Cancer charity loses 501(c)(3) status for running as a family business and inflating gift-in-kind reporting

Plain-English summary

The IRS revoked the tax-exempt status of a charity that had been recognized under section 501(c)(3) to give financial aid to needy cancer patients. To keep exemption, an organization must be operated exclusively for charitable purposes, and none of its earnings may inure to private individuals; Treasury Regulation section 1.501(c)(3)-1 says an organization fails this test if it serves private interests such as its creator, his family, or people the creator controls. The audit found that the founder ran the charity and a web of related "spin-off" cancer charities essentially as a family business: it paid large salaries to the founder, his relatives, and employees, provided free vehicles and interest-free loans, and passed almost all money raised by its call center and outside telemarketers back to itself as "grants," while only a tiny fraction reached cancer patients as cash aid. The organization also reported large noncash "gift-in-kind" donations on its Forms 990 at unverified fair market values it got from gift-in-kind brokers, without keeping control over the goods or records of charitable use, which overstated both its revenue and its program spending and understated its fundraising and administrative costs. The IRS concluded the primary purpose was to provide jobs and benefits to the founder and his family rather than to serve a charitable class, and that the inaccurate Forms 990 violated the reporting duty under section 6033. Exemption was revoked effective January 1 of the year in issue, contributions are no longer deductible under section 170, and the organization must file corporate returns on Form 1120. The document bundles the final revocation letter, the proposed-revocation letter (Letter 3618), and the Form 886-A examination report.

Ruling snapshot

• Question: Should a cancer-aid charity's section 501(c)(3) exemption be revoked where it operated for the private benefit of its founder and his family and filed inaccurate Forms 990 inflating gift-in-kind values?
• Outcome: revocation (exemption revoked effective January 1 of the year in issue; contributions no longer deductible under § 170; Form 1120 required going forward)
• Key authorities: IRC §§ 501(c)(3), 170, 6033(a)(1); Treas. Reg. §§ 1.501(c)(3)-1(c) and (d)

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected (for example, "IL.R.C." restored to "I.R.C." and "taxpaycradvocatc.irs.gov" to "taxpayeradvocate.irs.gov"); wording is otherwise verbatim, including the repeated Form 886-A page furniture, and redacted identifiers and figures (X, XXX, 20xx) appear as the IRS released them.

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE: EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: NOV 29 2017

Number: 201911006 Person to Contact:
Release Date: 3/15/2019

Identification Number:
Contact Telephone Number:

EIN:
UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a final revocation letter as to your exempt status under section 501(c)(3) of the Internal Revenue
Code. Our favorable determination letter to you dated in April 20xx recognizing you as an organization
described in section 501(c)(3), is hereby revoked effective January 1, 20XX.

The revocation of your exempt status was made for the following reasons:

You are not operated exclusively for exempt purposes within the meaning of Internal Revenue Code
section 501(c)(3). You have not established that your activities exclusively serve a charitable class or
further any purpose defined in section 501 (c)(3). Furthermore, you are operated for substantial private
purposes, including for the benefit of your officers, directors, employees, and fundraisers. In addition,
your net earnings inure to the benefit of private shareholders or individuals, such as your officers,
directors, and employees. It is also determined that you have become inactive and that there have been
no operations or regular financial activities conducted or planned. As such, you fail to meet the
operational requirements for continued exemption under Internal Revenue Code section 501(c)(3).

As such, you failed to meet the requirements of I.R.C. Section 501(c)(3) and Treasury Regulation
Section 1.501(c)(3)-1 (d)(I)(ii) in that you have not demonstrated that you are operated exclusively for
exempt purposes within the meaning of Internal Revenue Code section 501(c)(3).

Contributions to your organization are no longer deductible under section 170 of the Internal Revenue
Code, effective January 1,20XX.

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 December 31, 20xx, 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 judgment
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: Maria Hooke
Publication 892 Director, EO Examinations

¥79) Department of the Treasury Cae rch 9 2017

Internal Revenue Service ‘fication Number:
IRS Tax Exempt and Government Entities Taxpayer Identification Number:

Exempt Organizations Examinations
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. ,

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:

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,

Mary A. Epps

Acting Director, EO Examinations
Enclosures:
Report of Examination
Form 6018

Publication 892
Publication 3498

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

ne

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

ISSUE

Should the tax exempt status of

be revoked as described in section
501 (a) of the Internal Revenue Code? .

FACTS

was incorporated on October 9, 19xx in the State of as a non-profit corporation.
Articles of Incorporation stated that the corporation shall be organized and operated exclusively as a
charitable and educational organization to promote and provide direct financial assistance to cancer
patients whose financial resources have been depleted due to the huge cost of their treatment and care.

The Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, was signed by the president of , on December 12, 19xx.

Part lll of the Form 1023 sets forth the purposes of . It stated that the organization was created to

provide direct financial assistance to persons suffering from cancer who do not qualify for Medicaid or
other governmental assistance programs.

Internal Revenue Service granted tax exempt status to on May 9, 19xx.

was the executive director and president of since 19xx.

Form 990 for the year 20xx was not received by the Service. Form 990 for the year 20xx
was filed on July 31, 20xx. Part | of the 20xx Forms 990 provided that exempt activities
were to provide direct financial aid in the form of products and other support and services to financially
indigent cancer patients and their families, to provide products to hospices, other health care providers
and various non-profit community service organizations within and outside the United States. The Forms

990 filed by for the years from 20xx through 20xx are compared and summarized in table below:
Table 1: Revenue and Expenses reported on Forms 990 from 20xx through 20xx

Revenue 20xx 20xx 20xx 20xx 20xx 20xx

Federated Campaigns XXX,XXX XXX, XXX XXX, XXX XXX,XXX XX, XXX XX, XXX

Related Organization X)XXX,XXX X, XXX, XXX X, XXX, XXX X,XXX,XXX X, XXX, XXX X,XXX, XXX

All other contributions — cash X,XXX, XXX X, XXX, XXX X, XXX, XXX X,XXX,XXX X,XXX, XXX X, XXX, XXX

All other contributions ~ non-cash —_X, Xxx, Xxx XX,XXX,XXX XX, XXX, XXX XX, XXX, XXX XX, XXX,XXK X, XXX, XXX

Investment Income XX, XXX XX, XXX XX, XXX XX,XXX XX, XXX -XXX

Other revenue XX, XXX XX, XXX XXX,XXX XX,XXX XX, XXX XX, XXX

Total Revenue XX,XXX,XXX_-XX,XXX,AXXX —-XX,XXX,XXX —-XXXXX,XXK —--XX,AXX,AXX XXX, AAX

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

Expenses 20xx 20xx 20xx 20xx 20xx 20xx

Grants paid - cash XX, XXX X,XXX XX, XXX XX, XXX XX,XXX XX,XXX

Grants paid non-cash X,XXX,XXX XX, XXX, XXX XX, XXX, XXX XX, XXX, XXX XX, XXX, XXX X, XXX, XXX

Salaries, other compensation X,XXX,XXX X, XXX, XXX X,XXX,XXX X,XXX,XXX X, XXX, XXX X,XXX,XXX
Professional fundraising fees X,XXX,XXX X,XXX,XXX X, XXX, XXX X, XXX, XXX X,XXX,XXX X, XXX, XXX

Other expenses X,XXX,XXX X,XXX, XXX X,XXX,XXX X, XXX, XXX X,XXX, XXX X,XXX,XXX

Total Expenses XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX XX, XXX, XXX XX,XXX,XXX —_X,XXX,XXX

Fundraising Revenue and Expenses

Under the direction of ; created its fundraising organization, ;
, also d/b/a , in 20xx.
sole propose was to operate a fundraising call center in that solicits the public
donations. After expenses, gave virtually ail funds it had raised to as “grants.”
was run by officer(s) since its inception. employees had served as board members of
, undertaking -related functions during work hours. board members had also served
as board members.
was the chief financial officer of and received his salary from ; also
served as chief financial officer of at least from 20xx through 20xx. did not pay a
salary because part of job duties’ at were to be the volunteer president of , manage
, and keep president informed regarding fundraisers’ progress.
has maintained books and records on its computers and has issued credit cards to

employees for business use”.

Between 20xx and 20xx, the raised a total of $xx.xx million for , and received a total of
$x.xx million after the fundraising costs. See Table 1 of Exhibit 1 Fundraising Table Summary.
utilized many contracted telemarketers to raise fund for . Between 20xx and 20xx, the

contracted telemarketers raised a total of $xx.xx million for , and received a total of $x.xx

million after the fundraising fees. See Table 2 of Exhibit 1 Fundraising Table Summary.

and contracted telemarketers combined raised a total of $xx.xx million, and received a
combined net total of $xx.xx million after the fundraising costs between 20xx and 20xx. See Table 3 of
Exhibit 1 Fundraising Table Summary.

Cash and Non-Cash Grants

The Forms 990 filed by revealed that provided cash and non-cash grants to cancer patients.
The amounts and percentages of cash and non-cash grants made by from 20xx through 20xx are
summarized in the table below:

' Case X:XX- -XXXXX- Document xxx-x Filed 12/16/xx Page xx of xxx.

* Case X:XX- -XXXXx- Document xxx-x Filed 12/16/xx Page xx of xxx and Page xx of xxx.

