Foreign stock purchases and private benefits caused revocation

Plain-English summary

A section 501(c)(3) organization sent substantial charitable funds to accounts abroad for the purchase of shares in a publicly traded company. The examination report states that the treasurer knew the funds were buying stock while telling donors their money supported schoolchildren and flood relief. It also describes routed donations, reimbursements to donors, improper charitable deductions, overlapping directors, and benefits to private persons. The IRS concluded that these transactions served nonexempt purposes, violated the requirement to serve public rather than private interests, and were not incidental to the organization's activities. It revoked the organization's exemption because the organization failed the operational test and allowed private inurement and benefit.

Ruling snapshot

• Question: Did the organization's foreign stock-purchase and donor-reimbursement transactions remain consistent with section 501(c)(3)'s operational and public-benefit requirements?
• Outcome: exemption revoked
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c), (d); Rev. Rul. 80-278

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: March 21, 2017
Release Number: 201732032

Release Date: 8/11/2017

UIL Code: 501.03-00
Tax Year Ending:

December 31, 20XX
Taxpayer Identification Number:
Person to Contact:

Employee Identification Number:

Employee Telephone Number:

CERTIFIED MAIL — RETURN RECEIPT

Dear

This is a final determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section
501(c)(3) effective January 1, 20XX. Your determination letter dated March 23, 19XX is revoked.

The revocation of your exempt status was made for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax
under section 501(a) must be both organized and operated exclusively for exempt purposes. You
have failed to establish that you are operated exclusively for exempt purposes and that no part of
your net earnings inure to the benefit of private shareholders or individuals. You have failed to

meet the operational test described in IRC 501(c)(3).

Specifically, funds were wired to a foreign charitable organization and used to purchase shares of
a publicly-traded company in . The shares were bought by the organization’s Treasurer.
The benefits to your Treasurer, facilitated by you, are significant and are not incidental. This

activity served a nonexempt purpose and inured to the benefit of your Treasurer.

An organization exempt under IRC 501(c)(3) is required to operate exclusively for public benefit as
opposed to private interests. All directors and officers have a responsibility to ensure that the

organization’s primary purpose is directed to the furtherance of a charitable purpose.

Your officers and directors failed their fiduciary responsibilities to operate exclusively for IRC
501(c)(3) purposes because your officers and directors participated in and facilitated in the
abusive transactions between the years 20XX and 20XX.

When an organization operates for the benefit of private interests, the organization, by definition,
does not operate exclusively for exempt purposes. Thus, you are not operated exclusively for IRC
501(c)(3) purposes, and do not qualify for exemption as an organization described in IRC 501(c)(3).

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

Organizations that are not exempt under section 501 generally are required to file federal income
tax returns and pay tax, where applicable. For further instructions, forms, and information, please

visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment
by referring to the enclosed Publication 892. You may write to the courts at the following
addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

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

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or
you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

Tel:
Fax:

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

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

Date:
September 2, 2016
Taxpayer Identification Number:

Department of the Treasury
Internal Revenue Service

IRS Tax Exempt and Government Entities
Exempt Organizations Examinations
1100 Commerce Street MS 4900 DAL Form:

Dallas, TX 75242-1100 990 Return
Tax Year(s) Ended:

December 31, 20XX
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s Name/ID Number:

Manager’s Contact Number:

Response due date:
October 3, 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
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.

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


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

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

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.

Thank you for your cooperation.

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

3 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
Dec. 31, 20xx
ISSUE
Should the exempt status of under Section 501(a) of the Internal
Revenue Code (IRC) as an organization described in IRC Section 501(c)(3) be revoked effective January
1, 20XX?
FACTS
was incorporated on October 6, 19XX in the State of as a non-profit corporation. Article 3
provided the first Board of Directors. was listed as one of the first Board of Directors.

The Articles of Incorporation provided the purpose of the corporation is to provide

filed the Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, on October 18, 19XX.

Part II of the Form 1023 sets forth the purposes of _ . It states that the purpose of is to assist
underprivileged communities in reducing their poverty. It will be accomplished by promoting education
and better healthcare, and providing assistance in the rehabilitation of victims of natural and man-made

disasters. , the director of , is also a director of .
is a charitable foundation promoting education in , and will be one of the beneficiaries of
Internal Revenue Service granted tax exempt status to on March 23, 19XX.

The Forms 990 filed by between 20XX and 20XX provide the mission of is to promote education
and health care in underprivileged communities by working closely with , a registered non-profit
organization in . From 20XX through 20XX, Forms 990 listed its website address as

. The registrant¹ name and registrant organization of the web address
are and , respectively.

reported a total of $X,XXX,XXX grants made to outside U.S in its Form 990 between 20XX and
20XX. did not make any grant or conduct any exempt activity in the United States. The totals of the
grants made in the years 20XX, 20XX, and 20XX were $X,XXX,XXX, $X,XXX,XXX, and $X,XXX,XXX,
respectively.

