IRS revokes a "low-income housing" nonprofit that ran a commercial home-flipping business and funneled money to the founder's family

Plain-English summary

A nonprofit told the IRS it existed to create homeownership for low-income and disadvantaged people. On audit, the IRS found it mostly bought foreclosed houses through a bank-transfer program, rehabilitated them, and resold them at full fair market value on the open multiple-listing service to whoever could pay, while charging its own real estate sales commission on each deal and making loans at above-market interest. The IRS concluded this was a commercial real estate enterprise, not a charity: it did not verify buyer incomes, offered no down-payment help, counseling, or education, and sold to non-qualified buyers, so it failed the operational test for section 501(c)(3). The IRS also found that the founder-president, his wife (the vice-president), and their children drained money from the organization for personal use, including a personal credit card and ATM cards paid by the nonprofit, unaccountable bonuses, home-office reimbursements, and financed vehicles (antique cars and a boat) with no business records. Those payments were private inurement and automatic excess benefit transactions under section 4958. On both grounds, the IRS revoked the organization's tax-exempt status, told it to file corporate income tax returns (Form 1120), and noted the organization had waived its right to challenge the revocation in court under section 7428.

Ruling snapshot

• Question: Should the organization's 501(c)(3) exemption be revoked for operating a commercial home-sales business (a substantial non-exempt purpose) and for private inurement to its officers and their family?
• Outcome: revocation (final adverse determination; organization is no longer exempt)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c)(2), (d)(2), (e), (f)(2); IRC § 4958; Rev. Proc. 96-32; Rev. Rul. 70-585

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; wording is otherwise verbatim.

Department of the Treasury                    Date:
Internal Revenue Service                      JUL 20, 2022
Independent Office of Appeals                 Person to contact:
                                              Name:
                                              Employee ID Number:
                                              Phone:
                                              Fax:
                                              Employer ID number:
                                              Uniform issue list (UIL):
                                              0501.03-31

Release Number: 202241007
Release Date: 10/14/2022

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)
of the Code.

We made the adverse determination for the following reasons:

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax under
section 501(a) must be both organized and operated exclusively for exempt purposes. While your specific
purposes include charitable and educational purposes to aid the poor and disadvantaged individuals, a
substantial part of your activities involves providing real estate rehabilitation services, commercial-type real
estate sales to the public, and receipt of commercial real estate sales commissions. Selling real estate to the
public at a profit and earning commercial real estate commissions do not further charitable purposes. Moreover,
the organization is operated without a community-based board of directors for substantial non-exempt purposes
and serves private interests of the creator and his family. Therefore your organization is not organized and
operated exclusively for exempt purposes within the meaning of section 501(c)(3).

You are no longer exempt under Section 501(a) of the Code effective January 1,      .

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:
IRS Appeals Survey

cc:

Letter 1371-A (Rev. 10-2021)
Catalog Number 62960H


Department of the Treasury                    Date:
Internal Revenue Service                      01/14/2020
IRS Tax Exempt and Government Entities        Taxpayer ID number:
                                              Form:
                                              Tax periods ended:
                                              Person to contact:
                                              Name: Adalid Caballero
                                              ID number:
                                              Telephone:
                                              Fax:
                                              Address:
                                              Manager's contact information:
                                              Name:
                                              ID number:
CERTIFIED MAIL - Return Receipt Requested     Telephone:
                                              Response due date:
                                              02/14/2020

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.

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.

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

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

Sincerely,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018, Pub. 892, 3498

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


Form 886-A   Department of the Treasury - Internal Revenue Service
Explanation of Items
Name of Taxpayer:            Year/Period Ended:

Issues

Whether 501(c)(3) status should be revoked on the grounds that:

1. It is operated for a substantial non-exempt purpose, selling homes to non-qualified buyers, and
2. Its net earnings serve a private benefit rather than a public interest.

Facts

(_____) was incorporated in the State of ______ on ______. Its purpose, as stated in its Articles of
Incorporation, is "nonprofit public benefit corporation and is not organized for the private gain of any person."
It further states that it was created for "charitable and educational purposes to aid the poor and
disadvantaged individuals..." Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code, was filed on ______ and signed by President, ______. The IRS issued a
determination letter dated ______ granting exemption under section 501(c)(3) of the Code. It was further
classified as a non-private foundation pursuant to Internal Revenue Code sections 509(a)(1) and
170(b)(1)(A)(vi) as a public charity. The IRS issued a final determination letter dated ______ confirming its
original ruling of foundation status described in section 509(a)(1) / 170(b)(1)(A)(vi) as a public charity. To
date, this determination has not been changed.

Form 1023 Application:

On its application for exemption, Form 1023, ______ stated that it would provide programs "designed to create
homeownership to low and very low-income persons, to eradicate homelessness, to educate minority and
underprivileged youth in the skills of rehabilitative, constructive, and other areas". And "to provide health and
sanitory rental living facilities to those that are not eligible for home ownership." It also stated it would
provide credit and homeownership counseling and; mortgage intervention counseling when needed. Under
support services, ______ stated the following "to promote the construction and rehabilitation of dwellings for
low-and-moderate income persons in the State of ______, to operate as an outreach advocacy program for
youth at high risk, employment services, both job training and placement, housing, land acquisition, and other
programs to aid those in need."

During the determination process and in a letter dated ______, the IRS provided the guidelines relating to the
provision of housing as an activity described in section 501(c)(3) of the Code and requested additional
information regarding ______ activities.

Question 3 requested the following:

"Rev. Proc. 96-32 provides guidelines for determining whether organizations providing housing are described
in section 501(c)(3) of the Code. If you have not begun your housing program but wish this to be considered in
your application for exemption, please explain how you will comply with the safe harbor guidelines of Rev.
Proc. 96-32.

Specifically address the following:

a. Will you agree that for each housing project that (a) at least ___ percent of the units will be occupied by
residents that qualify as low-income; and (b) either at least ___ percent of the units will be occupied by
residents that also meet the very low-income limit for the area or ___ percent of the units will be occupied
by residents that also do not exceed ___ percent of the area's very low-income limit? Up to ___ percent of
the units may be provided at market rates to persons who have incomes in excess of the low-income limit.

If you agree, please submit a resolution adopted by your governing body and signed by at least (__)
officers agreeing to the above."

In its response dated ______, ______ attached a Board of Directors Resolution agreeing to provide at least
___ percent of the units to residents that qualify as low-income; ___ percent by very low-income or ___
percent by families that do not exceed ___ percent of the area very low-income limit. (Exhibit-A). The
resolution was signed by the President and the Secretary.

b. "Will you agree projects will actually be occupied by poor and distressed residents?"
"If you agree, please submit a resolution adopted by your governing body and signed by at least (__)
officers agreeing to the above."
______ stated "Yes" in its response.

c. "Will you agree to provide housing that is affordable to charitable beneficiaries?"
"If you agree, please adopt a rental policy which demonstrates affordable housing. Submit a copy of the
policy."
______ stated "Yes" in response.

d. "Will your project share the same ground?
If not, please describe in detail the facts and circumstances in which separate locations will be required
and explain how the separate locations will further your exempt purposes.
Please refer to Rev. Proc. 96-32 enclosed."
______ stated "Yes" in response.

e. "Explain how you will insure the sale of homes furthers exempt purposes. Describe in detail the
procedures you will follow in the sale of homes. For example, will you restrict sales to individuals which
would otherwise be unable to purchase a home? Will the sales price be set at an amount in which they may
afford to purchase the property?"
______ provided the following response:
"Sales of our homes will be geared toward the poor and disadvantage individuals and families. We will
offer the lowest possible price. We will target individuals who are unable to purchase home through the
traditional process."

