Determination Letter
202238010
Released September 23, 2022
Revocation
Transcribed from scan
IRS revokes a "flow-through charity" used as a vehicle in a promoter's abusive donated-LLC-interest charitable-giving tax scheme
Apply this to your situation
This page covers one taxpayer's ruling from 2022, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
Transcribed from a scanned original: the IRS released this determination as an image-only PDF. The full text below is a machine transcription, proofread against the scan. Check the original PDF before quoting exact language.
View official IRS release (PDF)
Plain-English summary
A nonprofit obtained 501(c)(3) status using a short-form application (Form 1023-EZ) and then operated as a "flow-through" for donated limited liability company (LLC) interests. On audit, the IRS found the organization was one piece of a promoter's abusive charitable-giving tax scheme. Wealthy participants placed assets into LLCs, "donated" non-controlling LLC interests to this charity while keeping exclusive management control (and in several cases borrowed the assets back at favorable interest rates), and then claimed large charitable-contribution deductions based on appraisals the promoter himself prepared and signed. The IRS treated these transactions as the same as, or substantially similar to, the listed transaction described in Notice 2004-30 (shifting the tax on pass-through income to a tax-exempt party while the donor keeps the economic benefit). The IRS also found that the charity's own "grants" mostly went to schools for specifically named students who were relatives or dependents of the LLC donors, and once to a church that shared a donor's last name, so the money flowed back to insiders' families. On those facts the IRS concluded the organization was not operated exclusively for exempt purposes: it participated in the tax-shelter scheme, it served as a vehicle for the promoter, and its net earnings inured to private individuals, which is absolutely prohibited under section 501(c)(3). The IRS revoked the exemption retroactively to the organization's first date of exemption and told it to file corporate income tax returns (Form 1120). A federal court had already permanently enjoined the promoter from organizing or marketing this and substantially similar arrangements.
Ruling snapshot
- Question: Should the organization's 501(c)(3) exemption be revoked because it operated as a conduit in an abusive donated-LLC-interest charitable-giving scheme and let its net earnings inure to insiders' relatives?
- Outcome: revocation (final adverse determination, retroactive; taxpayer waived its section 7428 right to contest)
- Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (a)(2), (c)(1), (c)(2), (d)(1); Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Notice 2004-30
Full text (IRS public release)
OCR transcription of a scanned document, proofread per house rules. Redactions in the original are shown as blanks (______). Obvious scanning misreads were corrected and the repeated page-header/footer furniture of the Form 886-A was normalized; wording is otherwise verbatim. Unreadable spots are marked [illegible].
Internal Revenue Service Department of the Treasury
Independent Office of Appeals Date: JUN 28 2022
Person to contact:
Name:
Employee ID:
Telephone:
Number: 202238010 Fax:
Release Date: 9/23/2022 Hours:
Employer ID number:
Uniform issue list (UIL):
501.03-00
501.03-30
Certified Mail
Dear ______:
This is a final adverse 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 Section 501(c)(3)
of the Code.
We made the adverse determination for the following reasons:
You failed to operate exclusively for exempt purposes as required under Section 501(c)(3) of the Code because
your net earnings inured to the benefit of private shareholders or individuals. In addition, you were primarily
for the benefit of the private interests of designated individuals rather than serving public interests.
You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail
your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and
instructions by visiting our website at www.irs.gov/forms or by calling 800-TAX-FORM (800-829-3676).
You've agreed to waive your right to contest this determination under the declaratory judgment provisions of
Section 7428 of the Code.
We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in
Notice 437.
If you have questions, contact the person at the top of this letter.
Sincerely,
______
Enclosures:
Letter 1371-A (Rev. 10-2021)
Catalog Number 62960H
Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities
Date: April 20, 2021
Taxpayer ID number:
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
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue Code
(IRC) Section 501(c)(3).
If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods
above.
After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.
If you disagree
1. Request a meeting or telephone conference with the manager shown at the top of this
letter.
2. Send any information you want us to consider.
3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
send additional information as stated in 1 and 2, above, you'll still be able to file a protest
with IRS Appeals Office after the meeting or after we consider the information.
The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.
Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn't apply now that we've issued this letter.
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.
Enclosures:
Form 886-A
Form 6018
Exhibits #1, #2, and #3 to the Form 886-A
Copy of Determinations File for ______
Publications 892 and 3498
Sincerely,
[illegible signature]
John A. Matias
Supervisory, Internal Revenue Agent for
Sean E. O'Reilly
Director, Exempt Organizations
Examinations
Letter 3618 (Rev. 8-2019)
Catalog Number 34809F
Form 886-A (May 2017) Explanations of Items Department of the Treasury — Internal Revenue Service
Name of taxpayer: ______ Tax Identification Number (last 4 digits): ______ Year/Period ended: ______
Issues:
1. Whether the tax-exempt status for ______ (henceforth referred to as
"organization", "the organization", or "______") should be revoked for failure to operate
exclusively in furtherance of exempt purposes.
2. Whether Organization's exempt status should be revoked retroactively to ______,
the first date that the organization failed to qualify for exemption.
Facts:
Form 1023:
The Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section
501(c)(3) of the Internal Revenue Code, was filed by the organization on ______. The
application was signed by ______ as the Secretary/CFO/Director. The Form 1023 provides that
the organization was incorporated in ______ on ______. The Form 1023 provides that
the purpose of the organization is charitable.
Exemption Letter:
The Internal Revenue Service (IRS) issued L5436 to the organization on ______ granting
the organization tax-exemption under Internal Revenue Code (IRC) Section 501(c)(3) effective ______.
Board:
The board of directors for the organization is listed as follows on the Forms ______ for the years
ended ______ and ______:
______ — President
The board of directors for the ______ period is listed as follows:
______ — President
______ — Director
______ — Director
Forms ______:
The organization filed Forms ______ for the tax years ______, ______, and ______ with the following
amounts reported:
Revenues
Contributions $______ $______ $______
Investment Income $______ $______ $______
Total $______ $______ $______
Expenses
Grants $______ $______ $______
Bank Fees $______ $______ $______
Total $______ $______ $______
Based on the expenses reported for grants for each year, charitable grants for the ______,
______ and ______ years were ______%, ______% and ______% respectively when compared to the revenues reported
by the organization.
[Page 1]
Assets
Cash $______ $______ $______
Other Assets $______ $______ $______
Total $______ $______ $______
Liabilities
Total $0.00 $0.00 $0.00
Based on the assets reported on the return, other assets (donated LLC interests) accounted for
______%, ______% and ______% of all assets of the organization for the ______, ______ and ______ years
respectively.
Forms ______ and Schedules:
The organization provided Forms ______ and Schedules for each LLC for which it owns donated
interest. The documentation provided the following information:
[Table: LLC Name | Form ______ Preparer | Profit and Loss Allocation (Per ______) | Ownership (Per ______)
— column values redacted in the original.]
For all of the LLCs who donated interests to the organization, ______ was the Form ______
return preparer. In each instance, the LLCs reported that ______ owned ______% of the interest in the
LLCs and that ______% of the LLC profits and losses were allocated to ______.
