501(c)(3) veterans charity revoked for private-benefit real-estate deals, undocumented grants, and a missing dissolution clause

Plain-English summary

A veterans-assistance charity recognized as a 501(c)(3) public charity lost its exemption after an IRS audit found three problems. First, its articles of incorporation lacked the dissolution clause required by section 501(c)(3), so it failed the "organizational test." Second, it failed the "operational test" because too much of its activity produced private benefit rather than public benefit. The charity ran real-estate "bargain sale" deals through an exclusive contract with a for-profit broker whose fee schedule (based on appraised value, not the lower actual price) captured most of the profit, and it gave donors deduction paperwork based on appraisals the IRS suspected were inflated. The organization kept little of the proceeds and made only small grants to individuals, and its website promoted a product tied to its Vice President and linked to board members' for-profit businesses. Third, its cash grants to veterans were undocumented and not shown to reach a charitable class: need was never verified and the main criterion was veteran status. The IRS also assessed penalties under section 6652(c) because the group filed Form 990-N e-postcards when its income and assets required a full Form 990. The IRS revoked the exemption effective the first period under examination; contributions are no longer deductible, and the organization must file Form 1120.

Ruling snapshot

• Question: Does a veterans-assistance nonprofit remain exempt under 501(c)(3) when its organizing document lacks a dissolution clause, a substantial part of its activity confers private benefit (bargain-sale real estate through a for-profit broker, insider product/website links), and its grants are undocumented, and do section 6652(c) penalties apply for filing the wrong return?
• Outcome: Revocation (final adverse determination); § 6652(c) penalties sustained
• Key authorities: IRC § 501(c)(3); § 6033; § 6652(c); § 170; Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 82-2; Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945); est of Hawaii v. Commissioner, 71 T.C. 1067 (1979); American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989)

Full text (IRS public release)

Department of the Treasury                       Date:
Internal Revenue Service                         November 15, 2022
IRS Tax Exempt and Government Entities           Taxpayer ID number (last 4 digits):

                                                 Form:
Release Number: 202319018                        Tax periods ended:
Release Date: 5/12/2023
UIL Code: 501.03-00                              Person to contact:
                                                 Name:
                                                 ID number:
                                                 Telephone:
                                                 Fax:

                                                 Last day to file petition with United States
                                                 Tax Court:
                                                 February 13, 2023

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: Organizations
described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated
exclusively for exempt purposes. You have not demonstrated that you are organized for exempt purposes within
the meaning of IRC Section 501(c)(3). Additionally, you have not demonstrated that you are operated for
exempt purposes within the meaning of IRC Section 501(c)(3).

Organizations that are not exempt under Internal Revenue Code (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 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 can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,
* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

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

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001
dcd.uscourts.gov

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 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.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

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.

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.
Sincerely,

[illegible] Brinkley
Acting Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


Department of the Treasury                       Date:
Internal Revenue Service                         01/21/2022
IRS 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:
                                                 02/20/2022

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.

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

Sincerely,

Karen T. Hood
Digitally signed by Karen T. Hood, Date: 2022.01.21 [illegible] for
Sean E. O’Reilly
Director, Exempt Organizations Examinations

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


Form 886-A     Explanation of Items          Schedule number or exhibit
(May 2017)
Name of taxpayer     Tax identification Number (last 4 digits)     Year/Period ended

ISSUES:

1) Did     fail to timely file the required Information Return Form 990, fail to establish
reasonable cause, and therefore is liable for penalties under §6652 of the Internal Revenue Code
(“Code”)?

2) Is     organized and operated exclusively for an exempt purpose within the meaning of
§501(c)(3) of the Code?

3) Should     continue to be recognized as tax exempt under §501(a) of the Code as an
organization described in §501(c)(3)?

FACTS

     , hereinafter referred to as the Organization, was incorporated under the laws of the state of
     as a nonprofit corporation on     . In a determination letter dated     , the
Organization was held to be exempt from federal income tax as an organization described in Code §501(c)(3)
and classified as a public charity described in Code §509(a)(1) and §170(b)(1)(A)(vi).

