IRS revokes a family private foundation run from the founders' home for inurement and self-dealing

Plain-English summary

The IRS revoked the tax-exempt status of a private foundation, effective January 1, 2016, after an audit found the foundation was operated for the private benefit of the married couple who ran it (the President and the Secretary) rather than exclusively for charity. The couple ran the foundation out of their home, kept almost no contemporaneous records, and treated a wide range of personal costs as foundation expenses: home upkeep (gardener, house cleaner, utilities, insurance, pest control), personal autos, credit-card purchases, season tickets, meals, and help for the Secretary's disabled sister. They also charged personal expenses to foundation credit cards to earn cash-back rewards and parked the amounts in a "Director Distribution" equity account without reporting a receivable. The IRS concluded that foundation funds inured to the benefit of the two insiders, that these were self-dealing transactions under section 4941, and that the foundation failed the operational test under section 501(c)(3). Because a single substantial nonexempt purpose and any private inurement defeat exemption, the foundation's recognition was revoked, and it must file taxable returns (and continue filing Form 990-PF until it terminates private-foundation status under section 507). The state had already revoked the organization's status.

Ruling snapshot

• Question: Should a private foundation's 501(c)(3) exemption be revoked where its funds inured to the two insiders who controlled it and it failed the operational test?
• Outcome: revocation (effective January 1, 2016; determination letter dated February 26, 2008, revoked)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (c)(2), (d)(1)(ii); IRC § 4941 (self-dealing); Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Wendy L. Parker Rehabilitation Foundation v. Commissioner, T.C. Memo. 1986-348; People of God Community v. Commissioner, 75 T.C. 127 (1980)

Full text (IRS public release)

Transcriber's note: this is a scanned adverse-determination package, comprising a Letter 6337 final revocation letter, a Letter 3618 proposed-revocation letter, and a Form 886-A audit report ("Explanation of Items"). The repeating Form 886-A page-header furniture has been removed and each page's footer replaced with a bracketed [Page N] marker. The audit report is heavily redacted, so many names, dates, and dollar amounts appear as blanks, and some OCR artifacts remain in that portion; wording is reproduced as scanned. Obvious OCR misreads in the cover letters have been corrected.

Department of the Treasury Date: March 2, 2021

Internal Revenue Service

Tax Exempt and Government Entities Taxpayer ID number:
Form:

Tax periods ended:

Person to contact:

Name:

ID number:
Release Number: 202221020 Telephone:
Release Date: 5/27/2022 Fax:

UIL: 501.03-00
CERTIFIED MAIL RETURN RECEIPT REQUESTED

Dear

Why we are sending you this letter

This is a final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective
January 1, 2016. Your determination letter dated February 26, 2008, is revoked.

Our adverse determination as to your exempt status was made for the following reasons: Organizations
described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated
exclusively for exempt purposes. You failed to satisfy the operational test and your funds inured to the benefit
of individuals. You have failed to show 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.

Organizations that are not exempt under IRC 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.

Because you were a private foundation as of the effective date of the adverse determination, you are considered
to be a taxable private foundation until you terminate your private foundation status under IRC Section 507.

In addition to your income tax return, you must also continue to file Form 990-PF, Return of Private Foundation
or Section 4947(a)(1) Trust Treated as Private Foundation, by the 15th day of the fifth month after the end of
your annual accounting period.

Contributions to your organization are no longer deductible under IRC Section 170.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was
mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of IRC Section 7428 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.

Letter 6337 (12-2020)
Catalog Number 74808E

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court U.S. Court of Federal Claims U.S. District Court for the District of Columbia

400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 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 IRC Section 7428.

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

Information about the IRS Taxpayer Advocate Service
The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service

Taxpayer Advocate Office

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676)
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records,

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 897

Letter 6337 (12-2020)
Catalog Number 74808E

Date: May 29, 2020
Department of the Treasury

Internal Revenue Service Taxpayer ID number:
IRS Tax Exempt and Government Entities

Form:
Tax periods ended:

Person to contact:
Name:
[ID number:
Telephone:
Fax:
Address:

Manager's contact information:

Name:
ID number:
Telephone:

Response due date:

CERTIFIED MAIL - Return Receipt Requested

Dear

Why you're receiving this letter

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 | 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.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

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.

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.

For 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,

For Sean E. O'Reilly
Director, Exempt Organizations
Examinations

Enclosures:

Forms 4621-A, 886-A

Form 6018

2 Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

ISSUE:

1. Do funds of the inure and serve the private interests of the members of the
governing body, , President, CEO, Director and , Secretary, CFO, Director

in violation of exemption requirements under Section 501(c)(3) of the Internal Revenue Code
(Code)?

2. Does the fail to meet the operational test under Section 501(c)(3) of the Code?

3. If the fails to meet the operational tast and uses funds to serve private interests,
should the exemption under Section 501(c)(3) of the Code be revokad as of 1/ /20 ?

FACTS:

The was incorporated in the State of onMarch ,20 .The

( ) received determination letter 1076 dated February ,20_ , recognizing it as exempt
from federal taxation under section 501(a) as a Charitable organization described in IRC section
501(c)(3) and classifying it as a private non-operating foundation. The organization’s address is the
same as the two members of its governing body, , (President) and , (Secretary).

