Founder's personal expenses and missing records cost charity its exemption

Plain-English summary

A founder controlled a charitable foundation's operations, bank accounts, and spending. The IRS found that the foundation repeatedly paid the founder's personal expenses without contemporaneously treating the payments as compensation or substantiating them under an accountable plan. The foundation also failed to document its claimed charitable activities or respond to repeated requests for records. The IRS concluded that the foundation served private interests, allowed its earnings to inure to the founder, and failed its recordkeeping duties, so it revoked the foundation's § 501(c)(3) status.

Ruling snapshot

• Question: Did the foundation continue to qualify under § 501(c)(3) despite founder-controlled personal spending and its failure to substantiate charitable activities and expenses?
• Outcome: revocation
• Key authorities: IRC §§ 162, 274, 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.62-2, 1.501(c)(3)-1, 1.6001-1, and 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: April 12, 2016
DIVISION

Taxpayer Identification Number:
Release Number: 201645015
Release Date: 11/4/2016 Person to Contact:

UIL Code: 501.03-00
Employee Identification Number:

Employee Telephone Number:

CERTIFIED MAIL — Return Receipt Requested
Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the code is hereby revoked effective January 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations exempt from Federal Income Tax under section 501(c)(3) of the
Internal Revenue Code are required to operate exclusively for charitable,
education, or other exempt purposes if the net earnings of the organization
inure in whole or in part to the benefit of private shareholders or individuals.
See Treas. Reg. § 1.501(c)(3)-1(c)(2).

During 20XX, 20XX, and 20XX, we have determined that your net earnings
inured to the benefit of private individuals by regularly paying personal
expenses of your founder without contemporaneously recording the
expenditures as salary or compensation. The transactions that resulted in funds
inuring to private individuals were multiple or repeated transactions during the
year and appear to overwhelm the amount of exempt activity conducted, if
any. Therefore, you have operated for the benefit of private interests of
individuals in contravention of the requirements of Treas. Reg. § 1.501(c)(3)-

1(d)(1)(ii).

Further, you have failed to respond to repeated reasonable requests to allow
the Internal Revenue Services to examine your records regarding your
receipts, expenditures, or activities as required by the I.R.C. § 6001,
6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code.

You are required to file Federal income tax returns on Form 1120. If you have not already
filed these returns and the agent has not provided you instructions for converting your
previously filed Form 990 to Form 1120, you should file these income tax returns with the
appropriate Service Center for the tax year ending December 31, 20XX and for all tax years
thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

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:
United States Tax Court, the United States Court of Federal Claims, or the United States
District Court for the District of Columbia. A petition or complaint in one of these three
courts must be filed before the 91st day after the date this determination was mailed to you
if you wish to seek review of our determination. Please contact the clerk of the respective
court for rules and the appropriate forms regarding filing petitions for declaratory judgment
by referring to the enclosed Publication 892. Please note that the United States Tax Court is
the only one of these courts where a declaratory judgment action can be pursued without the
services of a lawyer. You may write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US 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

You also have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal Appeals
process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or
extend the time fixed by law that you have to file a petition in a United States court. The
Taxpayer Advocate can, however, see that a tax matter that may not have 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

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: April 12, 2016
DIVISION

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

Sincerely yours,

Paul A. Marmolejo
Acting Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
1100 Commerce Street MS 4900 DAL
Dallas, TX 75242-1100

Date: July 31, 2015
Taxpayer Identification Number:
Form:

Tax Year(s) Ended:
December 31, 20XX, 20XX, 20XX
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s name/ID number:

Manager’s contact number:

Response due date:
August 31, 20XX

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

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

standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

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

Thank you for your cooperation.

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Sincerely,

Margaret Von Lienen
Director, EO Examinations

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

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
ISSUE:

1. Whether (hereinafter referred to as the Foundation)
is operated exclusively for exempt purposes described within Internal Revenue Code
501(c)(3):
a. Whether the is engaged primarily in activities that accomplish an exempt
purpose?
b. Whether is operated for the purpose of serving a private benefit rather

than public interests.