The Organization filed for an exemption determination electronically on Form 1023-EZ, Streamline Application
for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, signed on     .
The application attested that the organizational document contained the required limitation and dissolution
provisions, that it was organized and operated for charitable purposes, and that it would not conduct activities
that violate the applicable prohibitions and restrictions.

The Articles of Incorporation provides the following statement to address the specific purpose for which the
corporation was organized:

“OUR MAIN GOAL IS TO TAKE CARE OF THE ONES WHO TOOK CARE OF US. WE ARE HERE TO
HELP VETERANS IN NEED AS WELL AS THEIR FAMILY MEMBERS, WHETHER SOMEONE IS IN
NEED OF FOOD, SHELTER, CLOTHES, ETC..., WE WILL BE THERE”

The Articles does not contain the dissolution provision required under §501(c)(3).

Catalog Number 20810W   Page 1   www.irs.gov   Form 886-A (Rev. 5-2017)

The officers described their exempt activities to include talking to     in need of
conversation, referring to the (     ) for services and
providing financial assistance to veterans and their family members. The     was also included in
databases where it received referrals from other charities to assist needy individuals in their area. The
     frequently set up a booth at the     in     where it would
advertise the EO’s services, give out T-Shirts, and solicit cash donations. The     also received
donations through various corporate programs, such as     , where donors selected a charity to
which     would remit a portion of the donor's purchase as a charitable contribution.

On     , the website,     , was observed to include
information about     , including an image and contact information for the purchase of the
     product. The website stated the following:

“     ”

The website also included a page titled “     ”, which included live links to the
websites of     , an     owned and operated by the Treasurer,
and     , a     owned and operated by the Vice President.

During the periods under examination, the     issued a total of     grants to individuals. Between
     and     , the     issued one grant to individuals totaling $     .
Between     and     , the     issued no grants. Between
     and     , the     issued a total of     grants to individuals, totaling $     . The
payments are summarized in the Appendix on Page 13, Exhibit 1.

On     , in response to Information Document Request 4, the     provided a narrative
regarding the charitable distributions issued in     

“     received $     for tools. He was part of a program for the
homeless and needed tools to do the program. We gave him the grant so he would get off the streets
and start a new life.

     , was given $     to catch up on bills. He was behind on bills and was on the verge of
becoming homeless, so we helped him.
     received $     for food. Simply put he needed food and we helped him
     received     for electric. He was behind on his payments and we helped him so
his electric would not be shut off.
     received $     to help him purchase gifts for his daughter. His daughter loves
music and they did not have any funds to buy her some musical instruments, so we helped them.
Everyone we help is on a case by case phone call evaluation. I ask them their yearly income, if they’re
married or have children. I ask if they are service connected and if so how much. We do not have an
application process due to not being a big non-profit organization. I have no documentation for my
decisions.”

Catalog Number 20810W   Page 2   www.irs.gov   Form 886-A (Rev. 5-2017)

The     acquired and disposed of real property in bargain sale transactions facilitated by
(     ), a disinterested for-profit entity, who was contracted for brokerage and property management services.
As a part of the services, the     located sellers who wished to donate real estate properties at an amount
below the fair market value (FMV), a listing of qualified appraisers to complete the required appraisals, and
buyers who desired to purchase the property from the     . The     also facilitated financing through
negotiating seller financing, or covered acquisition costs and recouped these costs from the     during
the closing of the disposition sale. Beginning in     and concluding in     , the     acquired
properties appraised at $     . As a part of the transactions, the     provided the donors
acknowledgement of $     in noncash contributions. The     financed the remaining $
through the     and sellers. During the period of ownership, the     collected $     on behalf of the
     , comprising of rents and earnest money income from breached buyer contracts. This income was
later netted against expenditures associated with acquisition and disposition costs after the final disposition of
the property. In     , the     disposed of all properties for $     , and paid total fees and closing
costs of $     , of which $     was paid to the     for services. The net income
from these transactions totaled $     . See Page 14, Exhibit 2 for a summary of transactions by property,
including gross income, fees, and net income.