Question 4d asked the following:
"Please provide a list of your criteria and income guidelines when considering applicants for your housing
project. Specifically, describe the criteria used to determine low income, very low income and moderate
income."
______ provided the following response:
"Low income; those making less that ___ percent of the average medium income, very low income; those
making less than ___ percent of the average medium income, moderate income; those making less than
___ percent of the average medium income."

Question 4e asked the following:
"How many very low income occupants will you have as compared to low and moderate income occupants in
your housing project? If actual numbers are not available, please provide the percentage of very low income,
low income and moderate income occupants."
______ provided the following response.
"Very low income will make up approximately ___ percent of our clients."

Question 4f asked the following:
"How is it determined how much money is to be put down by the low income housing buyers for their home?"
______ provided the following response:
"It is based on their income."

Governance:

President ______ founded ______. On its most recent Form ______ filed for ______, ______ is still listed as
the president, his wife ______, is listed as a Trustee/Director, and his daughter in law, ______, as the
Vice-President (VP), respectively. There are other Directors listed ______ and ______ and ______ control the
day to day operations and finances of ______.

Section 1, Bylaws, states that "The corporation should have ___ Directors and collectively they shall be known
as the Board of Directors". The Articles of Incorporation lists ______, ______, and ______ as the initial
Directors of ______, and ______ as the incorporator. Both the Articles and Bylaws have not been amended
since inception.

In addition to the directors listed above, ______ has a close working relationship with ______, Volunteer (son
and husband of President and Vice President, respectively); and ______, Independent Contractor, (Son of Vice
President).

Form ______ for ______ lists ______ officers and directors. ___ of the board members are related: ______,
______, and ______.

President and VP compensation was reported at $______ and $______, respectively. Both Forms W-2 were
filed for the amounts reported. ______ compensation was reported for $______ on Form 1099. No
compensation was reported for ______.

EO Activities:

During the years ended ______ and ______, ______ activities consisted primarily of renting and selling homes,
which it calls "low income family houses". Occasionally, it lends money to home buyers and borrow money from
private investors for the purpose of conducting its business activities. ______ reported total revenues of
$______ and $______ for home sales and rentals for the tax year ended ______ and ______, respectively.

Property sales:

By far the main activity of ______ by way of revenue is to buy foreclosed properties and sell them in the open
market. The homes are purchase from the ______ (______), a national non-for-profit organization and
intermediary in the transfer of foreclosed and abandoned homes to "______".

In response to IDR 03, Item 1, ______ submitted a letter dated ______ from ______ which stated that ______ is
an approved ______ since ______ to participate in its ______. The letter further stated that in ______ ______
became a participant in the ______ (______) in which a consistent flow of new inventory from ______ and
______ are available on a pre-listed "first Look" basis to ______. Through ______' properties in ______,
______, and ______ valued below $______ are available for acquisition. ______ has acquired ______
properties from ______ as part of ______.

According to the [Program Guide] provided in response to IDR 03, ______ facilitates the transfer of properties
between financial institutions (______) and eligible housing providers (______) and supports the property
transactions needs of the ______. Support includes establishing standard pre- and post-purchase procedures.
______ is not involve in resale transactions with the subsequent end users. Section ___ of the Program Guide
states that "______ may only acquire properties of accessible value, defined as:

> "When the fair market value of a property at acquisition is within the reasonable purchase range for a
low-, moderate-, or middle-income homebuyer (up to ___% of Area Median Income) using conventional
financing products; and

> When the sales price of the property post-rehabilitation will be within the reasonable purchase range for a
low-, moderate-, or middle-income homebuyer using conventional mortgage financing products."

Section ___ of the Program Guide states that "______ agree to use their best effort to source income-eligible
end users for properties acquired through the ______. Income-eligible is defined as an individual or family
whose income is up to ___% of local Area Median Income". Section ___ of the Program Guide requires certain
data fields to be completed in its system. The data includes income verification of end user; owner occupation
verification; and homebuyer education verification.

Once purchased, ______ repairs and rehabilitate the homes. At the completion of the repairs, the homes are
then placed on the (______) for resale or rent. ______ website states that "______ is a fully licensed real estate
brokerage company and is a member of the ______ Board of Realtors." According to ______, the selling price of
the homes were set based on fair market value in the area. A review of ______ listing provided with IDR-3,
shows ______ as the selling office and its President, ______, as the listing agent with license #______. As the
seller, ______ charged a ___ percent commission for selling its own properties on the ______ listing site. It
received a commission from each home sale which is charged to buyers at closing. ______ reported real estate
commission income of $______ in ______ and $______ in ______. The listing offers the buyer's agent
compensation of ___%. For the sample listing provided in IDR-3, Under the Instructions Remarks the following
was stated: "______". There is no note or remark referencing low-moderate income buyers.

With regards to homeownership counseling, ______ indicated that while this was done in prior years
"historically low interest rates and depressed home prices improved the home affordability index to a near
all-time high, greatly reducing the need for counseling services. Further, due to the geographical diversity of
the properties, ______ marketing model changed to include the utilization of the (______) to market its
properties. Hence, ______ has little to no direct contact with the buyers and the selling agents are directly
responsible for guiding the buyers through the counseling, finance, and sales process."

The following is a sample overview of a home from the date it was purchased to the date it was sold by ______:

- ______ purchased home located at ______ from the ______ program for $______.
- Between ______ and ______, ______ rehabilitated the property.
- On ______, ______ listed the property for sale on the ______ for $______.
- On ______ the property was ultimately sold to ______, a limited liability company registered and managed
by ______ for $______.
- On ______, ______ sold the property to final end-user for $______.

The chart below shows a sample of properties purchased from ______ and sold to end-users:

[chart of sample properties: purchase price, resale price, occupant income %, % profit -- figures redacted]

Homes purchased through ______ are acquired at a cost less than FMV, as noted on the chart above in the
section for Purchases. The chart above shows that for the sample properties reviewed, ______ reported Net
Profits to ______ on ___ of the properties shown; ___ properties were reported as sold to Occupants making
less than ___% of ______, and ______ reported no "______" (presented as N/A in the chart). The column title
"% Profit" shows percentage of profit from sales.

Further review of Affidavit of Income secured from buyers and submitted with IDR-2, 3, and ______ responses
(See column title Affidavit %), shows that of the reports submitted to ______ showing no "______", all
reported percentage of ______ at ___% or higher and in ___ cases no Affidavit of Income was secured.

IDR 3, Item 9, requested income verification for a sample of properties including those in the chart below.
______ filed the following statement:
"Acceptable income documentation has been provided in accordance with the Federal Housing Finance
Agency...as administered by the ______ (______)...Every transaction has been reported to ______ and the....
as required in section ___ and ___ of the program guidelines. This includes the uploading of the Buyer's
Affidavit of Income and other documents as set forth in section ___ of the federally approved program
guidelines..."

