table below, the EBT transactions were substantial in

comparison to the total expenses of . We note that the percentage of transactions decreased
in. ., which is when our examination of began. In all years, the size of the EBTs is |
comparison to the other expense is substantial.
| 7 ; - 4-year Total

EBT Transactions .$. $ $ gS $

Total Revenue q . q. ¢ . ~ §$ $

Percentage of

% %

Revenue % % %

As shown above, the EBTs from : through , iS approximately . % of exempt revenue.
' This is a substantial level of EBTs, and does not account for any other private benefit that may

have been received by the for profit entities from labor provided by the boys. Therefore,
consideration of this second factor weighs in favor of revocation.

Form 886-A (1-1994) Catalog Number 20810W —Page_21 publish.no.irs.gov

Department of the Treasury-Internal Revenue Service —

Schedule number or exhibk

(oe server 1984) EXPLANATIONS OF ITEMS
Year/Period ended

Name of taxpayer Tax Identification Number

_ factor #3: Whether there were multiple EBTs

engaged in multiple EBTs with and his for profit entities continuously over

multiple years, as you can see from the facts of this report. entered into two contracts with
Since its inception in . The contracts entered into between and ’

outlined the understanding that had a duty and responsibility to pay for and
operate the cattle ranching operations on behalf of and for the benefit of the While
we are only examining the years through , we assume that the EBTs were ongoing

since the initial contract was entered into on

S activities and operations were integrated with the for-profit operations in such a wav that

the EBT’s and.inurement have happened on a day-to-day basis. During the initial visit at
facilities, the IRS was unaware of the for-profit entities and was under the impression that the

activities of the for-profit entities were part of $ operations. It wasn’t until after the first visit
that the IRS became aware of the for-profit entities and their role in the activities of No clear
Separation between these entities and has been shown.

Due to the continual and frequent nature of the EBTs, consideration of factor three weighs heavily
in favor of revocation. | . .

Factor #4: Whether safeguards have been implemented by the organization

The organization has not implemented any safeguards to prevent excess benefit transactions in
the future. While considered revising the contract between the organization and the
_ the revisions were never completed. Oversight of 8 activities and financial

transactions were the sole responsibility of or one of his family members. Board

members only visited periodically and heid sporadic board meetings. All of the day-to-day
operations were conducted by and his family members.

As discussed above, ceased operations in and the began operating the
activities as a for profit entity called is a for profit
entity owned by! _ . It is operating as a for profit home for troubled boys and is using
the assets owned by in its operations with no compensation to - Therefore, inurement -
to is continuing even after has ceases operations.

Due to the lack of safeguards being implemented by consideration of Factor four weighs

greatly in favor or revocation.

Form 886-A (1-1994) Catalog Number 20810W Page 22 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

X

Schedule number or exhibit

(oa BBA oa EXPLANATIONS OF ITEMS

Year/Period ended

Name of taxpayer ‘| Tax Identification Number

Factor #5: Whether the EBTs have been corrected or the organization has made a good faith

effort to seek correction

To date, has not received correction of the EBTs nor have they sought correction of the
transactions. For this reason, consideration of factor five weighs in favor of revocation.

As explained in factors 1 through 5, consideration weighs heavily in favor or revocation of Ss

exempt status.

Conclusion:

The does not qualify as an organization exempt from tax because | did not operate

exclusively for purposes described in IRC 501(c)(3), | _ earnings and assets inured to the
benefit of private individuals, and more than an insubstantial part of its activities furthered private

purposes rather than exempt purposes when paid for the expenses of the for profit
ranch and related for-profit businesses.

The inurement detailed in this report is a substantial amount of inurement compared to |

revenue. This puts | in violation of §1.501(c)(3)-1(c)(2) of the Treasury Regulations, and

warrants revocation of its exempt status under Code §501(c)(3). Given the frequent and

continuous nature of the inurement from ‘through , revocation is proposed effective
. Therefore, _ _ is liable for filing Forms 1120 for the tax year ended

_ as well as each subsequent tax year.

Form 886-A (1-1994) Catalog Number 20810W _ Page_23 publish.no.irs.gov Department of the Treasury-Internal Revenue Service