For the periods ending     and     , the     timely filed
declaring that their gross receipts are normally $     or less. During the examination, the     was
requested to file an information return to report noncash contributions, assets, and income and expenses from
rental and real estate activities. On     , the     filed
the tax period ending     indicating gross receipts of $
and total assets of $     . On the same day, it filed for the period ending
     indicating gross receipts of $     and total assets of $     . It also timely filed for the tax period
ending on     , indicating gross receipts of $     and total assets of
$     

Return information, as filed, is detailed in the Appendix on Page 15, Exhibit 3:

Catalog Number 20810W   Page 3   www.irs.gov   Form 886-A (Rev. 5-2017)

LAW

Code §501(c)(3) exempts from federal income tax organizations organized and operated exclusively for
charitable, educational, and other purposes, provided that no part of the organization’s net earnings inures to
the benefit of any private shareholder or individual.

Code §6033(a)(1) requires, in part, that organizations exempt from taxation under §501(a) to file an annual return
stating specifically the items of gross income, receipts, and disbursements, and such other information for the
purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe.

Code §6652(c) imposes a penalty for failure to file a return required under §6033(a)(1) on the date and in the
manner prescribed, failure to include any of the information required to be shown on a return, or failure to show
the correct information. The penalty is $20 for each day during which such failure continues. For returns required
to be filed in 2019, the maximum penalty for failure to timely file the required return with all required information
with respect to any one return shall not exceed the lesser of $10,000 or 5 percent of the gross receipts of the
organization for the year.

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

Treas. Reg. §1.501(c)(3)-1(b)(4) states that an organization is not organized exclusively for one or more exempt
purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered
dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision
in the organization's articles or operation of law, be distributed for one or more exempt purposes.

Treas. Reg. §1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated exclusively" for one
or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt
purposes specified in Code §501(c)(3). An organization will not be so regarded if more than an insubstantial part
of its activities is not in furtherance of an exempt purpose.

Treas. Reg. §1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one
or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a
private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish
that it is not organized or operated for the benefit of private interests such as designated individuals, the creator
or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests.

Treas. Reg. §1.501(c)(3)-1(d)(1)(iii), Example 3, describes an organization that is deemed to violate the
restriction on private benefit due to their arrangement with a related for-profit entity, regardless of whether the
payments to the related for-profit entity are reasonable.

Treas. Reg. §1.501(c)(3)-1(d)(2) defines “Charitable” to include: relief of the poor and distressed or of the
underprivileged; advancement of religion; advancement of education or science; erection or maintenance of
public buildings, monuments, or works; lessening of the burdens of government; and promotion of social welfare
by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii)

Catalog Number 20810W   Page 4   www.irs.gov   Form 886-A (Rev. 5-2017)

to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat
community deterioration and juvenile delinquency.

Revenue Procedure (Rev. Proc.) 82-2, 1982-1 C.B.367 identifies the states and circumstances in which the
Service will not require an express provision for the distribution of assets upon dissolution in an exempt
organization's articles of incorporation, trust instrument, or other organizing document to satisfy the
“organizational” test in Treas. Reg. §1.501(c)(3)-1(b)(4).

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945), the Supreme Court held that “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.”

In est of Hawaii v. Commissioner, 71 T.C. 1067 (1979), several for-profit est organizations exerted significant
indirect control over est of Hawaii, a nonprofit entity, through contractual arrangements. The Tax Court concluded
that the for-profits were able to use the nonprofit as an “instrument” to further their for-profit purposes. The
question for the Tax Court was not whether petitioner's payments to the for-profits were excessive but whether
the for-profits benefited substantially from petitioner's operations. The Tax Court noted that petitioner provided
a substantial private benefit to the for-profit corporations. Petitioner “was simply the instrument to subsidize the
for-profit corporations and not vice versa and had no life independent of those corporations.” Accordingly, the
Tax Court held that est of Hawaii did not qualify for exemption under §501(c)(3).