IDR 3, Item 1, Requested for source documents used in determining low and median income as reported on the
Affidavit of Income. The answer was the same as in Item 9.

IDR 3, Item 2, requested Selling/Leasing eligibility requirements or criteria used by ______ to determine low,
very low, and Moderate income. ______ filed the following statement:
"______ board of directors approved the organization to participate in the "______" program and adopted the
______ (attached). From ______ to ______ has participated in the ______ and adhered to all of the program
guidelines. Income limits (attached) are set by HUD and the ______ and these tables are published annually
based on geographical area and family size. "Low to Moderate" income buyers/tenants are identified by using
these tables and income documents are collected in accordance with ______."

During ______ and ______, ______ sold a total of ___ and ___ properties respectively including homes and
lots. Prices ranged from $______ for a sale of a lot to $______ for a home sold. During the examination, a
representative sample of ___ of these properties' records were requested including verification of "end-user"
income. Some records provided included listings, Sales contract, Settlement Statements, ______ reports,
(______), and Income Affidavits (IA). ______ did not provide income verification, so as to establish a basis for
income requirements.

Exhibit-B attached show a sample of properties sold, at (%) percent-___, Affidavit percentage of income
reported based on household size for each year for the sampled properties.

It shows that ___ of Income Affidavits reported income of ___% or higher, another ___ either did not complete
it or left it blank, and the rest reported of ___% or lower.

The Income Affidavits (IA) are self-completed. A copy of an IA is attached on Exhibit-C (with buyer identifiable
information redacted). The IA shows ______ as a percentage based on family size. Below the income table
buyers are asked for the number of family members who will occupy the home and percentage of median
income. The IA also includes the following statement above buyers' signature:
"By signing below, Buyer acknowledges that he/she meets the above income criteria and is therefore eligible to
purchase a home under this program. If needed, buyer may be requested to provide further documentation for
income qualification purposes. Buyer further certifies that the property will be used as his/her primary
residence."

It is noted that "if needed, buyer may be requested to provide further documentation for income qualification
purposes". ______ did not verify buyers' income for properties sold and relied solely on selling agents for
completion of the IA. On IDR-1 for tax year ended ______, agent requested a sample of ___ properties' file
documents for review. ______ response was as follows: "The request of ___ sample files for ______ is
overreaching and duplicative as the documents remained the same between ______ and ______ and were
submitted pursuant to IDR#1 dated ______."

When ______ was asked for other program-related activities conducted in relation to its exempt purpose
(IDR-3, Item-3), in part the reply says: "Hence, ______ has little to no direct contact with buyers and the
selling agents are directly responsible for guiding the buyers through the counseling, finance, and sales
process."

Property Rentals:

In addition to selling homes, ______ also rents some of the properties bought through the ______ programs.
The homes are located through out south ______. Rental prices range from about $______ for an apartment to
about $______ for a single-family home.

A review of a sample of rental properties for ______ and ______ shows that ______ secured a self-reported
Affidavit of Income from tenants either through rental agencies or directly from the tenants. Appendix-D, Rental
Properties, shows the rental property address, ___% of ______ (based on number of household members),
percentage of income reported on affidavit, and documents obtained from and reviewed.

Appendix-D, Column "Verification: doc", shows "None" to indicate that no verification of income or family size
documents were provided to independently verified information reported on IA submitted by home buyers.

On the letter dated ______, the IRS requested more information relating to original responses by ______ on
"Home Rental Projects" reported during the filing of the Form 1023 application for exemption. On ______ and in
response to the request, ______ reported the following:
"at the present time we do not have any policy regarding housing that is affordable to charitable beneficiaries.
However, this is something that we may wish to address in the future. The procedure used here in comes from a
program entitled "RFA" (Request for Applications). For your file, I have attached a copy of the policy regarding
the minimum requirements of their rental programs that are part of the RFA, which would be used in the future."

The policy attached to the response includes the following provisions:
"INCOME REQUIREMENTS FOR HOME TENANT
Home program requirements with respect to the occupancy and affordability of the units apply at the time home
assistance is initially provided, and for an extended period of time.
Owners of rental properties are required to maintain occupancy of units by low-income persons for the duration
of the mortgage, which is generally ___ years. During the applicable affordability period:
Monitoring and Ongoing Responsibilities
Tenants whose incomes exceed ___ percent of median may stay in their units. However, these over-income
tenants must pay at least ___ percent of their adjusted monthly income for rent and utilities. Projects
combining ______ and ______ are exempt from this provision."

Lending Activity - Interest Income:

In its ______ return ______ reported $______ interest income from its lending activity. ______ lending practice
through its affiliates: ______ and ______, provided a limited number of small amount loans ranging from
$______ to $______. The interest charged on these loans was between ___ percent (%). The financial records
for ______ showed interest payments being received for approximately ___ loans. According to ______, the
loans were provided to "held back seller financing in the form of a note and mortgage." A review of ______
submitted with IDR-4 shows the principal loan amount of $______ with ___ per cent interest. For late payments
it includes the following statement:
"If the holder has not received the full amount of any installment by the end of (__) calendar days after the date
it is due, Maker will pay a late charge of (__%) percent of the overdue installment." And, for default, the
following applies:
"If default be made in the payment of any of the sums or interest mentioned here in or in said mortgage for a
period of thirty days, or in the performance of any of the agreements contained herein or in said mortgage, then
the entire principal sum and accrued interest shall at the option of the Holder hereof become at once due and
collectible without notice, time being of the essence; and said principal sum and accrued interest shall both
bear interest from such time until paid at the highest rate allowable under the laws of the State of ______."

Borrowing from Private Sources

______ reported $______ for investor interest payments for ______ and $______ for ______. Private investor
loans were taken at around ___ percent interest plus ___% profit sharing on the homes sold. Again, a review of
___ of those loan agreements named "Memorandum of Understanding and Agreement", shows in part the
following terms and conditions:
"The Lender hereby establishes a loan in Borrower's favor in the amount of advanced for each property at the
lender's discretion; provided...."
"Any loan made in accordance with this agreement will bear interest at the rate of ___% per annum plus a profit
participation equal to ___ percent (__%) of the lender's pro rate portion of the total cash equity on the sale of
the property..."
"Any loan made in accordance with this agreement shall allowed to be encumbered on a property in the form of
a Mortgage..."

Summary of Income & Expenses:

The primary source of income was $______ reported from homes sales and $______ from home rentals. It also
derived income from its Real Estate Sales commission in the amount of ($______) and interest income from
loans. It also reported a loss on its sale of assets (equipment, vehicles, rentals) of $______. Total revenues
reported on the return was $______.

Forms ______ for the years ended ______ and ______ show the following:
[Gross Receipts; Revenues; Program Service Revenue; Investment Interest; Loss on sales of Assets; Total
Revenue $___ $___; Total Expenses $___; Excess (deficit) $___; Assets; Cash; Total Assets; Total Liabilities
$___ $___ -- figures redacted]

Most of income for the years under examination was reported in its financial statements as Rental and Sales of
"Low Income" houses. In addition, ______ charged a ___ percent commission for listing its own properties on
the ______ listing site.