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 EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax identification Number Year/Period ended
Dec. 31, 20xx
Table 2: Cash and Non-cash Grants reported on Forms 990 from 20xx through 20xx
20xx 20xx 20xx 20xx 20xx  - 20xx Totals
Grants paid- cash XX, XXX X, XXX XX, XXX XX, XXX XX, XXX XX, XXX XXX, XXX
Grants paid -non-cash —X, XXX, XXX XX,XXX,XXX XX, XXX, XXX XX XXX,AXK —- XXXXKXXX XX, XXX, XXX XX, XXX, XXX
Total Grants paid X,XXX,XXX _XX,XXX,XXX XX, AXXX,XXK AX,XXX XXX XX, AXX,XXK _XX,XXX, XXX XX, XXX,XXX
Cash Grants % X.XX% X.XX% X.XX% X.XX% x.XxX% x.xx% X.XX%
Non-Cash Grants % XX.XX% XX.XX% XX.XX% XX.XX% XX.XX% XX.XX% XX.XX%

reported a total of $xxx,xxx cash grants made from 20xx through 20xx, which represented x.xx%
of total cash and noncash grants made from 20xx through 20xx. Among the total cash grants of

$XXX, XXX, made $xx,xxx to , $XX,XXX to ;
$x, xxx to , and $xx,xxx to individuals between 20xx
and 20xx. The , , and
were related entities. The amounts and percentages of cash grants made by
between 20xx and 20xx were summarized and shown in the table below:
Table 3: amounts and percentages of cash grants made by between 20xx and 20xx
Amount Percentage
XX,XXX XX.XX%
XX,XXX XX.XX%
X,XXX X.XX%
XXXXX_ XX.XX%
Totals XXX, XXX XXX.XX%

made a total of $xx,xxx,xxx cash and noncash grants, $xx,xxx,xxx was noncash grants, which
represented xx.xx% of total cash and noncash grants made from 20xx through 20xx.

did not file Schedule B, Schedule of Contributors, to report the details of noncash contributions
received for the year 20xx. filed the Schedule B of Forms 990 for the years 20xx through 20xx. The
noncash contributions received by from 20xx through 20xx are summarized in the below:

Table 4: Noncash contributions reported on Forms 990 from 20xx through 20xx
Amount
Noncash Contributions reported on
Year Received From its Form 990
20xx XX, XXX, XXX

20xx XX, XXX, XXX
20xx | ___X,XXX,XXX

XXX, XXX
20xx X,XXX, XXX

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 EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended
Dec. 31, 20xx
Amount
Noncash Contributions reported on
Year Received From its Form 990
20xx X,XXX, XXX
20xx X,XXX, XXX
20xx XXX, XXX
20xx XXX, XXX
20xx XX,XXX,XXX
20xx XXX, XXX
20xx XXX, XXX

The noncash donations, noncash grants, and non-cash goods are referred to as “gift-in-kind” (“GIK”).

The GIK goods provided by consisted of sending individuals cancer patients, hospices, clinics,
hospitals, or other cancer patient service providers in the United States with cancer boxes of various
household items.

In the response to a request for interrogatories by on March 22, 20xx,

indicated that the GIK packages typically included a small quantity of Liquid nutritional supplements
( ), bar soaps, hand soap, shampoo, conditioner, snacks,
toothpaste, mouthwash, toothbrushes, body wash, deodorant, air freshener, lotion, clothing, toys,
bandages, over-the-counter (“OTC”) medications, family DVDs, etc.*

also indicated in the response that the GIK goods that distributed internationally were
originated from ; , , and
. The GIK goods provided internationally include, clothing, industrial sewing machines, hospital
beds, geriatric chairs, pediatric wheelchairs, shower stools, walkers, safety rails, medical supplies, food
items, kitchen utensils, blankets, various household items, hygiene items, school supplies, tools and
hardware, orphanage supplies, medical equipment, cancer medications, non-cancer medications, and
computers, etc. *

was a registered charity. Schedule B of Form 990 reported by for
the year 20xx provided that the noncash donations from were received on
06/20/20xx, 08/20/20xx, 09/09/20xx, 10/27/20xx, and 11/12/20xx. The website? of
provided that the Agency had revoked on April 25, 20xx.

reported on its Forms 990 showed that received the noncash donations from , and
the totals of fair market value of the noncash donations received were $xx,xxx,xXXX, $X,XXX,XXX, and
$XX,XXX,Xxx for the years 20xx, 20xx, and 20xx, respectively. Furthermore, Forms 990 indicated
that distributed the noncash donations received to foreign recipients. released its Forms

990 for the years 20xx, 20xx, and 20xx for public inspection. The Forms 990 revealed that
did not report any gift-in-kind shipments due to the problems with verifying values and or ownership.

