IRS revokes a charity's 501(c)(3) exemption for operating as a conduit in an abusive donated-LLC-interest tax scheme

Plain-English summary

A public charity recognized under section 501(c)(3) had its exemption revoked after an IRS examination. Its main assets and revenue came from donated interests in dozens of limited liability companies. The IRS found the charity was a vehicle in an abusive "charitable giving" tax scheme run by an outside promoter: wealthy participants transferred assets into their own LLCs, "donated" a non-voting interest to the charity to claim a large charitable deduction, but kept voting control, management rights, and use of the assets. The promoter, who set up the LLCs, drafted the paperwork, and prepared the appraisals, had already been permanently enjoined by a federal court for running the scheme, and two related charities he controlled had already lost their exemptions. The IRS concluded the charity was not operated exclusively for exempt purposes because more than an insubstantial part of its activity was participating in transactions substantially similar to the listed transaction in Notice 2004-30 and serving the promoter's scheme, which produced private benefit to the donors rather than public benefit. Exemption was revoked retroactively to the first year the charity accepted the donated LLC interests, and the organization must now file Form 1120 as a taxable corporation; contributions to it are no longer deductible under section 170. The document is the final adverse determination (Letter 1371) with the enclosed proposed adverse letter (Letter 3618) and the audit report (Form 886-A).

Ruling snapshot

• Question: Should a charity's 501(c)(3) exemption be revoked, retroactively, where it held donated non-voting LLC interests as a conduit in a promoter's charitable-giving tax scheme while the donors kept control of the assets?
• Outcome: Revocation (final adverse determination, retroactive)
• Key authorities: IRC § 501(c)(3); IRC § 170; Treas. Reg. § 1.501(c)(3)-1(a), (c)(1), (d)(1)(ii); Notice 2004-30; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Department of the Treasury

internal Revenue Service

Independent Office of Appeals
IRS 100 First Street

Suite 2000

San Francisco, CA 94105

Release Number: 202331003

Release Date: 8/4/2023

Certified Mail

Dear :

pate: MAY 0 9 2023

Person to contact:
Name:
Employee ID Number.
Phone:
Fax
Ernployer ID numbar:

Uniform issue list (VIL):
§01.00-00

This is a final adverse determination that you do not 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) .

We have hereby revoked the favorable determination letter to you dated and you are no longer exempt under

IRC Section 501{a) effective

We made the adverse determination for the following reasons:

Your organization is not operated exclusively for exempt purposes as described in IRC Section 501(c)(3) and
your operations provided for more than insubstantial private benefit to an individual or shareholder.

Contributions to your organization are not deductible under IRC Section 170.

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 IRS.gov/forms or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under IRC
Section 6110 after deleting certain identifying information. We provided to you, m 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 decide to contest this determination, you can file an action for declaratory judgment under the provisions

of IRC Section 7428 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

Letter 1371 (Rev. 9-2022)
Catalog Number 40683R


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.

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:

U.S. 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

ded.uscourts.gov

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under IRC Section 7428.

Taxpayer rights and sources for assistance

The Internal Revenue Code (IRC) gives taxpayers specific rights. The Taxpayer Bill of Rights groups these into
10 fundamental rights. See IRC Section 7803(a)(3). IRS employees are responsible for being familiar with and
following these rights. For additional information about your taxpayer rights, please see the enclosed Publication 1,
Your Rights as a Taxpayer, or visit IRS.gov/taxpayer-bill-of-rights.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and

‘protects taxpayers' rights. TAS can offer you help if your tax problem is causing a financial difficulty, you've

tried but been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure
isn't working as it should. If you qualify for TAS assistance, which is always free, TAS will do everything
possible to help you. To learn more, visit taxpayeradvocate.IRS.gov or call 877-777-4778.

Tax professionals who are independent from the IRS may be able to help you.

Low Income Taxpayer Clinics (LITCs) can represent low-income persons before the IRS or in court. LITCs can

also help persons who speak English as a second language. Any services provided by an LITC must be for free
or a small fee. To find an LITC near you:

¢ Go to taxpayeradvocate. IRS.gov/litemap;

* Download IRS Publication 4134, Low Income Taxpayer Clinic List, available at IRS.gov/forms; or
* Call the IRS toll-free at 800-829-3676 and ask for a copy of Publication 4134.

Letter 1371 (Rev. 9-2022)
Catalog Number 40683R

State bar associations, state or local societies of accountants or enrolled agents, or other nonprofit tax professional

organizations may also be able to provide referrals.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition

in a United States Court.

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

Sincerely,
Doug O'Donnell
Acting Commissioner
.By
Valeria 6. Farr
Valeria B. Farr
Appeals Team Manager
Enclosures:
Publication 1
IRS Appeals Survey
ce:

Letter 1371 (Rev. 9-2022)
Catalog Number 40883R

Department of the Treasury ate anuary 21, 2021
Internal Revenue Service Taxpayer ID number:
IRS Tax Exempt and Government Entities

Form:

Tax periods ended:

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

Manager's contact information:
Name:
iD number:

Telephone:
Response due date:
February 21, 2021

CERTIFIED MAIL ~ Return Receipt Requested
Dear

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue Code
(IRC) Section 501(c)(3).

If you agree

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods
above.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
letter.

2. Send any information you want us to consider,

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
send additional information as stated in 1 and 2, above, you’ll still be able to file a protest
with IRS Appeals Office after the meeting or after we consider the information.

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


The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we’ve issued this letter.

4, Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
Government Entities) if you feel the issue hasn’t been addressed in published precedent
or has been treated inconsistently by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal to
the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can
help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a
hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you
qualify for TAS assistance, which is always free, TAS will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

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

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


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

Enclosures:

Form 886-A

Form 6018

Publication 892

Publication 3498

Copy of Determinations File

Sincerely,

hie 4 Whaliae
bn A Matias
Supervisory, Internal Revenue Agent for
Sean E. O’Reilly
Director, Exempt Organizations
Examinations

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


Schedule number or
Form 886-A Qepartment of the Treasury — Internal Revenue Service nea
™ Explanations of Items ex

Name of taxpayer Tax identification Number (last 4 digits) | Year/Period ended
Issues:

1. Whether the exempt status for (henceforth referred to as

“organization”, ° *, or “the organization”) should be revoked for failure to operate exclusively
in furtherance of exempt purposes.

2. Whether Organization’s exempt status should be revoked retroactively to
the first date that the organization failed to qualify for exemption.

Facts:

Articles of Incorporation:

The registered agent of the organization (as listed on the Articles of Incorporation filed with the
application for exemption) is . The purpose of the organization listed in the articles is
to: provide assistance to other charitable organizations and support activities described in IRC
Section 501(c)(3). The articles were approved and filed with the State of on

Form 1023:
The F1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, was filed by the organization on . The primary contact listed on

the F1023 fs . The purpose of the organization as stated on the F1023 references
the Articles of Incorporation.

Exemption:
The organization received L947 from the Internal Revenue Service (IRS) dated . The
letter provides that the organization was granted exemption under Internal Revenue Code
501(c)(3). The effective date of the exemption is listed as

Board:
The board of directors of the organization consists of the following offices and individuals for the
year of examination:

~ President
~ Vice President
— Treasurer
and were also listed as the President and Vice President respectively
for the preceding years.
Forms :
filed Forms for the tax years ; , and
Contributions and Granis 3 g $
[__Irwestment income _| $ g § |
Other Revenue ._§ $ 4 _

Catalog Number 208 10W Page _4 www Ins.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury ~ Internal Revenue Servica Scheaue number or
Explanations of Items

Name of taxpayer Tax Identification Number (fasf 4 digits) YeariPeriod anded
Total ae ae ae ———nd
ee 23:0 UC ae career ent
Grants ee
Other Expenses
Total ———|

Based on the expenses reported for grants for each year, charitable grants for the ;
and years were %, %, and % respectively when compared to the revenues reported by
the organization.