The Expenses on the returns are represented as Program-related. A substantial part was reported as
Depreciation, Investor Interest Payments, Repairs, Compensation of current officers, Occupancy, and Other
Management and General Expenses. Depreciation schedule included antique and other newer financed
vehicles for which a business purpose could not be established due to the lack of record keeping. Private
investor loans were taken at around ___ percent interest plus ___% profit sharing on the homes sold. In
addition, reimbursements to officers and Independent Contractors for used of home office, meals, tolls, and
other expenses were disproportionate without proper substantiation or an Accountable Plan for reimbursement.

During ______ and ______, ______ leased warehouse and office space located at ______ for which it reported
$______ on Occupancy expense on its Return. In addition, VP, ______, claims her personal resident was also
used as a business office and ___% of the home total expenses were reimbursed by ______. There was no
written contract or board approval for the reimbursed amount which total $______ for ______ and $______ in
______. The home was purchased by ______ from ______ in a prior year.

According to financial records (bank and ______ accounts) a substantial amount of money, time, and effort was
invested on vehicle financed payments, repairs for antique vehicles, tolls, meals, unaccountable check
payments, and ATM cash withdraws. The organization's expenses and invoices do not indicate any educational
programs or financial support to aid the poor and disadvantage as stated on its application for exemption.

Use of EO Assets

Credit Card Payments:

______ has represented that it only had ___ bank account during ______ and that it was unable to obtain a
credit card account, therefore, ______ (President) used his own personal Credit Card (______) for purchases.
However, there were other Credit Card Accounts (______, ______) which ______ used primarily for home
building supplies and materials. ______ CC statements show numerous ______ and other transactions
including ______ of personal nature. There are other card holders on this account: his wife, ______, his son
______, and another account holder only identified as ______ (possible ______). The credit card was used both
for business and personal expenses. ______ was the primary user and expender on the account.

Most of the alleged business charges identified on the statements were made by the President's son, ______,
for vehicle repairs, gasoline, food, travel, and construction material. ______ antique vehicle expenses stood
out at ______ and ______, over $______ was spent in ______ on these vehicles along. There was no business
purpose for these vehicles. When the agent toured ______ facility, the vehicles were not there. The expenses
appear to be to improve the appearance and performance of the vehicles including: paint, sound system,
mechanical. ______ was also the driver of the ______, for which many expenses were charged to the card.
Request for records to support business usage of these vehicles were not provided, or if provided, did not
support a business purpose for the excessive expenses.

______ transactions were only identified with a note next to them relating to the nature of the expense others
were left blank. Review of ______ reimbursements and the credit card statements show ______ paid the full
monthly balance and a debit expense was created on the Receivable Due Account of the ______. There were no
records of each individual user of the account beside the CC statements.

There was no substantiation for the business purpose of the expenses and no accountable plan for
reimbursement. When the auditor requested financial records, ______ submitted an ______ report showing
debits and credits with a note on top "Personal Charges Paid by ______" with a balance due of ($______).

Total payments to ______ personal credit card totaled $______ for ______, of this amount $______ was debited
as "Personal Charges" on the account name "Receivables Due ______" (See Exhibit-E). On the same account,
credit payments to ______ in the amount of $______ were reported. In response to a request for supporting
records on IDR-5, Appendix-A, to show personal payments made by ______, ______ submitted copies of its
Account (______) bank statements highlighting deposits for $______ and $______, and a note indicating a
personal cash loan transaction from ______ for the purchase of a house located at ______. Review of the
property Settlement Statement does not indicate ______ funded the transaction. The name of the Borrower on
the Settlement Statement is shown as "______". There is no indication that the deposits or cash loans were
made by ______ personal funds.

In ______ ______ received an ______ credit card (______) which was issued under both ______ name and
______. The users listed on the CC statements are the same as in the prior account (______, ______, ______).
Review of the CC statements show the primary usage was for meals, gasoline, and other purchases
(construction material).

Checks

President, ______ and VP, ______, control the finances of ______. They wrote and signed all checks drawn on
______ bank account, deposited, withdrew, and transferred money in and out of the account. They both had
ATM debit cards. Also, ______, the President's wife, and ______, the VP's husband, and ______ (VP's son) had
ATM cards. ______ used the ATM card for cash withdrawals and purchases. The President and VP make the
day-to-day financial decisions including setting up their own compensation, bonuses, reimbursements, and
payments. This included bonuses for $______ to ______, and $______ to ______ in ______ based on payroll
reconciliation. During the Initial Interview, ______ confirmed she and ______ set up their own compensation
and bonuses. When asked how each employee salary is determined, she replied that "because ______ is family
related business no information is kept".

In addition to their bonuses, ______ received a total of $______ in check payments and ______ received
$______ not reported as compensation (See Exhibit-F). When asked for records to support the business
purpose of the transactions (IDR-5, Appendix-D), ______ highlighted some transactions and noted on the
appendix either "Bonus" or "Advance of P/R...returned on ______." Included with the response was a copy of
______ account (______) statement for ______ showing a deposit of $______ and a comparable salary
calculator printout for the Vice president position. Reviewed of the documents provided did not indicate either
that the $______ deposit was paid by ______ with personal funds or that the advance payment was returned on
______ as indicated. The comparable Vice-president data also does not indicate the payment highlighted as
"Bonus" was meant to be compensation at the time of the payment nor was reported as compensation on Form
W-2.

ATM Withdraws:

Debit cards (______, ______, ______) from Account number (______) were used for cash withdrawals and other
purchases (Exhibit-G). Based on bank statements, the debit cards were used primarily by ______ and on
occasion by ______. The total withdrawals from these transactions were $______.

Requests for supporting records to establish a business purpose for these multiple transactions was made on
IDR-5, Appendix-E. ______ submitted a sample of an invoice, receipt, copy of emails relating to a trip to
______, and an expense report for ___ of the questionable transactions on ______ for $______ cash. Review of
the documents submitted did not indicate that the specific transactions referred to in the Appendix were directly
related to the documents provided.

An invoice dated ______ for "______" for a ______ on the amount of $______ is reported to be associated with
a cash withdrawal on ______. The invoice shows to make the check payable to ______; the date of the cash
withdrawn is not near the date of the invoice; and there is no indication that invoice was paid with the cash
withdrawn on ______ beside a hand-written note on the invoice "Paid Cash". Another cash withdrawal on
______ for $______ is associated with a receipt dated ______ from ______ for the same amount. On the receipt
credit card payment is checked including an apparent credit card number. It is not clear if the payment was
made in cash or by credit card. The airline tickets purchased with the ATM and the copies of emails provided
associated with the expense, also did not indicate business related purpose. Both expenses on ______ and
______ indicate travelers (______ husband) and ______.

Fringe Benefits: Vehicles

During ______ and into ______, ______ financed ___ vehicles: ______, ______ and ______. All vehicles were
purchased and financed through ______ credit based on ______'s Vehicle Loan Interest account on the General
Ledger. Total vehicles loan interest paid in ______ was $______ and $______ in ______. The increased in
finance charges was due to purchasing of newer ______ and ______ models.