Cash Inflows and Outflows:
The organization provided ______ statements (Acct. #______) in response to the
Government's request for the banking statements of the organization. The statements provided
the following cash inflows and outflows for the year of examination:
[Monthly table, January through December, with Totals — dollar amounts redacted in the original.]
The ending balance in the account as of ______ was $______.
[Page 2]
The organization also provided statements from ______ (Acct. #______) and ______
(Acct. #______). The ______ account showed an initial balance of ______ with interest accrued for the
year of $______ resulting in an ending balance of $______. The organization only provided statements for the
______ account for the period beginning ______ through ______.
The account showed the following inflows and outflows for the year:
Month Cash In Cash Out
July $______ $______
August $______ $______
September $______ $______
October $______ $______
November $______ $______
December $______ $0.00
Totals $______ $______
The organization also provided copies of checks for the expenditures of $______. The checks
were made out as follows:
* Check # ______. Made out to ______ for $______. ______ was
included on the memo line.
* Check # ______. Made out to ______ for $______. Tuition
for ______, Student ID: ______ was included on the memo line.
* Check # ______. Made out to ______ for $______. Student ID: ______, Fall ______,
was included on the memo line.
The total for all checks issued was $______ which matches the amount reported by the
organization for grants on the Form ______ and also matches the total expenditures of the
organization for the year.
LLC Cash Distributions to Organization and Subsequent Charitable Donations:
The LLCs made cash distributions to the organization totaling $______ in the year of
examination. Of the total amount, $______ was distributed to the organization for "grant
making" purposes in the same year. The organization issued checks as outlined above totaling
$______. The cash distributions and subsequent checks were received and issued as follows:
[Table: LLC | Amount Distributed | Date of Distribution | Amount Paid Out | Payee | Date of Payment | Difference
— column values redacted in the original.]
The remaining distribution made to the organization of $______ was made by ______ on
______. The related payment from the organization for "grant making" was not made during
[Page 3]
the year of examination. However, the amount distributed is very close to the amount distributed
by the LLC on ______ for tuition for ______.
______ of the "grants" paid out by the organization were paid to educational institutions. For
both of the payments to educational institutions, the payments included:
. referenced student ID numbers,
. payments were made in the name of a specific student (______ and ______)
. Payment was issued for a specific semester (Fall ______).
The remaining "grant" was paid out to a church with the name ______ in the memo line which is the
same last name as the original donor for the LLC who made the distribution to ______ for the grant.
Information Document Request #3:
The Government issued IDR #3 to the organization in order to determine the relationship, if any,
between the LLC managers and grant recipients for the payments directed to the ______
(______) and (______). The organization provided the
following information in response:
* Payment made to ______
o ______ is not aware of a relationship between ______ and ______
o ______ was not given any specific directions when giving and does not know how ______
was selected as a grant recipient.
o ______ is a flowthrough charity. All ______ does is ensure that the recipient entity
is an IRC Section 501(c)(3) charity.
* Payment made to ______
o Individual ______ directed ______ to make the grant
o ______ are not aware of a relationship between ______ and ______
o ______ was not given any specific directions when giving and does not know how ______
was selected as a grant recipient.
o ______ is a flowthrough charity. All ______ does is ensure that the recipient entity
is an IRC Section 501(c)(3) charity.
______ and ______ Filing Research:
In order to determine whether ______ and ______ are related to ______ and ______
respectively, the Government conducted research on ______ as well as internal IRS
systems (Form ______ research). The research provided the following:
______ and ______:
* The research conducted on ______ is attached to this report as Exhibit #1. The
research shows that ______ is listed as a relative of ______ and vice versa on their
respective reports.
[Page 4]
* Forms ______ — The Form ______ filed by ______ for the period ended ______
is attached as Exhibit #2 shows that ______ listed ______ as a dependent on the
return.
______ and ______:
* The research conducted on ______ is attached to this report as Exhibit #1. The
research shows that ______ is listed as a relative of ______ and vice versa on their
respective reports.
* Forms ______ — The Form ______ filed by ______ for the period ended ______
is attached as Exhibit #3 and shows that ______ listed ______ as a dependent on
the return.
______ and ______:
* The research conducted on ______ is attached to this report as Exhibit #1. The
research shows that ______ is listed as the manager of ______ which is consistent
with the documentation provided by the organization.
______ and the directed donation for ______:
* The research conducted at ______ did not show any ties between any of the LLCs and ______
* The organization was questioned as to how ______ was able to direct any disbursements
to ______ being that he is not listed as a manager for any of the LLCs. The
organization was not able to provide a response as to how or why ______ was able to
direct ______ to make the payment to ______ in the name of ______.
Organizational Books and Records:
The government requested copies of the organizational books and records in the information
document request (IDR) #1. The following records were requested.
* General Ledger
* Electronic records backup (request was for ______, or ______)
* Schedules, worksheets, supporting documentation, or other documentation used to prepare
Form ______
The organization did not provide any formal books and records in response to the document
request. The lone item provided in response to the request was a list of contributions for the year
for each LLC which donated interest to the organization.
As no formal books or records were provided, the detail behind all revenue, expense, asset, and
liability reporting on the Form ______ could not be traced to the books and records of the
organization.
[Page 5]
Donated LLC Interest:
The organization provided operating agreements and assignment agreements for each LLC that
donated LLC interests to the organization. The documentation provided the following information
for each organization.
[Table: LLC Name | Original LLC Donor / LLC Manager | Donated Interest | ______ — General/Membership
Units — column values redacted in the original.]
How LLC Interest is Donated to Organization:
In all instances where LLC interest were donated to the organization as outlined above, the donors
signed an assignment agreement. The assignment agreements provide the following:
"In consideration of love and affection, the undersigned, ENTER NAME OF DONOR does hereby,
sell, assign, transfer, set over, and deliver, unto ______, a 501(c)(3) public
Charity, (______) units of LLC interest in the total LLC assets, in ENTER NAME OF
LLC, an ENTER STATE LLC.
The acceptance of this LLC interest subjects ______, to all terms, conditions,
and provisions of the LLC agreement executed by the members of the ENTER NAME OF LLC in
ENTER DATE."
Review of Appraisals and Forms 8283:
The organization provided appraisals and Form 8283, Noncash Charitable Contributions, for the
assets which were placed into the LLCs for which it claims own interests. The appraisals were
reviewed to determine the appraiser and the methodology used for the appraisal. The Forms 8283
were reviewed to verify the appraisal amount was properly reported and to identify the individual
who signed the F8283. The review provided the following information for each LLC:
[Table: LLC Name | Asset | Stated FMV | Value Prepared By | Appraiser | Date Appraised | Form 8283 Date |
F8283 Value — column values (all "LLC Interest" rows) redacted in the original.]
[Page 6]
The appraisals provided by the organization for the donated LLC interests were prepared by
______. The method of determining the value of the donated LLC interests is the same in
all of the appraisals, the appraiser reduces the "FMV" of the assets for lack of control (initial value
is reduced by ______%) and lack of marketability (remaining value is reduced by ______-______%) in all
instances.
It is important to note that the amounts determined for ______ was used in reporting
the value of the assets as reported on the Form ______ of the organization for the period ended
______ even though the appraisal was not completed until the year ______. As such, it
appears as though the appraisal amounts were determined by ______ prior to the preparation
of the appraisal reports and provided to ______ for preparation of the annual Form ______ and
reporting on the organizational books and records. Additionally, the F8283 for ______
was completed on ______, full years before the appraisal was completed.
