202150019: IRS revokes a motorcycle festival charity's 501(c)(3) status for operating primarily for private benefit

Plain-English summary

A charity had been recognized under Internal Revenue Code § 501(c)(3), stating in its exemption application that it would hold convention-style motorcycle rallies to raise money for other IRS-approved charities. On audit, the IRS found the organization was really running a large annual motorcycle festival ("Bike Week") that had been shifted over from a related for-profit company, and that the festival was primarily a social and commercial event (rides, vendors, entertainment, food, drinking, and camping) rather than a charitable one. The organization's president, who controlled the group and several related for-profit businesses, used the charity's money to pay for personal and family expenses (a credit card, home improvements, landscaping, travel, and payments benefiting properties and companies he owned), while only a small portion of the money collected went to actual charities, some of it unsupported and at least one recipient not even a 501(c)(3). The IRS concluded the group was operated for the private benefit of insiders and for primarily social purposes, not exclusively for exempt purposes, and that a single substantial nonexempt purpose defeats exemption under Better Business Bureau v. United States. Exemption was revoked effective January 1 of the first year at issue, contributions are no longer deductible under § 170, and the organization must file federal income tax returns. The lesson: routing a for-profit festival's revenue through a charity, and using charity funds to benefit its controlling insider, forfeits tax-exempt status even if some money reaches real charities.

Ruling snapshot

• Question: Does a § 501(c)(3) organization still qualify when it operates a primarily social, commercial motorcycle festival, serves the private interests of its controlling officer and his related for-profit businesses, and passes only a fraction of its receipts to actual charities?
• Outcome: revocation, effective January 1, 20XX (contributions no longer deductible under § 170; income tax returns required)
• Key authorities: IRC §§ 501(c)(3), 503, 511, 512, 513, 170; Treas. Reg. §§ 1.501(c)(3)-1(a), (c)(1), (c)(2), (d)(2); Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Copyright Clearance Center v. Commissioner, 79 T.C. 793 (1982); Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974); IRS General Counsel Memorandum (1987) private-benefit doctrine

Full text (IRS public release)

This document is an OCR transcription of a scanned IRS release. Wording is preserved verbatim; obvious scanning misreads have been corrected, and page furniture and footers are transcribed as scanned. The IRS redacted the taxpayer's name and all identifying names, amounts, dates, and percentages before release; in the scan these appear as blanks, as "0"/"$0.00", as "20XX", or as "0%", and are reproduced as scanned rather than treated as real figures. The two financial charts the IRS removed are marked "CHART DELETED" in the original. PDF-page markers [Page N] are placed at the start of each of the three enclosed documents; the enclosed Form 886-A also retains its own printed "Page: -N-" footers (its nine pages are PDF pages 5 through 13). Unreadable spots are marked [illegible].

[Page 1]

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: AUG 05, 2019

                          EIN:

Number: 202150019 Person to Contact:
Release Date: 12/17/2021
Identification Number:
Telephone Number:
Fax:
UIL: 501.03-00

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
Internal Revenue Code (the "Code") section 501(a) as an organization described in Code
section 501(c)(3), effective January 1, 20XX. Your determination letter dated November 14,
20XX is revoked.

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

Organizations described in I.R.C. § 501(c)(3) and exempt under section 501(a) must
be both organized and operated exclusively for exempt purposes. 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). An organization will
not be so regarded if more than an insubstantial part of its activities is not in
furtherance of 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 I.R.C. § 501(c)(3) and Treasury Regulation §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.

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

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

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

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

U.S. 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 Internal Revenue Code.

You may 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 1-877-777-
4778.

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

Sincerely yours,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892

[Page 3]

Department of the Treasury
Internal Revenue Service

Tax Exempt and Government Entities Division
IRS Exempt Organizations Examination

CERTIFIED MAIL Return Receipt Requested
Dear
Why you're receiving this letter

If you agree

Date: 03/30/2018
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:

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.

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.

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.

