IRS revokes a 501(c)(3) collection/museum charity that could not be distinguished from the affiliated social club that controlled it

Plain-English summary

A nonprofit had been recognized as a 501(c)(3) public charity (a publicly supported organization under sections 170(b)(1)(A)(vi) and 509(a)(1)) to assemble, collect, and display a significant collection. The collection was housed inside a building owned and controlled by an affiliated social club that is exempt under section 501(c)(7). The club was the sole corporate member of the charity and appointed (and could remove) the charity's directors, so the club controlled the charity. On audit, the charity asserted that the public could view the collection and that its shows and tours educated the public, but it produced no substantiation: no attendance logs, no written policies or procedures, no records of who attended events or how the public actually used the building. Its own former and current CFOs said public tours "hadn't been done" for years and that the charity did not know whether the public even knew the collection existed. The IRS found that access to the building was effectively limited to the club's members, their dependents, and their guests, who are not the "general public." Because there were no substantiated charitable operations, the IRS concluded the charity could not be distinguished from the social club: its activities and assets were functionally inseparable from the club and served the private interests of the club and its members, making the charity an instrument of the club rather than a public charity. The organization also failed to keep the books and records that sections 6001 and 6033 require to substantiate exempt operation. The IRS revoked the exemption retroactively to the first day of the year under examination. Because the charity's income came from gifts and bequests (not taxable under sections 61 and 102), no corporate income tax was imposed for the period, but going forward the organization must file Form 1120, and its charitable assets must be transferred to another 501(c)(3). This was issued as a final adverse determination (Letter 6337) after the organization filed an incomplete appeal; its section 7428 right to seek a declaratory judgment was preserved (90 days).

Ruling snapshot

• Question: Should the organization's 501(c)(3) exemption be revoked because it could not substantiate any charitable public operations and its activities and assets were functionally inseparable from the affiliated 501(c)(7) social club that controlled it?
• Outcome: revocation (final adverse determination, retroactive to the first day of the year under examination; section 7428 declaratory-judgment rights preserved)
• Key authorities: IRC §§ 501(c)(3), 501(c)(7), 512(a)(3), 6001, 6033, 170, 509; Treas. Reg. § 1.501(c)(3)-1(c), (d), (b)(4); Rev. Proc. 71-17; Est. of Hawaii v. Commissioner; P.L.L. Scholarship v. Commissioner; B.S.W. Group v. Commissioner; Better Business Bureau of Washington, D.C. v. United States

Full text (IRS public release)

OCR transcription of a scanned document, proofread per house rules. Redactions in the original are shown as blanks (______). This 52-page packet contains the final adverse determination (Letter 6337, dated June 10, 2021), the earlier proposed determination (Letter 3618, dated November 5, 2020), and the Form 886-A audit report. In the source scan the Form 886-A was photocopied about five times in full; it is reproduced once here, with the repeated page-header/footer furniture normalized. Obvious scanning misreads were corrected; wording is otherwise verbatim. Bracketed insertions supply an obviously omitted small word; unreadable spots are marked [illegible].

Department of the Treasury                         Date: June 10, 2021
Internal Revenue Service
Tax Exempt and Government Entities                 Taxpayer ID number:

Number: 202238011                                  Form:
Release Date: 9/23/2022
                                                   Tax periods ended:

                                                   Person to contact:
                                                     Name:
                                                     ID number:
                                                     Telephone:
                                                     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 ______. Your determination letter dated ______, is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have
not established that you are operated exclusively for an exempt purpose or that you have been
engaged primarily in activities that accomplish one or more exempt purposes within the meaning
of IRC Section 501(c)(3).

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury Regulations
Section 1.501(c)(3)-1(c), in that you have not established that you were operated exclusively for
exempt purposes.

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.

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.

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

                                                              Letter 6337 (12-2020)
                                                              Catalog Number 74808E

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 892


--------------------------------------------------------------------------------
[Enclosed proposed determination]

Department of the Treasury                         Date: November 5, 2020
Internal Revenue Service
Tax Exempt and Government Entities                 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.