2. Whether any part of the net earnings of inured to the benefit of any
private shareholder or individual.

3. Whether complied with record keeping requirements as required under
Internal Revenue Code section 6001 and 6033.

4. Should tax exemption under section 501(c)(3) of the Internal Revenue
Code be revoked because their activities have not met the requirements of Section 501(c)(3) of the
Internal Revenue Code. If revocation is upheld what should the effective date should be?

FACTS:

was founded by , . The
Foundation was incorporated in the State of in March, 20XX. In July, 20XX, the organization filed
Form 1023, Application for Recognition of Exemption. In a Determination Letter dated August 26, 20XX,
was recognized by the Internal Revenue Service as exempt from Federal income tax and as not being a
private foundation as an organization described under section 509(a)(1) of the Internal Revenue Code.

The articles of incorporation set forth the following purpose:

Article VI- Purpose:

Form 1023 Application, Application for Recognition of Exemption:
The Foundation application set forth the following:

Activities and Operational Information:

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


Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

On January 08, 20XX, Letter 3613 was mailed to the organization informing them of an examination for the

tax year December 31, 20XX. On March 18, 20XX agent interviewed , Founder and
President, concerning the Foundation’s programs and activities. During the interview, explained
that the Foundation does not have any employees and is operated from his home in ; he

controls the financial affairs of the Foundation: he has management authority over the Foundation’s day to
day operations and decisions; and he has sole signature authority on the Foundation’s bank accounts.

stated that Foundation provides youth with and ;

; ‘and

On March 16, 20XX, stated in a subsequent interview that he takes kids to

; he serves as an at local ; and purchases

for youth. He further explained that he pays for the and for
poor children; and that he is the only person that conducts these activities. According to , the

Foundation has achieved many accomplishments as described above. When questioned about the specific
events, no details on the number of kids, event dates, method of transportation, and number of
accompanying adults were provided. When asked to provide substantiation to support specific event dates,
location of events, and number of children who participated in the events nothing was provided. The
Foundation did not have any brochures, pamphlets or photos as evidence of activities carried on.

Agent made several requests to obtain any type of documentation to support the activities that occurred
during the tax years that ended December 31, 20XX, 20XX & 20XX. has not provided
any documentation to support any of the activities. .

Following the interview with and examination of the financial records for the December 31,

20XX tax year, the examination was expanded to include tax years December 31, 20XX and December 31,
20XX.

Funding:

During the periods under examination the Foundation reported the following sources of funding on their
Form 990-EZ returns:

Form 990-EZ, Part I - Statement of Revenue and Expenses:

Revenue Sources 20XX 20XX 20XX

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


Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

Tax Identification Number

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

XX,XXX XX, XXX XX, XXX

XX,XXX XX, XXX XX, XXX

XX,XXX XX, XXX X
Totals XXX,XXX XXX,XXX XX,XXX

The Foundation incurred numerous expenses. The bank statements and cancelled checks were
reviewed and analyzed for tax years under examination. The following is a summary of expenses

incurred:
Description of Expense 20XX 20XX 20XX Total
X,XXX X,XXX X,XXX XX, XXX
X,XXX X,XXX X,XXX XX,XXX
X,XXX X,XXX X,XXX XX, XXX
X,XXX X,XXX XXX X,XXX
X,XXX X,XXX X,XXX XX, XXX
X,XXX X,XXX X,XXX X,XXX
X,XXX XXX X,XXX X,XXX
XX, XXX XX,XXX X,XXX XX, XXX
X,XXX XX, XXX XX, XXX XX, XXX
XX, XXX XX, XXX XX, XXX XXX, XXX
X XX,XXX X,XXX XX, XXX
X X,XXX X,XXX X,XXX
Totals XX, XXX XXX,XXX XXX, XXX XXX, XXX

In order to substantiate that the expenses were related to the Foundation’s exempt activities, the agent
requested documentation (invoices, receipts) and an explanation (purpose of expenditures).