Assets :
Cash
Savings
| Investments — Other Securities

Total

fn ettennenen _acscnsaciaiennvoentennhnentetneitieiihictaith,
scesusutanreceeitny eed

|!

abil

Based on the assets reported on the return, Investments — other securities (donated LLC
interests) accounted for %, %, and % of all assets of the organization for the
, and years respectively.

Cash Inflows and Outflows:
The organization provided statements (Acct. # ) in response to the

Government's request for the banking statements of the organization. The statements provided
the following cash inflows and outflows for the year ended

Month. Gashin Gash Out

Totals

+

The organization reported in expenses on the Form , a figure which does not

accurately reflect the amounts expended by the organization from its accounts per the account
statements.

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


conn 886-A Department of the Treasury —Intermal Revenue Service sone number or
Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) YearfPeriod ended

LLC Cash Distributions to Organization and Subsequent Charitable Donations:
The organization provided a list of total distributions of cash made by each LLC to charities for the
year and also provided distribution requests made by each LLC to . The documentation
provided also included one instance where payments were made directly from an LLC ( )
to various charitable organizations. The documentation provided the following:

Lic Amount Reported | Percenlage of LLC Disbursement Disbursements | Difference
ap Charitable Valve @. . Requests by LLG to by LLe

|
|
Lill jot tpt bt bt

| ames seek one ames comune ee Wane a Oe Ne Ss a a

il

Hil

TTT

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Cataiog Number 20810W Page 3 www irs.gow Form 886-A (Rav. 5-2017)

i Schedule number or
Form 886-A Department of the Treasury — Internat Revenue Service ne
= Explanations of Items exhibi

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
C. Totals an aa a
The documentation provides that the LLCs paid out $ to charities in the year of
examination. The organization has provided documentation showing that $ of the
$ was disbursed by at the request of the LLCs and $ was distributed
directly by an LLC. The total expenditures as reported on the banking statements of the
organization were § and as such, the total charitable distributions reported of
$ could not have been paid directly by

The reports and documents also show that ofthe LLCs(or %) did not make any
distribution to charity. Furthermore, ofthe LLCs(or %) of the LLCs did not provide a
request to to disburse charitable funds.

Lastly, ofthe LLCs had an asset value above for the year ended

per documentation provided. Of these LLCs, LLCs did not make any distribution, LLCs
made distributions above the % required in the operating agreements, and LLCs made
distributions which were less than the % required by the operating agreements. The average
distribution percentage made by allLLCs was -%.

Disbursement Requests:
The organization provided copies of disbursement requests provided by the LLCs to for

charitable giving. The language of the disbursement requests varied, but all followed the same

pattern of transferring money to and asking to distribute that money to a charity. Below
are some examples of such language: .

e [tis ous wish to have a distribution made from our donor advised fund to the following
charities in the following amounts. We understand there is a $ processing fee per
check".

e “Enclosed is our check in the amount of $ payable to

Upon receipt of the funds, it is our wish to have a distribution made to the following
charities in the following amounts’.

e "We have transferred $ from the XXX account at

to the account at
Upon receipt of these funds, it is our wish to have them distributed as follows”.

Catalog Number 208 10W Page 4 www irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury ~ internal Revenue Service Schedule number or

Explanations of Items exhibit

Name of taxpayer Tax Identification Number (last 4 digds) | Year/Period ended

e "We will be transferring funds to from the above named

in the amount of $ . Upon receipt of the funds, it is our wish to have checks sent to

the following charities”.

e “l will be transferring funds to from the above named in the
amount of $ . Upon receipt of the funds, it is my wish to have a distribution made

from my donor advised fund to the following charities".

e “We have authorized a check payable to in the amount of

$ . Upon receipt, it is our request that you send a check in the amount of $
directly to”. ,

« “Itis our wish to have a donation in the amount of $ made from XXX to the

following charities”.

Donated LLC Interest:

The organization’s primary source of revenues and assets as reported by the organization on its

returns are derived from LLC interests donated t6 the organization. For the period ended

, the organization has reported donated LLC interests from separate and

distinct entities. Of these entities, | of the LLC interests (or approximately %) were

previously donated to (an unrelated 501(c)(3) organization) and were
subsequently assigned to the organization by the LLC managers. See the discussion on amended

operating agreements below for additional detail.

How LLC Interest is Donated to Organization:

In some instances where LLC interests were donated fo the organization, an assignment of the
interest from the owning LLC member, to the organization was completed using an assignment
agreement. In other instances, the assignment was memorialized in the operating agreement for

the LLC. The following table shows the types of units issued to an LLC, the number of units

“assigned” by the manager(s) of the LLC fo the organization, and other information provided in the

assignment agreements where applicable:

Name of PertnershipiitC | Managing Member

Load

Units Assinned to Date of Signed by

General
Units ° Membership Units Assignment

|

|

crTry

ETAL

JL

U

Ltt | Lu

Catalog Number 20810W Page 5 waww.ir8.gov Form 886-A (Rev. 5-2017)

neem

, - Schedule number or
Form 886-. A Depariment of the Treasury Internal Revenue Service exhibit
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) YeariPeriad ended

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a - eee ad 1pmannecemmoncenetts, memeecremmneeterrenamansancensisedeen tnesnenaaennnemneettedoer _——
few Ce eeneaamees ‘and on oo ne i seonceneeseeneeneneneneeennainstae nn wed ed
ba —pE Se ae cad — on od  eimemmenaneaees “oad —_—

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a enmeeenenens: We seeneineenttttementee “eccacneaconerans ne Seen ad oo
= = Te Ce eeeeteeeen oad ceneemmemenmmentemmenemnemnar sacl a oe
— “a eeneieshtemmmmnent ual S cmeeaaesianiitts bl Aeemmemrernenemncmmmammse seared cetroneeeenneenetenpas seratearteel
beet seemed -serasemnncmncsseee, nn il “erremenemmeremnemnentntintan li eencenmtcoasessnasnifien —
— S cemneiadamaneaianaaiaae ‘aad Seen acameemnaee anal aaeonnnnnnneninndrecnsnssnetaen, aa  caineniaanaanatianmnet ood aicanaeaaaantid
posse seeereenetsttcensttmedeee saceneeal

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


Form 886-A Department of he Treasury ~ infernal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

= Corre ond Aieetetttieeaoatnae esanumennennnened

LLC Valuation Amounts:
The donated interests were reported on the organization’s Form as an asset, specifically as
*. The total amount reported in the General Ledger of the
organization for the donated interests was,$ . The organization provided a
breakdown of the total donated LLC interest. The organization also provided appraisals for the
donated interest The documentation provided amounts for each LLC as follows:

j (Book Vaiss [Appraised Vaiue Appraiser

j
l

}

Hl

Le as ee ae 2

jit

lt

rrTryTyffYrrYrys?TrTrPreiyT hThUudT hui hr mr mae

Catalog Number 20840W Page 7 ww.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Scneaule number or
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

q

TT TTT f

Ly

ree rer? TT F

UTI TLL

Hl
|

rrTriprrri gd

Review of Appraisals:

The appraisals provided by the organization for the donated LLC interests were prepared by
primarily by ( or %) with the remaining appraisals prepared by

. The method of determining the value of the donated LLC interests is the same in all of
the appraisals, the appraisers reduce the “FMV” of the assets for lack of control (initial value is
reduced by % ( Jor %( )) and lack of marketability (remaining value is reduced
by %{ Jor %( )) in all instances. Overall, both appraisers use the same
method of discounting the value of the donated interest for both marketability and control using
different percentages for each method of reduction.

It is important to note that the amounts determined in both appraisals for the FMV were used in
reporting the value of the assets as reported on the Form of the organization for the period

ended even though the appraisals were not completed until . As such, it
appears as though the appraisal amounts were determined by and prior
to the preparation of the appraisal reports and provided to for preparation of the

annual Form and reporting on the organizational books and records.