The President, ______, drove the ______. The vehicle is kept at his house all year and all expenses are paid by
______ including tolls, gasoline, finance charges, maintenance, and insurance. On IDR-5, Item 5, supporting
documents for the business use of all vehicles were requested. For vehicle ______ it was reported that ___% is
for business use and ___% for personal. In addition, with the IDR-5 response, ______ submitted an allocation
expense of ______ with total expenses for this vehicle at $______ and $______ allocated to the personal usage
of the vehicle. There were no logs of business trips, miles driven, or any other business-related support of the
vehicle usage provided.

The ______ was reported as being used by ______ for volunteer labor. Review of the credit card statements,
checking account, and debit card shows he was the primary spender for maintenance, repairs, and upkeep of
this vehicle. The truck was not kept on site and logs for business and personal use of this vehicle were also not
kept.

______, Independent Contractor, for ______ was reported as driving the ______. Review of the Automotive
Expense account of the General Ledger shows a number of expenses relating to maintenance and upkeep of
this vehicle for ______. Records for business usage of the vehicle were not provided. On a copy of an email sent
with IDR-5 response, ______ writes, "I drive the ______. ______ seems about right". However, no records were
provided to show the allocation of business and personal usage of the vehicle.

The cost value of any of the above vehicles as a taxable benefit to those who received it was not established or
reported in any employment tax return.

Reimbursements: Home Office

In ______ and ______, ______ received ___ percent (%) reimbursement credits for her personal residence
expenses that she claimed for a room that was allegedly used as a home office. Expenses included: water,
electricity, taxes, Insurance, HMI, telephone, trash removal, Internet, and furniture. Total home office expenses
claimed were $______ for ______ and $______ for ______. The account was reported as Office Expense and
Accounts Receivables: Due ______ was credited with the amounts reported. There was no written contract for
the usage of the home office, and ______ leased over ______ of office and warehouse space in the same
locality where she lives. During a tour of the facility, the agent asked ______ to let see the home office, but she
refused.

A drawing of the house floor plan submitted shows the office is ___ Sq. feet including a pass-way to the office,
but this was not verified. The floor drawing submitted shows a total base area of ___ Sq. Ft. In addition to the
floor drawing, pictures of the office were also included. There was no other written document provided that
would show the legitimate business purpose of the office to ______.

The home is located at ______. County records shows the house has ___ bedrooms and ___ baths, Total
property size is ___ acres and the building Square footage is ___ Sq Ft. This is the same property that was
purchased from ______ in prior years and reported as a Quitclaim deed on county records.

Meals and Tolls:

Meals and tolls expenses for ______ totaled $______ and $______ respectively. $______ and $______ for
______ (See Exhibit-H). A sample review of meal transactions revealed that the account (______) ATM was the
primary method used for payments and that ATM numbers (______, ______) used by ______ and ______ were
used. Many of the toll transactions are in increments of $______ and $______ paid by both account holders. To
this date there has been no substantiation submitted for the business purpose of these expenses.

For the request for substantiation on IDR-5, Appendix-B, and IDR-2 for ______, ______ submitted a State of
______ red and blue dotted map showing properties owned by ______ across the State of ______. Properties
owned were highlighted in green and tolls were highlighted in red. No other records or support for individual
questionable transactions were submitted that will show a business purpose for the expenses and business
activities. ______ fail to follow its own Accountable Plan guidelines submitted with response to IDR-1 for
______, Appendix-7. Which state in part, under #2, "Under no circumstances will ______ reimburse employees
or volunteers for business or professional expenses incurred on behalf of ______ that are not properly
substantiated."

Below is a chart that shows the name, type, and total benefits received by each individual in ______ and ______

[Fiscal Year ended ______ -- Benefits: Exp.; Vehicle-Value; Meals/Tolls; Cash/Checks; Total... / Fiscal year
ended ______ -- Benefits: Exp.; Vehicle-Value; Meals/Tolls; Boat; Cash/Checks; Total... -- figures redacted]

Noteworthy statements made by ______ and ______ during the initial and subsequent interviews include the
following:

- The ATM is used by me (______) and ______
- Affidavit of Income is the only document secured by ______
- When asked if there was an Accountable Plan for reimbursement the answer was "no".
- When asked about the process for determining compensation, bonuses, and employment contracts for
officers the answer was there was none because it was family related.
- The personal credit card was used because ______ was unable to obtain its own credit card.
- When asked if the home office was used for purposes other than ______, the answer was "I don't remember."

Law

Internal Revenue Code

§501(c)(3) of the Internal Revenue Code provides for exemption from Income 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.

§1.501(c)(3)-1(d)(2) of the Income Tax Regulations defines the term "Charitable" to include: relief of the poor
and distressed or of the underprivileged; lessening the burdens of Government; and promotion of social welfare
by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii)
to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat
community deterioration and juvenile delinquency.

Rev. Proc. 96-32, establishes a safe harbor guideline for organizations that seek exemption under Section
501(c)(3) on the basis of relief of the poor and distressed. The guideline provides a safe harbor for projects in
which (1) at least 20% of the units are for residents with incomes that are 50% or less of area median income or
40% of the units are for residents with income that are 60% or less of area median income; (2) on an overall
basis, at least 75% of the units are for residents with incomes at 75% or less of area median income; and (3)
there are rental restrictions for low-income residents to ensure that the housing is affordable. Rev. Proc. 96-32
also makes it clear that organizations may qualify for exemption without meeting the safe harbor based on other
facts and circumstances.

Rev. Rul. 70-585, 1970-2 C.B. 115, illustrates 4 situations where an applicable tax-exempt organization is
within the meaning of Section 501(c)(3). Situation-1, the organization was found eligible under section
501(c)(3) on the basis that it provided homes to low income families who could not afford them under
conventional channels by providing low-payment plans, aid financially eligible potential buyer who did not have
the necessary down payment and offered new constructions homes for sale to low income families who qualified
under a Federal housing program. Or Situation-4, however, it was found that the organization did not qualify for
exemption under section 501(c)(3) on the basis that its programs were not designed to provide relief to the poor
or to carry out any other charitable purpose.

§4958(c) defines the term "excess benefit transaction" as any transaction in which an economic benefit is
provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified
person if the value of the economic benefit provided exceeds the value of the consideration (including the
performance of services) received for providing such benefit. For purposes of the preceding sentence, an
economic benefit shall not be treated as consideration for performance of services unless such organization
clearly indicated its intent to so treat such benefit.

§4958(e) defines "applicable tax-exempt organization" as an organization described in either §501(c)(3) or
§501(c)(4) of the Internal Revenue Code or an organization which was so described at any time during the
five-year period ending on the date of the excess benefit transaction.

§4958(f)(1) defines a "disqualified person" as (A) any person who was, at any time during the five-year period
ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the
organization, (B) a member of the family of a disqualified person, and (C) a 35% controlled entity.

Treasury Regulations

§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.

§1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes
if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

§1.501(c)(3)-1(d)(3)(i) defines the word "educational", as used in §501(c)(3) of the Code, as --
(a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or
(b) The instruction of the public on subjects useful to the individual and beneficial to the community.

§1.501(c)(3)-1(e) states that an organization may meet the requirements of section 501(c)(3) although it
operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in
furtherance of the organization's exempt purpose or purposes and if the organization is not organized or
operated for the primary purpose of carrying on an unrelated trade or business, as defined in section 513. In
determining the existence or nonexistence of such primary purpose, all the circumstances must be considered,
including the size and extent of the trade or business and the size and extent of the activities which are in
furtherance of one or more exempt purposes. An organization which is organized and operated for the primary
purpose of carrying on an unrelated trade or business is not exempt under section 501(c)(3) even though it has
certain religious purposes, its property is held in common, and its profits do not inure to the benefit of individual
members of the organization.