The articles of incorporation state the corporation was organized and operated exclusively for
charitable purposes within the meaning of Section 501(c)(3), Internal Revenue Code. The property of
this corporation is irrevocably dedicated to charitable purposes and no part of the net Income or
assets of this corporation shall never inure to the benefit of any director, officer or member thereof or
to the benefit of any private person.

Upon the dissolution or winding up of the corporation, its assets remaining after payment, or provision
for payment, of all debts and liabilities of this corporation shall be distributed to a nonprofit fund,
foundation or corporation which is organized and operated exclusively for charitable purposes and
which has established its tax exempt status under Section 5Ul(c)(3), Internal Revenue Code.

The articles further specifies its purpose is to donate available fund assets to certain academic
institutions for their research and development activity uses; advocacy for community benefits, which
include, but not limited to the performance of arts; and the remaining money is used to develop and
expand our variety of philanthropic missions.

The Articles of Incorporation for this Private Foundation included the following language:

A. The corporation will distribute its income for each tax year at a time and in a manner as not to
become subject to the tax on undistributed income imposed by section 4942 of the Internal
Revenue Code, or the corresponding section of any future federal tax code.

B. The corporation will not engage in any act of self-dealing as defined in section 494 I(d) of the Internal
Revenue Code, or the corresponding section of any future federal tax code.

C. The corporation will not retain any excess business holdings as defined in section 4943(c) of the
Internal Revenue code, or corresponding section of any future federal tax code.

[Page 1]

D. The corporation will not make any investments in a manner as to subject it to tax under section 4944
of the Internal Revenue Code, or the corresponding section of any future federal tax code.

E. The corporation will not make any taxable expenditure as defined in section 4945(d) of the Internal
Revenue Code, or the corresponding section of any future federal tax code.

For the year ending ,20 the Form ;

listed two officers, , (President) and , (Secretary) each working ( ) hours
per week in the

[he secretary stated during an initial interview conducted on / / that during the year under
examination, she and her husband were both employed full-time in the industry as

They conducted the activities of the organization out of their home in their spare time. At the time of
securing exemption, the requested foundation status as a non-operational private foundation.
Subsequently, they developed activities which they are directly involved in conducting.

In Part IX-A of Form they listed the following as their four largest direct activities:

{. President volunteered with non-profit organizations in their fund-raising and community outreach activities
( Area) annually. President, with a group of musicians, volunteered their time, to
practice, prepare, and perform for local community outreach activities and fund- raising events. These
activities were organized by local non-profit organizations, foundations and church in with
expenses listed on form as $

2. Secretary volunteered her time regularly to a permanently disabled patient, who lives locally and suffering
from uncontrollable seizures and mild depression. Secretary drives the patient weekly to grocery shopping,
movies, local errands, doctor visits, medical exams and occasionally pays for rent, groceries, meals and
entertainment with expenses listed on form as$,.

3. Both founders traveled to and regularly to volunteer i in clinic and hospital by providing
companionship to patients, assisting medical staff with patients, transporting and escorting patients in
wheelchairs, and running errands in other areas with expenses listed on form as$e, sts

4, Foundalion owns and manages rental properties, acquired during economic downturn in 20 — and kept
the monthly rent at % below the market price for low-income families, the elderly and the disabled to
afford decent, safe, and sanitary housing. They have provided their corporate place of

business, for free, to a financial struggling , to teach class every in their community.
They have volunteered their time at on ; ; ; : ; ,

’ & Secretary has volunteered time at as foster parent for dogs/cats with the
expense for these actlvitles shown on form as$ ,

[Page 2]

The Form and Books for the tax year ending , showed the following income:
Form Books
Contributions from founders $ , 3 ,

Interest on Savings

Dividends/Interest on Securities

Gross Rents

Net Gain or Loss from sale of Assets

Other Income-Rebates _.
Total Income $

koe
a

s

The income primarily comes from contributions from Prasidant and Socratary Tho othar sources of Income for
the are Investment income from an a trado account and rental income from rental properties
owned/maintained by the One of these was sold during the subsequent year.

Expenses shown on the Form are as follows:

Legal Fees s
Accounting Fees S
Taxes

Depreciation $
Auto Expense

Bank Charge $,
Filing Fee

Meals Expense

Membership Dues

Office Expense

Postage

Office Supplies

Telephone

Utilities

Rental Expenses §
Contributions Paid S$
Program Fee $
TOTAL Ss,

We. We 2

wh 4

AS UU Ue Ue OU

Secretary indicated in a phone conversation with the examiner that she was unaware of the rules regulating
private foundations. She stated that she was doing what she thought was acceptable per an accountant they

had hired lo assist them in establishing and operating thelr He has since been prosecuted by the Attorney
General of . They have since replaced accountants and have continued to operate even after being
revoked by the State of subsequent to an examination

The Secretary asserted in the initial interview, conducted, / /  , that the expenses reported on the Form

includes expenses related to their corporate place of business, (their home), on basis that several of the
direct activities they listed in Part IX-A, Summary of Direct Activities are charitable activities conducted at their
home, therefore all expenses relating to the upkeep of the premises are operational expenses and should be
deductible.