Catateg Number 208 10W Pege 8 . waww.Jrs.gov Form 886-A (Rev. 5-2017)

- i Schedule number or
Form 8B6-A Department of (he Treasury — internal Reverate Service exhibit
Explanations of Items
Name of taxpayer Tax identification Number {last 4 digits) Year/Period ended

Review of Operating Agreements:
The organization provided operating agreements for each of the = LLCs for which it received
donated interests. Of the operating agreements, the examiner identified two distinct types of
agreements with identical language which the examiner named and , Of the
agreements provided, agreements were and the remaining agreements were

The agreements appear to have been prepared by and/or provided by

and his related officials ( ) and the agreements appear to have been
provided or drafted by the (owned in part by
President of ).

Specific Language in the Operating Agreements
The following sections of the operating agreements provide insight into the operation of the LLCs
and their interaction with :

Section Company Purpose and Scope ( )

The Company is organized as part of a charitable planned giving strategy designed to fund tax
qualified charities chosen by the Manager, the initial Member, and the initial Member's successors
in interest. The investments held inside of this Company including any insurance policy death
benefit and/or other assets held in this Company must be distributed to one or more charities
during the life or upon the death of the initial Member or his/her successor in interest until fax
qualified charities have received distributions equal to the full amount of assets that the
Company's non-charitable Members have contributed to the Company plus a market rate of
return. For example, if the Company has been funded with¢ of marketable securities
and this $ value was used when a portion of the Company member interests were
donated to charity at a fime when the current long- term interest rates were %, then the Company
must insure that at least the $ plus % per year return will be distributed to third party
charities before distributions are made from the Company to any non-charitable Members of the
Company. While distributions must be restricted until third party charities receive assets in the
Company plus a market rate of return, the Company manager may make secured loans of
Company assets to qualified borrowers. Loan security must provide assurances that foans will be
repaid so that the Company can distribute funds to charity equal to asset contributed by the
members plus a market rate of return. The charity must maintain control over Company interests
and receive income from the interests to satisfy the substantial present economic benefit test.

Section Classification of Membership Interests ( )

The Company shall issue Voting Membership Interests to the Voting Members. The Voting
Members may vote upon all matters upon which Members have a right to vote under this
Agreement, in proportion to their Voting Membership Interests in the Company.

The Company may issue Non-Voting Membership interests. Members may own Voting
Membership Interests, Non-Voting Membership Interests, or both. Members who own only Non-

Catalog Number 20610W Page 9 wevw.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

Voting Membership Interests are Non-Voting Members and may not vote on any Company
matters.

Voting and Non-Voting Members have identical liquidation and distribution rights unless expressly
provided to the contrary in this Agreement. Voting and Non-Voting Members have the same
ownership rights except for voting rights.

Section Allocating Profits and Losses ( )
Subject to the provisions of Section and Section , all items of income, gain, loss,
deduction, and credit, whether resulting from the Company's operations or in connection with its

dissolution, must be allocated to the Members in proportion to their respective Membership
Interests.

lf the special allocations have substantial economic effect as required by applicable federal tax
law, the Voting Members, acting unanimously, may enter into agreements providing for the special
allocation of items of income, gain, loss, deduction, or credit.

The Voting Members may agree to allocate net profits and net losses in a way that conforms to
adjustments made to the Percentage Interests because of:

* any loans made to the Company that have been converted to Capital Contributions;
® any distributions of cash; or
e any liquidated distributions.

lf the Percentage Interest of a Member is not the same throughout a given Taxable Year, the
Manager shali determine the allocation of net profits and net iosses to the Members, taking into
account the Members’ varying Percentage Interests during the year. The Manager shall make the
determination consistent with the requirements of Intemal Revenue Code Section 706(d).

The Manager has the authority to change the allocation provisions of this Section if the Company's
legal counse! advises the Company that this change is required under the Internal Revenue Code
based on the manner in which the Members have agreed fo bear fosses and to share profits and
distributions under this Agreement.

The operating agreements contain the general LLC language, the name of the manager(s) of the
LLC, and information on ownership percentages as well as the type of ownership (Voting, non-
voting, general, etc.) for each LLC.

~

Section Distributions to Members ( )

The Company's primary intent is to retain Company funds in amounts determined in the
Manager's sole and absolute discretion to meet the reasonable needs of the business or
investments of the Company and other needs as provided in this Agreement. No Member may
demand distributions of any Company funds or assets.

Catalog Number 208 10W Page _10 weew.irs.gov Form 886-A (Rev. 5-2017)

Form B86-A Department of the Treasury — internal Revenue Service Schone number or
Explanations of Items .
Name of taxpayer Tax identification Number (fast 4 digits} Year/Period ended

Without the unanimous consent of all Members, the Manager may not distribute more than the
Company income for the previous tax year plus % of the value of the assets of the Company on
the last day of the previous calendar year in any single year.

Section Mandatory Yearly Distributions ( )

The Manager shall be required to distribute, on a pro-rata basis, a substantial present economic
benefit of at least percent( %) of the total assets held by the Company on a yearly basis. If
the optional distributions as set forth in Section above on a yearly basis are more than
percent( %) ona pro rata basis, then there shall be no mandatory distributions required under
this paragraph. If the optional distributions set forth under Section above are less than
percent( %) on an annual basis, then the Manager shall be required to make distributions on a
pro rata basis up to percent({ %) of the value of the assets on a year to year basis. For
purposes of this paragraph, the = percent{ %) value is determined as of the value of the
assets of the Company as of January 1 of each calendar year. Furthermore, this mandatory
distribution requirement shall not apply to the first partial year that this Company is in existence
and shall only apply to each full calendar year that this Company is in existence.

Section Distributions to members ( )

It is the primary intent of the Company to retain Company funds in amounts determined in the

sole discretion of the Manager to meet the reasonable needs of the business or investments of the
Company and other needs as provided in this Agreement. No Member shal! have the right to
demand distributions of any Company funds or assets,

Section Manager's General Authority ( )
Subject to the specific rights given the Voting Members in this Agreement, the Manager may make
all decisions concerning any matter affecting or arising out of the Company's business conduct.
The Manager has the right and authority to manage, conduct, and operate the Company business;
provided, however, that the manager shall make ‘all financial decisions only with approval from the
(" *) board for as long as LLC interests are owned entirely or in part
by or its successor or assign, which must be tax exempt pursuant to Internal Revenue Code,
26 U.S. Code, Section 501, and a qualified charity as defined by Internal Revenue Code, 26 U.S.
Code, Sections 170(c), 2055 (a) and 2522(a).

Section Manager’s Power to Amend (
The Manager may, without the consent of the Members, amend any provision of this Agreement
or the Articles of Organization and prepare and deliver any documents necessary to reflect:

A change in the name of the Company or the location of the principal office of the
Company; ,

The admission, substitution, or termination of Members according to this Agreement;

A change that the Manager in its sole discretion determines to be necessary or
advantageous to qualify or to enable the Company to continue to qualify as a limited liability

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

Form 886-A Department of the Treasury — intemal Revenue Service Schedule number or

exhibit

Explanations of Items

Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

company, or a company in which the Members have limited liability under the laws of any
jurisdiction, or to ensure that the tax treatment of the Company does not change, other than
as provided in Article Two;

A change that does not adversely affect the Members in any material respect or that is
tequired or contemplated by this Agreement; or

e Any other amendments similar to the foregoing.

Any other amendments will require the written consent of % of the Voting Membership
Interests unless other provisions of this Agreement require a higher percentage of the Voting
Members (such as the liquidation of the Company before the expiration of its term).