§1.501(c)(3)-1(f)(2)(i) states that, regardless of whether a particular transaction is subject to excise taxes
under section 4958, the substantive requirements for tax exemption under section 501(c)(3) still apply to an
applicable tax-exempt organization described in section 501(c)(3) whose disqualified persons or organization
managers are subject to excise taxes under section 4958. Accordingly, an organization will no longer meet the
requirements for tax-exempt status under section 501(c)(3) if the organization fails to satisfy the requirements
of paragraph (b), (c) or (d) of this section.

§1.501(c)(3)-1(f)(2)(ii) provides that, in determining whether to continue to recognize the tax-exempt status of
an applicable tax-exempt organization (as defined in section 4958(e) and §53.4958-2) described in section
501(c)(3) that engages in one or more excess benefit transactions that violate the prohibition on inurement
under section 501(c)(3), the Commissioner will consider all relevant facts and circumstances, including, but not
limited to, the following --
(A) The size and scope of the organization's regular and ongoing activities that further exempt purposes before
and after the excess benefit transaction or transactions occurred;
(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in
relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes;
(C) Whether the organization has been involved in multiple excess benefit transactions with one or more
persons;
(D) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess
benefit transactions; and
(E) Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6) and
§53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person(s)
who benefited from the excess benefit transaction.

Government's Position

Issue #1: Homes Sales to non-qualified buyers

Sales of homes to non-qualified very low, low, and medium income buyers as a charitable activity does not
meet the operational requirements established under §501(c)(3) of the Internal Revenue code. Section
501(c)(3) provides for exemption from income 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. ______ sale of homes to non-qualified (non-charitable class) home buyers
does not further its exempt purpose and it does not meet the operational test under Section 501(c)(3) of code.

Rev. Proc. 96-32, provides guidelines for relief of the poor and distressed. It provides a safe harbor for
organization wishing to be considered under the income percentages requirements established within the
guidelines. However, even though, ______ accepted these safe harbor requirements during its process for
recognition of exemption and even submitted its own Board of Directors' resolution adhering to these
requirements, the facts during the examination show otherwise.

The "Affidavit of Income" requested by ______ from home buyers, alone, does not independently show it met
the safe harbor guideline in Rev. Proc. 96-32. In addition, its own guidelines reported on Appendix-A, board
resolution submitted for recognition of exemption reflect this. The chart under Facts, Property Sales section,
shows home buyers income at all levels from ___% to over ___% (percent) of ______. Even for those under
___% of ______, the supporting documents are not available to independently verify if ______ met the income
guidelines for homes sold during the periods audited.

______ sold its properties at fair market value on the open market using the ______ site. There is no down
payment assistance, education, counseling, or any other related exempt activity conducted with home buyers to
set ______ apart from a counter-part doing the same activity for profit. This further indicates ______ running a
commercial enterprise rather than a charitable activity. Rev. Rul. 70-585, referred under Law Section,
Situation 4, found that organization did not qualify for exemption on the bases that its programs and activities
did not provide relief to the poor or carried out a charitable purpose. Similarly, ______ homes sales main
purpose is not to provide relief to the poor or a charitable class, but to buy low, and sell high, to the highest
bidder in disregard of the requirements imposed under the law even under its own board resolution
requirements.

______ did not follow, or chose to ignore, ______ program guidelines which call for "______" to acquire
properties of accessible value for very low, low, and medium income end-users. The guidelines also report that
"______" agree to use their best effort to source income-eligible end users for properties acquired through the
______ and to report income verification of end-user. ______ ignored buying properties of accessible value
prior or after rehabilitation; instead, it purchased properties of all sizes and values. The chart above, reporting
sample properties purchased from ______, shows prices ranging from $______ -$______ with resale prices
between $______ up to $______ unreachable for a very low to moderate income buyer. Therefore, selling
rehabilitated homes to any buyer who paid the fair market value of the property not withstanding its charitable
exempt purpose in clear violation of Section 501(c)(3)-1(d)(2), Rev. Proc. 96-32 safe harbor guidelines, and its
own board resolution.

______ did have the opportunity to show its best effort to sell its homes to low and moderate-income buyers
when it listed its properties on the ______ but chose not to. As it is, evidence on the sample listing provided
during the examination and referenced under Facts, EO Activities Section reflects this as well. There are no
signs or any notes or, remarks, where ______ let buyers or selling agents know of its intent to sell its homes to
low-to-moderate income buyers. It is not even involved in the completion of buyers' Affidavit of Income to
source income eligible buyers. Its actions clearly violate both ______ guidelines and IRS Section 501(c)(3).

There are no related educational programs or credit counseling offered as stated on its application for
exemption Form 1023. ______ statements during the initial and follow up interviews as to the lack of financial
records, loans at above market rate interest, and lack of financial assistance to those who may qualify but lack a
down payment or need credit assistance, are all indicative of a non-exempt purpose for the activity; namely,
making money for profit.

Inurement, as grounds for revocation in Issue #2, stands on its own and would alone warrant revocation. But,
given the estimates of at least ___% (percent) in non-qualified "low income" home sales per year, and other
non-related income sources (Interest, RE Commissions), this is a substantial non-exempt activity. This activity
does not meet the exemption of Treasury Regulations §1.501(c)(3)-1(d)(2), and therefore further warrants
revocation of exempt status.

Issue #2: Private benefits

______ earnings have inured, in substantial part, to the benefit of the officers and their family. This violates
§1.501(c)(3)-1(c)(2) of the Treasury Regulations and warrants revocation of ______'s 501(c)(3) status. ______
and ______ and her husband and son (______) were in a position of complete financial control during the years
under examination. Because of this control, ______ was able to use his father's Credit card and the ATM debit
cards to withdraw cash, pay for meals, and pay for his personal expenses including the maintenance of the
______ and the vehicles. He did so on numerous occasions during ______ and ______.

______ has stated, that he was a volunteer and only performed small jobs. However, financial transactions with
his father's credit card (paid by ______), meals, gasoline, tolls, and maintenance and repair expenses show
otherwise. She has stated that the vehicles were used primarily for business purposes but has not submitted
any records to that effect nor were any logs of business trips kept. A dotted State of ______ map submitted to
show business trips in relation to tolls, meals, and gas expenses do not support a business connection to those
expenses.

[______ used by ______ -- Annual Lease Value; Other expenses: Fuel Value; Less: ___% of business used;
Net Taxable-income -- figures redacted]

Cash Withdraws:

The ATM cash withdraws itemized on Exhibits G were made by ______ and her husband, ______, using their
assigned ATM cards. ______ has not provided documentation of any exempt purposes for these expenditures.
The documents provided during the examination were inadequate to represent a business purpose. An
Accountable Plan was not maintained for the use of these expenses. Therefore, whatever the purpose of the
expense was, it was not necessary for tax-exempt purposes and is therefore deemed to have benefited Mrs.
______ and her husband ______.