Promissory Notes:
The organization provided copies of promissory notes from the LLCs which detail loans made from
the assets of each LLC to the original donors who placed the assets into each LLC and later
"donated" their interest in the LLCs to the organization. The review of the promissory notes
provided the following for each organization where a loan was present:
[Table: LLC | Borrower | Amount | Stated FMV of All LLC Assets | Date of Note | Interest Rate (% Per Annum) |
Due Date — column values redacted in the original.]
In ______ out of the ______ instances where LLC interests were donated to the organization, the original
donor took out a loan from the LLC with repayment periods ranging from ______ to ______ years. In two
instances (______ and ______) the loan amounts were ______% of the total assets
placed into the LLCs.
Review of Operating Agreements:
The organization provided LLC operating agreements for each of the LLCs which donated
interests to ______. The operating agreements were reviewed for form and content. Overall, there
were two types of operating agreements provided. Type 1 were provided for ______;
______, and ______. Type 2 agreements were provided for ______,
______, and ______.
Noteworthy Language from Type 1 Operating Agreements:
[Page 7]
The operating agreements do not include any noteworthy language with respect to limitations or
prohibitions on ______ in the operation of the LLCs. The operating agreements also have little or no
specific language with respect to the operation of the LLCs, their purpose, activities, or
interactions with their members.
The operating agreements provided for these LLCs appear to be Articles of Incorporation where a
title was added to the Articles for "Operating Agreement of NAME OF LLC". These agreements
provide only the following information related to the organization of the LLCs:
* Offices
* Meetings
* Committees
* Officers
* Resignations
* Certificates Representing Membership
* Statutory Notices
* Fiscal Year
* Company Seal
* Books and Records
* Indemnification of Officers, Employees, and Agents; and
* Amendments
The sole pertinent section contained in the operating agreements is Article VI, Certificates
Representing Membership. The Article contains the following language:
Section 1. Form of Certificates - Each Member shall be entitled to a certificate or certificates in
such form as prescribed by the Members and by any, applicable statutes, which Certificate shall
certify the interest of the Member in the Company. The Certificates shall be numbered and
registered in the order in which they are issued and upon issuance the name in which each
Certificate has been issued together with the interest in the Company represented thereby and the
date of Issuance shall be entered in the Membership book of the Company by the Secretary or by
the transfer agent of the Company. Each certificate shall be signed by the Operating Manager and
countersigned by the Secretary and shall be sealed with the Company Seal or a facsimile thereof.
The signatures of the officers upon a certificate may also be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the Company itself or an
employee of the Company. In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer before the certificate is issued,
such certificate may be issued by the Company with the same effect as if the officer had not
ceased to be such at the time of its issue.
Section 2. Record Date for Members - For the purpose of determining the Members entitled to
notice of or to vote at any meeting of Members or any adjournment thereof or to express consent
or dissent from any proposal without a meeting, or for the purpose of determining the Members
entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any
[Page 8]
other action, the Members may fix, in advance, a date as the record date for any such
determination of Members. Such date shall not be more than ______ nor less than ______ days before the
date of any meeting nor more than ______ days prior to any action taken without a meeting, the
payment of any dividend or the allotment of any rights, or any other action. When a determination
of Members of record entitled to notice of or to vote at any meeting of Members has been made as
provided in this Section, such determination shall apply to any adjournment thereof unless the
Members fix a new record date under this Section for the adjourned date.
Section 3. Members of Record - The Company shall be entitled to treat the holder of record of any
Membership certificate as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such membership interest on the part of
any other person whether or not it shall have express or other notice thereof, except as otherwise
provided by the laws of the State of its organization.
Noteworthy Language from Type 2 Operating Agreements:
Section 5.2 No Management Responsibility - At no time during the term of the company shall any
general member have any authority or right to take part in the management of the business or
transact any business for the company. All management responsibility is vested absolutely and
exclusively in the managers. Any action by any general member inconsistent with this Section 5.2
shall subject such acting general member to the provisions of Section 5.3 hereof.
Section 5.3 No Authority to Act — Any action of a general member that is inconsistent with the sole,
exclusive and absolute right and authority of the managers shall:
a) Constitute a breach of this agreement on the part of the general member so acting, and
b) The manager shall provide such general member with notice of the breach. Such general
member shall have ______ days after he receives such notice of the breach to cure the breach.
If the breach is not cured within such ______ day period, such general member shall be liable
for any and all damages that may occur to the company and all of the other members, but
any such liability shall not extend to any creditor of the company.
Section 8.1 Distribution of Net Cash Flow and Net Proceeds — Net cash flow and net proceeds
shall be distributed at such times and in such amounts as the manager, in its sole discretion, shall
determine, taking into account the reasonable business needs of the company. Provided, that not
less than ______% of the net cash flow and proceeds shall be distributed each year beginning in the
third year of existence of the company to the members. The manager's determination regarding
whether or not to make distributions in excess of the necessary distribution and the amount of
distributions to be made shall be final and binding on all members. Such distributions shall be
made to each member in accordance with such member's interest in the company.
Charges from ______ and ______:
The organization provided copies of ______ that the organization provided to each LLC
on an annual basis. The letters provide information to each LLC on:
[Page 9]
* Payments due to the LLCs for notes payable
* Payments due to the LLCs for past due note balances not made in prior years
* Minimum payments due to ______ for support of charitable missions based on cash flows from
the LLCs
* Payments due to the LLCs for interest on notes payable
* Payments due to the LLCs for past year interest on notes payable
* Payments due to ______ for legal fees ($______ per annum)
* Payments due to ______ for accounting fees and tax preparation ($______ per annum)
Specific items of note in the ______:
* ______ was notified by the organization that no charitable distributions were
required by the LLC as the asset placed in the LLC was land which was awaiting sale.
* ______ was notified of its payment requirements for notes payable where ______
only note instrument was provided in response to the information document requests.
* ______ and ______ were informed in ______ that payments to ______
were still being requested (at $______ per annum) for legal work but that ______ was unsure as
to whether ______ would be able to fulfill that obligation going forward. ______ stated that
the LLCs should use their own discretion as to whether to remit payments for ______.
Initial Interview:
An initial interview was conducted with ______ (Director) and ______ (POA). The
following information was provided by the organization during the interview:
* The organization was originally started in ______. In ______, ______ started working with
______ and decided to use the organization as a way for his clients (from
______) to give to charity.
* That the organization serves as a flow-through for ______-______% of LLCs earnings each year.
* That ______ serves as a conduit for charitable giving which allows flexibility for its donors.
* That the organization does not maintain books as there are usually less than ______ total
transactions per year.
* ______ and ______ (Board Members) are employees of ______.
* That ______ has no involvement in the determination of selection of grantees as long as the
grantee is a 501(c)(3).
* That assets placed into the LLCs can be sold but the proceeds from the sales must remain
in the LLC.
* That the assets placed into the LLCs only become the sole property of ______ after ______ years.