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

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.

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

                                       Sincerely,

                                       Trina Fields
                                       AGM 7956 for
                                       Sean E. O'Reilly
                                       Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Form 4621-A
Pub 892
Pub 3498


--------------------------------------------------------------------------------
Form 886-A            Explanation of Items

The audit report dated ______ is corrected by this audit report. The attachments referenced to in
the audit report dated ______ are unchanged (and so are still valid as a part of this report) but are
not included with this report.

Issues:

(1) Does the ______ ("______") qualify for exempt status under Internal Revenue Code (IRC)
    § 501(c)(3)?
(2) If the ______ doesn't qualify for exempt status, when is the effective date of revocation?
(3) If the ______ doesn't qualify for exempt status, what is the tax effect of the revocation?

Facts:

______ (______) is a ______ located in ______ recognized on ______ as exempt under IRC
§ 501(c)(3) as further described under IRC §§ 170(b)(1)(A)(vi) and 509(a)(1) or 509(a)(2).

On ______ another determination letter was issued wherein the ______ was further described
under IRC §§ 170(b)(1)(A)(vi) and 509(a)(1) as an organization that receives support from the
general public.

The Form ______, Application for Recognition of Exemption, was received by the IRS on ______.
The Form ______ was analyzed. The current directors and officers were: ______

In Part II, Activities and Operational Information, several parts referred to an attached statement.
The attached statement states:

The ______ ("the ______") will assemble, collect and display significant ______, primarily ______
and ______. It is anticipated that the ______ will be acquired by the ______ primarily through gifts
in kind to the ______. It is also anticipated that the ______ will receive cash donations, which will
be used by the ______ to acquire ______.

The ______ will be housed and displayed at the ______. The ______ has over ______ members
and is heavily trafficked by the public. It is estimated that each ______ several ______ of
individuals will see, enjoy and be educated by the ______.

The ______ will conduct ______ shows or ______ on an almost ______ basis displaying ______.
Such shows and exhibits will be educational and noncommercial. Sales of exhibited works will be
prohibited. It is anticipated that such shows and exhibits will sometimes demonstrate the history or
method of a particular ______ form. In addition, from time to time parts of the ______ will be loaned
to other public charities, such as, for example, the ______ and the ______.

The Form ______, Part II, Items 2 and 3 of the attached summaries stated:
The ______ sources of support will be contributions of ______, contributions of cash, and a small
amount of interest and dividend income from the investment of the cash contributions pending
acquisition of additional ______.

The ______ will solicit contributions primarily from the members of the ______, which—as
indicated—has over ______ members.

The Form ______, Part II, Item 5 asks "Does the organization control or is it controlled by another
organization?" and "Is the organization the outgrowth of (or successor to) another organization, or
does it have a special relationship with another organization by reason of interlocking directorates
or other factors?" The ______ marked "______" to ______ questions and referenced an attached
statement. In the attached statement, the ______ states:

The ______ is controlled by the ______, a not-for-profit corporation qualified under IRC
§ 501(c)(7), by virtue of the fact that directors of the ______ are appointed, and subject to removal,
by the Board of Governors of the ______, and the ______ director, who is a nonvoting ex officio
director, is the from-time-to-time President of the ______.

The Articles of Incorporation attached to the Form ______ was analyzed:

  • The ______ was incorporated on ______.
  • In article #5 the corporation is organized and operated exclusively for charitable and
    educational purposes within the meaning of IRC § 501(c)(3) for the purpose of assembling,
    collecting and displaying significant ______.
  • In Article #6, the sole member of the corporation is the ______, a not-for-profit corporation.
    The affairs of the corporation shall be managed by the Board of Directors, and the directors
    and their successors shall be elected by the Board of Governors of the ______.

The ______ last filed a ______, Short Form Return of Organization Exempt From Income Tax, for
the fiscal year ended ______. For the year ended ______, the ______ filed a ______, Electronic
Notice (e-postcard) for Tax-Exempt Organizations Not Required to File Form ______ or Form
______, on ______.