[Page 3]

Schedule eumber or exhibit

In a fax received from the Secretaryon / /  shestated, “Our house setup- we hold events mosily
in kitchen, family, living and dining room, approx. sq. ft. The house is about sq. ft. We havea

(purchased by ourseives), tables, sofa and chairs.” No allocation of household expenses was made.

Activities Listed on Form

1. Information provided regarding President's activities in the was vague. In // , response to /DR1
the responded “No written contracts exists between the and the with whom
. pays certain expenses for the such as meals, travel, rental of
equipment, purchase of , books and phone and internet services in order to help make these
community outreach activities and fundraising possible” The dacuments provided / / did not
relate to the perlod under examlnation.
When asked for specifics as to costs related to this activity, the / 7? response to IDR4 included
the following:
volunteered his time and money for

provided for and .

provided and as well. For each , everyone is

responsible for small groups, and individual practices. Practice and location

is not consistent. It can be any member's home and it depends on member's
schedule. There is daily, weekly and monthly practices. Currently, we do not keep
track of travel to practices or or expenses specifically related to this
project. website — which contains photos, videos of
has driven to , ; ; ;
for practices. can only give a rough estimate of , miles travelled to
participate in practices and evenis,

is a 501(c)(3) organization established by a group of alumni of

from and who live in the . It consists of a larger
group of amateur and professional in the area that share the passion of
and together In thelr leisure time.
A further review of the website does not give a schedule of during the year
under exam. Documentation provided on / / regarding this activity does not support President’s
claim of expenses provided by the related to his participation in this or use of their home
for activities related to this activity.
The organization was asked about expenses related to a trip to fom / / to / ¢ . In / 7
response to [DR4 the PF responded “Between / / to / / made a trip to ; ,
, and ; volunteered in anniversary events, met several volunteers in
; , and , volunteered at a clinic and visited the orphanage.” No records were

provided that identify when he went to the orphanage, who he met with and what was discussed, or on what
date he worked at the clinic.

[Page 4]

2. Secretary volunteers her time regularly to a permanently disabled patient, who lives locally and suffering
from uncontrollable seizures and mild depression. Secretary drives the patient weekly to grocery shopping,
movies, local errands, doctor visits, medical exams and occasionally pays for rent, groceries, meals and
entertainment.

When asked about this activity, the POA // response to IDR1 stated, “ provides
services for ; that assist with her activities of daily living. suffers from
uncontrollable seizures and mild depression. She receives social security as income and cannot be left
alone, cook, drive, or work, assists by cooking for her, purchasing and delivering her

groceries, taking her to the docter and medical exams, taking her to an epilensv support graup, and
providing sources of entertainment such as trips tothe movies.” // ,the also provided a letter daled

{{ fram , the mother of , (Secretary’s sister) basically canfirming all the assistance the
has provided for her daughter.

When asked if they could teil me the total amount they provided to this activity, the / 7 response to
IDR4 was “We cannot determine the specific amounts, receipts and expenses related to assisting disabled
person , because we don’t track expenses by charitable project or activity. We estimate miles were
driven for this activity.” Their log of meals, (provided / / ) also showed they purchased season tickets
to the Symphony, in addition to several meais. s the only person the
assisted in this manner.

3 Both the President and Secretary traveled to and regularly to volunteer in clinic and hospital by
providing companionship to patients, assisting medical staff with patients, transporting and escorting patients in
wheelchairs, and running errands in other areas.

Secretary stated in the initial interview that she and the President travel to and on average four
(4) times a year, usually on their vacations. During these trips she confirmed that when they both go; their
children accompany them. // in response to IDR1, the orovided an itinerary of trips provided by the
included the following:

A. Trip to from / / to // to take donated goods, to volunteer, monitor progress in ;
discuss Chatily projecls, On way back travel delay coming from , alriine rerouted ta =. They had to
stay at the in , due to weather delay. Came back thru then on //
Trip by whole family.

if - : $

/ 7? Inresponse to IDR1 the states, “ began volunteering in clinics and hospitals in
and , because family and friends of its Board of directors work in the clinics and hospitals. Its members
generally travel to and once every three months. provides a variety of services
that do not require professional training in medical fields such as donating financial resources to charities,
transporting and escorting patients in wheelchairs, and running errands. ’s expenses related to
travel include airfare, lodging, taxis, meals, parking, and bridge tolls.”

They keep no records of what days volunteered in the hospital or clinic, what projects monitored, what charities
they donated to, how and when cash was donated or what charity projects discussed. No record of what
account the cash was taken out of.

[Page 5]

B. Trip by Secretary / / to / / to Meeting architect, to discuss design of
schoo! in . In // response to IDR2 when asked about this trip the indicated the following:
found an architect in who could help them in designing a school
from scratch. visited the architect to discuss the objective and goal of charity
project, an elementary and middle school in a rural area. Attached is a rough plan for a
school in a rural area. believes this project adheres to their "purpose and

mission" - promoting education, advocacy for community benefits.

