IRS revokes a religious school after missing records and alleged embezzlement

Plain-English summary

The IRS revoked the Section 501(c)(3) status of a religious elementary school that did not respond to seven information-document requests or substantiate its activities and expenditures. The report says former administrators were arrested on embezzlement charges, created two fake foundations, diverted donations into those accounts, and used school funds for excess-benefit transactions. The IRS sought records showing the school remained active, operated a K-8 program, safeguarded against further private inurement, and corrected past transactions, but the school supplied none. The property owner later reported that the campus was abandoned, in disarray, and missing items and vehicles. The IRS concluded that the school had not established continued exempt operations, adequate corrective measures, or the absence of private inurement, and revoked exemption.

Ruling snapshot

• Question: Could the school retain § 501(c)(3) status after alleged diversion of donations, seven unanswered records requests, and reports that its campus was abandoned?
• Outcome: Revocation of exempt status
• Key authorities: IRC §§ 170, 501(c)(3), 6033, and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6033-2(i)(2); Rev. Rul. 56-304; Rev. Rul. 59-95

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: JAN 8 2018

EIN:
Number: 202052033 Person to Contact:
Release Date: 12/24/2020

Employee Identification
UIL: 501-0300

Telephone Number:

Fax Number:

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear

This is a final determination that you do not qualify for exemption from federal income tax
under section 501(a) of the Internal Revenue Code Section (the “Code”) as an organization
described in section 501(c)(3), effective July 1, 20XX. Your determination letter dated
October 21, 19XX is revoked.

Our adverse determination as to your exempt status was made for the following reasons:

Organizations described in section 501(c)(3) of the Code and exempt from tax under
section 501(a) must be both organized and operated exclusively for exempt
purposes. You have failed to produce documents or otherwise 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.

As such, you failed to meet the requirements of section 501(c)(3) of the Code and Treasury
Regulation section 1.501(c)(3)-1(a), in that you have not established that you were organized
and operated exclusively for exempt purposes and that no part of your earnings inured to the
benefit of private shareholders or individuals.

Organizations that are not exempt under section 501 of the Code 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.

1

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

If you decide to contest this determination, you may file an action for declaratory judgment
under the provisions of section 7428 of the Code in one of the following three venues: 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 was mailed to you. Please contact the clerk
of the appropriate court for the rules for initiating suits for declaratory judgment. 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, 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

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 Code.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in section 501(c)(3) of the Code.

You may also be eligible for help from the Taxpayer Advocate Service (TAS). 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 877-777-4778.

Taxpayer Advocate assistance can’t be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have
been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

2

If you have questions, you can contact the person listed at the top of this letter.

Sincerely,

[illegible signature]
Maria D. Hooke
Director, EO Examinations

Enclosures:
Publication 892

3

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

Date:
March 23, 2018
Taxpayer ID number:

Form:
Tax periods ended:

Person to contact:

Employee ID number:
Telephone number:

Fax:
Address:
Manager's contact information:

Employee ID number:
Telephone number:
Response due date:

CERTIFIED MAIL — Return Receipt Requested
Dear

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke
your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3).

If you agree

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(3) for the periods above.

After we issue the final adverse determination letter, we’ll announce that your organization is no longer eligible
to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
   information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after
   the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t
apply now that we’ve issued this letter.

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
   if you feel the issue hasn’t been addressed in published precedent or has been treated inconsistently by the
   IRS.

If you’re considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

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
adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

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 877-777-4778.

Additional information

You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

June 30, 20XX
June 30, 20XX
June 30, 20XX
June 30, 20XX

Issue:

Is the an organization exempt from tax under
section 501(c)(3) of the Internal Revenue Code?

Facts:

The , hereinafter the “School”, was incorporated
on . The School received its exemption on as a
501(c)(3) 170(b)(1)(A)(ii) entity. The School is recognized as a non-church
religious organization that is not required to file Forms 990.

The School was organized to operate an elementary school on the
located in , . The school relies on members of the
and churches to provide financial and fundraising assistance. The churches
also provide the “volunteer” staff and administrators to run the school. Although
the has a degree of control over the School, it does/did
not maintain the power to compel accounting from the

The former Principal and Administrator.