The ______ has ______ valued at approximately $______ (see Attachment One). According to
instructions for Form ______, Return of Organization Exempt From Income Tax, the Form ______
must be filed if the organization has either gross receipts equal to or greater than $______ or total
assets greater than $______ at the end of the year.

______ (CFO) and ______ (Prior CFO) were asked questions that pertained to the ______. The
summary of those questions is given below:

  • The ______ accounting department takes care of the books and records of the ______ and
    all subsidiary organizations.
  • As with all subsidiary organizations, the ______ Board of Directors appoints the board
    members. Not all of the board members are ______ members. The directors are appointed
    based on knowledge and ability so that the ______ can properly operate under directors with
    an expertise in the ______ arena.
  • The ______ owns about ______ pieces of ______. Once ______ is donated to the ______,
    the ______ retains ownership.
  • The ______ used to give ______ tours, but that hasn't been done for ______ or ______ years.
  • ______ isn't sure if the public knows the ______ exists, but the public can ask for a tour and
    the public would then be given a tour.
  • Neither the prior or the current CFO knew of any substantiation of ______ activities.

On ______, the IRS examiner asked for the following in an information document request:

  • Minutes of meetings — for the fiscal years ended ______ and ______
  • The Chart of Accounts for the fiscal years ended ______.
  • The audit report prepared by ______ and includes a Consolidating Statement of Financial
    Position that categories for ______, ______ and ______ but does not include a category for
    the ______ (______) or for the ______. Because there is no category for the ______, the
    statement of financial position for the ______ cannot be derived. Please provide a statement
    of financial position for the ______ for the fiscal year ended ______
  • A copy that I can retain of the account summaries and accounting worksheet used that
    connects the books and records to the Statements of Financial Position (for #3 above).
  • If there are any estimated costs (such as overhead allocations), please provide an
    explanation of the basis used to allocate expenses to the ______.
  • I have reviewed the Form ______, Application for Recognition of Exemption. According to the
    Form ______, the ______ stated that each ______ several ______ of individuals see, enjoy
    and are educated by the ______ and almost ______ basis displaying of loaned ______.
    Please provide substantiation that non-members attended events in the building for the year
    ended ______ that includes—but is not limited to—what those events were, how many
    attended, the purposes of the events, and if these individuals were guests of a member or
    members.
  • In order to be exempt under IRC § 501(c)(3), the organization must provide more benefit to
    the general public then to ______ members and guests. Please provide copies of the
    substantiation that demonstrates that the ______ is carrying out charitable activities described
    in IRC § 501(c)(3).

On ______ the ______ asked for an extension of time to ______. On ______ the ______ asked for
an extension of time to ______. On ______ the IRS examiner asked for information in another
Information Document Request and included a draft Form 886-A, Explanation of Items. The ______
did not provide any response to the information document requests.

On ______ the L3618 (Rev. 9-2017) was sent as the 30-day letter. This is the wrong 30-day letter.
The correct letter should be L3618 (Rev. 8-2019). The ______ responded to the L3618 (Rev.
9-2017) with additional information and an incomplete appeal request (see Attachment 2).

The ______ cover letter for attachment 2 provides a good summary of the ______ position and legal
arguments. Attachment 2 provides the following asserted activities:

  • The ______ was formed to assemble, collect, and display significant ______, primarily
    ______ and ______
  • ______ is ______ of the foundations of civilized society; its presence helps to attract people
    who are interested in ______
  • The ______ instituted ______ displays in the lobby of the ______ (the "______") in which the
    ______ displays ______ from local ______ who, absent the activities of the ______, may not
    have a forum to present their work
  • There is an ______ at our location in ______ (______) which hosts ______ displays
  • The ______ displays in the lobbies of the ______ is accessible to the public
  • The ______ (recognized as a 501(c)(3) organization) has represented that the building located
    at ______, ______ (in which the majority of the ______ is displayed) is a component of the
    ______. This tour makes the ______ available to the general public, and allows ______ without
    a forum to present their ______
  • The ______ had a presentation on the ______ entitled "______" and "______."
  • It is estimated that each year several ______ of individuals will see, enjoy and be educated by
    the ______
  • A substantial number of nonmembers of the ______ (as well as events held by civic
    organizations) have access to and / or visited the clubhouse and therefore have access to the
    ______
  • The ______ attracts gifts of ______ that would otherwise leave the ______ area because their
    value is less than the ______ would accept
  • The ______ was in need of repair and the ______ engaged in restoration efforts
  • The ______ is agreeable to instituting public educational tours of its ______ going forward, in
    addition to the ______
  • The ______ disagrees with the IRS position that the ______ building's access is limited to
    members of the ______. Although members of the ______ may have easy access to the
    building, the preceding information provides substantial evidence of public access to the
    ______ held by the ______
  • The presence of building security does not mean that members of the public do not have
    access to and opportunity to view the ______; it reflects the reality of security restrictions in all
    buildings today

Attachment 2 included ______ Minutes. The date and summary of these minutes is given below:

  • There is still ______ to be restored—
  • Discussion on this restoration centered on whether to make the investment based on the
    current value v the after-restoration value
  • ______ were moved to the ______ and ______
  • The ______ will take place ______
  • ______ will run the ______
  • The ______ will subsidize the ______
  • During ______ Month, giving will be within the chits and promotional material and events that
    occur in ______
  • ______ description tags will start to appear alongside the ______
  • ______ will be replaced that will soon be restored from the pool at ______
  • Discussion about developing new ______ and shifting our focus from ______ displays to ______
    displays and how we go about it
  • President ______ spoke to the ______ to promote the ______ for the ______
  • Governor ______ spoke about a catalog to document the ______, and putting placards on all
    ______ to identify it
  • General Manager ______ suggested a subcommittee be established to oversee the movement
    and proper placement of the ______
  • It is the goal of the General Manager, ______, to continue to move the assets of the ______
    classified as ______ over to the ______
  • President ______ spoke about standards for accepting donations
  • Discussion about having ______ involved in ______ by having an ______ event surrounding and
    involving children

Attachment 2 includes a balance sheet for the year ended ______ with the following information:

  Assets                       Year ______     Year ______
    Cash
    Accounts Receivable
    Objects
  Liabilities
    Accounts Payable
  Equity
    Retained Earnings
    Profit (Loss)
  Total Equity

  [Balance-sheet table: all dollar figures redacted in the original.]

This attachment includes a summary of the ______ donated to the ______. The summary gives the
type of ______ donated, a description of the ______, the ______, and the value when donated /
transferred to the ______. The ______ also purchased a ______. Below is a summary of the value of
these activities:

  Donated       ______
  Transferred   ______
  Purchased     ______
  Total         ______

This attachment also includes an allocation of costs from the ______ to the ______. The ______ has
______ employee—the director of the ______. The time the director spent attending to ______
meetings, events and activities accounted for ______% of the director's time, and so ______% of the
director's salary, payroll taxes and medical insurance costs were allocated to the ______.

Included in attachment 2 was a listing of the events and meetings of various organizations at the
______ facilities that the ______ attended. In total, there were ______ meetings with ______ guests.

No documentation was provided from the ______ that gives the policies and procedures pertaining to
the ______ activities. The listing of registered individuals for ______ associated activities were not
provided by the ______. No substantiation of public participation in ______ activities or public use of
assets was provided.

Law:

Tax exemption is a matter of legislative grace, and the organization seeking exemption must show
that it comes squarely within the terms of the law conferring the benefit sought (Florida Hospital
Trust Fund v Commissioner, 103 T.C. 140, 153, 1994, aff'd 71 F. 3d 808 (11th Circuit 1996).