[Cash withdrawals- Taxable year- Cash withdraws-; Less: Less other/questionable; Meals and Tolls; Net owed
to ______ -Inurement -- figures redacted]

Similarly, the expenditures itemized on Exhibit-H for meals, tolls occurring on dates and by ______ when they
were not traveling in conjunction with an event were not necessary for tax-exempt purposes. So, they too will
be deemed to have benefited ______. The excess benefits, however, did not stop with ______, his wife,
Vice-President, (______), also took part on the easy access and personal use of assets.

Vice-President, ______:

The use of ______ personal resident as a "home office" without an accountable plan, lease agreement, and/or
board approval, is unreasonable on the basis of the percentage (___%) taken of the total home expenses. The
fact that ______ leased a building near her house, and the fact that the business usage of the room could not be
verified due to denial of a tour further demonstrates this. Home expenses from ______ residence paid by
______ constitute excess benefits. All ATM cash withdrawals, checks, and charges to ______ without
substantiation of business purpose are direct personal benefits to ______ with no benefit to ______.

Checks & Other Payments:

Other miscellaneous check payments itemized in Exhibit F to ______ including a transfer to unidentified
checking accounts, also bear no relationship to conducting a tax-exempt activity, and will therefore also be
deemed to have benefited ______. ______ claimed to have returned some money to ______ during ______, but
the documents provided do not indicate deposits were made from ______ personal funds.

Therefore, deposit/credits shown on the Receivables Due account are not credited as paid by ______. The
amount of money ______ owes to ______ for ______ and ______ is $______ and $______ respectively,
calculated as follows:
[Net Miscellaneous Payments to ______ -; Cash/Check payments to ______; Less: Receivables due
(Deposits); Meals and Tolls; Value of Boat; Net owed to ______ - -- figures redacted]

The amount shown as Net Owed to ______ - is the total amount of excess benefits Mrs. ______ received from
______ from checks and other type of payments made directly to her with no benefits whatsoever to ______.
This violates Section 1.501(c)(3)-1(f)(2)(i) in general, and in particular Part C, for multiple excess benefit
transactions. The inurement amount is in addition to her personal residence's expenses reimbursed to Mrs.
______ which will be addressed separately. The value and usage of the ______ listed above was questioned
during the examination. ______ reported its cost basis on the depreciation schedule at $______ and a current
depreciation of $______. On IDR-2 response dated ______, it was reported as a donation with no usage and
eventually sold for an undisclosed amount.

President, ______:

The President and creator of ______ was also not immune to the temptation of easy access to ______ assets.
He too was engaged in excess benefit transactions. He used and let other family members take part, by
providing ATM access and additional credit cards, in the scheme of using ______ assets without any
consideration. His personal credit card was used for both personal and business transactions without any
accountability. Family members including his wife, ______, and ______, used it as they wished without any
accountability. ______ was left to pay the full tab every month. ______, on the other hand, reported debits and
credit on ______ General Ledger, "Receivable Due ______" Account, without any substantiation or oversight.

Charges:

Based on review of the ______ statement transactions and based on the fact that some transactions were made
at ______ for construction materials during or around the time some homes rehabilitation were taking place,
______ is given the benefit-of-the-doubt that some expenses were related to its purpose, even though, no
supporting records were presented that would indicate the transaction was in connection to a home
rehabilitation activity. After subtracting the $______ of possible business expenditures itemized in Exhibit E,
the amount of money owed to ______ for payments to ______ card in ______ is $______, calculated as follows:
[Net Payments to Personal ______ -; Payments to ______ in ______; Less: Business Expenditures; Net
Personal Expenses due ______ - -- figures redacted]

The President has stated that he paid back ______ for the personal expenses based on adjusting entries
reported on "Account Receivables Due ______" submitted with a remaining balance of $______ due to ______.
Accordingly, the net payments to ______ will be applied first to the net payments to ______ $______ in
determining the net inurement during ______. Substantiation of business purpose of the total expenses was
requested on IDR-2-5, and copies of checks for personal expenses paid to ______ were requested but no
records have been received as of the date of this report. Total inurement for ______ and ______ is calculated as
follows:
[Excess Benefit Transactions- Personal card payment by ______; Cash and Other Check Payments; Meals and
Tolls; Value of ______ Purchased-; Net Inurement to ______ - -- figures redacted]

______ reported making payments or credit adjustments on the "Receivable Due ______" account of the
______. However, the supporting documents provided did not establish that any personal expenses paid by
______ on his behalf were returned to ______.

The submission of documents regarding the "Balance due ______" of $______ transaction appears intended to
establish that full correction has been made. This has not been established as of today. The making of
payments for the total balance on ______ personal credit card without an Accountable Plan for reimbursement,
which, if anything, would be ______ responsibility to prove a business purpose for each individual expense and
______ responsibility to maintain those records to substantiate its exempt purpose further demonstrates this.
The making of deposits by the President and the transfer of moneys for repayment without substantiation and
business purpose leaves ______ in the same or worse position than it was before the deposit, with a balance
due to ______ of $______ and $______ for ______ and ______, respectively, due by ______.

Vehicles:

Usage of vehicle without accountability and substantiation of business vs personal usage leads to at least a
taxable benefit or, at worst, inurement. ______ was the driver of ______ and ______ in ______ and ______. The
vehicles were financed by ______ and all expenses including gasoline and tolls, were paid by ______. The
vehicles were kept at his house. ______ has not provided substantiation of the business purpose of these
vehicles. In the absence of records, showing benefit and business purpose, the entire amount of the cost of
operating this vehicle is consider a direct benefit to ______. In response to IDR-5 for substantiation of business
use of the vehicle, it was stated that the vehicle is use ___% for business and ___% for personal. Included with
the response is an email record dated ______ from ______ to ______ (unknown person) stating "over ___% of
the use is for business." However, no specific records for each business trip or business logs were kept to
showed that assertion. Therefore, in the absence of business trips records to show a business connection with
the vehicle usage, the total leased and fuel value is a direct benefit to ______. The amount of the taxable
benefit is calculated as follow:
[______ used by ______ -; Other Expenses: Fuel Value; Less: business used of vehicle; Net-Taxable benefit to
______ -- figures redacted]

Interaction with Section 4958 of the Code

______, having been recognized in ______ as an organization described in §501(c)(3) of the Internal Revenue
Code, and remaining so recognized through the date of this report, is an "applicable tax-exempt organization",
as contemplated by §4958(e) of the Code.

______ is the founder and President of ______ and his daughter in law, ______, Vice-President. Their son and
husband, respectively, ______, was the primary user of the accounts during ______. His place was taken by his
______ and ______, in ______ as evidence by numerous ATM debit and credit transactions. ______ and
______ write, and sign checks drawn on ______ bank account, make deposits, and signs Forms ______. ______
and ______ are officers of ______, and exercise substantial influence over the affairs of ______, and therefore
meets the definition of a "disqualified person" as contemplated by §4958(f)(1) of the Code. ______ and ______
also meet the definition of a "disqualified person" as linear family members of both the President and
Vice-President.