On May 18th, 20XX, the Internal Revenue Service mailed the initial examination
Letter 3611, Form 4564, Information Document Request #1 (IDR 1), and Publication 1,
Your Rights as a Taxpayer to the organization at
, ,
, . The initial exam was scheduled for June 21, 22, & 23, 20XX at the
School's facilities.

IDR 1 asked the School to provide information and documents explaining its
activities. The examining revenue agent called the School’s number listed on its
website on May 24, 20XX to confirm the appointment set for June 21 through 23.
informed the examining agent that ‘the School is currently in its graduation week,
that its very busy’. He stated that the missionaries, who are from all parts of
the country, are going home next week, and that the school will be closed until
August 20XX. advised the examining agent to contact the
Treasurer, at .

An agreement was made that the exam would be postponed from June to August 20XX.
The examining agent attempted to call several
times to re-schedule the exam for a specific day in August. Several voice messages
were also left with the number provided, however no return call was placed.

1

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

June 30, 20XX
June 30, 20XX
June 30, 20XX
June 30, 20XX

On September 1, 20XX, Letter 1477 along with IDR #2 was mailed to the School’s
address. No response was received from the School by the due date of September 21,
20XX.

IDR #3 was mailed on September 13, , which expanded the exam to include the
subsequent year ending June 30, 20XX. IDR # 3 requested in part, bank statements
for the period July 1, 20XX through June 30, 20XX, Minutes of meetings, all books
and records of assets, liabilities, receipts and disbursements, Financial
statements, Chart of Accounts, check register, canceled checks, and bank statements
from (July 1, 20XX through June 30, 20XX). No response was received by the due
date of September 30, 20XX. Note that and wife were arrested
for embezzlement charges on September 27, 20XX.

The examining agent issued a third-party record keeping summons to
on September 21, 20XX. The United States Postal Service reported that the Summons
Noticee copy was unclaimed and subsequently returned to sender.

Letter 1398 (served as request #4), as well as copies of IDR # 1, 2, & 3, were
mailed to the School on January 18, 20XX. The request asked the School to provide
Governing instruments (articles of incorporation, bylaws, etc.)

• Minutes of meetings

• All books and records of your assets, liabilities, receipts and disbursements

• Check register, canceled checks, and bank statements

• Auditor's report

• Copies of prior and subsequent year returns

• Copies of any other Federal tax returns filed

• Pamphlets, brochures, and other literature printed

• Correspondence files

The School did not response to the fourth (4th) request.

IDR # 5 was issued on January 25, 20XX and asked the School to explain selected
expenditures obtained from the statements and cancelled
checks. The attached expenditures totaled $ . The
School did not respond to the Service’s inquiries or substantiating documents that
could explain how the expenditures served an exempt or educational purpose.

2

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

June 30, 20XX
June 30, 20XX
June 30, 20XX
June 30, 20XX

Additional bank accounts were discovered, and on March 8, 20XX third party record
keeping summonses were issued to and .
The USPS reported that delivery of the Summons Noticee copies (taxpayer
copies) were attempted on March 11th, then forwarded to a residential address in
, in which the letter’s acceptance was refused on March 18, 20XX. At the time, it
was unclear which administrator submitted the change of address / mail forward on
behalf of the School.

On April 14, 20XX, the School's account was summonsed.
On April 17, 20XX, the Summons Noticee was refused at the address.

On May 3rd, , IDR #6, Letter 5077-B, IDR delinquency notice, with attached IDR #
1, 2, 3, 4, 5, and a notification that June 30, was now under exam, was mailed
to the School at its new address per updated IRS records:

,

IDR # 6 asked the School to provide evidence that:

• the organization continues to be operated exclusively for 501(c)(3) purposes.
  to explain if the organization is currently active and operating as a K-8
  school. Fully describe any changes in operations or discontinued activities.
  Please provide documentation evidencing that
  is operated exclusively for exempt purposes described under 501(c)(3).
  Please also provide student enrollment documents, tuition fee schedules, and
  curriculum, syllabus, etc. for each grade (k - 8).

• explain if the organization continues to solicit donations from the public,
  charges tuition, or receives government funded grants. Provide supporting
  documentation detailing the source and amount of all funds received for the
  current year (June 30, ).