About ______:
On the ______, Plaintiff, ______ filed a Complaint for Permanent Injunction
and Other Relief against ______, Defendant. Per the complaint:
[Page 10]
1. From ______ to the present, ______ ("______") has organized, promoted, and
operated an elaborate—and bogus—charitable giving tax scheme throughout the United
States. Through this scheme, ______ creates an entity for each scheme participant and
advises them to transfer assets to the new entity. ______ then causes the participants to
purportedly "donate" or "assign" an interest in these entities to charities that ______ controls.
______ then "appraises" the purportedly donated interests in a manner that fails to comply
with the law and generally accepted appraisal standards. Finally, ______ prepares the
federal income tax return documents to claim the bogus charitable contribution deductions.
2. This entire tax scheme occurs only on paper. Participants never actually transfer or donate
anything to purported charities. In some egregious instances, participants claim
bogus charitable deductions for nonexistent, fictional assets that ______ fabricates.
3. Regardless of the purported form, ______ advises scheme participants to take unwarranted
tax deductions for charitable donations that ______ knows were never made, and, in some
instances, for assets that did not exist. ______ sells this scheme to the clients of financial
planners and Certified Public Accountants by misrepresenting his experience, his
credentials, and the merits of his charitable giving tax scheme. In return, scheme
participants pay substantial fees to ______ based on the purported value of the assets
initially transferred to the entities.
4. ______ charitable giving tax scheme has harmed the United States by depriving the
government of tax revenue. The IRS has identified specific transactions that, through ______,
cost the United States Treasury more than $______ million in lost tax revenue. And while the
IRS has assessed and will continue to assess scheme participants with significant tax
liabilities, it will likely never fully recover the monies bilked from the Treasury.
The United States brings this Complaint pursuant to 26 U.S.C. §§ 7402, 7407, and 7408 to
enjoin ______ and all persons and entities in active concert or participation with ______ from,
among other things, directly or indirectly:
a. Making or furnishing or causing another person to make or furnish a statement with
respect to the allowability of any deduction or credit, the excludability of any income,
or the securing of any other tax benefit, or otherwise providing tax advice, in
exchange for compensation;
b. Preparing (or assisting others in preparing) appraisals in connection with any federal
tax matter;
c. Acting as federal tax return preparers, or filing, assisting in, or directing the
preparation or filing of federal tax returns, amended returns, or other related
documents or forms for any person or entity other than his own tax returns; and
d. Organizing or assisting in the organization of a partnership or other entity, any
investment plan or arrangement, or any other plan or arrangement concerning
charitable contribution deductions.
[Page 11]
The United States also seeks to disgorge the ill-gotten gains that ______ derived from this
bogus charitable giving tax scheme.
Bogus Charities:
Since ______ has established at least ______ purported charities in (1) ______
and (3) ______ ("______") (collectively, the "______").
______ controlled all purported charities and operated them in the same manner.
According to their respective Articles of Incorporation, the ______ were purportedly
organized for charitable purposes. ______ submitted a Form 1023, Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code ("Tax
Exempt Status Application"), on behalf of each of the ______. The IRS granted the ______
tax exempt status based on the Tax-Exempt Status Applications that ______
submitted.
Over the years, ______ is listed on documents filed with the Secretary of State's
Office as an officer, treasurer, director, incorporator, or registered agent for the ______.
______ has also attempted to avoid IRS scrutiny by affiliating his parents or other
individuals with the ______ on filings with the Secretary of State's Office.
At all times, however, ______ controlled the ______ and was the only true officer
and director. The ______ had no employees.
On ______, ______ executed an agreement with the IRS on behalf of ______
retroactively revoking ______ tax-exempt status as of ______. The IRS concluded,
and ______ did not dispute, that ______ was not engaged primarily in activities for exempt
purposes, and its net earnings inured to the benefit of private individuals, i.e., him and his
family.
On ______, ______, on behalf of ______, stipulated to an entry of judgment against it in
U.S. Tax Court for past due taxes for ______ and ______. ______ owed taxes on its income
because it was not a tax-exempt entity.
On ______, ______ executed agreements with the IRS on behalf of ______
and ______ retroactively revoking ______ and ______ tax exempt status as of ______
and ______, respectively, because ______ used ______ and ______ as
tools for promoting, organizing, and executing his charitable giving tax scheme.
Bogus Charitable Transactions:
[Page 12]
Under the first step in ______ scheme, ______ creates a partnership or limited liability
company (the "Entity" or "Entities") for scheme participants. Regardless of their form, the
Entities are holding companies that exist solely to facilitate ______ scheme. ______
prepares and files all paperwork necessary to create the Entities, including the partnership
or LLC agreements.
Next, the scheme participants transfer "property" to the newly formed Entities using
contractual documents prepared by ______. Some participants, at ______ direction, claim to
transfer cash or real property to the Entities while others purportedly transfer backdated
promissory notes and fabricated intellectual property. Over time, ______ varied how he
executed this scheme step, but the variations were meaningless from both economic and
federal income tax perspectives.
______ then drafts the paperwork necessary to cause the scheme participants to "donate" or
"assign" an interest in the newly created Entities to one of the ______.
Some participants purport to donate a ______% non-controlling interest in their Entity, while
others a ______% interest. In some cases, ______ misrepresents the "transaction" to the
participants, telling such participants that they were "contributing" a ______% non-controlling
interest, when, in fact, ______ completed the transactional paperwork to show a ______%
"contribution."
______ then causes the ______ to send contemporaneous written
acknowledgments of the purported contributions to the scheme participants.
______ appraises each "contribution" to facilitate the bogus charitable deductions. Not only
are the appraisals baseless, but ______ is prohibited by law from providing them.
______ completes, signs, and provides to each scheme participant IRS Forms 8283,
Noncash Charitable Contributions ("Form 8283"), which are necessary to claim a non-cash
charitable contribution of more than $______. ______ sends the scheme participants the
following instructions: "Please find IRS Form 8283 which has been completed and signed.
Please attach the Form 8283 with your [tax year] Form ______. After you have done this, then
simply file the Return .... Use the value of the gift on Form 8283 (page 2 Part I) as a
DEDUCTION on SCHEDULE A-ITEMIZED DEDUCTION -CHARITABLE
CONTRIBUTION."
In following ______ instructions, the scheme participants then attach the prepared
Form 8283 to their personal federal income tax returns to claim unwarranted charitable
deductions. The Forms 8283 are based entirely on the bogus appraisals that ______
prepares to facilitate this scheme.
[Page 13]
On paper, it appears that the participants donate something of value to the ______.
______ repeatedly advises the scheme participants to take actions to give his scheme
substance. This was mere window dressing, however, designed to disguise ______ tax
shelter. In reality, the scheme participants retain complete control over their Entities and
their Entities' assets and continue to use the purportedly donated assets as if nothing ever
happened.
After executing the "transaction," the ______ do not take dominion or control over
the Entities or their assets. The ______ are simply vehicles through which ______
executes his elaborate charitable giving tax scheme.
Misrepresentation of Structure by ______:
______ told potential participants that they could establish Donor Advised Funds ("DAFs")
through the ______, but this was a false statement.
The Internal Revenue Code defines DAFs as a fund or account "(i) which is separately
identified by reference to contributions of a donor or donors, (ii) which is owned and
controlled by a sponsoring organization, and (iii) with respect to which a donor ... has ...
advisory privileges with respect to the distribution or investment of amounts held in such
fund or account by reason of the donor's status as a donor."