The plan they attachod, ( / / ) was not an architect's plans but is written more like a business plan
entitled “ "and Il was
propuarod int Fobruury 20

Expenses included:

/ ] to , one-way, depart / / $

ff

i] to , one-way, return / / $

/ ] from / -/ $

/ ] fom / to / / $ .

TOTAL ,

This trip also included purchase of tickets for her sister and sister's mother for same time by Secretary. These
tickets were on the but not on . And as indicated below, the »rovided a Founders’ Log of
Activities,( / / )andforthe period / / to / / there is no mention of this trip. During these days it is
listed thaton / / the Secretary went to the Post Office to check the mail, driving to take grocery

shopping, working on problem at one of the condo, & Monitoring the clay class taught at their home; on 3/30 &
/ / driving to the Post Office to check the mail. The Log of activities does not support the PF’s assertion
of the purpose of the travel expenses.

C. Trip by President / -/ / ,thistripwasaddressedby in / / response to IDR4 listed above.
The expenses shown in the books for this trip include the Airline expenses booked under travel which
were purchased thru a travel agency:

/ f/f to ; to rd. Trip $

ff and Oli Way $

No records were provided that identify when he went to the orphanage, who he met with and what was
discussed, or on what date he worked at the clinic.

D. Trip by President / -/ / to to volunteer, donate goods and cash, monitor progress,
discuss charity projects.

The expenses shown in the books for this trip include the following:
i] - to round trip $

Although we received documents on / / from several doctors stating that the two members of the
governing body have volunteered at a hospital and a clinic when in since , there are no
contemporaneous records kept indicating of what day(s) or where he volunteered, where he went to monitor

[Page 6]

progress of what project or what types of goods and what cash donation he made or how cash was taken to
the foreign country or no evidence of any cash being taken out of any of the accounts.

E. [rip Both to , Starting in , golng to then returning to from
When asked about these trips the / / response to IDR2 was as follows:
When in or volunteers with Dr. and Dr. In

. They generally assist with incoming visitors, greeting, directing and escorting. They
also help the doctors with data eniry, troubleshooting computer and running office
errands. They also do networking with local community members.

makes donalions of toys, sligels, blanket, and shoes lo local atid inlernalional
organizations

The expenses for this trip were as follows:

{ f to , found trip forbothfor / to // $,
/ i] to one way forbothdepart / /
I] to one way for both depart / /
/ f from / to / /
/ f for //
i] in / to ff
The expenses for this trip do not show up in the books or records of the organization for . The remainder

of the food expenses were paid in

As to their foreign activities, the Secretary stated in the initial interview that they came from a poor area and got
education and now want to return to where they came from and give back to those communities. In the hospital
she said they work at the volunteer desk. Inthe / / response to IDR1 the provided a table which
indicated that the foreign donations are monitored by “a. Family and friends to monitor the use of our donation,
to ensure our funds are benefiting communities and general public. b. We also travel to and

frequently for site visits, to monitor the use of our donation.”

The also provided documents in support of their foreign efforts:
Inresponse tolDR1, // the provided:

1)Letterdated // from Dr. at to University of
in indicating, they have been volunteers in the hospital since

2)Letterdated / / from Dr. at Clinic in ; indicating they have
volunteered in the clinic since
3)Letterdated / / from for donations from thru
Then in response toIDR4, / / , when asked who this person is and what the relationship to the primaries
ofthe they responded, was introduced to when volunteered for
a local charity event in ,in is an accountant who practices in is also a
volunteer who has donated to various charity organizations. is not related to the founders of

at all. The founders have never paid | for anything. donated to various
charity organizations in , based upon professional and knowledgeable recommendations.”

[Page 7]

The list provided in response to |IDR1, / / shows the cash donation made in and to have

occurred as follows:

Date Amount Name Purpose of Donation
if , General fund to people in poverty
if . General fund to people in poverty
i] . General fund to people in poverty

i] . General fund to people in poverty
i] . General fund to people in poverty
l/ , To bring ed to benefit underprivilege children
in arphanaga
I] \ . Funds to repair temple which will
benefit the public.

TOTAL $ ,
Since these are cash donations, the entries into the books are shown as Journal Entries and are posted to an
Account , Donated Gifts as of / / . The entries as can be seen in copies of GL received from
during examon / / for donation to are shown in the books as
$,  . andthe as$, . . The supporting documents received // during the

exam are in foreign language and are not translated. The dates are handwritten on the documents and agree
with what is shown in the table, but do not correlate with the dates of any trips taken by the President or
Secretary of the =. There was no evidence in the books or statements provided showing what account the
cash was taken out of for these cash donations.

The on //_ inresponse to IDR1 provided a list of purchases which included office supplies and donated
gifts which included titles Date Description Amount. On this list and accompanied by receipts were purchases
of video games at . These are donated gifts per the organization's records.

4a. owns and manages rental properties, acquired during economic downturn in and kepi the
monthly rent at % below the market price for low-income families, the elderly and the disabled to afford
decent, safe, and sanitary housing.

