Exemption revoked for missing records and apparent inurement

Plain-English summary

A section 501(c)(3) organization gave inconsistent accounts of its fundraising events, income, and expenses and did not provide adequate records for many bank transactions. The IRS found numerous unsubstantiated withdrawals and expenditures while one officer had complete financial control, leaving the organization unable to show that its funds served charitable purposes rather than the officer’s private interests. The organization also received an Economic Injury Disaster Loan advance despite reporting no employees, did not substantiate use of the grant for permitted purposes, and remained suspended by its state regulator. Its incomplete and sometimes post-dated supporting materials did not establish compliance with the recordkeeping rules in sections 6001 and 6033 or rebut apparent private inurement. The IRS revoked its section 501(c)(3) exemption and required corporate income tax returns for the examination period forward.

Ruling snapshot

• Question: Should the organization’s exemption be revoked for inadequate records, failure to establish exempt operations, and apparent inurement to an insider?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1, 1.6033-2; Rev. Rul. 59-95

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service October 25, 2023
IRS Tax Exempt and Government Entities . Taxpayer ID number (last 4 digits):

Form:

Tax periods ended:

Release Number : 202403018
Release Date: 1/19/2024 Person to contact:

UIL Code: 501.03-00 Name:
ID number:

Telephone:
Fax:

Last day to file petition with United States
Tax Court:

January 23, 2024
CERTIFIED MAIL - Return Receipt Requested

Dear

Why we are sending you this letter

This is a final determination that you don’t qualify for exemption from federal income tax under Internal

Revenue Code (IRC) Section 501 (a) as an organization described in IRC Section 501(c)(3), effective
Your determination letter dated , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have not
demonstrated that you are operated exclusively for exempt purposes within the meaning of Internal Revenue
Code section 501(c)(3) and that no part of your net earnings inure to the benefit of insiders. As such, you no
longer meet the operational requirements to continue your exemption status under Internal Revenue Code (IRC)
Section 501(c)(3).

Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns
and pay tax, where applicable. For further instructions, forms and information please visit 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

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,

Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

cc:

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

Department of the Treasury Date:

Internal Revenue Service 07/10/2023

Tax Exempt and Government Entities Taxpayer ID number:
IRS Exempt Organizations Examinations

Form:

Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:

Fax:
Address:

Manager’s contact information:
Name:
CERTIFIED MAIL — Return Receipt Requested ID number:
Telephone:
Response due date:

08/10/2023
Dear

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke

your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3).

If you agree
If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the

contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(3) for the periods above.

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

If you disagree

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

2. Send any information you want us to consider.

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

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

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t

apply now that we’ve issued this letter.

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

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

IRS.

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

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

adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your

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

Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at

www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

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

Sincerely,

John A. Matias, Supervisory, Internal Revenue Agent for
Lynn Brinkley
Director, Exempt Organizations Examinations
Enclosures:
Form 886-A
Form 6018

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

F886-A,

Events List

Page 1 of 7

F886-A,

- Bank Statement Transactions

Bank Statement Transactions

Date

Deposits
and
Other Credits

Withdrawls
and
Other Debits

Description

Balance

Page 2 of 7

F886-A, - Bank Statement Transactions

Bank Statement Transactions

Date Deposits Withdraws Description Balance
and and
Other Credits | Other Debits

Page 3 of 7


F886-A, - Bank Statement Transactions

Page 4of 7

F886-A, - Bank Statement Transactions

Page 5 of 7

F886-A, - Bank Statement Transactions

Page 6 of 7

Page 7 of 7

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
ISSUE:

Whether the section 501(c)(3) tax exemption status of
(“ ”) should be revoked due to failure to maintain records per sections 6001 and 6033 of the

Internal Revenue Code and inurement to a disqualified person?

FACTS:

Background of

(“ ”) was incorporated under the laws of the State of
as a Nonprofit Public Benefit Corporation on

On its Form 1023 Application for Recognition of Exemption, indicated its primary activities

will be to

On received tax exemption as a charitable organization within the
meaning of section 501(c)(3) of the Internal Revenue Code (IRC) and was classified as a public
charity under IRC section 509(a)(2) based on information provided on its Form 1023 Application
for Recognition of Exemption. The effective date of tax exemption was

filed Form 990-N, Electronic Notice (e-Postcard) annually - its in

Initial Contact with

On , the mailed the initial contact letter to to inform
of the examination and to request financial records for the

examination year of

On , during the ’s initial phone call with ("
’); 's ( — ) and (  ),
stated that received income its in , and it did not
have any books and records. The requested to send a letter stating
that to the
On , faxed a letter to the in response to the ’s
request. In the letter, stated “

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

Schedule number or

Form 886-A Department of the Treasury — Internal Revenue Service exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

Interview with

On , the conducted a phone interview with .
; ’s accountant its , Was also present in the interview. The

following information was collected during the interview:

> has board members, and (Secretary).
of and are in the .
is the of located at
, which with (the
noticed the website was closed down after the examination started).
group and individual ; isa and
instructor.