Amendments:
The operating agreements were reviewed to determine the stated members and ownership

percentages. In addition to the original operating agreements, amendments to the agreements
were provided for the following LLCs:

e

. First Amendment —- The amendment changed the owner of the % interest in the

from the ( )to

. First Amendment — The amendment changed the owner of the % interest in the

from the to

. First Amendment ~ The amendment changed the owner of the % non-voting

interest in the from : to

. Second Amendment - The amendment changed the owner ofthe % interest in the

from the to

. First Amendment ~— The amendment assigned % of the member interest in the

from the to

. Second Amendment - The amendment changed the owner of the % interest in the

from the to

. First Amendment - The amendment changed the owner ofthe  % interest in the

from the to

. First Amendment ~ Only the last page of the amendment was provided. There was

no detail on what was changed included in the amendment.

. First Amendment — In the first amendment assigned his member

interest in the te

Catalog Number 20840W Page 12 www irs.gov Farm 886-A (Rev. 8-2017)


Schedule number ar
Fe 886-A Department of the Treasury — Internal Revenue Service hibit
“m Explanations of Items exp

“Name of taxpayer Tax identification Number (last 4 digits) YeariPeriod ended
b. Second Amendment — In the second amendment resigned as manager
of the and named as the new manager.
c. Third Amendment -~ In the third amendment was removed as the
investment advisor for the and ( ) was

delegated to be the investment advisor.

d. Fourth Amendment — In the fourth amendment transferred ¥% of its member
interest in the to

a. First Amendment -in the first amendment assigned his member
interest to the
b. Second Amendment — in the second amendment resigned as

manager of the and assigned to act as manager of the

c. Third Amendment — In the third amendment transferred % of its interest in
the to ‘

a. First Amendment — In the first amendment resigned as the manager of the
and transferred §% of its ownership interest in the to . also was
named as the new manager.

a. First Amendment ~ In the first amendment resigned as the manager of the LLC
and transferred % of its ownership interest in the to . also was
named as the new manager.

a. First Amendment — In the first amendment and
resigned as the managers of the and appointed as the manager.
Additionally, they transferred their member interest in the to
b. Second Amendment - In the second amendment resigned as the manager of the
and transferred §% of its ownership interest in the to . also was
named as the new manager.

a. First Amendment - In the first amendment the resigned as the
manager of the and appointed as the manager. Additionally, the trust
transferred its member interest in the to

b. Second Amendment - In the second amendment resigned as the manager of the

and transferred = % of its ownership interest in the to . also was
named as the new manager. ‘ ‘

a. First Amendment — In the first amendment resigned as the manager of the
and transferred §% of its ownership interest in the to , also was
named as the new manager,

Catalog Number 20840W Page 13 www irs.gov Form 886-A (Rev. 5-2017)

Form B86- A Departmesit of tha Treasury — intemal Revenue Service Schedule number or
| Explanations of Items
Name of taxpayer Tax identification Number (lasf 4 digits) Year/Period ended

a. First Amendment — In the first amendment

of the and appointed

to

Second Amendment — In the second amendment
the LLC and transferred

% of its ownership interest in the

resigned as the manager
also assigned his % member interest

resigned as the manager of
to also

was named as the new manager.

a. First Amendment - In the first amendment
and transferred

% of its ownership interest in the

named as the new manager.

a. First Amendment — In the first amendment

interest to

Ownership and Changes:
The examiner reviewed the operating agreements and amendments to the agreements to
determine the stated ownership of each LLC. The following information was obtained from the

resigned as the manager of the
to also was

assigneda % non-Voting

review:
LLC Name Agreament | Listed Qwnership Current Amended | Date Qwnership
Type Mamber/Sianed Gy | Percentages of Agreement Amonde Porcentage
Members prior to Member
Amendments,
Catalog Number 20810W Page 14 ww irs.gov Form 886-A (Rev. 5-2017)


~ Schedule number or
Form 886-A Department of the Treesury Infernal Reverwe Service exhibit
Explanations of Items

Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

Catatog Number 20810W Page 15 WM iFS.gOVv Form 886-A (Rev. 5-2017)

Schedule number or

Form 886- A Department of the Treasury ~ Internal Revenue Service exhibit
Explanations of items
Name of taxpayer “Tax Identification Number (last 4 digits) | Year/Period ended
Catalog Number 20810W Page 16 wew.irs.gov

Form 886-A (Rev. 5-2017)

j Schedule number or
e 886-A Department of the Treasury ~ internal Revenue Service hibit
mm Explanations of Items *

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period anded
According to the operating agreements and related amendments, approximately % ( ) of
the LLC interests areowned % by . Of the % owned interests or % were
originally donated to prior to being transferred to . The interests
transferred from —_—to were all dated to have occurred in the month of
Ownership Reported by other Entities:

) (A Charity which was previously run by )
filed a Form return for the period ended . The organization reported

owning member interests in the following entities (not an all-inclusive list) for the period:

Catalog Number 20810W Page 17 www ira.gav Form 886-A (Rey. 5-2017)

Schedule number or
Form 886-A Department of the Treasury — intemal Revenue Service ee
Explanations of Items sxnipn
Name of taxpayer Tax Identification Number (last 4 digifs) Year/Period ended
e
e
e
e
As such, and are both claiming ownership of the listed above for the period
ended . Additionally, provided documentation showing that the member

interest it recelved for these organizations was received from and not

About :
During the examination the organization provided documentation which it provides to parties
interested in donating LLC interest to . The documents included:

e Law Firm brochure
e Trifold
e Planned Giving Trifold
e Book on the * .
All of these documents are created and provided to potential clients by through
Law (DBA ) and . Each of
these documents outlines methodologies used by to solicit potential clients.

utilizes many forms of “tax planning” one of which is the same or substantially
similar to the method used by as outlined below. received

compensation from the clients for the initial setup of the structure used (formation of :

preparation of appraisals, etc.) and continued support to each (annual filings, gift receipts for
“donations” etc.)

It is also apparent that has direct ties to as evidenced by his acceptance
of interests from which was run by and the use of as an
appraiser for the donated interests.

About Z
On the United States of America, Plaintiff, filed a Complaint for Permanent Injunction
and Other Relief against , Defendant. Per the complaint:

1. From to the present, : ‘ (' ") has organized, promoted, and
operated an elaborate-and bogus-charitable giving tax scheme throughout the United
States. Through this scheme, creates an entity for each scheme participant and
advises them to transfer assets to the new entity. then causes the participants to
purportedly "donate" or “assign” an interest in these entities to charities that controls.

Catalog Number 20810W Page 18 wenv irs.gov Form 8B6-A (Rev. 8-2017)


Form 886-A Department of the Treasury ~ Internal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

then "appraises” the purportedly donated interests in a manner that fails to comply
with the law and generally accepted appraisal standards. Finally, prepares the
federal income tax return documents to claim the bogus charitable contribution deductions.

2. This entire tax scheme occurs only on paper. Participants never actually transfer or donate
anything to purported charities. In some egregious instances, participants claim
bogus charitable deductions for nonexistent, fictional assets that fabricates.

3. Regardless of the purported form, advises scheme participants to take unwarranted
tax deductions for charitable donations that Knows were never made, and, in some
instances, for assets that did not exist. sells this scheme to the clients of financial
planners and Certified Public Accountants by misrepresenting his experience, his
credentials, and the merits of his charitable giving tax scheme. [n return, scheme
participants pay substantial fees to based on the purported value of the assets
initially transferred to the entities.

4. charitable giving tax scheme has harmed the United States by depriving the
government of tax revenue. The IRS has identified specific transactions that, through
cost the United States Treasury more than $ in lost tax revenue. And while the
IRS has assessed and will continue to assess scheme participants with significant tax
liabilities, it will likely never fully recover the monies bilked from the Treasury.

.

5. The United States brings this Complaint pursuant to 26 U.S.C. §§ 7402, 7407, and 7408 to
enjoin and all persons and entities in active concert or participation with from,
among other things, directly or indirectly:

a. Making or furnishing or causing another person to make or furnish a statement with
respect to the allowability of any deduction or credit, the excludability of any income,
or the securing of any other tax benefit, or otherwise providing tax advice, in
exchange for compensation;

b. Preparing (or assisting others in preparing) appraisals in connection with any federal
fax matter;

c. Acting as federal tax return preparers, or filing, assisting in, or directing the
preparation or filing of federal tax returns, amended returns, or other related
documents or forms for any person or entity other than his own tax returns; and

d. Organizing or assisting in the organization of a partnership or other entity, any
investment plan or arrangement, or any other plan m arrangement concerning
charitable contribution deductions.