Organizations organized substantially for pleasure, recreation, and other non-profitable purposes, or
to support such purposes, are exempt under IRC § 501(c)(7). The exemption of social clubs is based
on the logic of allowing members to pool their funds for recreational purposes, rather than for a
compelling public benefit. Congress granted exemption so that these membership pools would not be
taxed twice (at the member level and at the organizational level) (see Portland Golf Club v C.I.R.
497 U.S. 154, 110 S. Ct. 2780 (1990)).

Exempt function income means the gross income paid by members of the organization (that includes
the members, their dependents and their guests) [for] goods, facilities or services in furtherance of
the purposes constituting the basis for exemption of the organization (IRC § 512(a)(3)(B)). The term
"unrelated business taxable income" refers to gross income derived from any trade or business
unrelated to the purposes for which the organization is exempt (IRC § 512(a)(1)). With regards to
unrelated business taxable income, there are special rules applicable to organizations described in
IRC § 501(c)(7) (IRC § 512(a)(3)(A)).

Rev. Proc. 71-17, 1971-1 C.B. 683, sets forth guidelines for determining the effect gross receipts
derived from use of a social club's facilities by the general public have on the club's exemption from
federal income tax under IRC § 501(c)(7). The procedure defines the term "general public," as
persons other than members of a club or their dependents or guests.

Exemption is provided for organizations that are organized and operated exclusively for charitable,
religious and educational purposes with no part of the net earnings inuring to the benefit of any
private shareholder or individual (IRC § 501(c)(3)). An organization is operated exclusively for one or
more exempt purposes only if [it] engages primarily in activities which accomplish one or more such
exempt purposes specified in IRC § 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 (Tax Reg.
§ 1.501(c)(3)-1(c)(1)).

An organization may be exempt as an organization described in IRC § 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 (Tax
Reg. § 1.501(c)(3)-1(d)(1)(i)). The term "charitable" as used in IRC § 501(c)(3) is used in its
generally accepted legal sense (Tax Reg. § 1.501(c)(3)-1(d)(2)).

An organization is not organized and operated exclusively for one or more of these purposes unless
it serves a public rather than a private interest (Tax Reg. § 1.501(c)(3)-1(d)(1)(ii)). An organization is
not dedicated to one or more exempt purposes if its assets are not dedicated to an exempt purpose
(Tax Reg. § 1.501(c)(3)-1(b)(4)).

The purposes toward which an organization directs its activities, and not the nature of the activities
themselves, determine whether the organization meets the operational test (B.S.W. Group Inc v
Commissioner, 70 T.C. 352, 356-357 (1978)). An organization is required to keep records,
substantiate its activities and file returns as required by the Secretary (IRC §§ 6001 and 6033; Tax
Regulation § 1.6033-2(i)(2)).

Impermissible benefit to private interests encompasses not only benefits to insiders but also benefits
that an organization may confer on unrelated or even disinterested persons (i.e., outsiders)
(American Campaign Academy v Commissioner, 92 T.C. 1053, 1068-1069; see also Capital
Gymnastics Booster Club Inc. v Commissioner T.C. Memo 2013-193, 2013). In American Campaign
Academy, the private interests were republican entities and candidates.

The organization was operated for a substantial non-exempt purpose because its net earnings inured
to the benefit of its members. Net earnings include more than net profits and may inure to the benefit
of private persons other than in the distribution of dividends (Unitary Mission Church v
Commissioner, 74 T.C. 507, 512-513 (1980); Canada v Commissioner (82 T.C. No. 73, 82 T.C.
973).

An organization which is exempt from taxation under § 501(a) and is not required to file annually an
information return shall immediately notify in writing the district director for the internal revenue
district in which its principal office is located of any changes in its character, operations, or purpose
for which it was originally created (Tax Regulation § 1.6033-2(i)(1)).

A non-exempt entity that substantially benefits from the activities of the exempt organization and
exerts considerable control over the exempt organization and how the exempt organization carries
out its activities means the exempt organization is being used as an instrument to further the private
benefit of the non-exempt and does not qualify as tax exempt (Est. of Hawaii v Commissioner 71
T.C. 1067 (1979)). A tax-exempt organization and non-exempt entity were controlled by the same
persons, and their activities were so interrelated as to be functionally inseparable, then the benefit to
the non-exempt was not incidental (P.L.L. Scholarship v Commissioner, 82 T.C. 196 (1984)).