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the Tax Court determined that the
American Campaign Academy, a training program for political campaign professionals, operated for the private
benefit of the Republican party because its curriculum was tailored to Republican interests, its graduates worked
for Republican candidates and incumbents, and it was financed by Republican sources. The Tax Court defined
private benefit as "nonincidental benefits conferred on disinterested persons that serve private interests." Private
benefits included "advantage; profit; privilege; gain; [or] interest."

ISSUE #1 — Did     fail to timely file the required Information Return     , fail to establish
reasonable cause, and therefore is liable for penalties under §6652 of the Code?

TAXPAYER’S POSITION

On     , the     provided an unsigned written penalty relief request for the period
ending     . On     the     provided a signed written penalty relief
request for the period ending     

The requests stated, in part, the following:
“Our     was filed late because     was the first time we were required to file a     . There
was a misunderstanding of the filing requirement because of how a bargain sale was handled by the
company managing the bargain sale (     ). We fully believed that since the transaction and all funds
were handled through     , we were only required to report the net profit of the property when the
     was sold.”

“Our     was filed late because     was audited and     was the first time we were
required to file a     . Due to poor knowledge of the filing requirement because of how a bargain
sale was handled by     , Managing the bargain sale     . We fully believed that since the transaction
and all funds were handled through     , we were only required to report the net profit of the property
when the     was sold. The net profit from the bargain sale was well below the filing requirement and a
     was timely filed for     . All future     will be filed timely.”

Catalog Number 20810W   Page 5   www.irs.gov   Form 886-A (Rev. 5-2017)

GOVERNMENT'S POSITION

It has been determined that the     failed to timely file the required information return,     , failed
to establish reasonable cause, and is therefore liable for penalties under §6652(c) of the Code. The
     is liable for penalties of $     and $     for the periods ending     and
     respectively.

Under Code §6033(c)(1), all organizations exempt from taxation under Code §501(c) are required to file an
annual return, which correctly and completely states gross income, receipts, disbursements, and assets held for
the period. This return must be filed on the proper form by the due date or extended due date for the period in
question.

The filing requirements, as detailed in the Form 990 Series Instructions booklets, and posted on www.irs.gov is
as follows:

Gross receipts normally ≤ $50,000                                       990-N
Gross receipts < $200,000, and Total assets < $500,000                 990-EZ or 990
Gross receipts ≥ $200,000, or Total assets ≥ $500,000                   990

For the periods ending     and     , the     submitted     ,
instead of a     , when their income and/or assets surpassed the
minimum filing requirement thresholds for the periods. As the gross receipts for the period ending
     included the non-cash contribution of     , which was appraised at
$     when received, the     was required to file     to report the gross receipt. As the
     retained the asset throughout the period ending     , it was required to file
     to report the total assets, which surpassed $     based on their accepted valuation. By filing an
electronic notice instead of an annual information return, the     failed to provide the Service with the
necessary information required for the purposes of carrying out the internal revenue laws, as prescribed by the
Secretary.

The     failed to establish reasonable cause, as it did not exercise ordinary care and prudence. The
Service finds that the     should have had knowledge sufficient to determine the correct filing
requirements under the law for the periods under examination. To make this determination, the Service
considered the facts and circumstances against the argument of ‘ignorance of the law’ and a
‘mistake being made.’ Information regarding filing requirements is widely available, as can be obtained online at
www.irs.gov, including on the
(     ) landing page, as well as the     and     booklets. The Chief Executive
Officer (CEO) and Treasurer both hold bachelor’s in business administration degrees, the latter having a
concentration in Accounting. The Treasurer, who completed the filing of the     also possesses an
(     ) Certification and owns and operates a bookkeeping and tax practice,
where he works year-round as a tax preparer. It is a reasonable expectation that, based on the Officer's
education and experience in the handling of business matters and tax issues, they should have known about the
filing requirement. Additionally, making a mistake generally is not in keeping with the ordinary business care and
prudence standard and does not provide a basis for reasonable cause.