The United States also seeks to disgorge the ill-gotten gains that derived from this
bogus charitable giving tax scheme.

Catalog Number 20810~W Page 19 weow.irs.qov Form 886-A (Rev. 5-2017)

Schedule number or
Form 886-A Department of the Treasury ~ Internal Revenue Service hibit
Explanations of Items °
Name of taxpayer Tax identification Number (last 4 digits) Year/Pariod ended
Since : has established at least three purported charities in (I)
and (3) (  ") (collectively, the " ").
controlled all purported charities and operated them in the same manner.
According to their respective Articles of Incorporation, the were purportedly
organized for charitable purposes. submitted a Form 1023, Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code ("Tax
Exempt Status Application”), on behalf of each of the . The IRS granted the
tax exempt status based on the Tax-Exempt Status Applications that
submitted.
Over the years, is listed on documents filed with the Secretary of State's

Office as an officer, treasurer, director, incorporator, or registered agent for the
has also attempted to avoid IRS scrutiny by affiliating his parents or other

individuals with the on filings with the Secretary of State's Office.
Ai all times, however, controlled the and was the only true officer
and director. The had no employees.
On ' executed an agreement with the IRS on behalf of
retroactively revoking tax-exempt status as of . The IRS concluded,
and did not dispute, that was not engaged primarily in activities for exempt
purposes, and its net earnings inured to the benefit of private individuals i.e., him and his
family.
On ' , on behalf of , Stipulated to an entry of judgment against it in
U.S. Tax Court for past due taxes for and . owed taxes on its income
because it was not a tax-exempt entity.
On ' executed agreements with the IRS on behalf of
and retroactively revoking and tax exempt status as of

and , respectively, because used and as

tools for promoting, organizing, and executing his charitable giving tax scheme.

Transactions:

Under the first step in scheme, creates a partnership or limited liability
company (the “Entity” or “Entities") for scheme participants. Regardless of their form, the
Entities are holding companies that exist solely to facilitate scheme.

prepares and files all paperwork necessary to create the Entities, including the partnership
or LLC agreements.

Catalog Number 20810W Page 20 wwwJrs.gov Form 886-A (Rev, 5-2017)

_ ‘ Schedule number or
Form 886-A Department of the Treasury ~ internal Revenue Service exhibit
Explanations of Items

Name of taxpayer Tax identification Number (fast ¢ digits) Year/Period ended

Next, the scheme participants transfer "property" to the newly formed Entities using

contractual documents prepared by . Some participants, at direction, claim to
transfer cash or real property to the Entities while others purportedly transfer backdated
promissory notes and fabricated intellectual property. Over time, varied how he

executed this scheme step, but the variations were meaningless from both economic and
federal income tax perspectives.

then drafts the paperwork necessary to cause the scheme participants to “donate” or
“assign” an interest in the newly created Entities to one of the

Some participants purport to donate a % non-controlling interest in their Entity, while
othersa % interest. in some cases, misrepresents the “transaction” to the .
participants, telling such participants that they were “contributing” a % non-controlling
interest, when, in fact, completed the transactional paperwork to show a %
“contribution.” .

then causes the to send contemporaneous written
acknowledgments of the purported contributions to the scheme participants.

appraises each “contribution to facilitate the bogus charitable deductions. Not only
are the appraisals baseless, but is prohibited by law from providing them.

completes, signs, and provides to each scheme participant IRS Forms 8283,
Noncash Charitable Contributions ("Form 8283"), which are necessary to claim a non-cash

charitable contribution of more than $ sends the scheme participants the
following instructions: "

”l

In following instructions, the scheme participants then attach the prepared
Form 8283 to their personal federal income tax returns to claim unwarranted charitable
deductions. The Forms 8283 are based entirely on the bogus appraisals that

prepares to facilitate this scheme.

On paper, it appears that the participants donate something of value to the

repeatedly advises the scheme participants to take actions to give his scheme
substance. This was mere window dressing, however, designed to disguise tax
shelter. In reality, the scheme participants retain complete control over their Entities and

their Entities' assets and continue to use the purportedly donated assets as if nothing ever
happened.

Catalog Number 20810W Page _ 21 ve. irs.gov Form 886-A (Rev. 5-2017)

_ Schedule number or
Form 886-A Department of the Treaeury Internal Revenue Service exhibit
Explanations of Items

Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

After executing the “transaction," the do not take dominion or control over
the Entities or their assets. The are simply vehicles through which
executes his elaborate charitable giving tax scheme.

Misrepresentation of Structure by

told potential participants that they could establish Donor Advised Funds ("DAFs")
through the , but this was a false statement.

The Internal Revenue Code defines DAFs as a fund or account "(i) which is separately
identified by reference to contributions of a donor or donors, (ii} which is owned and
controlled by a sponsoring organization, and (iii) with respect to which a donor... has ...
advisory privileges with respect to the distribution or investment of amounts held in such
fund or account by reason of the donor's status as a donor.”

DAFs are not standalone entities. Each DAF is established by a sponsoring organization,
which must be an Internal Revenue Code§ 50I(c)(3) tax exempt organization. The
sponsoring organization creates a separate DAF for each donor. The donor then makes a
tax-deductible charitable contribution to the donor's DAF. The donor cannot use or
otherwise access the donated property because the sponsoring organization maintains
complete control over the DAF and its properly. The donor retains “advisory privileges”
regarding future DAF distributions, but the sponsoring organization is not required to honor
the donor's requests and may only distribute DAF property to other Code§ 50/(c)(3) tax
exempt entities. After a donor makes a distribution request to a DAF, the DAF will make a
distribution from the assets that the DAF controls after performing due diligence to ensure
the intended recipient is a qualified charity.

By advising potential participants that they could establish DAFs through the
: misrepresented the structure of his illegal tax shelter. The

did not qualify or operate as sponsoring organizations, and the Entities established
did not qualify or operate as DAFs.

To be a sponsoring organization, the were required to inform the IRS that
they intended to be sponsoring organizations on their Tax-Exempt Status Applications.
They did not. To be a sponsoring organization, the were also required to

describe its DAF program and the written materials provided to donors on the Tax-Exempt
Status Applications. They did not.

To be a sponsoring organization, the were required to report certain
information on the annual "tax return” for tax exempt entities-Form

("Form _"), They did not. Indeed, on the Forms , Part
IV, Question 6, stated that the did not "maintain any donor advised

Catalog Number 20810W Page _ 22 www ins.gov Form 886-A (Rev. 5-2017)

Form 886-A Departmant of the Treasury ~ intemal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

funds or any similar funds or accounts for which donors have the right to provide advice on
the distribution or investment of amounts in such funds or accounts."

completed the Tax-Exempt Status Applications and Forms and
knew that the did not report the required information to be a lawful
sponsoring organization. Therefore, knew that the were not
sponsoring organizations.

To establish a DAF, the were required to take control of the purportedly
contributed Entity interests. As explained throughout this Complaint, the scheme
participants never gave up control of the purportedly contributed assets, which knew.
if scheme participants actually wanted to make a donation to a charity through a
(which many participants did not do) required them to send to hima

“along with a check made out to one of the
These‘ "merely gave the appearance of a valid DAF, but a
valid DAF would never have required an additional check from the participant. This process

shows that the never had dominion or contro! over any of the purported
contributions.

&

Scheme Flagrantly Violates internal Revenue Laws:

Some participants in tax scheme, upon advice and with his assistance,
have taken out substantial loans from their respective Entities even after transferring their
ownership interest fo ane of the . These loans are made on beneficial terms
and sometimes go unpald. testified ina deposition that most participants
borrowed their Entities' assets or used the assets as collateral for some other purpose.