The Internal Revenue Service did not receive the Form 990 for the year 20XX filed by

Similar to the years 20XX through 20XX, the only activity of for the years 20XX through 20XX was to
make grants to the organizations outside U.S. did not make any grant or conduct any exempt activity
in the United States. The totals of the grants made in the years 20XX, 20XX, and 20XX were $XXX,XXX,
$XXX,XXX, and $XXX,XXX, respectively.

¹ The registrant information was gathered from on May 11, 20XX.

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
Dec. 31, 20xx
Relationship between and
was a director of from its inception to 20XX and the founder/director of . He
also was the founder, chairman, and CEO of ². is a

publicly traded company in

has a close relationship with . Between 20XX and 20XX, four (4) of directors listed on
Forms 990, , ; , and , were also listed on
Annual Reports as the directors of

passed away in from complications of a stroke in October 20XX as said by
news reports.
For the years 20XX and 20XX, three (3) of directors, , , and
, were also the directors of . And, was listed as a chairman of on its 20XX Annual
Report.
The following table provides the summary of the directors of and the directors of
20XX | 20XX | 20XX | 20XX | 20XXK | 20XX
X xX X X X X Xx
X x xX X X
X X X X X
X X X X
X xX X X X X
X X X X
X X X X X
X Xx X X X X xX
X X
X X
X X
X X X
— Treasurer of
was a director and treasurer of from 20XX to 20XX.
Between 20XX and 20XX, arranged to repurchase of more than XX,XXX,XXX shares in
for over $X,XXX,XXX from , whom the U.S. Treasury Department's OFAC had
designated as a shortly after the events of , 20XX.
held an interest in through an company called
loaned large sums of money to assist in the purchase those shares from
² 20XX Annual Report

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

Dec. 31, 20xx

. Between July 1, 20XX and March 31, 20XX, at direction, sent
approximately XX wire transfers to accounts in , for a total of $X,XXX,XXX, to be used for
the purchase of shares in . As aresult, by June 20XX, was the listed holder of over
X,XXX shares of stock in that had been purchased from for a total ownership
interest in the corporation of X.XXX percent, and a value of over $X.X dollars.
regularly communicated with regarding the status of the repurchase of shares from
and/or . See Exhibit 1 for the XX wire transfers to accounts in

, as the treasurer of , told his donors that money was going to school
children, and to flood relief. But instead of funding schools, a significant portion of assets went to
buy shares back from , who has been designated by the Treasury Department as a

. He knew that the money was going to buy back shares of ,
and not to school children, as the mission stated.

signed the plea agreement with the statement of facts described above on January 9, 20XX,
and received his sentenced on August 1, 20XX.

— Director of

serviced with on the Board of Directors of at least from 20XX through
20XX.

was one of the individuals used by to route funds from to United States.

On March 9, 20XX, one of family members referenced need for reimbursement
from on an upcoming trip to later that month. In the email, the family member
wrote that she would transfer money to if would provide cash to in

agreed to the plan and instructed to send check to In accordance with the agreement,

wrote a check dated March 15, 20XX, and made payable to in the amount of $XX,XXX.

On March 21, 20XX, one of family members wrote that wanted to
transfer $XX,XXX into the bank account of brother, and would take the rest in cash
when he arrived in between March 28 and April 10, 20XX⁴.

deducted the $XX,XXX he sent to as a charitable contribution, even though he was
reimbursed for this in

claimed charitable deductions to _ for a total of $XXX,XXX between 20XX and 20XX, even
though reimbursed him for at least a portion of these transfers. As a result, the Government
had a total of $XX,XXX tax loss⁵.

³ Case Document XX, Position of the United States with Respect to Sentencing Factors, filed on
07/28/XX

⁴ Case Document XX, Statement of Facts, filed on 12/02/XX

⁵ Case Document XX, Position of the United States with Respect to Sentencing Factors, filed on
07/28/XX

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
(Rew. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

Dec. 31, 20xx

signed the plea agreement with the statement of facts described above on November 3,
20XX, and was sentenced on August 1, 20XX.

— Donor of

was a donor of who provided a testimony for another donor,⁶ on April 21,
20XX.

indicated in his testimony that he made the first donation of $X,XXX to the in 20XX which
was a directed donation to a distant cousin of him. He explained what directed donation is in his
testimony. He said, directed donation is being able to direct a part of some of your donation to a cause
that otherwise is dear to you as an individual. And that included earmarking a certain percentage or
proportion of that donation for an end recipient, whether it be an organization or an individual, whether
family member or otherwise, who you wanted to donate money to because you felt they deserved charity.

Subsequent to his first donation to , he made other directed donations that routed through . He
indicated that an approximately X to XX percent of his donations were reimbursed.

agreed the statement made by his counsel in his testimony that it was not at all unusual for
donors to the to indicate as part of their donation either what kind or what
specific organization they would like to receive that money.

At the end of his testimony, he stated that the way it was presented was allowed you to give
donations to non-501(c)(3) entities in that are charitable.

Interview with the officers of

The interview with the officers of including the president, was requested.