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

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,

[signature]

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

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

[Page 5]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX
ISSUE
Whether the tax-exempt status of as an organization described in section 501(c)(3)

should be revoked, effective January 1, 20XX, due to the following:

a. was engaged in for profit activities that were not properly reported;
b. More than an insubstantial part of activities were in furtherance of a
nonexempt purpose;
c. was operated for benefit of private interests, rather than public
interests; and
d. The net earnings of inured to the benefit of and other
insiders.
FACTS
( ) was incorporated pursuant to the Non-Profit Corporation Law in the state of
in 20XX. According Articles of Incorporation, provided with the Application for Recognition of

Exemption-Form 1023, the corporation was formed to establish a charitable organization to operate exclusively for
nonprofit purposes, including distributing contributions to other organizations operating as 501(c)(3) organizations.
F-1023 Application for Exemption was signed by CPA on 6/17/XX.
were the officer/directors at that time. The application stated that 0% of net income was to be donated to
501(c)(3) charitable organizations. In 20XX the State Liquor board had their own requirements in order to
obtain a liquor license, 0% of gross receipts from liquor sales had to be donated to a 501(c)(3) org.

Articles of Incorporation, also included with the application, state no part of earnings shall inure to the
benefit of any director, trustee, creator or organizer; the corporation is authorized to pay "reasonable"
compensation and make payments in furtherance of its charitable purpose; the corporation shall not engage in
political or legislative activities; and the corporation shall not directly or indirectly carry on any activity which
would prevent it from obtaining exemption from federal income taxation as a non-profit.

As part of application for recognition of exemption, the organization submitted a narrative description of
their activities in which it was stated that "plans to hold convention type rallies where
motorcycle enthusiasts come together to share their common interests." Events "are designed to raise money for
different charities that have been approved by the Internal Revenue Service as 501(c)(3) organizations."

The organization was granted exemption under section (c)(3) on letter 1045 dated 11/14/20XX. Their foundation
status was granted under section 509(a)(1).

Form 990 Return for Organizations exempt from Income Tax for the year ended December 31, 20XX
states that the organization's mission or most significant activities are "a week-long experience catering to
individuals whom are active in riding motorcycles activities for these individual including rides, vendors,
entertainment, food, drinking and camping." Their program services listed on Part III of the 990 described the
organization's mission as "to raise funds through a series of various activities during Bike Week. Other fun
rides are schedule for the participation of avid motor cycle enthusiasts. We also help to provide support to other
local charities."

Form 990 for the year ended December 31, 20XX and 20XX reiterate the statements reported on the
20XX return.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

[Page 6]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX

Forms 990 Returns of Organization Exempt from Tax for the years ending December 31, 20XX affirm that
the organization did not become aware of an excess benefit transaction with a disqualified person from a prior year.

Forms 990 for the year ending December 31, 20XX report that with the exception of , vice
president, who received $0 in 20XX from the organization, the organization officer's received no reportable
compensation from the organization, from related organizations or any estimated other (non-reportable)
compensation from the organization and related organizations. Furthermore, the returns convey that none of the
officers received or accrued compensation from any unrelated organization or individual for services rendered to the
organization. There are no directors listed on the Form 990.

      is the president of           for all examined years           has signature authority over the

bank accounts as well as the accounts for related for-profit organizations, ( ),
and He has complete control over every aspect of the

businesses. In 20XX he received wages from
does not have signature authority over the corporate bank accounts. She is listed as the Vice

President in part VII of the F-990 and received $0 from in 20XX. As of 1/1/20XX, she is a shareholder in

      does not have signature authority over the corporate bank accounts. He is listed as the

Treasurer in part VII of the F-990 and no compensation is reported. He resides in , and he and his son received

"consulting fees" from which were described as services provided on Farmland formerly
owned by , and as of 20XX owned by (0%) and parents (0%).
became a shareholder in on 1/1/20XX.

      is a for-profit corporation, which files on a fiscal year in relationship to the annual BIKE

WEEK event (which occurs in ). and are owners of this entity. Prior to 20XX,
reported the receipts and expenses related to the Bike Week event according to the taxpayer.
The history of is intertwined with that of . In November 20XX, established
and purchased the rights to BIKE WEEK from owned and operated by
and , the original filers of the F-1023 for (20XX). The assets, contracts and trade names were
purchased under a promissory note signed by for $0.00. The directors of were
(0 shares of ), (0 shares of under the name ) &

      (0 shares of           ) Total outstanding shares of           were 0 shares.