> Case X:XX-  -XXXXX- Document xxx-x Filed 12/16/xx Page xxx of xxx.
“ CaS@ X:XX- -XXXXX- Document xxx-x Filed 12/16/xx Page xxx of xxx.
° The website address is

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
reported on its Form 990 for the year 20xx indicated that received the noncash donations from
the and the total of fair market value of the noncash donations was $xxx,xxx. The
released its Form 990 for the year 20xx for public inspection. The Form 990 revealed
that the did not make grant (cash and/or noncash) in the year 20xx. The

filed Form 990-N for the year 20xx due to its gross receipts was less than $xxx,xxx.

reported on its Form 990 for the year 20xx indicated that xxxx received the noncash donations from

the and the total of fair market value of the noncash donations was
$x,XXX,Xxx. In the response to a request for interrogatories by on March 22, 20xx, revealed
that ® was located in of which had the same
address of . The website of provided that no record of
was found.
The noncash donations (GIK goods) that received and distributed were procured from both for-profit
and non-profit GIK brokers by paying procurement, cost of shipping in, warehousing, and shipping out
fees. The for-profit GIK brokers were , , and . The
non-profit GIK brokers were , and . The fees
that paid for its procurements for the years 20xx through 20xx are summarized in the table below’.

Table 5: Fees paid by for its procurements between 20xx through 20xx:

International Domestic

Year

20xx XX, XXX XX, XXX XX, XXX XXX, XXX

20xX = XXX,XXX X,XXX XX,XXX XX, XXX

20xx XXX, XXX XX, XXX XX, XXX X,XXX X,XXX

20xx XXX,XXX XX, XXX XX, XXX XX,XXX XX,XXX

20xx XXX, XXX XX, XXX XX,XXX X,XXX X, XXX

Total XXX, XXX XXX, XXX XX,XXX XXX,XXX ss XXX, XXX X,XXX

son, , introduced the international GIK shipping to the board on

December 5, 20xx, while he was still vice-president. According to board meeting minutes, “
has hosted three international shipments® through a company called . This
company is a broker that lines up gifts in kind with charities. These gifts-in-kind are intended for
international charities, and they need US charities, such as to handle the freight costs. By agreeing
to accept goods and cover the shipping costs, can credit these shipments toward patient services

with a substantial offset to our fundraising costs.”

° Case X:XX-  -XXXXX- Document xxx-x Filed 12/16/xx Page xxx of xxx
3 Case X:XX- -XXXXx- Document xxx-x Filed 12/16/xx Page xxx of xxx
Country Agency Commodities Value Shipping costs
Med Supplies, etc. $SXXX, XXX $XX, XXX
Medicine, Clothes, etc. $xxx,xxx $XX, XXX
Food, clothes, meds $XXX, XXX $XX, XXX

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

is a for-profit GIK broker which facilitates the GIK transactions. advertised that participants in
its GIK program could help “reduce fundraising percentages by booking large gift values for a low service
fee” and “receive high value donations of items whose value is booked as revenue.”

provided with information about “available” shipments that donors wanted to ship to pre-
selected foreign recipients. The information provided included shipping costs, the fees charged by

, the estimated value of the shipment, the goods in the shipment, and the destination and recipient of
the shipment. After agreed and accepted the “available” shipment, would arrange to ship the
goods and provide the with paperwork such as receipt of the donated GIK goods from the donor, the
value of the donated goods, and distribution of the goods to the foreign recipient.

itself did not possess or hold title to any of the goods. stated in its website that does not
solicit donations, nor do we plan, conduct, manage, or prepare any materials in connection with the
solicitation of contribution, advice, or act as a consultant with respect to the solicitation of contributions.

The vice president of ; asked the VP of Business Development of , ,
in the mail dated June 14, 20xx that the documents that provided meet all of the tests to
satisfy the IRS. responded back in the e-mail dated June 14, 20xx that these
documents have passed audits for the past x years with no problems.

The e-mail dated August 9, 20xx was sent by to and provided the
information for shipment . The information provided the shipment was 1x40’ of

medicine and medical supplies, provider was , the consignee was
, the approximately donation value was $x,xxx,xxx.xx®, and the procurement fee was $xx,xxx.
received the donation certificate dated August 13, 20xx from indicated that
is please to donate to one 40’ container of medicine and medical
supplies suitable for cancer patients and their families with a total donated value of $x,xxx,xxx.xx USD.
The letter sent on August 16, 20xx by included the inventory valuation signed by
indicated the total value of donated goods was $x,xxx,XXX.XX.