DAFs are not standalone entities. Each DAF is established by a sponsoring organization,
which must be an Internal Revenue Code § 501(c)(3) tax exempt organization. The
sponsoring organization creates a separate DAF for each donor. The donor then makes a
tax-deductible charitable contribution to the donor's DAF. The donor cannot use or
otherwise access the donated property because the sponsoring organization maintains
complete control over the DAF and its property. The donor retains "advisory privileges"
regarding future DAF distributions, but the sponsoring organization is not required to honor
the donor's requests and may only distribute DAF property to other Code § 501(c)(3) tax
exempt entities. After a donor makes a distribution request to a DAF, the DAF will make a
distribution from the assets that the DAF controls after performing due diligence to ensure
the intended recipient is a qualified charity.
By advising potential participants that they could establish DAFs through the ______,
______ misrepresented the structure of his illegal tax shelter. The ______
did not qualify or operate as sponsoring organizations, and the Entities established
did not qualify or operate as DAFs.
To be a sponsoring organization, the ______ were required to inform the IRS that
they intended to be sponsoring organizations on their Tax Exempt Status Applications.
They did not. To be a sponsoring organization, the ______ were also required to
[Page 14]
describe its DAF program and the written materials provided to donors on the Tax Exempt
Status Applications. They did not.
To be a sponsoring organization, the ______ were required to report certain
information on the annual "tax return" for tax exempt entities-Form ______
("______"). They did not. Indeed, on the Forms 990, Part
IV, Question 6, ______ stated that the ______ did not "maintain any donor advised
funds or any similar funds or accounts for which donors have the right to provide advice on
the distribution or investment of amounts in such funds or accounts."
______ completed the Tax Exempt Status Applications and Forms ______ and
knew that the ______ did not report the required information to be a lawful
sponsoring organization. Therefore, ______ knew that the ______ were not
sponsoring organizations.
To establish a DAF, the ______ were required to take control of the purportedly
contributed Entity interests. As explained throughout this Complaint, the scheme
participants never gave up control of the purportedly contributed assets, which ______ knew.
If scheme participants actually wanted to make a donation to a charity through a ______
(which many participants did not do) ______ required them to send to him a
"Disbursement Request Form" along with a check made out to one of the ______.
These "Disbursement Request Forms" merely gave the appearance of a valid DAF, but a
valid DAF would never have required an additional check from the participant. This process
shows that the ______ never had dominion or control over any of the purported
contributions.
______ Scheme Flagrantly Violates Internal Revenue Laws:
Some participants in ______ tax scheme, upon ______ advice and with his assistance,
have taken out substantial loans from their respective Entities even after transferring their
ownership interest to one of the ______. These loans are made on beneficial terms
and sometimes go unpaid. ______ testified in a deposition that most participants
borrowed their Entities' assets or used the assets as collateral for some other purpose.
Consequently, participants in ______ scheme receive a large income tax deduction and
still get the use and enjoyment of the assets that generated the deduction.
Because each of ______ scheme participants claimed non-cash charitable contributions of
over $______ on their tax returns based on the purported donation of their Entity interests to
the ______, they were required to obtain qualified appraisals of the purportedly
donated Entity interests from "qualified appraisers."
[Page 15]
In reality, ______ performs the appraisals for the scheme participants. ______ does not tell
scheme participants that he is the appraiser prior to performing the appraisals. ______
completed and signed the Form 8283 for each of the participants, which ______ based
entirely on the bogus appraisals he prepared. ______ often listed the following credentials
on the Form 8283 after his signature:
______ claims that he "implemented and consulted on over ______ charitable plans in ______ States
encompassing $______ [and] performed over ______ qualified appraisals of closely-
held businesses since ______."
The appraisals ______ uses in his tax scheme are bogus because ______ is excluded by law
from preparing appraisals in connection with this scheme, the appraisals are not qualified
appraisals within the definition of the Internal Revenue Code, and the appraisals are based
on unreliable methods.
______ profits from his scheme by charging a percentage fee based on the value of the
purportedly donated assets. His standard fee is "______% of net assets transferred (to the
______) up to but not in excess of $______, plus ______% of net assets transferred which
exceed $______."
Example of Charitable Giving Scheme:
______ sold his charitable giving tax scheme to Participant 1 through Participant
1's financial planner. Participant 1 claimed a $______ charitable contribution deduction on
his federal income tax return. ______ charged $______ for Participant 1 to participate in
this scheme.
Participant 1 decided to participate in ______ charitable giving tax scheme in ______.
______ used an existing LLC and illegally backdated every document he prepared for
Participant 1 so that Participant 1 could claim a charitable deduction on his federal
income tax return.
On ______, ______ and Participant 1 completed an LLC Agreement to transfer an
LLC that ______ had previous established in ______ to Participant 1. ______ backdated the
LLC Agreement to ______. Then, ______ drafted a promissory note through
which Participant 1 promised to pay his LLC $______. ______ backdated the promissory
note to ______. The promissory note was not secured by any collateral and
charged a ______% interest rate on outstanding balances in ______ and ______% on any outstanding
balances thereafter.
______ also drafted an assignment agreement through which Participant 1 purported to
assign ______% of his LLC to ______. ______ backdated the assignment agreement as well to ______.
[Page 16]
Despite executing the assignment agreement, Participant 1 believed,
based on ______ misrepresentations, that Participant 1 only assigned a non-controlling
LLC interest to ______.
On ______, Participant 1 opened a bank account in the LLC's name. Participant 1
was the only person with signature authority over this account. Participant 1 never gave
______ or anyone at ______ control over the account.
Later in ______, Participant 1 transferred $______ to the LLC's bank account to "repay" the
bogus note's principal. Participant 1 did not pay any interest.
______ prepared an appraisal report backdated to ______—more
than ______ months prior to the transfer of the LLC to Participant 1—in which ______
"appraised" Participant 1's purported gift of LLC units to ______ at $______.
______ backdated appraisal does not describe or analyze the LLC's only asset—the
promissory note. Rather, ______ applied his standard ______% discount for lack of control,
despite stating that ______ owned ______% of Participant 1's LLC, and a ______% discount for lack of
marketability. ______ provided no meaningful explanation for these discounts.
______ then prepared an IRS Form 8283 so that Participant 1 could claim a
$______ charitable contribution for the purported donation to ______ on his
federal income tax return.
The IRS audited Participant 1's tax return and disallowed the $______ charitable
contribution.
In ______, after the IRS initiated the audit of Participant 1's tax return,
Participant 1 made four charitable distributions totaling $______ to ______. In order to do so,
Participant 1 completed ______ "Disbursement Request Form," but also sent a check to ______
in that amount.
Additional information can be found at United States ______, Plaintiff, v.