These rentals are not low-income housing but are investment which provides rental income for the

b. They have provided their corporate place of business, for free, to a financial struggling art teacher, to teach

class every in their community. When asked about this activity the Secretary told me that she allows
an __- Teacher to teach classes in her home once a week for hours for the community at no cost to the
leaclhier.

| asked her where in her home she said in mostly in the kitchen, family, living and dining room. During the
examination // atthe representative's office in response to [DR1 questions about this activity their written

response included “With respect to relationship with the — teacher who teaches at
place of business, members of Board of Directors metthe teacher ata
local school function and discussed offering classes at corporate place of business.

does not receive any payment from the — teacher or her students for their use of
place of business.”

[Page 8]

| also received ( ) color photos of and an email response from the teacher,

. The Secretary's email to her asked her if she could provide a few statements on their relationship
and what the President and she have provided her. Could you confirm that they provided her a
classroom at their home on a regular basis, every . hrs. to teach to people in the
community and that she didn't teach their kids or receive any payments from them. Her reply was “Yes, |
teach class at your house in and and you didn’t receive any payments from me, and your
kids are not part of the class.”

Subsequently the Secretary indicated inher / / fax that their home is sq. ft and the activities of
the Class and the practices happen in approximately sq. ft of their home. The Secretary
provided photos of thei kilchen, farnily room, dining/living room and a bedroom. She also slated, “! louse
Cloancr After holding — olass or at our home, we need cieaning-up of the area. |
personally Cleat inty house every week as well, so cleaners do nol come every week or month.”

She also stated, “Pest Control- We always have ants ‘Infestation problem at our property since . itis
quarterly service. Without controlling ants, we would need a weekly house cleaning service to keep the
place presentable. Gardner- we have used the same gardener since . We lived in a community that
has a strict CC&R and we have monthly HOA dues$ . Per CC&R, residents need to upkeep the front
and back landscaping, and all external facing items, such as fences, trees, lightings, etc... We are not
able to spend time to keep up with our yard maintenances as we have too many things going on in our
life. We keep the yard tidy, so people don’t trip over outgrown plants, or vegetation. Trying to avoid
unnecessary liability for us and the ’ Then she asks if they can deduct part of the HOA fee, repair of
plumbing fixtures, replacement of water heater, fence repair as business expense.

The expenses taken without allocation that relate to their personal residence are as follows:

Property Insurance Annually $,
General Liability Insurance Annually
Pest Conirol Quarterly
Gardner- - Monthly Paid Monthly
House Cleaning- Bi-Monihly (6 times)
Utilities-

- Gas & Elec. Monthly ;
Water- Ri-Monthly
Garbage- Quarterly
Monthly _
Telecommunications Monthly soo:
$

Some of these expenses show up on the return in two places, for example, Utilities are shown as part of
Other Expenses and listed in as Schedule of Other Expenses as $ with the remainder lumped
together with ather expenses to be listed “PROGRAM FFF" also a part of Other Fxpenses Same with
Telephone, shown in that Schedule of Other Expenses as $ , While (he remainder of
Telecommunications is lumped into PROGRAM FEE along with other expenses. Note
Telecommunications includes not only the phone number used primarily by the buf = {_— +) total
phones.

c, They have volunteered their time at Foodbankon / , / , / , ¢ , 7, ff,
/ , ?/? &Secretary has volunteered time at as foster parent for dogs/cats

[Page 9]

In response to IDR4, / /
list with the titles Date

Purpose Driver

Distance (miles)

, the PF provided a Founders’ Activity Log. It is an excel printout which shows a
Time Spent (hr.). This list was for all year. This

list doesn’t include the activity of going out for meals. A sampie of what this list shows are:

if Drive to
grocery shopping

This activity done weekly. The Property is owned by Secretary,

w/mother.

~
~ SR

, take to

Secretary (hr.)

is her sister, lives in home

Secretary
Scerotary
Sacratary
Secretary
Secretary

The Secretary states that part of why she includes household expenses is because they foster cats and

dogs. She took training to foster animal in

under exam for  (

Additionally, the srovided on / /

and only one Foster puppy was in their home during year
}) days, then it was returned. Subsequently, she was trained in another capacity
and she volunteered to do work at the

stuffing envelopes etc.

in response to IDR1 Lists of Meals which had the following titles:

Date Description Purpose Attendees Amount This list was for all year January-December 20

Examples of Entries are as follows:

a a a ae

i

Total of Meals was § ,
family, included ;
“discuss charity project", while

. Trelated to recent Travel,

Of the

IDR1 requested minutes of all meetings of the board and in their response received / /

Discuss charity project
Discuss charity project
Discuss charity project
Discuss charity project
Discuss charity project
First time visiting  , Discussing
charity projects

Discuss charity project
Season Tickels
for

Discuss charity project
Discuss charity project
Take to Movies
Discuss charity project

days listed,

“Celebrating

listed only one attendee,
included a potential donor. As for purpose,
had purpose of “discuss
related to Rental and

Both $
Secretary

Both

Both

Both & farnily
Both &

Potential Donor
Both

Both &

Both

Both & family
Secretary &
President

included both and

of them had the purpose of

audit” or related,
Birthday” etc.

related to

, they provided

one set of minutes kept are at beginning of the year, for the annual board of director meeting. No notes
stating which charity project was discussed during the meal meetings was provided. According to the

“ecords these meals are paid for usually with

CCs and are part of expenses shown on the Form

[Page 10]

On //  inresponse to IDR1, PF provided a list of Auto related expenses:
1} Fuel, which showed Date Description Amount, example

i] Gaus
/ / Gas
i]

No indication of what car fuel was for; based on credit card statements also received on // able to
see chargesmadeon / & / charges made on card used by President.