Consequently, participants in scheme receive a large income tax deduction and
still get the use and enjoyment of the assets that generated the deduction.

Because each of scheme participants claimed non-cash charitable contributions of
over $ on their tax returns based on the purported donation of their Entity interests to

the , they were required to obtain qualified appraisals of the purportedly
donated Entity interests from “qualified appraisers.”

In reality, performs the appraisals for the scheme participants. does not tell
scheme participants that he is the appraiser prior to performing the appraisals.
completed and signed the Form 8283 for each of the participants, which based

entirely on the bogus appraisals he prepared. often listed the following credentials
on the Form 8283 after his signature:

Catalog Number 20870W Page 23 wrew irs. gow Form 886-A (Rev. 5-2017)

, - Schedule number or
Form 886-A Department of the Treasury ~ internal Revanue Service

" hibit
Explanations of Items “
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

claims that he “implemented and consulted on over charitable plansin States

encompassing $ since [and] performed over qualified appraisals of closely-
held businesses since .

The appraisals uses in his tax scheme are bogus because is excluded by law
from preparing appraisals in connection with this scheme, the appraisals are not qualified
appraisals within the definition of the Internal Revenue Code, and the appraisals are based
on unreliable methods.

profits from his scheme by charging a percentage fee based on the value of the
purportedly donated assets. His standard fee is “ % of net assets transferred (to the

) up to but not in excess of $ , plus % of net assets transferred which
exceed $ *

Example of Charitable Giving Scheme:

sold his charitable giving tax scheme to -based Participant 1 through Participant
1's financial planner. Participant-1 claimed a $ charitable contribution deduction on

his federal income tax return. charged $ for Participant 1 to participate in
this scheme.

Participant 1 decided to participate in charitable giving tax scheme in

used an existing LLC and illegally backdated every document he prepared for
Participant 1 so that Participant 1 coufd claim a charitable deduction on his federal
income tax return.

On : and Participant 1 completed an LLC Agreement to transfer an
LLC that had previous established in to Participant 1. backdated the
LLC Agreement to . Then, drafted a promissory note through
which Participant 1 promised to pay his LLC $ . backdated the promissory
note to . The promissory note was not secured by any collateral and
charged a % interest rate on outstanding balances in and % on any outstanding
balances thereafter.

also drafted an assignment agreement through which Participant 1 purported to

assign %ofhisLLCto . backdated the assignment agreement as well to

. Despite executing the assignment agreement, Participant 1 believed,
based on misrepresentations, that Participant 1 only assigned a non-controlling
LLC interest to
On , Participant 1 opened a bank account in the LLC’s name. Participant 1

was the only person with signature authority over this account. Participant 1 never gave
or anyone at control over the account.

Catalog Number 20810W Page 24 wew.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury ~ intemal Revenue Service serene number or
Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

Later in , Participant 1 transferred to the LLC’s bank account to “repay” the
bogus note’s principal. Participant 1 did not pay any interest.

then prepared an appraisal report backdated to —more
than months prior to the transfer of the LLC to Participant 1—in which
“appraised” Participant 1’s purported giftof_LC unitsto  at$

backdated appraisal does not describe or analyze the LLC’s only asset— the
promissory note. Rather, applied his standard % discount for lack of control,
despite stating that owned % of Participant 1's LLC, anda % discount for lack of
marketability. provided no meaningful explanation for these discounts.

then prepared an IRS Form 8283 so that Participant 1 could claim a
$ charitable contribution for the purported donation to on his
federal income tax return.

The IRS audited Participant 1's tax return and disallowed the $ charitable
contribution.

in , after the IRS initiated the audit of Participant 1’s tax return,
Participant 1 made charitable distributions totaling $ to . In order to do so,
Participant 1 completed “ .” but also sent a check to

in that amount.

Additional information can be found at United States of America, Plaintiff, v.
, Defendant. Case No.: .

Permanent Injunction:
On , the United States District Court Judge ( ) issued a permanent
injunction against permanently barring him from directly or indirectly:

a. Organizing (or assisting in the organization of), promoting, marketing, or selling the

or any plan or arrangement that is substantially similar, or
participating (directly or indirectly) in the sale of any interest in the
or any plan or arrangement that is substantially similar;

b. Making or furnishing, or causing another to make or furnish, any statements about
the tax benefits of the or any plan or arrangement that is
substantially similar,

c. Organizing (or assisting in the organization of}, promoting, marketing, or selling any
entity, plan, or arrangement involving charitable giving, or participating (directly or

indirectly) in the sale of any interest in an entity, plan, or arrangement involving
charitable contributions;

Catalog Number 20810W Page 25 woww.irs.gov Form 886-A (Rev. 5-207)

Form 8B6-A Department of the Treasury ~ internal Revenue Service Sone number or
Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

d. Furnishing, or causing another to furnish, tax advice regarding charitable
contributions; .

e. Organizing (or assisting in the organization of), promoting, marketing, or selling any
entity, plan, or arrangement involving federal taxes that relies upon, requires
customers to execute, or uses a standard set (or substantially similar version or set)
of transaction documents;

f. Making or furnishing, or causing another to make or furnish, any statements about
the tax benefits of entities, plans, or arrangements that rely upon, require customers
to execute, or use a standard set (or substantially similar version or set) of
transaction documents;

g. Making or furnishing, or causing another fo make or furnish, any statements in
connection with the organization or marketing of a transaction having a significant
purpose of avoidance or evasion of federal taxes;

h. Preparing (or assisting others in preparing) appraisals in connection with any federal
tax matter;

i. Representing anyone other than himself before the IRS;

j. Acting as a federal tax return preparer, or filing, assisting in, or directing the
preparation or filing of federal tax returns, amended tax returns, or other related
documents or forms for any person or entity other than his own individual tax returns
(or his joint tax return);

k. Assisting or advising individuals or entities in seeking tax-exempt status from the
IRS;

|. Advising, performing work for, or receiving compensation from

a : ,

’ » Or , ’

m. Advising, performing work for, or receiving compensation for work performed for
individuats in connection with making assignments, donations, contributions, or
transfers to ' ;

' , , or
> or

n. Referring individuals to make assignments, donations, contributions, or transfers to

’ , , OF

Law:

IRC Section 501(c)(3) provides for an exemption from tax for corporations, and any community
chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes, or to foster national or international
amateur sports competition (but only if no part of its activities involve the provision of athletic
facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net

Catalog Number 208 10W Page _26 wew.irs.gav Form B86-A (Rev. 5-2017)

- Schedule number or
Form 886-A Dapartment of the Treasury Internal Reverwe Service exhibit
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

earnings of which inures to the benefit of any private shareholder or individual, no substantial part
of the activities of which is carrying on propaganda, or otherwise attempting, to influence
legislation (except as otherwise provided in subsection (h)), and which does not participate in, or
intervene in (including the publishing or distributing of statements), any political campaign on
behalf of (or in opposition to) any candidate for public office.

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

Treas. Regs. Section 1.501(c)(3)-1(a)(2) provides that, the term exempt purpose or purposes, as
used in this section, means any purpose or purposes specified in section 501(c)(3), as defined
and elaborated in paragraph (d) of this section.

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

Treas. Regs. Section 1.501(c)(3)-1(d)(1) provides that in general:
i. An organization may be exempt as an organization described in section 501(c)(3) if it is
organized and operated exclusively for one or more of the following purposes:

Religious,

Charitable,

Scientific,

Testing for public safety,

Literary,

Educational, or

g. Prevention of cruelty to children or animals

li. 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.

~oooo®m

ln Better Business Bureau of Washington D.C. v. U. S., 326 U.S. 279 (1945, the court found that
the existence of a substantial nonexempt purpose, regardless of the number or importance of
exempt purposes, will cause failure of the operational test.