The interview was held on August 10, 20XX.

Two of directors, 7 and appeared at the interview. ,

representative, also appeared for the interview.
did not appear at the interview because of the advice of his attorney.
was asked how long he has been a director of . He replied, about X years. He also was
asked why his name was on Forms 990 at least from 20XX through 20XX. He replied that he does
not know why his name was shown on the Forms 990 prior to 20XX.

Questions regarding to the XX wire transactions made by the prior treasurer, , between 20XX
and 20XX were asked to officers and representative. The answers were, do not know.

⁶ testimony provided that did not engage in a scheme to get reimbursement of his charitable
contributions through stock returns (Case Document XX filed 04/23/XX).

⁷ was appointed by board as a non-voting board member on July 10, 20XX. His name is not shown on the

Forms 990 as a director of

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
Dec. 31, 20xx

Questions regarding to the donation reimbursements received by prior director of , , were

asked to officers and representative. The answer for the questions was that the board does not

know about the reimbursements until the audit.

Questions regarding to the directed donations were asked to officers and representative. The
answer for the questions was that the board is not aware of the directed donations.

LAWS

IRC §501(a) provides, in part, that organizations described in IRC §501(c) are exempt from federal
income tax. Section 501(c)(3) of the Code describes, in part, an organization that is organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational
purposes, no part of the net earnings of which inures to the benefit of any private shareholder or
individual.

Treasury Regulations §1.501(c)(3)-1(a)(1) states that 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 section. If an organization fails to meet either the organizational test or
the operational test, it is not exempt.

Treasury Regulations §1.501(c)(3)-1(c)(1) states 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.

Treasury Regulations §1.501(c)(3)-1(c)(2) states 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.

Treasury Regulations §1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated
exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it
serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, 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.

Revenue Ruling 80-278, 1980-2 CB 175, (Jan. 01, 1980) establishes that in making the determination of
whether an organization’s activities are consistent with exemption under section 501(c)(3) of the Code,
the Service will rely on a three-part test. The organization’s activities will be considered permissible
under section 501(c)(3) if:

(1) The purpose of the organization is charitable;

(2) The activities are not illegal, contrary to a clearly defined and established public policy, or in conflict
with express statutory restrictions; and

(3) The activities are in furtherance of the organization’s exempt purpose and are reasonably related to
the accomplishment of that purpose.

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

Dec. 31, 20xx

GOVERNMENT’S POSITION

It is the Government's position that the organization has failed to meet the operational test described in
Treasury Regulation Section 1.501(c)(3)-1(c)(1). In order to continue tax-exempt status an organization
must prove that it is operated exclusively for tax-exempt purposes and that no part of its net earnings
inured to the benefit of any private individuals.

, the treasurer of , followed the direction of to wire a total of $X,XXX,XXX to
for purchasing the shares of from , whom the U.S. Treasury Department's
OFAC had designated as a shortly after the events of
20XX. knew that the funds were used to buy back shares of , not to school children,
as the mission stated. However, he told the donors that money was going to school
children and to flood relief.

The $X,XXX,XXX of funds used to purchase the shares of for represented XX.XX% of
total grants made by in the years between 20XX through 20XX. The benefits to
facilitated by , are significant, and are not qualitatively and quantitatively incidental. This activity

served a nonexempt purpose and merely inured to the private benefit of

also made false representation to Internal Revenue Service and general public by filing its Forms
990 for the years 20XX through 20XX indicating that the funds granted to the organizations outside
United States were used for promoting education and health care in underprivileged communities in .

failed two of the three-part test described in Rev. Rul. 80-278. The activity of purchasing the shares

of from ,a , is contrary to a clearly defined
and established public policy. And, the activity of purchasing the shares of for was
not in furtherance of exempt purpose.

As mentioned above, used its funds for nonexempt purpose, _ also facilitated tax avoidance by
allowing its officer, , and donors to make the improper charitable contribution deductions and
receive private benefits.

According tax law, an IRC section 501(c)(3) nonprofit organization is required to operate exclusively for
public benefit, refraining from allowing individuals to benefit financially. All directors and officers have a
responsibility to ensure that the organization’s primary purpose is directed to the furtherance of a
charitable activity.

The officers and directors of failed their fiduciary responsibilities to operate the for exclusively
tax-exempt purpose because the officers and directors participated in and facilitated the abusive
transactions between the years 20XX through 20XX.

When an organization operates for the benefit of private interests, the organization, by definition, does
not operate exclusively for exempt purposes. Thus, is not operated exclusively for 501(c)(3)
purpose, and does not qualify for exemption as an organization described in section 501(c)(3).

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
Dec. 31, 20xx
Based on the facts and laws presented above, has failed to operate exclusively charitable purposes

within the meaning of IRC § 501(c)(3) to be recognized as exempt from federal income tax under
IRC § 501(c)(3). Accordingly, the organization's exempt status is revoked effective January 1, 20XX.

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

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
Dec. 31, 20xx

Exhibit 1 — the XX wire transfers to accounts in

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