The Officers stated unequivocally that they have no employment contracts and they set up their own
compensation and bonuses. ______ and his daughter in law are listed on Forms ______ as receiving
compensation and Forms W-2s were filed as stated on ______ return. ______ was reported as a volunteer for
the services he provided. ______ received Form 1099 for the total compensation reported. Therefore, any
additional compensation or economic benefit received by the officers or other family members were not
intended to be treated as compensation by ______. Per §53.4958-4(c)(1) of the Treasury Regulations, and any
economic benefit that they received from ______ is an automatic excess benefit transaction. All of the
transactions itemized in Exhibits E thru H represent economic benefit to them and are thus all excess benefit
transactions.

Following is a discussion of the five factors contemplated in §1.501(c)(3)-1(f)(2)(ii) of the Treasury Regulations
for revoking 501(c)(3) status on the grounds of inurement when the inurement also constitutes excess benefit
transactions ("EBTs"):

Factor #1: Size and scope of exempt activities before and after EBTs

Revocation is being proposed primarily on the grounds of selling homes to non-qualified buyers under Section
501(c)(3), and secondarily on the grounds of inurement. The definition of the word "educational" in
§1.501(c)(3)-1(d)(3)(i) of the Treasury Regulations includes "the instruction or training of the individual for the
purpose of improving or developing his capabilities". For the purposes of this report, it is assumed that ______
through its independent realtors provided counseling and education for this purpose. It will further be assumed
that homes were sold to "low income" families, (which it is clear is not the case), is related, however remotely, to
its exempt purpose.

The sale of "low income" homes is unrelated to ______ stated exempt purpose. Any person can come across the
Ad on the ______ listing, sign the Affidavit of Income, and purchase a house from ______. There is no proof of
income required by ______, no counseling, education, financial assistance, down payment assistance. Instead,
loans are offered at above market rate, and ______ charge a sales commission of ___% of the sales price plus
an additional ___% which goes to the selling realtor. Home prices are at market value, and no discounts, no
down payment assistance nor any kind of financial assistance to aid the poor in obtaining home ownership is
provided. All of this combined indicates ______ is, in fact, running a commercial enterprise.

Since ______ did not maintain financial records adequately to distinguish buyer qualifications for low, very low,
and area medium income all the homes sold are considered non-qualified buyer sales for the purpose of
501(c)(3) status. Given the sample of homes reviewed during the examination, records provided, and
statements provided by the officers stating that the "Affidavit of Income" was the only financial record requested
and received, it is determined that ______ does not meet the requirements of Section 501(c)(3) charitable
purpose.

______ lack of education, counseling, and home sales to qualified buyers as exempt activities, such as they are,
do not mitigate the instances of inurement detailed in this report. Further, given the level of non-exempt activity
represented by the selling of so called "low income" homes to anyone who can afford them, ______ qualification
for 501(c)(3) status was tenuous to begin with. As such, consideration of this first factor weighs in favor of
revocation.

Factor #2: Size and scope of EBTs in relation to size and scope of exempt activities

As discussed in Factor #1 above, the sale of homes is not educational nor is it to Area low income buyers.
Therefore, the EBTs are to be considered relative to the size and scope of EO's home sales. For the purposes
of this report, this comparison is made using exempt function revenues. Subtracting $______ of home sales, RE
Commissions of $______, and $______ of Interest Income from the total revenues reported for ______ yields
$______ of Exempt Revenue. Subtracting $______ from the home sales, RE Commissions of $______, and
Interest Income of $______ from total revenues reported for ______ yields $______. The year ______ Form
______ examination has now been completed. However, information received on IDR-1, ______ did not change
the outcome. ______ did not provide records to show homes sold in ______ met buyers' low-income
requirements. Therefore, one must look at the size and scope of the EBT in comparison to exempt revenues.

The comparison is as follows:
[Year; EBTs; Exempt Revenue; EBTs as % of Exempt Revenue; ___-year total -- figures redacted]

As shown in the chart, the level of EBTs during the years ______, and ______ is approximately ___% of exempt
revenue. This is a substantial level of EBTs and does not account for any other EBTs that may have occurred in
the years under audit, but which have not been identified. Therefore, consideration of this second factor weighs
in favor of revocation.

Factor #3: Multiple EBTs

As shown in Exhibits E and H, there were hundreds of transactions over the course of ______ and ______ that
constitute both inurement and EBTs. EBTs were thus not isolated or infrequent. Consideration of this third
factor then also weighs in favor of revocation.

Factor #4: Whether safeguards have been implemented

The transactions constituting inurement and EBTs were routine and continuous. This suggests a complete
absence of any internal controls or safeguards, with the most glaring absence being that of an independent
governing body. Officers familial relationships and the ability to write checks, sign checks, use ATMs at their
discretion without any accountability, and use of personal cards show the unfettered control of ______ finances.
This condition allowed these transactions to occur.

No safeguards have been implemented. There is no internal control process in place, no accountability, nor any
due diligence process to protect the assets of ______. It should be noted, however, that with governing body
consisting of family members and other names listed on the return but having no saying on finances and
operations, there has not been any disinterested party within ______ to enforce any safeguards, if any were
implemented. Consideration of this fourth factor therefore also weighs in favor of revocation.

Factor #5: Whether the EBTs have been corrected

Of the $______ of EBTs and gross inurement that occurred during ______ and $______ in ______, $______ has
been verifiably returned to ______ bank account as of the date of this report. This leave $______ of net
inurement and uncorrected EBTs. This amount alone warrants revocation of 501(c)(3) status.

For the purposes of considering this fifth factor, in light of the officers unfettered control of finances, there is
little significance to the transfer and payment of money from Officers' accounts to ______. The money in ______
bank account has been no less at risk of being used by the family than has any other money. For this reason,
consideration of this fifth factor weighs all the more in favor of revocation.

Summary

The $______ of net EBTs detailed in this report is a significant amount of inurement; particularly for an
organization that reported a loss in ______ and mere net revenue of $______ in ______. This puts ______ in
violation of §1.501(c)(3)-1(c)(2) of the Treasury Regulations and warrants revocation of its exempt status
under Code §501(c)(3). So, too, does its non-exempt activity of selling "Low Income" homes to anyone who can
afford to buy them. Given the routine and continuous nature of the inurement and non-qualified home sales
throughout ______ and ______, revocation is proposed effective ______.

Taxpayer's Position

Unknown at this time.

Conclusion

______ is not operated exclusively for exempt purposes within the meaning of section 501(c)(3) of the Code. Its
housing activity is not being conducted in a manner that serves a charitable purpose within the meaning of
§501(c)(3) of the Code. ______ net earnings have inured, in substantial part, to the benefit of its founder and
President, ______, VP ______, and ______. This violates §1.501(c)(3)-1(c)(2) of the Treasury Regulations. An
organization cannot be recognized as exempt under §501(c)(3) unless it shows that it is operated exclusively for
charitable, education, or other exempt purposes. Since ______ housing activity is not conducted within the
meaning of §501(c)(3) and its net earnings have inured to the founder and other related parties, its exemption
status should be revoked effective ______. The non-exempt activity of selling "Low Income" homes to
non-qualified buyers only reinforces this. Forms 1120, U.S. Corporation Income Tax Return, should be filed for
______, ______, and each year thereafter as long as ______ remains subject to federal income tax. If the
proposed revocation becomes final, appropriate state officials will be notified of such action in accordance with
§6104(c) of the Internal Revenue Code.