The Foundation responded with general explanations but no supporting documentations validating the
expenses were ever provided. The Foundation does not have an accountable plan in place to authorize
and approve expenses. See Exhibit 1 for a summary of expenses by tax year.

Agent issued several Information Document Request (IDR) and letters requesting receipts and information
with respect to how these expenditures were related to the Foundation’s exempt purposes. The Foundation

did not respond to the requests.

LAW.

Treasury Regulation section 1.162-1(a) states, in general, that business expenses deductible from gross
income include the ordinary and necessary expenditures directly connected with or pertaining to the
taxpayer's trade or business, except items which are used as the basis for a deduction or a credit under
provisions of law other than section 162.

Treasury Regulation section 1.62-2(c)(2)(i) provides that if an arrangement meets the requirements

business connection, substantiation, and returning-excess-payments provisions of this section, all amounts

paid under the arrangement are treated as paid under an “accountable plan.”

Treasury Regulation section 1.62-2(d)(1) provides that expenses reimbursable under an accountable plan

must constitute deductible business expenses under section 162 or other business deduction statutes.

Form 886-A (1-1994)

Catalog Number 20810W Page 3

publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

Treasury Regulations section 1.62-2(e)(1) provides that expense reimbursements under an accountable
plan must satisfy the substantiation rules of sections 1.162-17 or 1.274-5T of the regulations.

Treasury section 1.274-5T(b) (1) In general. —Section 274(d) and this section contemplate that no
deduction or credit shall be allowed for travel, entertainment, a gift, or with respect to listed property unless
the taxpayer substantiates the requisite elements of each expenditure or use as set forth in this paragraph

(b).

Treasury Regulations section 1.274-5T(b)(2) Travel away from home. —The elements to be proved with
respect to expenditure for travel away from home are: (i) Amount. —Amount of each separate expenditure
for traveling away from home, such as cost of transportation or lodging, except that the daily cost of the
traveler's own breakfast, lunch, and dinner and of expenditures incidental to such travel may be
aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil, and for taxi fares;
(ii) Time. —Dates of departure and return for each trip away from home, and number of days away from
home spent on business; (iii) Place. —Destinations or locality of travel, described by name of city or town or
other similar designation; and (iv) Business purpose. —Business reason for travel or nature of the business
benefit derived or expected to be derived as a result of travel.

Section 501(c)(3) of the Code provides for the exemption from Federal income tax of organizations
organized and operated exclusively for religious, charitable and educational purposes, no part of the net
earnings which inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized and operated exclusively for
charitable purposes unless it serves a public rather than a private interest.

Treas. Reg. Section 1.501(c)(3)-1(a)(1) states: “In order to be exempt as an organization described in
Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of
the purposes specified in such Code section.”

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated
exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish
one or more of such exempt purposes specified in 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.

Treas. Reg. § 1.501(c)(3)-1(a) provides that in order for an organization to be exempt as an organization
described in Section 501(c)(3), an organization must be both organized and operated exclusively for one or
more of the purposes specified in section 501(c)(3) of the Code.

Treas. Reg. § 1.501(c)(3)-1(b) provides that an organization is organized exclusively for one or more
exempt purposes only if its articles of organization (a) limit the purposes of such organization to one or
more exempt purposes; and (b) do not expressly empower the organization to engage otherwise than as
an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more
exempt purposes.

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

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

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). 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. Section 1.501(c)(3)-1(c)(2) provides, “An organization is not operated exclusively for one or
more exempt purposes only if its net earnings inure in whole or in part to the benefit of private
shareholders or individuals.