In January 20XX, resigned and represented by , as president,
promised to pay $0 (principle & interest) for 0 shares of due on May 1, 20XX at 0% interest.

      also agreed to sell their shares at the same terms for 0% interest). The redeemed stock was re-

sold as follows:

      [illegible]

¹An audit of in 20XX (included in the administrative files and reference below) includes comments by the
Revenue Agent: "0 of the original 0 partners want out of the arrangement and are in process of being bought out

while 0 others are buying into the venture. As the original 0 partners remain on the note, shares of these 0
individuals are held in Trust, pending payoff. The 0 new partners have contributed capital. There were some

questions during the interview concerning structure of the buy-outs. Agent has requested additional documentation
and will consider.

footnote continues next page

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

[Page 7]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX

CHART DELETED

The existence of is not disclosed on the F-990, with the exception of a comment as an asset on
Part IX (Balance Sheet) of the 20XX F-990 [DUE FROM $0]. Related entities are not disclosed
on line 34 part IV of the F-990 which asks the question "was the organization related to any tax exempt or taxable
entity?" No compensation to officers from related organizations was reported on Part VII of the F-990.

The 20XX and 20XX F-1120s for PROMOTIONS were audited in 20XX. The agent made the following

statements in their interview notes in regard to the relationship between and

"Liquor laws in stipulate liquor can't be provided unless a special events liquor license is

obtained. Per , the company is ineligible to apply for the license, and as is typical, affiliates

it(self) with a charity which acquires the event license. In turn, contracts with

the charity for the right to use the license. In exchange, the company gives the charity 0% of the

liquor proceeds."
This comment in the audit file was discussed during the audit of and according to the power of attorney,
is the charity described in this statement. It was also explained at that time that liquor laws no longer have

this requirement (this statement is in dispute now).

According to the current bookkeeper, , former CPA , suggested that
consolidate the operations for BIKE WEEK under

continued footnote

      , too, is interested in selling as the initial investment has created enormous debt. The company has generated

minimal profit, if any, since the acquisition. The company pays no salary to the owner (owner living off income
from his design firm and liquidation of investments). Company also pays no rent as it is operated out of same
facility used by owner's design firm.

Note terms with the original seller were renegotiated in 20XX, reducing the annual payment from $0 to $0. S/h
states $0 of the $0 is to be designated interest for extension of the note. Revisions to the note were not documented
in writing. Agent takes issue with the $0 interest designation as the additional $0 payment is due irrespective of the
outstanding principal. As a result the effective interest rate on the note incrementally increases from 0% to in excess
of 0% in later years. As actual interest rates are decreasing with the depressed economy, and because no
documentation exists specifying treatment of the $0, Agent will consider the amount as additional principal."

Evidence of the renegotiation which is "not documented in writing" was not produced during the current audit.
However intangibles were addressed in the Audit and therefore, will not be addressed here.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

[Page 8]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX
In addition, to ; is 0% owner of
and None of these organizations were disclosed on the F-990.
The audit of conducted in 20XX, also identified as the owner of , described as
design firm". The Revenue Agent states that pays no rent "as it is operating out of the same facility used by

(the) owner's design firm." In 20XX (and 20XX 20XX), and
are still operating out the same address: . However in 20XX, paid $0 to
for the use of and , as well as $0 for "consulting" which is comprised of
compensation for and services according to ( and Wages are
paid by ). which operates a year-round business paid $0 according to
PRIVATE BENEFIT/INUREMENT:
Over the course of the audit, transactions deducted as expenses on the F-990 were examined,
possessed a credit card #0 under the name of " / " made
all the payments on the credit card for the year ending 12/31/20XX. The total payments made in 20XX by
were $0. There were no records to support whether any of these charges were attributable to nor that they are
"in furtherance of. " In addition, there was no evidence that repaid for any of these
disbursements. Furthermore, never claimed to have made any repayments to . The individual
transactions were input into QuickBooks accounting software and coded as business expenses and eventually
deducted from income on the F-990 for the year ending December 31, 20XX.
As stated earlier, in 20XX was involved in zero annual events which had previous been reported on the Form
1120 for . Bike Week took place in the spring running primarily over 0 days.