/ f Paring . We know that was trip taking to for medical
/ i] tolls

This also included alist( / / ) of Toll Crossings which consisted of a print-out from their
The list does provide ihe dates between / - / / ,nameof bridge crossed, lists different vehicles
tags, and time they crossed.

3)List of Auto Expenses other than fuel — including receipts for both , and
. The PF purchased a new car in which they paid$ , . which they are currently
depreciating on the return.
Expenses shown on the return and in the books:
if S.. DMV Renewal
/ f/f S$... DMV Renewal
/f $s. B Service
/f $, . A Service
/ f Ss. Cert. Tire
// S$. A Service
// S$, . 4 Tire, Align.
/ f $l. B Service

Even though the organization has shown u vehicle on thet depreciation statement and Uicy purchased il
with funds of the organization, they have not provided any proof it is recorded in the name of the but
two autos can be shown to belong to ihe President.

Lastly, records, received // in response to IDR included statements from bank account and
from numerous credit cards. There was always two cards from each company in the name of the one
used primarily by the Secretary and one used by the President. These credit cards were used by the
Secretary and President for personal type expenses, inciuding golf course, grocery store, purchasing
travel for relatives, Legal Fees, on-line shopping, etc. The balance sheet also showed an equity account

“Director Distribution” with a balance of S$, which many of the credit card accounts had transactions
split with.

In response to IDR2, / / regarding an account ‘Director Distribution’, the representative
responded, " decided that some expenses were not related to the business as they are

trivial to their foundation’s overall mission. The expenses were categorized as director distribution, and
this is "account receivable” for the corporation."

[Page 11]

Subsequently, Secretary called my office on / / and explained that they used the organization's
credit cards for their personal expenses in order to help get bigger cash-back rebates. She then directs
personal expenses to be put into a “Director Distribution” account and treated as an accounts receivable
thal they eventually pay back. In IDR3 | asked If thls statement was accurate to please explain the
process for keeping track of what is personal usage and how and when the amounts are paid back.

On / / the representative’s response to IDR3,” The Founders' process of keeping track of
personal and business usage is to separate receipts and write a personal check to pay

credit card charges (for personal expenses if applicable) every month. You can see these payments
made by the Founders’ personal accounts under GL account

a [he Founders hired in to correct and keep accurate accounting of the
The Founders have designated 4 great many expenses as “{drector (istribition" even if such
expenses were relaled to a charily project.

b. The Founders pay the amount under “account receivable". However, currently there is an
account payable of $8, because the Founders have personally contributed $ into
from to ,butonly"$S  , “was reported as revenue.

i. fn , the Founders personally contributed $ into and it was reported by the
Foundation as "$ “in revenue.

ii. [In , the Founders personally contributed 3, into and was reported by the
Foundation as "$ “in revenue

tii. In , the Founders personally contributed $ into and $
reported.”

' was

In review of the response provided by the representative, the account shown on the books as
GL account isa personal checking account, which is shown to have made payments to
some of the various Credit Card accounts totaling$ , . throughout the year. This account carried on
the GL is the only evidence received from the PF, no copies of the statements for this account was given.

The payments made on all Credit Card accounts together out of the Checking totaled

, . and after this amount was paid during the year the balance remaining In the Director
Distribution account to which the = moved personal expenditures was $ , | . This account was
not shown on the balance sheet as a receivable but rather as an equity account. It was not shown at all
on the Form

As for an accounts receivable, the year under examination there was no accounts receivable and the
Director Distributions has been shown as an Equity Account.(See GL Documents Received / / ) The

has not provided any documentation to support any notes receivable or proof of amounts due from
prior years.

The Sceretary indicated that the basis for doing this with the Credit Card accounts was in order to get the
cash-back rebates which would enable the io have more funds in which to utilize for exempt purposes.
The total number of Rebates reported as otner income in either the books or the return were from the
Credit Cards for$ , . none reported from the Credit Cards for which the
used for part of the year.

[Page 12]

There was also a Check # which was written to Secretary for S$, . from the
Checking Account, with a memo notation of :Adv. from “on the check. The check was shown
inthe books asa$ , deduction from the total amount contributed from the President anda$ ,

deduction from the total amount contributed from the Secretary. [he amounts reflected on the
return is after this deduction. When asked about this check, / / in response to IDR4, the stated,

“In , the Founders, on behalf of , donated personal cash$, to a foreign
charitable organization. Receipts written in are provided on google drive. Thus,
wrote a check # to reimburse herself for the donation. These organizations are:

' and . The Founders advanced these
funds to the charitable organizations, then were reimbursed from the for the charitable
donations by ” The check was written lo on ff. Thee list of
donations provided in response toIDR1 on // discussed ahave indicates that cash payments made
lo some of hese enlittes were made $, . on // and$. // and$S . on //
And the total donations on the listis$__, . . (See list above).