In 20xx, paid a total of $xxx,xxx to to procure GIK shipments that were shipped to
a total fair market value of $xx,xxx,xxx.xx that claimed on its Form 990 for the year 20xx.

vehicles and funds used by officers and employees

owned several vehicles from time to time. The vehicles were used by its officers and employees. In
the response to a request for interrogatories by on March 22, 20xx, provided a list of the
officers and employees who used the vehicles’’, and they were: ;
, and . Except and , the rest of the people shown on the list were
, his family members, and his relatives.

° The shipment contained xx pallets; xx boxes per pallet; xxx packets per box .
0 Each packet was $x.xx and the total value was $x,xxx,xxx ($X.XX x XXX x XK x XX = $X, XXX, XXX).
Case x:xXx-  -XXXXX- Document xxx-x Filed 12/16/xx Page xx of xxx

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
The statements" of for the year 20xx revealed that used

funds to pay for gasoline, repairs, and car washes. There were receipts attached with the monthly
statements. However, there was no mileage log and/or explanations of the gasoline, repairs, and car
washes expenses used by

No discussion was found in the board meeting minutes regarding the vehicles of used by its officers
and employees.

As the executive director of ; had hire employees, set their salaries, authorized
employee benefits, determined bonuses and raises, authorized loans of charity funds to employees, and
made promotion decisions — including for his relatives.

had made these decisions on his own, with little or no input or supervision from the
board of directors. As president of the board, had voted on annual employee bonuses
awarded by the board - including his own.

had made a short-term, interest free loan, approved by to , and paid
college tuition for toy ' , and

also provided employees with company credit cards without providing written policies about
personal use of such cards to employees. The credit cards'* showed the purchases of gas, car washes,
meals at and other restaurants, cell phone apps and games, and movie tickets. Reimbursement
for personal charges on company cards was not required until the end of each year, and some personal
charges were not repaid.

related entities

and his family members had founded five cancer charities, ;

5] ’

, and

'' The information was provided by Court ordered Receivership,
'2 Case X:XX--XXXXx- Document x Filed 05/18/xx Page xx of xxx

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
started in 20xx to help raise funds for . He and directed the operations of
from headquarters.
At , employed his family members and relatives: ; 14
’ 2 of , ? ’ and
(deceased). See Exhibit 2 for the detailed family relationships of board members and
employees.

had continued to employ family members regardless of where in the country they live.
When and moved to , had open a “chapter” in
to keep them on the payroll.

paid a total of $x,xxx,xxx in salaries for , his family members and relatives for the years
20xx through 20xx. The detailed salaries paid by to and his family members are
shown in the Exhibit 3.
started as a special project of . It split off from in late 20xx. , served as its
initial president while also employed at . Later, they turned over to Ex-wife,
, who left to run . In 20xx, at direction, gave a

grant of $xx,xxx.

At , employed her family members and relatives: , ;

also compensated step-nephew, ,as
an independent contractor. See Exhibit 4 for the detailed family relationships of CEO and
employees. paid a total of $x,xxx,xxx in salaries for , her family members and
relatives for the years 20xx through 20xx. The detailed salaries paid by to , her
family members and relatives are shown in the Exhibit 5.

, who began working at when he was xx, learned the cancer business from his
father. Before starting , while at , tested fundraising specifically for breast cancer
patients, setting up a separate fundraising campaign with main telemarketer,

. Donations for this campaign were deposited into accounts until ;
established and signed a separate fundraising contract with . In
20xx, at direction, provided a grant of $xx,xxx.
At ; , employed his family members and relatives: ' '
, ; , and . See Exhibit 6 for the detailed
family relationships of CEO and employees. paid a total of $x,xxx,xxx in salaries to
, , his family members and relatives the years 20xx through 20xx. The detailed salaries paid
by to , , his family members and relatives are shown in the Exhibit 7.
At , wife, , Started in 20xx. She employed her relative,

paid a total of $xxx,xxx in salaries from 20xx through 20xx.

13 .
is also known as

Form 886-A (1-1994) Catalog Number 20810W Page 8 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

On May 19, 20xx, the and filed a federal lawsuit again

; ; , and the former chief financial officer for both organizations, . In
March, 20xx, and were shut down by and state charity regulators.

also shut down as part of a lawsuit due to spent less than x percent of its collections

helping cancer patients.
LAW

I.R.C. § 501(c)(3) exempts from federal income tax, organizations organized and operated exclusively for
religious, charitable, scientific, or educational purposes whereby no part of the net earnings 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 intervene on behalf of
(or in opposition to) any candidate for public office.