      is a one-day event which takes place in November. In previous years,           handled

for a dealership in
Despite the periodic activities , the transactions paid for and deducted by occurred consistently over a 0
month period. Among the transactions appearing on the credit card statement were at least one trip for
, his mother, , and his children, and ; road trip expenses for to a motorcycle event
in near his parent's home; and a trip to . There are numerous meals and entertainment
expenses which are not supported with documentation of a business purpose. There are transactions related to the
improvements to a residence owned by . There are dental payments and vehicle payments for which
there are no supporting documents related to business purpose.
In addition to the credit card payments, direct payments were made from the bank accounts; a
small business checking account #0( -0) and a checking account #0 ( -0).
These payments included $0 to . The memos on these checks reference and

      ; properties owned by           and his family. Check memo statements and QuickBook

descriptions indicate the checks were for TV, Internet and telephone services. According to statements and records,

      was occupied by           and           was occupied by           and
      ; corporations.

Direct payments were also made to ($0), ($0),
($0), (0), ($0), ($0),
($0) and the ($0). None of these payments have been tied to a charitable activity.
Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -4-

[Page 9]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX
Check #0 dated 4/30/XX to in the amount of $0 is referenced as " " for
and dated 4/30/20XX. An additional check for $0 was paid by in June for "sprinkler repair". The
location is a residence owned by and
Check #0 dated 1/6/XX to in the amount of $0 is referenced as "0". Note the bill was paid in
20XX, but was included as a deduction in 20XX as Repairs & Maintenance. is a cash-based taxpayer
according to the form 990.
Check #0 dated 5/8/XX to Services in the amount of $0 is referenced as "Landscaping @
" Additional payments to are made from personal account and an account under
the name of
Check #0 dated 1/4/XX to in the amount of $0.00 is referenced as " " Note the
bill was paid in 20XX, but was included as a deduction in 20XX as "Other Expenses" and then a journal entry was
made which included this amount to reduce an income category entitled "commissions". is a cash-based
taxpayer according to the form 990.
Check #0 dated 1/9/XX to in the amount of $0.00 is referenced as " ". Other information
reviewed stated that it is for a house remodel interior authorized by . Note the bill was paid in
20XX, but was included as a deduction in 20XX as Repairs & Maintenance. is a cash based taxpayer
according to the form 990.
Two checks totaling $0.00 were paid to . It was explained that acts as a
management company for some of properties. Check #0 dated 3/20/XX for $0.00 is reference as "
Repair". Other information reviewed indicated it was for "paint, shutters- repairs". A second check

0 dated 12/24/20XX in the amount of $0.00 referenced " house-labor-". Other information reviewed

stated " " is a residential property purchased by
Corporation in 20XX. eventually uses this property as his residence. Note, he is paying for pool

maintenance in 20XX on a monthly basis.

Two checks totaling $0.00 were paid to . The first check #0 dated 2/14/20XX for $0.00 was referenced as
"concrete pad install". Receipt #0 dated 2/14/XX was a bill for $0.00. Handwritten on the bill was "paid $0k per

      ". The second check #0 dated 4/18/XX was for $0.00 and referenced "Concrete pad Ck #0 $0.00".
      explained that the concrete pad was needed to park a trailer used for the various events and that it would have

removed when the property was sold.

Zero payments were made to the . The website states that payments are for Water & Sewer, Waste &
Recycling, and Gas. The checks indicate that they are for " " and they total $0.00.

Total payments made by for the benefit of or individuals and organizations associated with
were calculated to be $0.00.