Separately incorporated entities must qualify for exemption on their own merits. The exception is
where an organization's activity is an integral part of an exempt affiliates' activities. In this case, the
organization may derive its exemption from that of its affiliate (Geisinger Health Plan v C.I.R., 30 F.
3d 494, 498 (1994)).

The presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly exempt purposes (Better Business Bureau of
Washington D.C. Inc. v United States, 326 U.S. 279, 283 (1945)).

With regards to taxability, Internal Revenue Code § 61 states, unless otherwise provided, all income
is taxable. IRC § 102 states that as a general rule gross taxable income does not include the value of
property acquired by gift, bequest, devise or inheritance (see Synanon Church v Commissioner, T.C.
Memo 1989-270).

Government Position:

The ______ and its ______ is housed in the same building as the ______. The ______ controls
access to, and use of, the building. By appointing the board members, the ______ controls the
______ organization. Because exemption is a matter of legislative grace, the ______ needed to
substantiate that it is operating to carry out charitable activities (Florida Hospital Trust Fund v
Commissioner (IBID), IRC §§ 501(c)(3), 6001, 6033; Tax Reg. §§ 1.501(c)(3)-1(c)(1),
1.501(c)(3)-1(d)(1)(i) and 1.501(c)(3)-1(d)(2)).

Exemption is provided for organizations that are organized and operated exclusively for charitable,
religious and educational purposes with no part of the net earnings inuring to the benefit of any
private shareholder or individual (IRC § 501(c)(3)). Being organized to carry out a charitable purpose
is just the first requirement. The second requirement is that the organization operate exclusively for a
charitable purpose. Substantiation that the organization is carrying out charitable purposes is
required (IRC §§ 6001 and 6033).

The ______ represented in its Form ______, that it annually had ______ members and that ______ of
people from the general public came through to view the ______ housed in the ______ building.

The ______ has made assertions about what its activities are without providing any substantiation
that those activities actually operate as claimed. The ______ is to keep books and records that
substantiated its assertion that it is exempt under IRC § 501(c)(3) and properly file required returns
(IRC §§ 6001 and 6033). The ______ has not provided substantiation of its claimed operational
activities. Assertions, no matter how often repeated, is not substantiation.

Substantiation such as policies and procedures, documentation that the policies and procedures are
in operation, documents that substantiate where the activity (or activities) occurred, who was in
attendance (via attendance logs) and relationship these attending individuals have with the ______
would have assisted in establishing the operations.

The facts already show that in order to attend ______ related activities, the person had to register to
attend. The ______ has not provided these attendance documents. That members of the general
public could have attended these activities is not the same thing as substantiation that members of
the public actually did attend the activity. This is not the only barrier the ______ would have to
address.

A tour of the building demonstrates that access to the building is limited to members of the ______,
their dependents and their guests. Because the ______ did not substantiate that members of the
general public were allowed access to—or actually made use of or toured—the building, then the only
conclusion that can be reached based on the substantiation in the possession of the IRS examiner is
that there is no public use of the building and no public viewing or use of the ______ or ______
activities.

The other conclusion is that the viewing and use of the ______ is limited to the ______ members,
and their dependents and guests. The members, their dependents and guests are not members of the
general public (Rev. Proc. 71-17 (IBID)).

Because of the lack of substantiation, operationally, the ______ could not be distinguished from the
operations of the ______. While the ______ has provided legal arguments based on the asserted
operational activities, no legal analysis could be performed until after the operational activities were
substantiated as actually occurring.

The ______ financial and operational activities are so inter-related to the ______ financial and
operational activities that they are functionally inseparable from the ______. For this reason, the
benefit to the ______ is not incidental (P.L.L. Scholarship v Commissioner (IBID)). Because they are
so inter-related, the activities the ______ carries out are deemed to be in support of—and part of—the
______ activities. As such, the ______ is considered to be an instrument of the ______ that provides
private benefit to the ______ and the members thereof (see Est of Hawaii v Commissioner (IBID)).