Treas. Reg. § 1.501(c)(3)-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 purposes

specified in such section. If an organization fails to meet either the organizational or the operational test,

it is not exempt. An organization is organized exclusively for one or more exempt purposes only if its
articles of the organization as defined in subparagraph (2) of this paragraph: (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.

Treas. Reg. § 1.501(c)(3)-1(c)(1) states that an organization will be regarded as “operated exclusively”
for one or more purposes only if it engages primarily in activities which accomplish one or more 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(c)(2) 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) provides that the terms “private shareholder or individual” as used in
section 501 refer to persons having a personal and private interest in the activities of the organization.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for charitable purposes unless it serves a public rather than a private interest. 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.

Treas. Reg. § 1.501(c)(3)-1(e) states that an organization may meet the requirements of section
501(c)(3) although it operates a trade or business as a substantial part of its activities, if it operates the
trade or business in furtherance of its exempt purposes. The organization must not be organized or
operated for the primary purpose of carrying on an unrelated trade or business.

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

Form 886-A (1-1994) Catalog Number 20810W  Page_9 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

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.

GOVERNMENT’S POSITION

does not meet the operational test for exempt status under section 501(c)(3) of the Internal
Revenue Code because has failed to establish that it is operated exclusively for charitable
purposes. The regulations define “exclusively” as engaging primarily in activities that accomplish one or
more of the exempt purposes specified in section 501(c)(3) of the Code. provided more financial
benefits to and members of his family than the needy cancer patients.

In order to explain the complete operations of , the explanations below are using the information
provided to on March 22, 20xx which contained financial information
from 20xx through 20xx.

Salaries and benefits for _his relatives, and employees

Under the directions of ; utilized many contracted telemarketers to raise fund for

In the period between 20xx and 20xx, paid a total of $xx,xxx,xxx to telemarketers. paid total
salaries of $x,xxx,xxx to and his relatives, and $x,xxx,xxx to other employees.

also made a total of $xxx,xxx cash grants to needy cancer patients, and paid a total of $x,xxx,xxx
for GIK procurements.

The expense amounts and percentages are summarized and shown below table:

Table 6: The expense amounts and percentages between 20xx through 20xx:

Expenses 20xx 20xx 20xx 20xx 20xx_ Totals Percentage
Grants paid — cash XX, XXX X,XXX XX,XXX XX,XXX XX, XXX XXX,XXX X.XX%
Procurements Fees = XXX,XXX =—- XXX, XXX XXX, XXX XXX, XXX XXX,XXX X,XXX, XXX X.XX%
Salaries, family members — XXx,XXx XXX, XXX XXX,XXX XXX,XXX XXX, XXX X,XXX,XXX X.XX%
Salaries, other employees XXX,XXX XXX, XXX XXX, XXX X,XXX,XXX _-X, XXX, XXX X,XXX, XXX XX.XX%
Professional fundraising fees X,XXX,XXX  X,XXX,XXX —-X,XXX,XXX X,XXX,XXX X,XXX,XXX XX, XXX, XXX XX.XX%
Other expenses XXXX,XXX _X,XXX,XXX —-X, XXX, XXX X,XXX, XXX X,XXX,XXX X,XXX,XXX XX.XX%
Total Expenses X)XXX,XXX_ —-X,XXX,AXXX —-X, XXX, XXX X,XXX,XXX X,XXX,XXX -XX,XXX,XXX XXX.XX%

paid its employees substantially more than it spend on the cash and GIK goods provided to needy
cancer patients domestically and internationally. The other expenses also included the loan payments,

gas, and maintenance fees of the vehicles that driven by , his family members, and
his relatives.

Form 886-A (1-1994) Catalog Number 20810W Page 10 _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

provided employees with company credit cards without providing written policies about personal use
of the cards. Reimbursement for personal charges on company cards was not required until the end of
each year. It actually created floating short-term, interest-free loans to its employees.

Based on the information shown above, it showed that exempt purpose activity is secondary to that

of paying salaries for professional fundraising fees, salaries for and his relatives, salaries for
other employees, free auto for and his relatives, and interest-free short-term loans to
employees.

and its related entities

and its related entities, ; ' , and are all run by and members of
his family.
started in 19xx. He described™* and as “spin-offs” of , and
explained that setting up and helped because was “really top heavy” with
executives. started in 20xx to help raise funds for . He and directed the
operations of from headquarters. son, served on the board of
directors.
started as a special project of , and split off from in late 20xx. , served as
its initial president while also employed at . Later, he turned over to . other
employees joined at , and individuals left the board to serve on the
board. In 20xx, at direction, gave a grant of $xx,xxx.
started as a separate fundraising campaign of . Donations for this campaign were deposited
into accounts until , @Stablished and signed a separate fundraising contact with a
telemarketer. In 20xx, at direction, provided a grant of $xx,xxx.
wife, , worked at for years before she started in 20xx.
also provided $x,xxx cash grants to in 20xx.
The information above provided that operated and its related entities like a family

business to providing employments and benefits for him, his family members, and his relatives.

failed to meet the section 501(c)(3) of the Internal Revenue Code because has failed to
establish that it is operated exclusively for charitable purposes. The primary purpose of and its
related entities was to providing employments and benefits to , his family members, and his
relatives which is not exclusively for charitable purposes.