• explain whether the organization has implemented safeguards that are
  reasonably calculated to prevent excess benefit transactions from occurring
  in the future

• Provide supporting documentation that the organization's earnings are not
  being distributed to any insider such as officers, trustees, school board
  members, etc.

• explain whether the excess benefit transactions that have occurred have been
  corrected or whether has made good faith
  efforts to seek correction from the disqualified persons who benefited from
  the excess benefit transactions: &
  , , , and

• Provide a current listing of school
  board members, officers, directors, trustees, and any other governing
  official or decision maker within the organization.

IDR # 6 also asked for responses to Information Document Requests 1, 2, 3, 4 & 5
that remain outstanding. The School did not respond to IDR #6.

3

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

June 30, 20XX
June 30, 20XX
June 30, 20XX
June 30, 20XX

On May 25, 20XX, IDR # 7 was issued along with a notification that the prior year
ending June 30, 20XX is under examination. The requested information included
books records, financial statements, meetings, banks statements cancelled checks,
etc. The School did not provide a response to IDR #7.

Additional summonses were issued to and
on July 11, 20XX covering prior years. The USPS left a notice on July 17th, 20XX
(no authorized recipient available) and the summons notice remained unclaimed and
was returned to sender on August 23, 20XX.

Evidence was obtained revealing the School administrators created two entities in
entitled the , and
¹. accounts were opened in the name of
these ‘fake’ foundations. Donations destined for the
were deposited into these ‘fake’ foundation accounts. On July 12, 20XX
was summonsed as a third-party record keeper for the
. The USPS left a notice on July 17th, 20XX (no authorized recipient
available) and the item remained unclaimed and returned to sender on August 23,
20XX.

Information obtained from the account revealed that checks
written to were deposited into the fake
foundation’s account. The funds were embezzled for similar purposes described
above.

Approximately in August 20XX information² was discovered revealing that both
and fellow administrator, rented the house at
, beginning in February 20XX. The Pretrial
Release Conditions revealed that is no longer an
administrator or working for the School. The release conditions also stated a new
board has been implemented, however no names were provided.

In March of 20XX, information was obtained from the
which listed as the statutory agent of the
School. According the , was also
responsible for changing the Schools address from:
, , to , , .

On November 18, 20XX was summonsed with respect to the
. The Summons Noticee copy was mailed to the School’s
physical address at .
. The address at is now deemed invalid
because and are no longer officers or
administrators of the School. The Noticee copy mailed to the School’s physical
address was also returned to sender.

¹ These entities are not recognized under IRC 501(c)(3). None of the Schools funds were
deposited into bank account.
² Pretrial Release Conditions

4

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

June 30, 20XX
June 30, 20XX
June 30, 20XX
June 30, 20XX

Finally, the owner of the property, the , reported³ that
the Schools is in disarray, items and vehicles are missing, and the premise is
abandoned.

Law:

Section 501(c)(3) of the Internal Revenue Code provides for exemption from taxation
for organizations "organized and operated exclusively for religious, charitable,
scientific, testing for public safety, literary, or educational purposes, or to
foster national or international amateur athletic competition..., or for the
prevention of cruelty to children or animals, no part of the net earnings of which
inures to the benefit of any private shareholder or individual..."

Section 1.501(c)(3)-1(c)(1) of the Income tax regulations 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."

Section 1.501(c)-1(d)(1)(ii) of the Income tax regulations states that "An
organization is not organized or operated exclusively for one or more of the
purposes specified ... 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."

Section 1.6033-2(i)(2) of the Income tax regulations provides that "Every
organization which is exempt from tax, whether or not it is required to file an
annual information return shall submit such additional information as may be
required by the Internal Revenue Service for the purpose in inquiring into its
exempt status and administering the provisions of subchapter F (section 501 and
following), chapter 1 of subtitle A of the Code..."