LAW:

Section 501(c)(3) of the Code provides, in part, exemption from federal income tax to organizations
that are organized and operated exclusively for religious, charitable, scientific, literary, or educational

purposes, as long as no part of the organization’s net earnings inures to the benefit of any private
shareholder or individual.

Federal] Tax Reguiations (Regulations) Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt
as an organization described in section 501(c)(3) of the Code, the organization must be both
organized and operated exclusively for one or more of the purposes specified in that section. If an
organization fails to meet either the organizational or operational test, it is not exempt.

Regulations Section 1.501(c)(3)-1(c)(1} states 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 exempt purposes specified in Section 501(c)(3) of the Code. The Regulations further
clarifies that an organization will not be regarded as operated exclusively for exempt purposes if more
than an insubstantial part of its activities is not in furtherance of exempt purposes.

Regulations Section 1.501(c)(3)-1(c)(2) further specifies 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.

Regulations Section 1.501(c)(3)-1(d)(1)(ii) provides that in order to meet the operational test, an
organization must serve a public purpose rather than private interests. Thus, the organization must
establish that it is not operated for the benefit of private interests such as designated individuals, the
creator or his family, or the persons who directly or indirectly contro! the organization.

[Page 13]

Regulations Section 1.501{a)-1{c) defines private shareholder or individual within this section 501 as
persons having a personal and/or private interest in the activities of the organization.
section 501(c)(3) of the Code.

While the provision speaks of "net earnings,” it is not interpreted in a strict accounting sense to mean the
remainder after expenses are subtracted from gross earnings. Any unjust enrichment, whether out of gross or
net earnings, may constitute inurement. See People of God Community v. Commissioner, 75 T.C. 127 (1980).

In Better Business Bureau of Washington D.C., inc. v United States, 326 U.S. 279, 283 (1945), the
Supreme Court held that the presence of a single non-exernpl purpose, if substantial in nalure, will
desiroy the exemption regardless of the number or importance of truly exempt purposes.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. C.1.R., T.C. Memo. 1986-348, the Tax Court upheld the
Service's position that a foundation formed to aid coma victims, including a family member of the founders,
was not entitled to recognition of exemption. The Court found that the family coma victim was a substantial
beneficiary of the foundation's funds. It also noted that such distributions relieved the family of the economic
burden of providing medical and rehabilitation care for their family member and, therefore, constituted
inurement to the benefit of private individuals.

In Spokane Motorcycie Club v. U.S.,222 F. Supp F. Supp.151 (E.D. Wash. 1963) it was found that since the
profits of the club inured to the benefit of private individuals, the club members, the taxpayer was denied
exempt status. The Counsel for plaintiff arqued that the amount involved in this case was de minimis;
however, the court found that the organization was not operated exclusively for recreation, pleasure, charitable

and other nonprofit purposes and that part of the earning of the organization did inure to the benefit of private
individuals.

The court found that if any part of the net earnings inure to the benefit of the private individuals, the
organization's tax-exempt status will be revoked.

Government's Position:

A private foundation must not be organized or operaled for Whe benefit of private individuals. No part of the nel
earnings of an organization organized per IRC 501(c)(3) of the Internal Revenue Code may inure to the benefit
of any private shareholder or individual. A private shareholder or individual is a person having a personal and
private interest in the activities of the organization.

A private foundation is prohibited from allowing more than an insubstantial amount of private benefits, including
non-monetary benefits, to individuals or organizations. The intent is to ensure that a tax exempt organization
serves a public inleresl, nol a privale irilerest.

Based on Form information, during the year under examination, ending : , the!
stated that they conducted direct activities which served public interest out of their corporate place of business,
their home, such as fostering cats and dogs, when evidence showed the Secretary received training for the
activity, picked up a dog, haditfor days then returned it.

They also indicated the President hosted practices for an he plays in, yet the documentation failed to
support this. No contemporaneous records of when practices were held at their home, documents provided

[Page 14]

suggested a long time had occurred since the group had last seen each other and that perhaps he travels to
other places to practice and or perform or that these are the activities of another (c)(3) organization.

It is clear that the President enjoys playing the in this , but this is not a charitable

activity carried on by the Without documentation to support when the home was used for

practices by the members of the orchestra and without contemporaneous records of use of the auto

for travel to and from performances and practices outside of the home, his use of their home to

practice and the cost of any materials or equipment is persona! and should not be the expense of the
but rather an activity inuring to the benefit of the President.

[he ised these aclivilles which consisted of an class being laughlin thelr home — hrs. per week to pay
for the persona! residence expenses such as:

« Personal gardener
House cleaner

Utilities

Insurance on their home
Telephone

No allocation was done and not all the activities are charitable., therefore expenses believes belong to the
are actually personal expenses of the individuals.

They also provided assistance to the sister of the Secretary, who is disabled by driving her to the doctor,
taking her grocery shopping weekly, making purchases for her, etc. Providing assistance to a relative is
inurement and is not an exempt activity per IRC501(c)(3). The use ofthe 3 assets is for personal purposes.