Catalog Number 20810W   Page 6   www.irs.gov   Form 886-A (Rev. 5-2017)

The penalty is computed based on the taxpayer's figures, as follows:

Income
Contributions                                              $
Gross Receipts                                             $
5% of Gross Receipts                                       $

Number of days delinquent
Rate per day

Total proposed penalty                                     $
Maximum penalty                                            $
Lesser of Maximum penalty or 5% of gross receipts          $
Total Failure to File Information Return Penalty
IRC 6652(c)                                                 $

Income
Contributions                                              $
Rents                                                      $
Gross Amount Sales of Assets other than Inventory          $
Gross Receipts                                             $
5% of Gross Receipts                                       $

Number of days delinquent
Rate per day

Total proposed penalty                                     $
Maximum penalty                                            $
Lesser of Maximum penalty or 5% of gross receipts          $
Total Failure to File Information Return Penalty
IRC 6652(c)                                                 $

Catalog Number 20810W   Page 7   www.irs.gov   Form 886-A (Rev. 5-2017)


ISSUE #2 — Is     organized and operated exclusively for an exempt purpose within the meaning
of §501(c)(3) of the Code?

TAXPAYER’S POSITION
The Taxpayer's position is unknown.

GOVERNMENT’S POSITION
It has been determined that the     is not organized and operated exclusively for and exempt purpose
because it does not meet the organizational test or the operational test under Treas. Reg. §1.501(c)(3)-1(a)(1).

Organizational Test

The     Articles of Incorporation do not contain a provision that dedicates its assets to exempt
purposes described in Code §501(c)(3) upon dissolution. Furthermore, the     is organized in the State
of     , who does not have statutes applicable to nonprofit charitable corporations that satisfy the provisions
of Treas. Reg. §1.501(c)(3)-1(b)(4), per Rev. Proc. 82-2. The     was granted exemption based on
their statement on Form 1023-EZ that the organizing document contained the required language. During the
examination, the Service reviewed the articles of incorporation, found no dissolution language, and confirmed
that there were no amendments to the document that effected the dissolution clause. Therefore, the
     does not meet the organizational test as described in Treas. Reg. §1.501(c)(3)-1(b)(4).

Operational Test

The     substantially engaged in non-exempt activity that conferred more than a nonincidental private
benefit on disinterested parties. Treas. Reg. §1.501(c)(3)-1(c)(1) provides that an organization will be regarded
as operated exclusively for exempt purposes only if it engages primarily in activities which accomplish one or
more exempt purposes. An organization will not be so regarded if more than an insubstantial part of its activities
is not in furtherance of an exempt purpose. Treas. Reg. §1.501(c)(3)-1(d)(1)(ii) provides that an organization is
not operated exclusively for exempt purposes unless it serves a public rather than a private interest. Thus, even
if an organization has many activities which further exempt purposes, exemption may be precluded if it serves a
private interest.

The     activity involving the acquisition and disposition of real estate as a part of bargain sales
transactions served the private interests of the     and the donors of the properties. Private benefit has been
defined as "nonincidental benefits conferred on disinterested persons that service private interests." American
Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). "Prohibited private benefit may include an
‘advantage; profit; privilege; gain; [or] interest." In analyzing the factors of the transactions against the factors
observed by the courts, the Service considered the benefit conferred and whether that benefit was qualitatively
and quantitatively incidental. Qualitatively incidental means that the private benefit is a mere byproduct of the
public benefit. For private benefit to be quantitatively incidental, it must be insubstantial in amount. The private
benefit must be compared to the public benefit of the specific activity in question, not the public benefit provided
by all the activities.

Catalog Number 20810W   Page 8   www.irs.gov   Form 886-A (Rev. 5-2017)

The benefits in question are the $     in fees paid to the     for the facilitation of the bargain sales
transactions, as well as the $     in charitable deduction documentation given to the donors, which were
based on appraisals that the     currently suspects to be overvalued. First, the     entered
an exclusive contract to acquire, manage, and dispose of property through the     , and completed a total of
     transactions encompassing the purchase and sale of individual properties. The fee schedule was based
on the appraised value of the property, not the actual purchase or sale price, which was substantially less. This
arrangement maximized the earnings of the     , while minimizing the earnings of the     . Typically,
an entity looking to purchase goods and services would deal with a number of different entities. In addition, it is
abnormal to accept unfavorable terms or fail to compare prices prior to entering a contract. In this case, the
     entered into an exclusive contract with a for-profit entity that had a highly unfavorable fee structure.

