Foreign funding conduit and undocumented cash cause revocation

Plain-English summary

A domestic section 501(c)(3) organization solicited contributions in the United States to support the known activities of a foreign organization. It did not make proposal-based grants, document how the foreign organization used the money, or show that it retained control and discretion over the funds. Supporting the foreign organization was its only charitable activity, so the IRS concluded that the domestic organization functioned as a conduit rather than independently furthering exempt purposes. A disqualified person also issued and cashed checks payable to cash, and the supplied receipts were signed by that same person rather than providing acceptable documentation of charitable use. The IRS revoked the exemption based on both the conduit arrangement and private inurement.

Ruling snapshot

• Question: Does the organization remain exempt when it passes donations to a foreign organization without control or expenditure records and permits undocumented cash withdrawals by an insider?
• Outcome: revocation
• Key authorities: IRC §§ 170(c) and 501(c)(3); Treas. Reg. § 53.4946-1(f)(2); Rev. Rul. 68-489

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION Date: JUN 21, 2017
Number: 201751015 Person to Contact:
Release Date: 12/22/2017 Identification Number:

Contact Telephone Number:
Telephone Number:
Fax:
EIN:
UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested
Dear

This is a final determination that your exempt status under section 501(c)(3) of the Internal Revenue
Code is revoked. Recognition of your exemption under Internal Revenue Code section 501(c)(3) is
revoked effective for the following reason(s):

You have not demonstrated that you are operated exclusively for charitable, educational, or other
exempt purposes within the meaning of I.R.C. section 501(c)(3). Organizations that are described in
I.R.C. section 501(c)(3) and section 501(a) must be organized and operated exclusively for an exempt
purpose. You have not established that you have operated exclusively for an exempt purpose.

As such, you failed to meet the requirements of Internal Revenue Code section 501(c)(3) and Treasury
Regulation Section 1.501(c)(3)-1(d), in that you failed to establish that you were operated exclusively for
an exempt purpose.

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

You are required to file Federal income tax returns on Form 1120. These returns should be filed with
the appropriate Service Center for the year ending , and for all subsequent years.


Processing of income tax returns and assessment 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 in court, you must initiate a suit for declaratory judgement
in the United States Tax Court, the United States Claim Court or the District Court of the United
States for the District of Columbia before the 91st day after the date this determination was mailed
to you. Contact the clerk of the appropriate court for the rules for initiating suits for declaratory
judgment. 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 may call the IRS telephone number listed in your local directory. An IRS employee there may be
able to help you, but the contact person at the address shown on this letter is most familiar with your
case. You may also call the Internal Revenue Service Taxpayer Advocate.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect your taxpayer rights. We 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 our assistance, which
is always free, we will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 1-877-
777-4778.

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

Sincerely yours,

Enclosures:
Publication 892 Director, EO Examinations


Date:
9/13/2016
Taxpayer Identification Number:

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Exempt Organizations Examinations
Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager's Name/ID Number:

r's Contact Number:
Certified Mail - Return Receipt Requested Manager's Conta

due date:
Dear Response due

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.

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

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


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:

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,

Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

2 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

EXPLANATION FOR PROPOSED REVOCATION OF EXEMPT STATUS

The purpose of this attachment is to provide you with our preliminary examination findings, which
indicate that we should propose revocation of the 501(c)(3) exempt
status.

PRIMARY BASIS FOR REVOCATION:

We intend to propose revocation of the ’s exempt status because our
examination revealed that the Organization appears to be a foreign conduit without control or
discretion over charitable funds solicited in the United States, and distributed to a foreign entity,
i.e., . In addition, the Organization appears to have permitted its income to inure to
the benefit of a Disqualified Person.

FACTS:
We are proposing revocation of the Organization’s exempt status based on the following facts:

* Certain persons in this country, desirous of furthering the work of a foreign organization,

located in , formed a charitable organization within the United States. The
domestic organization, located in , receives contributions
and makes payments by check, at convenient intervals, to . The
organization, previously received a ruling that contributions to it are deductible under section 170
of the Code. In conducting its fundraising activities, the organization represents
to prospective contributors that funds raised will go to . According to

IRC § 170(c), the Service holds that contributions to domestic organizations that operate under the
circumstances described above are not deductible.

* The Representative for the Organization confirmed that the organization does
not provide grants to the foreign organization on a proposal basis, but raises funds to support
known activities in which the foreign organization consistently engages. The Organization has
provided no documentation to show how funds contributed by the domestic organization were
utilized for charitable purposes. According to Rev. Rul. 68-489, 1998-2 C.B. 210, an organization
will not jeopardize its exemption under § 501(c)(3) of the Code, even though it distributes funds to
nonexempt organizations, provided it retains control and discretion over use of the funds and
maintains records establishing that the funds were used for § 501(c)(3) purposes. Expenditure
responsibility is required as IRC § 170(c)(2) states that a contribution or gift by a corporation to a
trust, chest, fund, or foundation shall be deductible by reason of paragraph 170(c)(2) only if it is to
be used within the United States or any of its possessions exclusively for purposes specified in
subparagraph 170(c)(2)(B). Contributions made directly to foreign organizations are not
deductible, and our examination revealed that the organization appears to
have no control or discretion over how the foreign organization utilizes its contributed funds.