Notice 2004-30

Catalog Number 208 10W Page 27 wew.irs.gov Form 886-A (Rev, 5-2017)

Form 886-A Department of the Treasury ~ Internal Revenue Service sre number or
Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) | Year/Period ended

The Internal Revenue Service and the Treasury Department are aware of a type of transaction,
described below, in which S corporation shareholders attempt to transfer the incidence of taxation
on § corporation income by purportedly donating S corporation nonvoting stock to an exempt
organization, while retaining the economic benefits associated with that stock. This notice alerts
taxpayers and their representatives that these transactions are tax avoidance transactions and
identifies these transactions, and substantially similar transactions, as listed transactions for
purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-2(b)(2) and

301 .6112-1(b)(2) of the Procedure and Administration Regulations. This notice also alerts parties
involved with these transactions to certain responsibilities that may arise from their involvement
with these transactions.

FACTS

In a typical transaction, an S corporation, its shareholders, and an organization exempt from tax
under § 501(a) and described in either § 501(c)(3) or § 401 (a) of the Internal Revenue Code (such
as a tax-qualified retirement plan maintained by a state or local government) (the exempt party)
undertake the following steps. An S corporation issues, pro rata to each of its shareholders (the
original shareholders), nonvoting stock and warrants that are exercisable into nonvoting stock. For
example, the S corporation issues nonvoting stock in a ratio of 9 shares for every share of voting
stock and warrants in a ratio of 10 warrants for every share of nonvoting stock. Thus, if the S
corporation has 1,000 shares of voting stock outstanding, the S corporation would issue 9,000
shares of nonvoting stock and warrants exercisable into 90,000 shares of nonvoting stock to the
original shareholders. The warrants may be exercised at any time over a period of years. The
strike price on the warrants is set at a price that is at least equal to 90 percent of the purported fair
market value of the newly issued nonvoting stock on the date the warrants are granted. For this
purpose, the fair market value of the nonvoting stock is claimed to be substantially reduced
because of the existence of the warrants.

Shortly after the issuance of the nonvoting stock and the warrants, the original shareholders
donate the nonvoting stock to the exempt party. The parties to the transaction claim that, after the
donation of the nonvoting stock, the exempt party owns 90 percent of the stock of the S
corporation. The parties further claim that any taxable income allocated on the nonvoting stock to
the exempt party is not subject to tax on unrelated business income (UBIT) under §§ 511 through
514 (or the exempt party has offsetting UBIT net operating losses). The original shareholders
might also claim a charitable contribution deduction under § 170 for the donation of the nonvoting
stock to the exempt party. In some variations of this transaction, the S corporation may issue
nonvoting stock directly to the exempt party.

Pursuant to one or more agreements (typically redemption agreements, rights of first refusal, put
agreements, or pledge agreements) entered into as part of the transaction, the exempt party can
require the S corporation or the original shareholders to purchase the exempt party's nonvoting
stock for an amount equal to the fair market value of the stock as of the date the shares are

Catalog Number 20810W Page 28 wew.irs.gov Form B86-A (Rev. 5-2017}

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

presented for repurchase. in some cases, the S corporation or the original shareholders guarantee
that the exempt party will receive the fair market value of the nonvoting stock as of the date the

stock was given to the exempt party if that amount is greater than the fair market value on the
repurchase date.

Because they own 100 percent of the voting stock of the S corporation, the original shareholders
have the power to determine the amount and timing of any distributions made with respect to the
voting and nonvoting stock. The original shareholders exercise that power to cause the S
corporation to limit or suspend distributions to its shareholders while the exempt party purportedly
owns the nonvoting stock. For tax purposes, however, during that period, 90 percent of the S
corporation's income is allocated to the exempt party and 10 percent of the S corporation’s income
is allocated to the original shareholders. The transaction is structured for the original shareholders
to exercise the warrants and dilute the shares of nonvoting stock held by the exempt party, or for
the S corporation or the original shareholders to purchase the nonvoting stock from the exempt
party at a value that is substantially reduced by reason of the existence of the warrants. In either
event, the exempt party will receive a share of the total economic benefit of stock ownership that is
substantially lower than the share of the S corporation income allocated to the exempt party.

DISCUSSION

The transaction described In this notice is designed to artificially shift the incidence of taxation on
S corporation income away from taxable shareholders to the exempt party. In this manner, the
original shareholders attempt to avoid paying income tax on most of the S corporation’s income
over a period of time. The Service intends to challenge the purported tax benefits from this
transaction based on the application of various theories, including judicial doctrines such as
substance over form. Under appropriate facts and circumstances, the Service also may argue that
the existence of the warrants results in a violation of the single class of stock requirement of §
1361(b)(1)(D), thus terminating the corporation’s status as an S corporation. See, e.g., §§ 1.1361-
1(I)(4)(ii) and (iii).

Transactions that are the same as, or substantially similar to, the transaction described in this
notice are identified as “listed transactions” for purposes of §§ 1.6011-4(b)(2), 301.611 1-2(b}(2),
and 301.6112-1(b}(2} effective the date this notice was released to the public.
Independent of their classification as listed transactions, transactions that are the same as, or
substantially similar to, the transaction described in this notice may already be subject to the
disclosure requirements of § 6011 (§ 1.6011-4), the tax shelter registration requirements of § 6111
(§ 301.6111-1T and § 301.6111-2), or the fist maintenance requirements of § 6112 (§ 301.61 12-
1). Under the authority of §1.6011-4(c)(3)(i)(A), the exempt party in the listed transaction
described in this notice will also be treated as a participant in the transaction (whether or not
otherwise a participant). The exempt party will be treated as participating in the transaction for the
taxable year of the purported donation, the taxable year of the reacquisition, and all intervening
taxable years. Pending further review and possible additional guidance, this notice does not apply

Catalog Number 208 10W Page 29 wwwits.gov Form $86-A (Rev. 5-2017)


Form 886-A Department of the Treasury ~ internal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

to any investment in employer securities, as defined in § 409(!), by an employee stock ownership
plan subject ic the requirements of § 409(p).

Persons who are required to register these tax shelters under § 6111 but have failed to do so may
be subject to the penalty under § 6707(a). Persons who are required to maintain lists of investors
under § 6112 but have failed to do so (or who fail to provide those lists when requested by the
Service) may be subject to the penalty under § 6708(a). In addition, the Service may impose _
penalties on parties involved in these transactions or substantially similar transactions, including
the accuracy-related penalty under § 6662.

The Service and the Treasury Department recognize that some taxpayers may have filed tax
returns taking the position that they were entitled to the purported tax benefits of the type of
transaction described in this notice. These taxpayers should take appropriate corrective action and
ensure that their transactions are disclosed properly.

Taxpayer's Position:

1. The Taxpayer has not provided a position on the issue.
2. The Taxpayer has not provided a position on the issue.

Government's Position:

1. That the exempt status for should be revoked for failure to
operate exclusively in furtherance of exempt purposes.

Under IRC Section 501(c)(3) an exemption from tax is provided for organizations, organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition, or for the
prevention of cruelty to children or animals, no part of the net earnings of which inures to the
benefit of any private shareholder or individual, no substantlal part of the activities of which Is
carrying on propaganda, or otherwise attempting, to influence legislation, and which does not

participate in, or intervene in, any political campaign on behalf of (or in opposition to) any
candidate for public office.