Non-cash donations (GIK)

, , revealed the purpose to board of why needs to procure non-cash donations
(GIK) from GIK brokers during its board meeting held on December 5, 20xx. It is because can credit
these GIK shipments toward patient services with a substantial offset to its fundraising costs.

4 Case Filed 08/04/xx Entered 08/04/xx Desc Main Document Page 12 of 125

Form 886-A (1-1994) Catalog Number 20810W Page 11 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

incorrectly reported the non-cash donations (GIK) on its Forms 990 by using unverified fair market
values of the GIK goods that procured from GIK brokers. Instead, should report the total of
procurement fees on its Forms 990 as non-cash grants provided.

In addition, did not retain control and discretion over the use of the non-cash goods, and maintain
records that establish the recipient uses the non-cash goods for the organization’s IRC § 501(c)(3)
purposes.

Form 990 is used by tax-exempt organizations to provide information required by IRC section 6033.
Some members of the public and/or state agencies rely on Form 990 as the primary or sole source of
information about a particular organization. How the public perceives an organization in such cases may
be determined by the information presented on its return. Therefore, the return must be complete,
accurate, and fully describe the organization’s programs and accomplishments.

filed Forms 990 inaccurately by claiming fair market values of GIK goods procured from GIK brokers
as non-cash donations. The GIK transactions represented a flow-through of dollar amounts that were
paper transactions only. reported the fair market values of GIK goods procured on Forms 990 as
revenue received and expenses paid. By reporting fair market values of GIK goods procured as revenue,
incorrectly increased the revenue received. By reporting fair market values of GIK goods procured
as expenses, decreased the overall percentage of administrative costs and substantial offset its
fundraising costs.

fails to meet IRC section 6033 of the Code which requires every organization exempt from taxation
under 501(a) to file an annual return, stating specifically the items of gross income, receipts, and
disbursements, and such other information for the purpose of carrying out the internal revenue laws.

Form 886-A (1-1994) Catalog Number 20810W Page 12 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: Fundraising Table Summary

Table 1 - Fundraising Table Summary
% Net Cash
Cash Net Cash /Received over
Year Raised Kept Received | Cash Raised
20xx X,XXX, XXX X,XXX,XXX X,XXX, XXX XX.XX%
20xx X,XXX, XXX X,XXX, XXX X,XXX,XXX XX.XX%
20xx XX, XXX, XXX X,XXX,XXX X,XXX, XXX XX.XX%
20xx X,XXX, XXX X,XXX, XXX X,XXX,XXX XX.XX%
20xx X,XXX,XXX X,XXX, XXX X,XXX, XXX XX.XX%
20xx X,XXX, XXX X, XXX, XXX X,XXX, XXX XX.XX%
Totals XX,XXX,XXX XX, XXX, XXX X,XXX, XXX XX.XX%%

Table 2 - Telemarketers’ Fundraising Table Summary

% Net Cash
Cash Fundraising | NetCash |Received over

Year Raised Fees Received | Cash Raised
20xx X,XXX, XXX X,XXX,XXX X,XXX, XXX XX.xx%
20xx X, XXX, XXX X,XXX, XXX XXX, XXX XX.XX%
20xx X,XXX, XXX X,XXX, XXX X,XXX,XXX XX.XX%
20xx X, XXX, XXX X,XXX, XXX X,XXX, XXX XX.XX%
20xx X,XXX, XXX X,XXX, XXX XXX, XXX XX.XX%
20xx X,XXX,XXX X, XXX, XXX XXX, XXX XX.xx%
Totals XX,XXX,XXX | _XX,XXX,XXX X, XXX, XXX XX.XX%

Table 3 - & Telemarketers’ Combined
Totals Fundraising Table Summary
% Net Cash
Cash Fundraising Net Cash /Received over