On     , during the initial interview, the     indicated that it discontinued the relationship
with the     after the Treasurer reviewed the documentation and fee schedule and determined that the
     was “taking a lot of money out of the transactions” and that the net proceeds were low.

Second, the structure of the acquisition transaction involved a seller who would transfer the property to the
     for a value below the appraised amount, treat the difference between the FMV and the sales price
as a non-cash contribution, and claim a charitable deduction under Code §170(a) based on the appraised FMV
of the property at the time of the sale. In this case, the     found the donor and connected them with a tax-
exempt entity willing to participate in the transaction. The FMV was determined by an appraiser who was chosen
from a list of preferred appraisers provided by the     . During the initial interview, the     stated
that it was minimally involved in the appraisal process, and never met with or talked to the appraiser. The
     further stated that at the time it did not doubt the valuation, but now believes that the     and
the appraisers were working together to overstate the values of the properties. As a part of each transaction, the
     provided a signed, written communication to the donor listing their name, date and amount of
donation, based on the potentially overstated FMV, totaling $     . As a result, any excess benefit received
by the donor in the form of deductions that are not allowable serves their private benefit, and not the benefit of
the public at large.

The benefits received by the     and the donors were not a mere byproduct of a benefit received by the
public. The     real estate transactions were not related to the charitable purpose, or any activity
carried on to fulfill that charitable purpose. The purchase and sale of the real estate was purely for investment
purposes with the goal of generating capital. The activity had no direct benefits to the public at large. Therefore,
the benefit was not qualitatively incidental.

The benefits received by the     and the donors were not insubstantial. The fee schedule of the transaction
is structured so that the EO retains very little profit and the real estate broker and their related contractors
(appraiser, title search company, etc.) receive the largest benefit from the transaction. Analysis of the individual
transactions show the proportion of financial benefit received by the     , the     , and the other
related contractors. On average, the     retained     % of the proceeds ($     in Fees/ $
in Adjusted Gross Profit (computed as $     Sales of Investments less $     Acquisition
Contract Prices)). On Average, the     retained     % of the proceeds ($     Net Profit/
$     in Adjusted Gross Profit (computed above)). Of the $     in proceeds received, the
     issued only $     in grants to individuals. Therefore, the benefit was not quantitatively incidental. See Exhibit
4 on Page 16 in the Appendix for comparison of the income distribution between the     , the     ,
and Other by property. Also refer to Exhibit 2 for additional details related to income by property.

Catalog Number 20810W   Page 9   www.irs.gov   Form 886-A (Rev. 5-2017)


The Service also analyzed the other     activities to determine if it served an exempt purpose,
specifically the provision of financial assistance to     and family members of     , talking to
     in need of conversation, outreach efforts at the     , referring to the     for services,
and promotion of     . After review of all the facts and circumstances, the     failed
to provide evidence of substantial exempt activities.

The     failed to substantiate that the payments made to individuals were given to a charitable class,
such as the poor, elderly, physically or mentally handicapped, or distressed, and that the payments furthered a
charitable purpose. As indicated by the CEO during the initial interview, the primary criteria for assistance is
being a     or the family member of a     . Assisting     and their families alone does not
constitute as charitable under the meaning of Treas. Reg. §1.501(c)(3)-1(d)(2). By his statement, the
     does not assist     who are     % disabled because they can receive assistance directly from the     . The
     does not have a process to analyze need. No application or formal request for assistance is
required. No established procedures of oversight are in place, such as board member approvals. Instead, if
contacted, the CEO reviews the     
driver's license, or state identification, and assesses whether they currently receive benefits from the     . This
practice supports the government’s assertion that the criteria for assistance is more associated with the
recipient’s status as a     than being in a charitable class. The determination to assist the individual is then
made at the CEO's discretion. No documentation exists to establish a financial need, such as a past due bill. No
documentation related to the transaction is kept, other than the cancelled check, to establish the recipient as a
member of a charitable class. Furthermore, the explanations provided by the     about each grant
does not clearly identify how the expenditure advanced an exempt purpose.