______, Defendant. Case No.: ______
Permanent Injunction:
On ______, the United States District Court Judge (______) issued a permanent
injunction against ______ permanently barring him from directly or indirectly:
a. Organizing (or assisting in the organization of), promoting, marketing, or selling the
______ or any plan or arrangement that is substantially similar, or
participating (directly or indirectly) in the sale of any interest in the ______
or any plan or arrangement that is substantially similar;
[Page 17]
b. Making or furnishing, or causing another to make or furnish, any statements about
the tax benefits of the ______ or any plan or arrangement that is
substantially similar;
c. Organizing (or assisting in the organization of), promoting, marketing, or selling any
entity, plan, or arrangement involving charitable giving, or participating (directly or
indirectly) in the sale of any interest in an entity, plan, or arrangement involving
charitable contributions;
d. Furnishing, or causing another to furnish, tax advice regarding charitable
contributions;
e. Organizing (or assisting in the organization of), promoting, marketing, or selling any
entity, plan, or arrangement involving federal taxes that relies upon, requires
customers to execute, or uses a standard set (or substantially similar version or set)
of transaction documents;
f. Making or furnishing, or causing another to make or furnish, any statements about
the tax benefits of entities, plans, or arrangements that rely upon, require customers
to execute, or use a standard set (or substantially similar version or set) of
transaction documents;
g. Making or furnishing, or causing another to make or furnish, any statements in
connection with the organization or marketing of a transaction having a significant
purpose of avoidance or evasion of federal taxes;
h. Preparing (or assisting others in preparing) appraisals in connection with any federal
tax matter;
i. Representing anyone other than himself before the IRS;
j. Acting as a federal tax return preparer, or filing, assisting in, or directing the
preparation or filing of federal tax returns, amended tax returns, or other related
documents or forms for any person or entity other than his own individual tax returns
(or his joint tax return);
k. Assisting or advising individuals or entities in seeking tax-exempt status from the
IRS;
l. Advising, performing work for, or receiving compensation from ______, ______, or ______;
m. Advising, performing work for, or receiving compensation for work performed for
individuals in connection with making assignments, donations, contributions, or
transfers to ______, ______, ______, or ______; or
n. Referring individuals to make assignments, donations, contributions, or transfers to
______, or ______.
[Page 18]
Law:
IRC Section 501(c)(3) provides for an exemption from tax for 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.
Treasury Regulation (Treas. Regs.) Section 1.501(c)(3)-1(a)(1) provides 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.
Treas. Regs. Section 1.501(c)(3)-1(a)(2) provides that, the term exempt purpose or purposes, as
used in this section, means any purpose or purposes specified in section 501(c)(3), as defined
and elaborated in paragraph (d) of this section.
Treas. Regs. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as
operated exclusively for one or more exempt purposes only if it engages primarily in activities
which accomplish one or more of such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.
Treas. Regs. 1.501(c)(3)-1(c)(2) states that an organization is not exclusively operated for one or
more exempt purposes if its net earnings inure in whole or in part to the benefit of private
shareholders or individuals.
Treas. Regs. Section 1.501(c)(3)-1(d)(1) provides that in general:
i. An organization may be exempt as an organization described in section 501(c)(3) if it is
organized and operated exclusively for one or more of the following purposes:
Religious,
Charitable,
Scientific,
Testing for public safety,
Literary,
Educational, or
Prevention of cruelty to children or animals
[Page 19]
ii. An organization is not organized or operated exclusively for one or more of the purposes
specified in subdivision (i) of this subparagraph unless it serves a public rather than a
private interest. Thus, to meet the requirement of this subdivision, it is necessary for an
organization to establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests.
In Better Business Bureau of Washington D.C. v. U.S., 326 U.S. 279 (1945), the court found that
the existence of a substantial nonexempt purpose, regardless of the number or importance of
exempt purposes, will cause failure of the operational test.
Notice 2004-30
The Internal Revenue Service and the Treasury Department are aware of a type of transaction,
described below, in which S corporation shareholders attempt to transfer the incidence of taxation
on S corporation income by purportedly donating S corporation nonvoting stock to an exempt
organization, while retaining the economic benefits associated with that stock. This notice alerts
taxpayers and their representatives that these transactions are tax avoidance transactions and
identifies these transactions, and substantially similar transactions, as listed transactions for
purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-2(b)(2) and
301.6112-1(b)(2) of the Procedure and Administration Regulations. This notice also alerts parties
involved with these transactions to certain responsibilities that may arise from their involvement
with these transactions.
FACTS
In a typical transaction, an S corporation, its shareholders, and an organization exempt from tax
under § 501(a) and described in either § 501(c)(3) or § 401(a) of the Internal Revenue Code (such
as a tax-qualified retirement plan maintained by a state or local government) (the exempt party)
undertake the following steps. An S corporation issues, pro rata to each of its shareholders (the
original shareholders), nonvoting stock and warrants that are exercisable into nonvoting stock. For
example, the S corporation issues nonvoting stock in a ratio of 9 shares for every share of voting
stock and warrants in a ratio of 10 warrants for every share of nonvoting stock. Thus, if the S
corporation has 1,000 shares of voting stock outstanding, the S corporation would issue 9,000
shares of nonvoting stock and warrants exercisable into 90,000 shares of nonvoting stock to the
original shareholders. The warrants may be exercised at any time over a period of years. The
strike price on the warrants is set at a price that is at least equal to 90 percent of the purported fair
market value of the newly issued nonvoting stock on the date the warrants are granted. For this
purpose, the fair market value of the nonvoting stock is claimed to be substantially reduced
because of the existence of the warrants.
Shortly after the issuance of the nonvoting stock and the warrants, the original shareholders
donate the nonvoting stock to the exempt party. The parties to the transaction claim that, after the
[Page 20]
donation of the nonvoting stock, the exempt party owns 90 percent of the stock of the S
corporation. The parties further claim that any taxable income allocated on the nonvoting stock to
the exempt party is not subject to tax on unrelated business income (UBIT) under §§ 511 through
514 (or the exempt party has offsetting UBIT net operating losses). The original shareholders
might also claim a charitable contribution deduction under § 170 for the donation of the nonvoting
stock to the exempt party. In some variations of this transaction, the S corporation may issue
nonvoting stock directly to the exempt party.
Pursuant to one or more agreements (typically redemption agreements, rights of first refusal, put
agreements, or pledge agreements) entered into as part of the transaction, the exempt party can
require the S corporation or the original shareholders to purchase the exempt party's nonvoting
stock for an amount equal to the fair market value of the stock as of the date the shares are
presented for repurchase. In some cases, the S corporation or the original shareholders guarantee
that the exempt party will receive the fair market value of the nonvoting stock as of the date the
stock was given to the exempt party if that amount is greater than the fair market value on the
repurchase date.
Because they own 100 percent of the voting stock of the S corporation, the original shareholders
have the power to determine the amount and timing of any distributions made with respect to the
voting and nonvoting stock. The original shareholders exercise that power to cause the S
corporation to limit or suspend distributions to its shareholders while the exempt party purportedly
owns the nonvoting stock. For tax purposes, however, during that period, 90 percent of the S
corporation's income is allocated to the exempt party and 10 percent of the S corporation's income
is allocated to the original shareholders. The transaction is structured for the original shareholders
to exercise the warrants and dilute the shares of nonvoting stock held by the exempt party, or for
the S corporation or the original shareholders to purchase the nonvoting stock from the exempt
party at a value that is substantially reduced by reason of the existence of the warrants. In either
event, the exempt party will receive a share of the total economic benefit of stock ownership that is
substantially lower than the share of the S corporation income allocated to the exempt party.