Treas. Reg. § 1.501(c)(3)-1(d)(2) provides that the term “charitable” is used in section 501(c)(3) in its
generally accepted legal sense, and includes the relief of the poor and distressed, and the promotion of
social welfare by organizations designed to lessen neighborhood tensions, eliminate prejudice and
discrimination or combat community deterioration and juvenile delinquency.

Treas. Reg. § 1.501(c)(3)-1(d)(3) provides that the term “educational”, as used in section 501(c)(3) of the
Code, relates to:

(a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or
(b) The instruction of the public on subjects useful to the individual and beneficial to the community.

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the collection thereof,
shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time
prescribe.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt from tax
under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and
disbursements, and such other information for the purposes of carrying out the internal revenue laws as the
Secretary may by forms or regulations prescribe, and keep such records, render under oath such
statements, make such other returns, and comply with such rules and regulations as the Secretary may from
time to time prescribe.

Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that every organization
exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511 on its unrelated business
income must keep such permanent books or accounts or records, including inventories, as are sufficient to
establish the amount of gross income, deduction, credits, or other matters required to be shown by such
person in any return of such tax. Such organization shall also keep such books and records as are required
to substantiate the information required by IRC § 6033.

Treas. Reg. § 1.6001-1(e) states 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.

Treas. Reg. § 1.6033-1(h)(2) provides that every organization which has established its right to exemption
from tax, whether or not it is required to file an annual return of information, shall submit such additional
information as may be required by the district director for the purpose of enabling him to inquire further into

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter
1 of the Code and IRC § 6033.

In Better Business Bureau of Washington, D. C., Inc. v. U.S., 326 U.S. 279 (1945), the Supreme Court
stated that an organization is not operated exclusively for charitable purposes if it has a single non
charitable purpose that is substantial in nature.

In Church by Mail, Inc. v. Commissioner, 765 F.2d 1387 (9th Cir., 1985), aff'g T.C. Memo. 1984-349 (1984),
the Court indicated whether an organization has a substantial nonexempt purpose is a question of fact, to
be resolved on the basis of all the appropriate evidence.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the Tax Court observed: “Factors such as the
particular manner in which an organization's activities are conducted, the commercial hue of those
activities, and the existence and amount of annual or accumulated profits are relevant evidence of a
forbidden predominant purpose.”

Revenue Ruling 59-95, you do not qualify for exempt status under Section 501(c)(3) of the Code because
of your failure to comply with the Regulations under Section 6033 of the Code.

Taxpayer’s Position:

The Foundation’s position has not been determined.

Government’s Position:

1. Whether (hereinafter referred to as the Foundation) is

operated exclusively for exempt purposes described within Internal Revenue Code 501(c)(3):

The founder states the Foundation has engaged in ongoing activities such as

; the organization has not furnished proof that
they conducted these activities. The Foundation was unable to substantiate event dates and locations,
number of children involved in activities, or brochures and pamphlets that advertised the activities. Based
on the facts of the examination, the organization does not qualify for exemption.

a. Whether the is engaged primarily in activities that accomplish
an exempt purpose?
In order for an organization to retain its exempt status it must demonstrate to the Service that it meets both
the organizational and the operational tests. The Foundation fails to meet the operational test because it
cannot substantiated any activities actually occurred. Revenue agent made multiple and repeated request
for documentations to support the activities and programs. The Foundation
simply did not provide the records to support and substantiate the existence of their activities.

b. Whether is Operated for the purpose of serving a private
benefit rather than public interests.

Form 886-A (1-1994) Catalog Number 20810W Page 6 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations states that an organization is not organized exclusively
for any of the purposes specified in section 501(c)(3) of the Code unless it serves public, rather than
private interests.

During the examination, Revenue Agent obtained and analyzed the Foundation’s bank statements and
cancelled checks for all years under examine. The founder used the organization’s debit card on regular
basis purchase vehicle fuel and card repairs, restaurants and fast food establishments, cash withdrawals,
airline tickets and hotel bills, gym membership, child care expenses and the likes.