In addition, made $0.00 in payments to , in 20XX. Some of these payments were identified as
"consulting fees" and/or "rent". The taxpayers were requested to provide the methods used to calculate these
payments, but none were provided. It was stated, however, that and salaries
were paid by , with funds provided by

      made payment of $0.00 to           in 20XX. A payment of $0.00 in July 20XX was identified as "dividend

payback".

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

[Page 10]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX

NON-EXEMPT PURPOSE:

As explained above, according to the bookkeeper, the festival activities formerly reported by for-profit entity,
, were consolidated under the non-profit . had formerly been
responsible for collecting donations from designated charitable "rides" and turning the donations over to various
other 501(c)(3) organizations. In 20XX, F-990 reported $0.00 in charitable donations. According to
QuickBooks records these donations are as follows:

CHART DELETED

The transactions making up the return item were traced to the bank records, support for three of these transactions
(totaling $0.00 — 0% of the deduction) could not be identified and was not provided by the taxpayer. In addition,
to which a donation of $0.00 was reported, is not a 501(c)(3) organization.

In 20XX, reported gross receipts of $0.00. The $0.00 deducted as charitable contributions represents 0% of

the funds reported as collected in conjunction with the Bike Week festivities and the two smaller events held during
the year by

      reported $0 in deductible expenses that year, which included the "charitable" donations, as well as

personal expenses totaling $0.00, $0.00 to and $0.00 to . The 20XX F-990

for reported an excess of revenues less expenses of $0.00 in 20XX. Previous and subsequent returns reflect
similar circumstances.

Furthermore, the 20XX Form 990 reported beginning "net assets or fund balances" of $0.00 and ending
balances of $0.00. Previous and subsequent F-990s reflect similar increases. In addition, the balance sheet on the F-
990 reported loans to related organizations. The ending balance due from was reported to be $0.00. The
balance due from was reported as $0.00 and another $0.00 was due from

      three major expenses reported in 20XX were reported as (1) entertainment expenses (0% of total expenses),

(2) equipment rental expenses (0%) and (3) occupancy (0%). The entertainment expenses are consistent with
information provided on the website " ," which reported that the 20XX event included
concerts with national known entertainers including & the ; and

In addition, the website listed other events such as factory demo rides, vendors and attractions. Attractions in
20XX included ; ;
Show and a " " special appearance. The only charitable activities identified were seven "charity
rides". The organizers also offered campground rental and RV space to attendees for a fee. (EXHIBIT A)

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -6-

[Page 11]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX
In 20XX, the Bike Week/ website advertised the event with links to events,
vendors, camping and rally gear. The only mention of a possible charitable connection was the Children's
Hospital logo on the homepage. (EXHIBIT B)

LAW

Internal Revenue Code Section 501(c)(3) describes corporations exempt from income tax as, "Corporations, and
any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes, or to foster national or international amateur sports
competition (but only if no part of its activities involve the provision of athletic facilities or equipment), 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, no substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate
in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in
opposition to) any candidate for public office."

Treas. Reg. 1.501(c)(3)-1 explains that, "in order to be exempt as an organization described in section 501(c)(3),
an organization must be both organized and operated exclusively for one or more of the purposes specified in such
section. If an organization fails to meet either the organizational test or the operational test, it is not exempt." The
regulations provide both an organization test, as well as an operational test which must be satisfied in order for an
organization to maintain its exempt status.

Treas. Reg. 1.501(c)(3)-1(c)(1) is one of four tests that an organization must pass in order to sustain its status
under section 501(c)(3). This section states that the organization must engage primarily in activities which
accomplish one or more of the exempt purposes specified under the code section. This section provides that an
organization will be regarded as "operating exclusively" for one or more exempt purposes only if it engages
primarily in activities that accomplish one or more of the exempt purposes specified under IRC Section 501(c)(3).

The term "exclusively" has not been construed to mean "solely" or "absolutely without exception". An organization
that engages in exempt activities qualifies for exempt status so long as those nonexempt activities are only incidental
and less than substantial. Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945);
Copyright Clearance Center v. Commissioner, 79 T.C. 793, 804 (1982).