The ______ is organized and operated for the pleasure, recreation and other non-profitable purposes
of its members, and their dependents and guests (IRC § 501(c)(7), Portland Golf Club (IBID)). The
exempt function income of the ______ is by definition the gross income paid by members of the
______, their dependents and guests for goods, facilities or services in furtherance of the purposes
for which it was granted exempt status (IRC § 512(a)(3)(B)).

Organizations like the ______ were granted exempt status so that the member's pooled recreational
funds wouldn't be taxed twice (Portland Golf Club (IBID)). The principle activities of organizations
like the ______ are focused on the recreation of the members, their dependents and guests. The
mere fact that the ______ is exempt from business income tax doesn't mean that the ______ principle
activities and operations are charitable activities described in IRC § 501(c)(3).

Because the ______ is carrying out activities that support the ______, the operational activities and
purposes of the ______ are not charitable activities with a charitable purpose (Tax Reg.
§§ 1.501(c)(3)-1(d)(1)(ii), 1.501(c)(3)-1(d)(2) and 1.501(c)(3)-1(d)(1)(iii); B.S.W. Group Inc. v
Commissioner (IBID)).

These operational activities serve the private interests of the ______ as well as the members,
dependents and guests thereof far more than the interests of the general public. For this reason, the
______ is not operating exclusively for one or more charitable purposes (Tax Regulation
§ 1.501(c)(3)-1(d)(1)(ii)).

By supporting the private interests of the ______ members, dependents and guests, the ______
operations provide private benefit and inurement to the ______ members, dependents and guests
(American Campaign Academy v Commissioner (IBID), Capital Gymnastics Booster Club v
Commissioner (IBID), Unitary Mission Church v Commissioner (IBID), Canada v Commissioner
(IBID)).

For the reasons already given above, the assets of the ______ are dedicated to the ______ and the
members, dependents and guests thereof and are not dedicated to charitable purposes. For this
reason, the ______ doesn't qualify for exempt status under IRC § 501(c)(3) (Tax Reg.
§ 1.501(c)(3)-1(b)(4)).

Because the assets of, and the activities of, the ______ are for the benefit of the ______ and the
members and guests thereof, the ______ does not qualify for exempt status under IRC § 501(c)(3)
(Tax Reg. §§ 1.501(c)(3)-1(d)(1), 1.501(c)(3)-1(b)(4); see also B.S.W. Group Inc. v Commissioner
(IBID), Est of Hawaii v Commissioner (IBID), American Campaign Academy v Commissioner (IBID),
Better Business Bureau of Washington D.C. v United States (IBID)).

Taxpayer Position:

See Attachment 2. As summarized in the facts section, the ______ has made several assertions
about the activities of the ______ and the public use of assets. The ______ also makes an extensive
legal argument about why its claimed operational activities are charitable activities.

Conclusion:

For the reasons already given in the Government Position, because the ______ legal argument is
based on unsubstantiated assertions of activities, no extensive analysis of the legal argument needs
to be made. Simply put, because there are no substantiated operational activities the legal arguments
do not apply to the facts of this case.

For the reasons already given, the primary position is that the exempt status of the ______ should be
revoked effective the first day of the year under examination: ______

Because the gross income is derived from gifts and bequests, the ______ does not have any taxable
gross revenue that would require the ______ to file a Form ______, U.S. Corporation Income Tax
Return (see IRC §§ 61 and 102; and Synanon Church v Commissioner (IBID)). For that reason, no
Form ______ is being solicited by the IRS due to this proposed revocation and no taxes associated
therewith will be imposed.

Because charitable assets are dedicated to charitable purposes, the net assets of the organization
will need to be transferred to another organization described under IRC § 501(c)(3) (Tax Reg.
§ 1.501(c)(3)-1(b)(4)), and in subsequent time periods the organization will need to file Form 1120.