In addition, it is noted that during the years under examination, grants were issued totaling $     . No
grants were awarded in the period ending     . Based on the Service’s analysis of the books
and records, outside of noncash contributions, rental income and real estate sales proceeds received in
connection with the bargain sales transactions, charitable receipts totaled $     in the period ending
     , $     in the period ending     , and $     in the period ending
     . Between     and     , prior to the receipt of the real estate proceeds,
the     paid a total of $     in grants to fulfill their exempt purpose. In the absence of the funding gained
from non-exempt real estate activities during     , there would be little to no exempt activities. Taking the scope
of their prior activities into consideration, and when measured in comparison with the magnitude of the real estate
activities that resulted in     in gross Income, these activities appear substantially insignificant.

Activities related to conversations with     was not shown to serve and exempt purpose, as no information
was provided to establish that the discussions were conducted with a charitable class. In addition,     referrals
were not shown to advance an exempt purpose. While lessening the burden of government is a charitable
purpose under §501(c)(3), the     failed to demonstrate that it acts on the government’s behalf, and
thereby actually free up government assets — human, material, and fiscal. In addition, no relevant factors to
determine if the government unit has made the necessary objective manifestation exists. While the activities with
the     are found to serve an exempt purpose, they were not found to be substantial. The     
explained that, since formation, it received     referrals from the     , of which
it assisted     individual. The outreach activities at the     events are shown to support the
     by allowing the general public to find out about their services and donate, however no substantiation
was provided to show how the public benefitted from the activity.

Catalog Number 20810W   Page 10   www.irs.gov   Form 886-A (Rev. 5-2017)


Activities associated with     did not advance an exempt purpose, but instead would serve the
private interests of the Vice President and his business entities. Based on the statement of the Vice President
during an interview on     , the arrangement entailed the     licensing the brand and
use of image from     . The     would assist in the promotion of the product, cases
would be pre-ordered, and the product would be manufactured to fill the order. The     would cover all
expenses, donate $     per bottle to the     , take a charitable deduction, and retain any remaining profit.
This arrangement allows an insider to receive a financial benefit, specifically the charitable deduction and the
gross profit, through their affiliation with the     . The CEO and Vice President assert that sales were
insignificant, and no profit or charitable deductions were realized. However, the     shared their name
and logo with the product and actively promoted the     through advertisement on their website. In addition,
the     website also contains live links to the websites of for-profit businesses owned by their board
members, including     . Regardless of the actual income realized from
these activities, the insiders received an advantage created by the promotion of the product and
services. The court established in American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989) that a
prohibited private benefit may include an ‘advantage; profit; privilege; gain or interest’. The existence of the
advertisement and links to the websites of insider’s for-profit entities on the     
website, in conjunction with the arrangement with     that advances the private interest of an insider,
are factors that contribute to the determination that the     activities served private interests.

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. v. U.S., 326
U.S. 279 (1945). In the case of     , evidence indicates that there is a lack of activities fulfilling an
exempt purpose, where there is an abundance of activities that fulfill non-exempt purposes. Like the ruling in est
of Hawaii v. Commissioner, the for-profit entities were able to use the     as an “instrument” to further
their for-profit purposes. The     allowed for the for-profit entities to receive substantial private benefit
from the arrangements. In the instance of the arrangement with the     , the     participated in
     separate transactions, and was used as an instrument resulting in $     of earnings in one fiscal period.
As such, the     fails the operational test under Treas. Reg §1.501(c)(3)-1(c)(1) and Treas. Reg.
§1.501(c)(3)-1(d)(1)(ii) as it engaged in activities that served private interests, and therefore more than an
insubstantial part of their activities is not in furtherance of an exempt purpose.

Catalog Number 20810W   Page 11   www.irs.gov   Form 886-A (Rev. 5-2017)

ISSUE #3 — Should the taxpayer continue to be recognized as tax exempt under §501(a) of the Code as an
organization described in §501(c)(3)?