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

Treas. Regs. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as
operated exclusively for one or more exempt purposes only if it engages primarily in activities
which accomplish one or more of such exempt purposes specified in section 501(c)(3). An

organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Catalog Number 20810W Page 30 waw.irs.gov Form 886-A (Rev. 5-2017)


un ; Schedule number or
Form 886-A, Department of the Treasury Internal Revenue Service exhibit
Explanations of items

Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

Here the facts show that more than an insubstantial part of the organization’s activities are not in
furtherance of an exempt purpose. These activities include:

1. Participating in the S Corporation Tax Shelter Scheme
2. Operating as a vehicle to assist the promoter of the scheme ( ) in carrying
out his abusive charitable scheme

These activities disqualify the organization from exempt status under IRC Section 501(c)(3).
Discussion on the disqualifying activities

1. The organization is a participant in the S Corporation Tax Shelter Scheme.

Transactions that are the same or substantially similar to those described in Notice 2004-30 are
designed to artificially shift the incidence of taxation on S corporation income away from taxable
shareholders to the exempt party. In this manner, the original shareholders attempt to avoid
paying income tax on most of the S corporation's income over a period of time. The shifting of
taxation away from the taxable shareholders is possible due to the exempt party generally does
not pay tax on its income. Since inception, . has not paid any fax on
its income. Notice 2004-30 designated these type of transactions as listed transactions.

In determining whether the donations of LLC membership units to the organization are the
same or substantially similar to Notice 2004-30, the provisions in the Operating Agreements and
other relevant facts are examined. These provisions include:

* The original shareholders donated membership units to the organization.
¢ The original shareholders retain control of the LLC via their haldings of exclusive
management rights and/or ownership of voting units.
* The original shareholders have the power to determine the amount and timing of any
distributions.
* The organization is allocated percent or more of the profit, while the original
shareholders are allocated percent of the loss.
* The LLCs have the first right to purchase the organizations membership units. With the
original shareholders having exclusive management right, they can issue additional
shares to dilute the shares held by the organization.

Discussion of the above factors
i. The original shareholders donated membership units to the organization.
Similar to Notice 2004-30, the original shareholders donated membership units to the

organization, while retaining complete and total control over the LLC units. As the holder of
membership units, the organization has no voting rights and consent right.

Catalog Number 20810W Page 3] www Irs.gov Form 886-A (Rev. 5-2017}

. Schedule number or
Form 886-A Department of the Treasury Internal Revenue Service axhibit
Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

ii. The original shareholders retain control of the LLC via their exclusive management rights.

Similar to Notice 2004-30, after the original shareholders donated membership units to the
organization, they still maintain complete contro! over the assets of the LLC. In the majority
of instances { LLCs or %) where interest was donated to the organization,a %
non-voting interest was donated while a % Voting interest was maintained by the original
donors. As such, the original donor maintains all voting rights and management rights of the
LLC. This creates a situation where the donor can take a tax deduction for a “charitable
contribution” while maintaining the economic benefit and control of the donated asset.

iii. The original shareholders have the power to determine the amount and timing of any
distributions.

In Notice 2004-30, because they are the sole managers of the S Corporations, the original
shareholders have the power to determine the amount and timing of any distributions.

In this case, the original shareholders, also Manager of the LLCs, have the power to
determine the amount and timing of distributions. Per the Type Operating Agreements,

there are no required annua! distributions for organizations operating under the Type 1
agreements.

For organization’s operating under Type 2 agreements, the manager shall be required to
distribute, on a pro-rata basis, a substantial present economic benefit of at least

percent( %) of the total assets held by the Company on a yearly basis. For purposes of
this paragraph, the two percent( %) value is determined as of the value of the assets of
the Company as of January 1 of each calendar year. Furthermore, this mandatory
distribution requirement shall not apply to the first partial year that this Company is in
existence and shall only apply to each full calendar year that this Company is in existence.

in the year of examination, some LLCs did not make any distributions to the organization
. Additionally, only ofthe LLCs(or %) made distributions at or above the
required % with LLCs making no distribution or a distribution which was less than the

% required by the operating agreements. Overall, the average distribution for all LLCs was
% of the value of the LLC at .

Where distributions were made to charities; the timing, amount, and chosen charity were
determined by the LLC manager (typically the original donor). Many of ihe LLCs made
direct payments to their chosen charities without any notification to and simply
reported the expense to at year end...

Other entities transferred funds to and also provided with payout instructions on
recipients and amounts to be paid. In these instances, acted as a passthrough
account with no oversight or involvement in the actual charitable giving process.

Catalog Number 20810W Page 32 www.irs.gov Form 886-A (Rev. 5-2017)

corm 886+A Department of the Treasury ~ Internal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

was unable fo provide any documentation or substantiation of its involvement in the
charitable giving or disbursement process other than its activities as a pass-through entity

for a portion of the charitable giving activities so that it can show some form of charitable
activity for the year.

iv. The organization is allocated percent or more of the profit, while the original
shareholders are allocated percent of the loss. The Special Allacation Provisions

further allocate all passive income to the organization and all active Income and deductions
to the original shareholders.

Inthis case, %- % of profits and losses are allocated to the exempt party and % -
% are allocated to the original shareholders. However, none of the profits or losses are

realized by the exempt party as the only funds received are the pass-through funds
received as outlined in item #v above.

v. With the original shareholders having exclusive management right, they can issue
additional shares to dilute the shares held by the organization.

In these LLCs, the donors, their spouse and/or family members are the sole managers of
the LLCs. They have the power to issue additional membership units within the LLC. Such
issuance of additional shares may dilute the value of those share already held by the

organization. Given the organization has no consent rights, there’s nothing it can do to
prevent the issuance of additional units.

In summary, the facts show the transactions in this case are the same or substantially similar to
those described in Notice 2004-30. Therefore, it is concluded thai was a participant in the S-
Corporation Tax Shelter scheme as described in Notice 2004-30.

2. acts as a vehicle to assist the promoter of the scheme (
} in carrying out his abusive charitable scheme.

As stipulated in United States of America v. charitable giving

scheme is designed to assist his wealthy clients improperly reducing their tax liability by taking
unwarranted charitable contribution deductions. Mr. scheme has harmed the United
States by depriving the government of tax revenue. The IRS has identified specific transactions
that, through , cost the United States Treasury more than $ in lost tax revenue.

To facilitate his scheme, needed a charity described under IRC § 501(c)(3) to take the
bogus contributions, as contributions to such charity Is tax deductible. In the beginning,

created his ' , and so he could facilitate his scheme. Once

Catalog Number 20810W Page 33 ww irs.gov Form 886-A (Rev. 5-2017)


Forn 886-A Department of the Treasury ~ Internal Revenue Service Schedule number or
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

scheme was exposed, the IRS revoked ; , and | tax exempt
status, which agreed to.
Facts connecting to scheme included, but are not
limited to:

* Approximately % of the LLC interest “assigned” fo were originally “assigned” to
, a Charity which was involved in the scheme until it was revoked by the IRS.
° appraised the value of ownershin interest for many of the donors who
donated their interest to the organization. signed many of the Forms 8283 for
the appraised assets.
° is the President of which is named in the
injunction against It is clear from the injunction that: and
worked together to perpetrate the tax scheme concocted by
and that is a promoter of the scheme.

In conclusion, the facts show that the organization was operated as a vehicle of
bogus charitable scheme which is being promoted and carried out by

The activities discussed above were more than an insubstantial part of activities.
These activities did not further one or more exempt purposes described in IRC § 501(c)(3).
Therefore, exempt status under IRC § 501({c)(3) should be revoked.

2. That the Organization’s exempt status should be revoked retroactively to , the

first date that the organization failed to qualify for exemption.

; activities remain the same in the year of examination as they were at
the inception of the federal tax exemption on . The organization began accepting
LLC interest donations in the tax year based on their Form reporting. This demonstrates
that became a participant in the tax avoidance scheme in

Therefore, it is warranted to revoke the exempt status of the organization retroactively to

the first date it was determined that the organization was not operated exclusively for
exempt purposes.

Conclusion:
is not operated exclusively in furtherance of an exempt purpose as
outlined in IRC Section 501(c)(3}. As such, its tax-exempt status should be revoked retroactively

to . is required to file Form 1120, U.S. Corporation
Income Tax Return, for the tax years , ' , and all future years.

Catalog Number 208 10W Page 34 wow Its.gov Form 886-A, (Rev. 6-2017)