Rev. Rul 59-95, An organization previously held exempt from Federal income tax was
requested to produce a financial statement as of the end of the year and a
statement of its operations during such year. However, its records were so
incomplete that it was unable to furnish such statements. Section 6033 of the
Internal Revenue Code of 1954 provides that every organization, except as provided
therein, exempt from taxation under section 501(a) of the Code shall file an annual
return, stating specifically the items of gross income, receipts, and
disbursements, and shall keep such records, render under oath such statements, make
such other returns and comply with such rules and regulations as the Secretary of
the Treasury or his delegate may from time to time prescribe. Held, failure or
inability to file the required information return or otherwise to comply with the

³

5

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

June 30, 20XX
June 30, 20XX
June 30, 20XX
June 30, 20XX

provision of section 6033 of the Code and the regulations which implement it, may
result in the termination of the exempt status of an organization previously held
exempt, on the grounds that the organization has not established that it is
observing the conditions required for the continuation of an exempt status.

Rev. Rul. 56-304, Organizations privately established and funded as charitable
foundations which are organized and actively operated to carry on one or more of
the purposes specified in section 501(c)(3) of the Internal Revenue Code of 1954,
and which otherwise meet the requirements for exemption from Federal income tax are
not precluded from making distributions of their funds to individuals, provided
such distributions are made on a true charitable basis in furtherance of the
purposes for which they are organized. However, organizations of this character
which make such distributions should maintain adequate records and case histories
to show the name and address of each recipient of aid; the amount distributed to
each; the purpose for which the aid was given; the manner in which the recipient
was selected and the relationship, if any, between the recipient and (1) members,
officers, or trustees of the organization, (2) a grantor or substantial contributor
to the organization or a member of the family of either, and (3) a corporation
controlled by a grantor or substantial contributor, in order that any or all
distributions made to individuals can be substantiated upon request by the Internal
Revenue Service.

Government's Position:

The Internal Revenue Service requested the School to provide specific information
about its actual activities during the years ending June 30, 20XX through June 30,
20XX. The School has not responded to a single request from the Service, nor has it
provided any information on how it conducts its charitable activity.

The Internal Revenue Service asked the organization to:

• Prove that it continues to be operated exclusively for 501(c)(3) purposes
  fully describe any changes in operations or discontinued activities

• provide student enrollment documents, tuition fee schedules, and curriculum,
  syllabus, etc. for each grade (k - 8)

• explain if the organization continues to solicit donations from the public,
  charges tuition, or receives government funded grants

• Provide supporting documentation detailing the source and amount of all funds
  received for the current year (June 30, 20XX)

• explain whether the organization has implemented safeguards that are
  reasonably calculated to prevent excess benefit transactions from occurring
  in the future

6

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

June 30, 20XX
June 30, 20XX
June 30, 20XX
June 30, 20XX

• Provide supporting documentation that the organization's earnings are not
  being distributed to any insider such as officers, trustees, school board
  members, insider

• explain whether the excess benefit transactions that have occurred have been
  corrected or whether has made good faith
  efforts to seek correction from the disqualified persons who benefited from
  the excess benefit transactions: &
  , , , and

• Provide a current listing of school
  board members, officers, directors, trustees, and any other governing
  official or decision maker within the organization.

The Internal Revenue service also asked the School to describe its activities and
to provide books, records, minutes, invoices & receipts, financial statements,
governing instruments, etc. The organization did not respond to any of the seven
document requests issued by the Service.

As required by Revenue Ruling 56-304, the School did not provide any records to
show that it continues to operate for exempt purposes; or that safe guards were
implemented to prevent future inurement and excess benefit transactions. An exempt
organization must respond to Internal Revenue Service inquiries to establish that
it is entitled to tax exempt status. The School’s administrators embezzled nearly
$ during the years of examination, yet the taxpayer has repeatedly ignored
the Service’s inquiries in the matter. In Sum, revocation of
tax exempt status under 501(c)(3) is proposed due to its failure to provide
records to the Service regarding its exempt activities and expenditures, failure to
show that corrective measures have been implemented to prevent future inurement.
Additionally, the reporting of the School’s abandonment also supports the Service’s
position that no exempt activity is being conducted.

Taxpayer's Position:

The organization has not submitted its position.

Conclusion:

Exemption under Code section 501(c)(3) for the
should be revoked effective July 1st, 20XX. The organization is required to file
Form 1120 for subsequent taxable years.

7