DISCUSSION
The transaction described in this notice is designed to artificially shift the incidence of taxation on
S corporation income away from taxable shareholders to the exempt party. In this manner, the
original shareholders attempt to avoid paying income tax on most of the S corporation's income
over a period of time. The Service intends to challenge the purported tax benefits from this
transaction based on the application of various theories, including judicial doctrines such as
substance over form. Under appropriate facts and circumstances, the Service also may argue that
the existence of the warrants results in a violation of the single class of stock requirement of §
1361(b)(1)(D), thus terminating the corporation's status as an S corporation. See, e.g., §§ 1.1361-
1(l)(2)(iii) and (iii).
[Page 21]
Transactions that are the same as, or substantially similar to, the transaction described in this
notice are identified as "listed transactions" for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2),
and 301.6112-1(b)(2) effective April 1, 2004, the date this notice was released to the public.
Independent of their classification as listed transactions, transactions that are the same as, or
substantially similar to, the transaction described in this notice may already be subject to the
disclosure requirements of § 6011 (§ 1.6011-4), the tax shelter registration requirements of § 6111
(§ 301.6111-1T and § 301.6111-2), or the list maintenance requirements of § 6112 (§ 301.6112-
1). Under the authority of § 1.6011-4(c)(3)(i)(A), the exempt party in the listed transaction
described in this notice will also be treated as a participant in the transaction (whether or not
otherwise a participant). The exempt party will be treated as participating in the transaction for the
taxable year of the purported donation, the taxable year of the reacquisition, and all intervening
taxable years. Pending further review and possible additional guidance, this notice does not apply
to any investment in employer securities, as defined in § 409(l), by an employee stock ownership
plan subject to the requirements of § 409(p).
Persons who are required to register these tax shelters under § 6111 but have failed to do so may
be subject to the penalty under § 6707(a). Persons who are required to maintain lists of investors
under § 6112 but have failed to do so (or who fail to provide those lists when requested by the
Service) may be subject to the penalty under § 6708(a). In addition, the Service may impose
penalties on parties involved in these transactions or substantially similar transactions, including
the accuracy-related penalty under § 6662.
The Service and the Treasury Department recognize that some taxpayers may have filed tax
returns taking the position that they were entitled to the purported tax benefits of the type of
transaction described in this notice. These taxpayers should take appropriate corrective action and
ensure that their transactions are disclosed properly.
Taxpayer's Position:
1. The Taxpayer has not provided a position on the issue.
2. The Taxpayer has not provided a position on the issue.
Government's Position:
1. That the tax-exempt status for ______ should be revoked for failure to operate
exclusively in furtherance of exempt purposes.
Under IRC Section 501(c)(3) an exemption from tax is provided for organizations, organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition, or for the
prevention of cruelty to children or animals, no part of the net earnings of which inures to the
benefit of any private shareholder or individual, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting, to influence legislation, and which does not
participate in, or intervene in, any political campaign on behalf of (or in opposition to) any
candidate for public office.
[Page 22]
Treas. Regs. Section 1.501(c)(3)-1(a)(1) provides 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.
Treas. Regs. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as
operated exclusively for one or more exempt purposes only if it engages primarily in activities
which accomplish one or more of such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.
Here the facts show that more than an insubstantial part of the organization's activities are not in
furtherance of an exempt purpose. These activities include:
1. Participating in the S Corporation Tax Shelter Scheme
2. Operating as a vehicle to assist the promoter of the scheme (______) in carrying out his
abusive charitable scheme
3. Allowing the net earnings of ______ to inure to the benefit of private shareholders.
These two activities disqualify the organization from exempt status under IRC Section
501(c)(3).
Discussion on the disqualifying activities
1. The organization is a participant in the S Corporation Tax Shelter Scheme.
Transactions that are the same or substantially similar to those described in Notice 2004-30 are
designed to artificially shift the incidence of taxation on S corporation income away from taxable
shareholders to the exempt party. In this manner, the original shareholders attempt to avoid
paying income tax on most of the S corporation's income over a period of time. The shifting of
taxation away from the taxable shareholders is possible due to the exempt party generally does
not pay tax on its income. Since inception, ______ has not paid any tax on its income. Notice 2004-
30 designated these type of transactions as listed transactions.
In determining whether the donations of LLC membership units to the ______ organization are the
same or substantially similar to Notice 2004-30, the provisions in the Operating Agreements
and other relevant facts are examined. These provisions include:
* The original shareholders donated membership units to the organization.
* The original shareholders retain control of the LLC via their holdings of exclusive
management rights.
[Page 23]
* The original shareholders have the power to determine the amount and timing of any
distributions. Although the Operating Agreement requires annual distributions, in practice,
some LLCs have not made a distribution to the organization in certain years.
* The organization is allocated ______ percent or more of the profit, while the original
shareholders are allocated ______ percent of the loss.
* The LLCs have the first right to purchase the organizations membership units. With the
original shareholders having exclusive management right, they can issue additional
shares to dilute the shares held by the organization.
Discussion of the above factors
The original shareholders donated membership units to the organization.
Similar to Notice 2004-30, the original shareholders donated membership units to the
organization, while retaining complete and total control over the LLC units. As the holder
of membership units, the organization has no voting rights or consent rights.
The original shareholders retain control of the LLC via their exclusive management rights.
In this case, similar to Notice 2004-30, after the original shareholders donated
membership units to the organization, they still maintain complete control over the assets
of the LLC.
In ______ out of the ______ instances where LLC interests were donated to the organization, the
original donor subsequently took out a loan from the LLCs. These loans ranged in length
from ______ to ______ years and the loan amounts taken were in some cases (______ and
______) in excess of ______% of the total value of the assets originally placed into
the LLC.
[Page 24]
In these instances, the original donors were able to take a contribution deduction on their
personal tax returns for the amount of the appraised donations to the organization, while
at the same time, maintaining full control of the assets. In some instances, the donors
took substantial portions of the assets out of the LLC by issuing themselves a note with
favorable interest rates.
Furthermore, the organization stated (in response to ______ question posed in the initial
interview) that the assets originally placed into the LLCs do not become the sole property
of ______ for a period of ______ years from the date of the donation.
Lastly, Articles 5.2, 5.3, and 8.1 for the Type 2 operating Agreements give the managers
of the LLCs total control of all aspects and finances of the LLCs and their related assets.
Being the manager of the LLC allows the original shareholder to retain control of the
assets originally placed in the LLCs.
iii. The original shareholders have the power to determine the amount and timing of any
distributions.
In Notice 2004-30, because they are the sole managers of the S Corporations, the
original shareholders have the power to determine the amount, payee, and timing of any
distributions.
In this case, the original shareholders, also Manager of the LLCs, have the power to
determine the amount and timing of distributions. The organization does send annual ______
to each LLC detailing the amount of distributions that each LLC is
required to make for charitable purposes, note payments, legal payments to
______, and payments to ______ for accounting fees and tax preparation.
The ______ include the following statement with respect to charitable
distributions:
"Based on our analysis of the cash flows from LLC NAME in ______, please have LLC
NAME write a check for AMOUNT to ______ at a minimum in support of its
charitable mission, remember you can always do more! Please also indicate the charities
you would like the funds to support in the attached donation form."