TAXPAYER’S POSITION

The Taxpayer's position is unknown.

GOVERNMENT’S POSITION

It has been determined that the     does not qualify for exemption as an organization described in
Code §501(c)(3) because it does not meet the organizational test or the operational test under Treas. Reg.
§1.501(c)(3)-1(a)(1). The     should not continue to be recognized as tax exempt under §501(a) of the
Code as an organization described in §501(c)(3).

The     fails the organizational test because its organizing document does not contain the required
dissolution clause dedicating its assets to exempt purposes. It fails the operational test because more than an
insubstantial part of its activities is not in furtherance of an exempt purpose, as it serves a private rather than a
public benefit.

CONCLUSION

As required under Code §6033(c)(1), the     did not timely file an annual return that correctly and
completely stated their gross income, receipts, disbursements, and assets held for the periods, and failed to
establish reasonable cause for the purposes of determining penalty relief. The     is liable for penalties
under Code §6652(c) of $     and $     for the periods ending     and
     respectively.

The     is not an organization described in Code § 501(c)(3) and therefore is not exempt from federal
income tax. The government will propose revocation of exemption on the first day of the tax year in which the
noncompliant activities were substantiated, which is the first period under examination. Therefore, the effective
date of revocation is     . Forms 1120, U.S. Corporate Income Tax Return, should be prepared and
filed by the     for the period of examination forward.

Catalog Number 20810W   Page 12   www.irs.gov   Form 886-A (Rev. 5-2017)

Appendix

Exhibit 1
Schedule of Grants Paid
Periods ending     through     

Date   Check   Name   Amount   Memo
                              Good Luck
                              Tools
                              Bills
                              [illegible]
                              Electric, Etc.
                              Christmas

Catalog Number 20810W   Page 13   www.irs.gov   Form 886-A (Rev. 5-2017)


Exhibit 2
Real Estate Transactions Detail by Property
Net Income and Fee Structure
Transaction Price Subtotal
Gross Income
$
$
$
$
$
Total Gross Income                                         $
Acquisition Contract Price (Note)
$
$
$
$
$
Total Acquisition Contract Price (Note)                    ($     )
Closing Cost (After payoff of Acquisition Contract Price (Note))
$
$
$
$
$
Total Closing Cost (After payoff of Acquisition Contract Price (Note))   ($     )
Fees
$
$
$
$
$
Total Fees                                                 ($     )
Total Fees                                                 ($     )
Net Profit
$
$
$
$
$

Catalog Number 20810W   Page 14   www.irs.gov   Form 886-A (Rev. 5-2017)

Exhibit 3

Form     Return Data, As Filed by Taxpayer
Periods ending     through     
GROSS RECEIPTS
$     $     $
REVENUES
Contributions, gifts, grants:     $     $     $
Investment Income:                $     $     $
Other Revenue:                    $     $     $
TOTAL REVENUE                     $     $     $
EXPENSES
Grants and similar amounts paid:  $     $     $
Other Expenses:                   $     $     $
TOTAL EXPENSES                    $     $     $
REVENUE LESS EXPENSES             $     $     $
NET ASSETS
Total Assets:                     $     $     $
Total Liabilities:                $     $
NET ASSETS OR FUND BALANCES       $     $     $
Catalog Number 20810W   Page 15   www.irs.gov   Form 886-A (Rev. 5-2017)

Exhibit 4
Real Estate Transaction Income as a Percentage by Property

Income as a Percentage (after payment of Note)
     %
     %
Other     %
Total     %

Income as a Percentage (after payment of Note)
     %
     %
Other     %
Total     %

Income as a Percentage (after payment of Note)
     %
     %
Other     %
Total     %

Income as a Percentage (after payment of Note)
     %
     %
Other     [illegible]
Total     %

Income as a Percentage (after payment of Note)
     %
     %
Other     %
Total     %

Catalog Number 20810W   Page 16   www.irs.gov   Form 886-A (Rev. 5-2017)