The <ept logs of auto expenses by the individuals which consisted of a list of fuel purchases, list of
auto repairs, list of toll crossings, list of toll and parking expenses, but failed to identify how these items
are for purposes. The auio expenses are in relation to the individual’s personal autos and no
documentation has been offered to show how these are related to the purposes and not for the benefit
of the individuals, they purchased an automobile in , but no proof of any auto being owned by the
was found. It was noted that the President was owner of several of the vehiclas for which repairs were
made. No calculation was done for personal use; therefore, auto expense is personal,

Documentation establishes that the organization incurred the following unreported expenses (omitted from

Form ) that benefited of the Secretary, President, and their family members:
e Season tickets to for
e Attornoy fees not related to
e Trips- to perform in reunion events in
e Large check written to Secretary
« Usinc credit cards for personal purchases

The President and Secretary were aware the funds were used for personal expenses, as the checks and the
sredit cards purchases were signed by and

[Page 15]

P
F
Ange ns a

4

2 és

“oaths Ate Bes
BE eR se:

As for the rental properties the = maintains, although the expenses may not be charged directly to the tenant,
they are paid out of the rental income. There is no evidence that the rental properties are charitable activity but
rather an investment to the

With regards to the identified travel, expenses were in question. The Secretary and President took trips back
to and on their vacations. They went back to the place they came from where they had family.
But because the — did not keep records that identify during the year under examination, when they volunteer,
on what days, what projects they are monitoring, how and when they are making the cash and non-cash
donations, it is not clear what accounts the cash came out of. Also, the non-cash donations that they provided
receipts for include video games. It is unknown how the underprivileged utillze the video games. It is unclear
how much of the expense of the travel is related to = purpose and how much is personal.

In addition. the Secretary recelved a checkfor$ ,  . Itwas memo notated “Adv from
foundation". The reason given for the check and the way if was memo notated along with how it was recorded
in the books do not agree, it appears to be personal benefit to the Secretary.

The President and Secretary, disqualified persons (“DP”), used __ credit cards for personal expenses; use of

credit is a self-dealing transaction. They claimed to have put these transactions into an accounts
receivable called “Director Distribution”. We also have concerns with how the Director Distribution was (not
reported) on Form return and how it was reported in the accounting records. Jid not report
Accounts Receivable from Disqualified Persons online in the year under exam or in prior years. We are
unable to verify whether the amounts owed tothe — were repaid and how they were characterized. This
amount serves a private benefit.

For the year ending , , the form listed $ , in total expenses and disbursements.
It is the government’s position that $ , of the funds inured to the benefit of the
governing body members and

The is not operated exclusively for charitable purposes if its activities are carried on in a manner that can
be classified as contrary to public benefit. As a result, the does not satisfy the operational test under
Section 501(c)(3) of the Code.

With — funds inuring to the private benefit of individuals and the failure to meet the operational test under
Section 501(c)(3) of the Code, the exemption should be revoked.

TAXPAYER'S POSITION:
The believes that husbands performing in is charilable activily of

The believes that fostering one dog for days and allowing an art teacher to teach class for
hrs. per week in their horne allows the v pay for most of the expenses of their personal
residence.

With regards to using the Credit Cards for personal usage, " decided that some
expenses were not related to the business as they are trivial to their foundation's overall mission. The
expenses were categorized as director distribution, and this is "account receivable” for the corporation."

[Page 16]

They also stated:

The Founders’ process of keeping track of personal and business usage is to separate
recelpts and write a personal check to pay credit card charges (for personal
expenses if applicable) every month. You can see these payments made by the
Founders’ persona! accounts under GL account

a. The Founders hired in to correct and keep accurate accounting of
the . The Founders have designated a great many expenses as "Director
Distribution" even if such expenses were related to a charity project.

b ‘he Founders pay the amount under “account receivable". Llowever,
currently there is an account payable of $s, because the Founders have
personally contributed $ =, into from to , but only
" ,  " was reported as revenue.

i. In , the Founders personally contributed $ , into and
it was reported by the as "$ "in revenue.

ii. In , the Founders personally contributed $_, into and
was reported by the as "$ "in revenue.

iii. In , the Founders personally contributed $ ; into and

$$, was reported.

They do not believe they should be revoked.

Conclusion:

exempt status with the State of was revoked for years - because the
State determined the organization was not operating exclusively in a charitable manner.

The — did not keep contemporaneous records that includes substantiation for the projects they support,
travel, and donations given.

The President and Secretary have not established that they repaid the for personal usage of the

credit cards. The Checking Account was used to repay % of the credit card debt. At the end of the
year, the books still identified an unpaid balance of $ , __ in the “Director Distribution” account, which was
noi classified as a receivable on the balance sheet.

Personal use of the assets inured to the benefit of , President, CEO, Director and

, oecrelary, CFO, Director in violation of exernplion requirernents under Section 50 1(c)(3) of
the Code and are further characterized as self-dealing transactions per Code section 4941.

failed to satisfy the operational test under Section 501{c)(3) of the Code.

Because failed to satisfy the operational test and the organizations funds inured to the benefit
of individuals, exemption under Section 501(c){3) of the Code should be revoked as of / /

[Page 17]