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

« While may be the equivalent of a 501(c)(3) organization in ,
organization has provided no documentation to show how the domestic organization maintained
expenditure responsibility, or to show how the foreign organization utilized any of the funds
contributed.. From the little information secured over the course of the examination, the
Organization is considered to generally fund the activities of across-the-
board, to potentially include non 501(c)(3) expenditures as well as an unknown percentage of
administrative costs. According to IRC § 170(c), if an organization is required for other reasons,
such as a specific provision in its charter, to turn contributions, or any particular contribution it
receives, over to another organization, then in determining whether such contributions are
deductible, it is appropriate to determine whether the ultimate recipient of the contribution is a
qualifying organization. It is well established in the law of taxation that “A given result at the end of
a straight path is not made a different result because reached by a devious path”. Minnesota Tea
Co. v. Helvering, 302 U.S. 355, at 358, Ct. D. 1431, C.B. 1940-1, 136. Moreover, it seems clear
that the requirements of § 170(c)(2)(A) of the Code would be nullified if contributions inevitably
committed to go to a foreign organization were held to be deductible solely because, in the course
of transmittal to the foreign organization, they came to rest momentarily in a qualifying domestic
organization. In such cases, the domestic organization is only nominally the donee; the real
donee is the ultimate foreign recipient. In the year under review, the Organization
received contributions, which were inevitably committed to go to . In this
instance, the contributed funds came to rest briefly with the Organization
until the Organization made payments by check, at convenient intervals, to

* In the year under review, the Organization engaged in no other
charitable activities other than to fund the activities of the foreign organization. In United States v.
Wells Fargo Bank, 485 U.S. 351, 108 S. Ct. 1179, 99 L.Ed. 2d 368 (1900) the Supreme Court held
that an organization must prove unambiguously that it qualifies for a tax exemption. In Harding
Hospital, Inc. v. United States, 505 F2d 1068 (1974), the court held that an organization seeking a
ruling as to recognition of its tax exempt status has the burden of proving that it satisfies the
requirements of the particular exemption statute. Whether an organization has satisfied, the
operational test is a question of fact. In Better Business Bureau of Washington, D.C.., Inc. v.
United States, 326 U.S. 179 (1945), the Supreme Court held that the presence of a single non-
exempt purpose, if substantial in nature, will destroy a claim for exemption regardless of the
number or importance of truly exempt purposes. As mentioned above, IRC § 170 states that
contributions to domestic organizations that operate under the circumstances described above are
not deductible. Our examination revealed the support of to be the
Organization’s primary activity. Due to the Organization’s apparent operation as a foreign conduit,
coupled with the Organization’s lack of expenditure responsibility, we conclude that the
Organization is no longer eligible for tax exemption under IRC § 501(c)(3).

* Additionally, in the year under review , a Disqualified Person, cashed
multiple checks totaling $ from the domestic organization’s bank account.

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
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

A Disqualified Person is an officer, director, or trustee of a private foundation (or a person having
similar responsibilities). Under Regs. 53.4946-1(f)(2) a person is considered an officer of a
foundation if he or she is specifically so designated under the certificate of incorporation, bylaws,
or other constitutive documents of the foundation. He or she is also considered an officer under
the regulations if he or she regularly exercises general authority to make administrative or policy
decisions on behalf of the foundation. The individual who made $ in checks
payable to cash, and the individual who cashed them, , was listed as “Senior
Vice President” on the bank signature authorization card for the account from which the checks
were made payable, but was not listed as an Officer on the Organization’s corresponding Form
990 return. power to exercise general authority is implied due to his access to,
and use of, the domestic organization’s checking account. also wrote the
checks that were made payable to the foreign organization, which was indicative of his authority to
conduct business on behalf of the Organization.

¢« The Representative stated that had hand carried the cash amounts to the
foreign organization, but provided no explanation as to why many checks were made payable
directly to the foreign organization, but others were made payable to “cash”, and cashed by

The Representative supplied copies of “receipts” that he stated were from the foreign organization,

but the receipts were signed by “ ” the same individual who cashed the checks in
the United States. As the receipts supplied do not constitute acceptable documentation for the $
in checks cashed by , we also intend to propose revocation based on inurement.

Section 501(c)(3) of the Code forbids inurement of any part of the net earnings of a qualifying
organization to the benefit of any private shareholder or individual. “Any part” literally means any
part. The smallest amount of inurement results in the organization’s failure to meet the
requirements for exempt status.

CONCLUSION:

Our examination revealed that the was formed to support a foreign
organization, . The organization solicits tax-deductible
contributions in the United States for which it represents to prospective contributors that the
ultimate destination for the contributed funds is . The

organization makes distributions to the foreign organization via check payments, made at
convenient intervals, with no apparent control or discretion over how the foreign organization
utilizes the funds.

As a result, the Government's position is that appears to be a
foreign conduit. In addition, a Disqualified Person issued and cashed $ in checks
from the Organization’s bank account with no acceptable documentation to show what became of
the funds, or whether or not the funds were used for charitable purposes. We intend to propose
revocation of the Organization’s exempt status based on the results of our examination. Once an
organization’s exempt status is revoked, contributions to the Organization are no longer deductible
under IRC § 170, and the organization is no longer eligible for tax exemption under IRC §
501(c)(3).

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service