In Better Business Bureau of Washington D.C., the Supreme Court held that the presence of a single non exempt
purpose, if substantial in nature, will prevent exemption regardless of the number or importance of truly exempt
purposes. The Court held that a trade association had an "underlying commercial motive" that distinguished its
educational program from that carried on by a university.

Treas. Reg. 1.501(c)(3)-1(d)(2) defines the term charitable is used in section 501(c)(3) in its generally accepted
legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other
tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decision. Such
term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of
education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of
Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes,
or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil
rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

[Page 12]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX

Treas. Reg. 1.501(c)(3)-1(c)(2) explains that an exempt organization must not allow its net earnings to inure to the
benefit of private shareholder or individuals.

If an organization fails to comply with any of these requirements, it will fail the operation test and lose its IRC
Section 501(c)(3) exemption. Harding Hospital, Inc. v. U.S., 505 F.2d 1068, 1072 (6th Cir. 1974).

I.R.C. § 503 explains that an organization operating under Section 501(c) shall not be exempt if it has engaged in a
prohibited transaction. Such transactions include:
(1) lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of
interest, to;
(2) pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal
services actually rendered, to;
(3) makes any part of its services available on a preferential basis to;
(4) makes any substantial purchase of securities or any other property, for more than adequate consideration in
money or money's worth, from;
(5) sells any substantial part of its securities or other property, for less than an adequate consideration in money
or money's worth, to; or

(6) engages in any other transaction which results in a substantial diversion of its income or corpus to;

the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a
member of the family (as defined in section 267(c)(4)) of an individual who is the creator of such trust or who has
made a substantial contribution to such organization; or a corporation controlled by such creator or person through
the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock
entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.

I.R.C. § 511 imposes a tax on unrelated business income of organizations described in Section 501(c).
I.R.C. § 512 describes "unrelated business taxable income" as the gross income derived by any organization from
any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by

this chapter which are directly connected with the carrying on of such trade or business.

unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to
the charitable, educational, or other purpose that is the basis of the organization's exemption

TAXPAYER'S POSITION

The taxpayer states that the activities engaged in by the organization are all related to charity.

ARGUMENT/GOVERNMENTS POSITION

The taxpayer's opinion, as expressed during the audit, is that the activity involving charitable rides is sufficient to
render the entire social event to be organized for charitable purposes. They illustrate this position with annual
donations to various 501(c)(3) organizations, only a portion of which have been supported with adequate records.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

[Page 13]

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
12/31/20XX
However, the government argues that the events organized in the name of are

primarily social in nature and that the funds donated to charitable organizations are merely donations. The
principle purpose as stated on the Form 990 is to provide an experience for motorcycle enthusiasts, which includes
rides, vendors, entertainment, food, drinking and camping. The program services activity reported as "raising
funds" and supporting "local charities" is a minor and insignificant matter when compared with the entire
experience.

Furthermore, under IRC § 1.501(c)(3) an organization is not described in this section "if it serves a private interest
more than incidentally." The private interest doctrine is described in IRS General Counsel's Memorandum issued in
1987, which noted that:

An organization is not described in section 501(c)(3) if it serves a private interest more
than incidentally....
A private benefit is considered incidental only if it is incidental in both a qualitative and a
quantitative sense. In order to be incidental in a qualitative sense, the benefit must be a necessary
concomitant of the activity which benefits the public at large, i.e., the activity can be accomplished
only by benefitting certain private individuals....To be incidental in a quantitative sense, the
private benefit must not be substantial after considering the overall public benefit."

In the case of the private benefit is not incidental. The Bike Week event, as well as
the other events, benefit the shareholders of and his related organizations, as well
as motorcycle enthusiasts who wish to pay to participate in the activities. The organization does not serve a broad
charitable class. In this case, the incidental benefit is provided to the local charities.

CONCLUSION:

As of 1/1/20XX, is determined to be organized and operated for primarily private benefit and activities social
in nature rather than exclusively for an exempt purpose as described under IRC 501(c)(3). As a result, the
organization exempt status is revoked as of that date.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-