For the year ended ______, ______ of the LLCs which donated interest to ______
failed to make distributions of any kind. For all LLCs where distributions were made, the
Manager, who is also the original donor or his/her representative, had the sole discretion
in determining the amount and timing of distributions.
As a result of this arrangement, ______ of the checks issued for "charitable grants" were
issued to educational institutions where a specific student was identified. In one instance,
the specific student shared the same last name as the original donor to the LLC (______,
last name ______). Both of these acts constitute private benefit and do not
fulfill a charitable purpose.
Lastly, the ______ issued to each LLC show that LLCs receive direction from ______
on amounts due for notes and charitable distributions each year. In several instances,
the same amounts were requested for distribution on the following years Direction Letter.
In these instances, the LLCs failed to make any of the requested note payments or
charitable distributions. This demonstrates that the LLC managers, not ______, have the
ultimate power when making distributions of any kind.
iv. The organization is allocated ______ percent or more of the profit, while the original
shareholders are allocated ______ percent of the loss. The Special Allocation Provisions
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further allocate all passive income to the organization and all active income and
deductions to the original shareholders.
In this case, ______% of profits and losses are allocated to the exempt party and none are
allocated to the original shareholders.
v. With the original shareholders having exclusive management right, they can issue
additional shares to dilute the shares held by the organization.
In these LLCs, the donors, their spouse and/or family members are the sole managers of
the LLCs. They have the power to issue additional shares to the LLC or increase the
authorized shares so they can issue additional shares. Such issuance of additional
shares may dilute the value of those share already held by the organization. Given the
organization has no consent rights, there's nothing it can do to prevent the issuance of
additional shares.
In summary, the facts show the transactions in this case are the same or substantially similar to
those described in Notice 2004-30. Therefore, it is concluded that ______ was a participant in the S-
Corporation Tax Shelter scheme as described in Notice 2004-30.
2. ______ acts as a vehicle to assist the promoter of the scheme (______) in
carrying out his abusive charitable scheme.
As stipulated in United States ______
v. ______ charitable giving scheme is designed to assist his
wealthy clients improperly reducing their tax liability by taking unwarranted charitable
contribution deductions. ______ scheme has harmed the United States by depriving the
government of tax revenue. The IRS has identified specific transactions that, through ______, cost
the United States Treasury more than $______ in lost tax revenue.
To facilitate his scheme, ______ needed a charity described under IRC § 501(c)(3) to take
the bogus contributions, as contributions to such charity is tax deductible. In the beginning, ______
created his ______, ______ and ______ so he could facilitate his
scheme. Once ______ scheme was exposed, the IRS revoked ______, ______, and ______
tax exempt status, which ______ agreed to.
Facts connecting ______ to ______ scheme included, but are not limited to:
* ______ (through ______) prepared state returns for the LLCs
where the returns were provided by the organization. ______ is the president of
______. ______ appraised the value of ownership interest for donors who donated their interest
to the organization. ______ signed Forms 8283 and completed all appraisals for each
of the LLCs.
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* ______ acting in his capacity as the President of ______ accepted all gifts of donated LLC
interests through receipt of the Forms 8283.
* ______ worked with ______ and the original donors/managers of the LLCs to set up
each LLC, to obtain appraisals, and to ensure that ______ received payment from
each LLC every year as outlined in the ______ issued to each LLC.
each year ______.
* ______ receives monetary recompense from the financial planning for the charitable
giving arrangement through ______.
* ______ is the President of ______ which is named in the injunction against ______.
It is clear from the injunction that ______ and ______ worked together to perpetrate the tax
scheme concocted by ______ and that ______ is a promoter of the scheme.
* A review of cash inflows and outflows for the organization shows that like the ______,
______ acts as a passthrough for charitable activities determined and carried out by
the LLCs. ______ has no meaningful control or input into the process.
3. ______ allowed its net earnings to inure to the benefit of private shareholders
which is absolutely prohibited under IRC Section 501(c)(3).
______ made ______ distributions in the year of examination. Of these distributions, ______ (or
______%) were directed disbursements from individuals at the LLC level to their relatives. These
payments amounted to $______ out of the total $______ (or ______% of the total
expenditures) expended by the organization in the year of examination. As such,
approximately ______% of the activities conducted by the organization constituted prohibited
inurement transactions.
______ made payments to:
a. The ______ as directed by his relative ______
of ______ totaling $______
b. ______ as directed by his relative ______ totaling $______
______ of these payments constitute inurement as the payments were directed by insiders of the
organization (substantial contributors) to their relatives. In its response to IDR #3, ______ makes the
assertion that it does not know whether ______ and ______ are related or whether ______
and ______ are related. The Government would contend that it is the duty of ______ (or those
acting on behalf of the organization) to inquire as to the relationship between donors and grant
recipients.
The Government conducted a review of the filings of Forms ______ for ______ and noted that
the preparer for the Form ______ is listed as ______, the President of ______. ______ is required under
IRC Section 501(c)(3) and the related regulations to ensure that the net earnings of ______ do not
inure to the benefit of private shareholders. In the immediate instance, ______ should have been
aware of the family relationship between ______ and ______ as the President of ______
(______) is the return preparer for Form ______. IRC Section 501(c)(3) and the
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related regulations make no qualms about the absolute prohibition against inurement as
follows:
"IRC Section 501(c)(3) provides for an exemption from tax for 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. Regs. 1.501(c)(3)-1(c)(2) states that an organization is not exclusively operated for
one or more exempt purposes if its net earnings inure in whole or in part to the benefit of
private shareholders or individuals."
The presence of inurement in this case alone is grounds for the revocation of the exempt status
of the organization.
In conclusion, the facts show that the ______ organization is operated as a vehicle of ______
bogus charitable scheme which is being promoted and carried out by ______. Additionally,
the net earnings of the organization inured to private individuals and shareholders of the
organization.
The activities discussed above were more than an insubstantial part of ______ activities.
These activities did not further one or more exempt purposes described in IRC § 501(c)(3) and
in the case of the inurement activities, were absolutely prohibited under IRC Section 501(c)(3)
and the related regulations. Therefore, exempt status under IRC § 501(c)(3) should be
revoked.
2. That the Organization's exempt status should be revoked retroactively to ______, the
date that the organization failed to qualify for exemption.
______ activities remain the same in the year of examination as they were at the inception of the
federal tax exemption on ______. The organization began accepting LLC interest
donations in the tax year ______ but did not have any activities prior to ______. This demonstrates
that ______ planned to use ______ as a participant in the tax avoidance scheme in ______ when it
was established.
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Therefore, it is warranted to revoke the exempt status of the organization retroactively to
the first date it is determined that the organization was not operated exclusively for
exempt purposes.
Conclusion:
______ is not operated exclusively in furtherance of an exempt purpose as
outlined in IRC Section 501(c)(3) and has conducted prohibited inurement transactions which
alone are grounds for revocation. As such, its tax-exempt status should be revoked retroactively to
______. ______ is required to file Form 1120, U.S. Corporation Income Tax
Return, for the tax years ______, ______, ______, and all future years.
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