Checks were written for cash, to law groups, home owner association fees, traffic tickets, State of

auto tags, City of building permits departments and car repairs and insurance.
The foundation does not own any vehicles which is the property of the founder.

No documentation was provided that the funds were expended for ordinary and necessary expenses of the
. (IRC sections 162 and 274) The payments were made under a non-accountable plan. (Regs1.62-2(c).
Substantially all of the expenses incurred by the Foundation lacked documentation that would satisfy the
requirements of an accountable plan. Therefore, failed to
substantiate that the funds expended benefited a public rather than private interest

2. Whether any part of the net earnings of inured to the benefit

of any private shareholder or individual.

An organization described in section 501(c)(3) must establish that no more than an insubstantial part of its
activities is not in furtherance of an exempt purpose. Treas. Regs. 1.501(c)(3)-1(c)(1).

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations states that an organization is not organized exclusively for
any of the purposes specified in section 501(c)(3) of the Code unless it serves public, rather than private
interests. failed to provide documentations to substantiate that all the
funds expended benefited a public rather than private interest.

Without evidence (receipts, invoice, plausible explanations) that the expenses incurred serves a charitable
purpose and were ordinary and necessary to carry out charitable activities, we can only conclude that
expenses were incurred for non-exempt purposes.

The founder has sole and exclusive control over the bank accounts. He has control over the funds received
from fundraising events, disbursements, and assets of the organization. He is the sole officer and makes all
decisions on the activities of the organization. The examination determined that the Foundation has no
internal controls in place to ensure that funds are used for exempt purposes.

3. Whether complied with record keeping requirements as required under
Internal Revenue Code section 6001 and 6033.

The Foundation failed to provide the required documentation requested to substantiate their exempt
activities and financial expenditures per Section 6033 of the Code. Revenue Ruling 59-95, you do not
qualify for exempt status under Section 501(c)(3) of the Code because of your failure to comply with the
Regulations under Section 6033 of the Code.

Under Section 1.6033-2(i)(2) of the Regulations, every organization exempt from tax, whether or not it is
required to file an annual information return, shall submit additional information as may be required by the
Internal Revenue Service for the purpose of inquiring into its exempt status.

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
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

During the examination, several requests for information were made, but the Foundation failed to supply
the requested information. The organization has clearly failed to provide the requested information despite
adequate notice as required by Section 1.6033-2(i)(2) of the Regulation.

4. Should tax exemption under section 501(c)(3) of the Internal Revenue
Code be revoked because their activities have not met the requirements of Section 501(c)(3) of the Internal

Revenue Code. If revocation is upheld what should the effective date be?

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations states that an organization is not organized exclusively for
any of the purposes specified in section 501(c)(3) of the Code unless it serves public, rather than private
interests. The Foundation’s funds were used substantially for the private benefit of the founder and
president during the tax periods under examination.

Based on the facts of this examination the does not qualify for
exemption under IRC Section 501(c)(3) as a charitable organization. Revocation of the organization’s
exempt status is recommended since it is not operated exclusively for exempt purposes.

serves a private benefit rather than public interest.

Based on the facts learned during the examination, the 501(c)(3) tax exempt status of

should be revoked because it is not operated exclusively for tax exempt purposes. The effective date of
revocation is 01/01/20XX because that is the first day of the tax year we recognized as not being operated
as organization described under section 501(c)(3) of Internal Revenue Code.

Conclusion:

. does not satisfy both the organizational test and the operational test.
Accordingly, the Foundation does not qualify for exemption under section 501(c)(3) and its tax exempt
status should be revoked. This proposed revocation would be effective January 1, 20XX.

The Foundation will be required to file Form 1120 for the tax period ending December 31, 20XX and for all
subsequent tax years.

Form 886-A (1-1994) Catalog Number 20810W Page 8 publish.no.irs.gov Department of the Treasury-Internal Revenue Service