Year Raised Fees/Kept Received | Cash Raised
20xx XX,XXX,XXX | XxX, XXX, XXX X,XXX, XXX XX.XXY%
20xx XX,XXX,XXX ] XX, XXX, XXX X,XXX, XXX XX.XxX%
20xx XX,XXX,XXX |  XX,XXX,XXX X,XXX,XXX XX.XX%
20xx XX,XXX,XXX | _XX,XXX,XXX X, XXX, XXX XX.XX%
20xx XX,XXX,XXX | XX, XXX, XXX X,XXX,XXX XX.XXY%
20xx X, XXX, XXX X, XXX, XXX X,XXX,XXX XX.XXY%
Totals XX,XXX,XXX | XX, XXX, XXX XX, XXX, XXX XX.xx%

Form 886-A (1-1994) Catalog Number 20810W Page 13 _ 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 2 — The detailed family relationships of board members and employees

EXHIBIT 2 - DELETED

Form 886-A (1-1994) Catalog Number 20810W Page 14 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
Dec. 31, 20xx
Exhibit 3 — the salaries paid by to and his family members for the years 20xx — 20xx
Name 20xx 20xx 20xx 20xx 20xx 20xx 20xx
XXX, XXX XXX, XXX XXX, XXX XXX, XXX XXX,XXX XXX, XXX XXX, XXX
XX,XXX XX,XXX XX,XXX XXX,XXX XXX, XXX XXX, XXX XX, XXX
XX, XXX XX, XXX XX,XXX XX,XXX XX, XXX XX, XXX XX, XXX
XX, XXX XX, XXX XX,XXX XX, XXX
XX, XXX X,XXX XX
XX,XXX XX,XXX XX,XXX XX,XXX XX,XXX XX,XXX XX, XXX
XX,XXX XX, XXX XX,XXX XX,XXX XX,XXX
XX,XXX XX,XXX XX,XXX XX, XXX XX,XXX XX, XXX X,XXX
XX, XXX XX, XXX XX,XXX XX,XXX XX,XXX XX, XXX XX, XXX
XX,XXX XX, XXX XX,XXX XX,XXX XX,XXX XX,XXX XX, XXX
X,XXX XX, XXX XX,XXX XX, XXX XX,XXX
XXX, XXX
Sub Total XXX, XXX XXX, XXX XXX, XXX XXX,XXX XXX,XXX XXX,XXX XXX,XXX

Form 886-A (1-1994) Catalog Number 20810W Page 15 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 4 —- The detailed family relationships of CEO and employees

EXHIBIT 4 - DELETED

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

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
Dec. 31, 20xx
Exhibit 5 — the salaries paid by to and her family members for the years 20xx — 20xx
Name 20xx 20xx 20xx 20xx 20xx 20xx 20xx
X,XXX X,XXX X,XXX XX,XXX X,XXX XX,XXX X,XXX
X,XXX X,XXX X,XXX
X,XXX
X,XXX XX,XXX XX, XXX XX, XXX XX,XXX X,XXX
X,XXX
XX, XXX XX,XXX XX, XXX XX,XXX XX, XXX XX, XXX XX, XXX
XXX X,XXX X,XXX
XXX, XXX XXX,XXX XXX,XXX XXX,XXX XXX, XXX XXX, XXX XX, XXX
XX, XXX XX,XXX XX,XXX XX,XXX XX, XXX X,XXX
XX, XXX XX,XXX XX,XXX XX, XXX XX, XXX XX, XXX XX, XXX
XX,XXX XX,XXX XX,XXX XX, XXX
XX,XXX XX,XXX XX,XXX XX,XXX XX,XXX XX, XXX X,XXX
X,XXX XX,XXX XX, XXX X,XXX
X,XXX XX, XXX XX, XXX
Sub Total XXX, XXX XXX,XXX XXX, XXX XXX,XXX XXX, XXX XXX, XXX XXX, XXX

Form 886-A (1-1994) Catalog Number 20810W Page 17 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 6 — The detailed family relationships of CEO and employees

EXHIBIT 6 - DELETED

Form 886-A (1-1994) Catalog Number 20810W Page 18 _ 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
Dec. 31, 20xx
Exhibit 7- the salaries paid by to and his family members for the years 20xx — 20xx
Name 20xx 20xx 20xx 20xx 20xx 20xx 20xx
XXX,XXX XXX, XXX XXX, XXX XXX, XXX XXX, XXX XXX,XXX —_ XXX,XXX
XX,XXX XX,XXX XX, XXX XX,XXX XX,XXX XX, XXX
X, XXX XX, XXX XX,XXX XX,XXX
XXX XX, XXX X,XXX
X,XXX XX, XXX XX, XXX XX, XXX XX, XXX XX,XXX
X,XXX X, XXX
Sub Total XXX, XXX XXX,XXX XXX, XXX XXX,XXX XXX, XXX XXX, XXX XXX, XXX

Form 886-A (1-1994) Catalog Number 20810W Page 19  publish.no.irs.gov Department of the Treasury-Internal Revenue Service