» When the asked about the activities conducted and income received its
; affirmed had not conducted any programs or activities
its , thus, no incomes were received, and no expenses were incurred.

>» Later on during the interview, the asked about the fundraising activities,
stated fundraising event was conducted in . This event was held at a private
venue in and roughly US$ -$ was raised. asserted that the
fund raised from this event was income received its .
also stated that there were a few promotional events in . Those events
were to promote for not to fundraise, thus, no income was raised.

The Grants

On , the sent information document request (IDR) # to to
request the bank statements and additional information needed for the examination. While
reviewing ’s bank statements, noticed a deposit of $ into ’s bank
account on . The deposit description indicated that it’s an Economic Injury Disaster
Loan (EIDL) grant payment from the ( ). In , as part of the

’s EIDL program, could apply for an emergency grant of $ per
employee, up to $ as an advancement with their loan applications. The advance payment is
treated as tax-free grant that does not need to be repaid, and businesses could cancel the EIDL
loan without returning the EIDL advance payment.

The purpose of the EIDL grant was to help businesses that suffered a substantial economic injury
as a result of the pandemic. The grant proceed may be used to keep employees on payroll, pay

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

_ F Schedule number or
Form 886-A Department of the Treasury Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

for sick leave, meet increased production costs due to supply chain disruptions, or pay for
business obligations, including debts, rents, and mortgage payments. However, if the grant was
used for other than these permissible purposes, then the business will have to immediately pay
back the grant with one and a half times of its original amount. Also, the business may have to pay
possible criminal charges.

According to ; has uncompensated volunteer officers its
(interview on ). ; also claimed that there were expenses
incurred . The checked the filing record and confirmed that
had filed any employment tax related returns including the Forms 941, Employer's
Quarterly Federal Tax Return. For to receive a $ grant ($ per employee),
had to report employees on its EIDL application. did not provide a copy of the
EIDL application when requested by the . Instead, provided a copy of the letter
from regarding EIDL loan cancellation. The letter indicated had requested to
withdraw or had failed to proceed with the EIDL loan application. Nevertheless, kept the
$ grant received.

At the time of the Economic Injury Disaster Loan (EIDL) application, each applicant needs to
acknowledge that the grants received could be used on the following purposes allowable
under Section 7(b)(2) of ; , including:

1. Providing paid sick leave to employees unable to work due to the direct effect of the COVID-
19;

2. Maintaining payroll to retain employees during business disruptions or substantial slowdowns;

3. Meeting increased costs to obtain materials unavailable from the applicant’s original source
due to interrupted supply chains;

4. Making rent or mortgage payments; and

5. Repaying obligations that cannot be met due to revenue losses.

On ; inquired if used the grant received for the
purposes stated above, and if yes, which of the purposes (IDR # )? In response,
stated that the grant received was used on ’s bank account fee,
equipment, and to support the program in by facilitating the with money for
the (IDR# & # ). However, was not able to substantiate the expense on the
equipment purchase. Based on ’s responses, the could not conclude that the

grant received was used according to the grant requirements.

City of _
During the examination, the discovered from the internet that in ; had
received a for . The
asked to describe what did do to receive that award (IDR # ). In response,

Catalog Number 2081 0W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)

Schedule number or

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (/ast 4 digits) Year/Period ended
stated “
"(IDR # ). ’s responding statement was contradictory to
what had conveyed to the . stated that had
fundraising event anda promotional events its incorporation.

Undisclosed Events and inconsistent Responses

While the was conducting research on , the found
event announcements on the internet. Of all the events found publicized on the internet,
disclosed of the events to the as of . The events disclosed were
the promotional event at in , and the fundraiser event at in . The
asked to provide details including the fund raised and the expense
incurred for the events announced on the internet. Throughout the process of collecting the
needed information for the examination, constantly changed his responses to the
’s inquiries including the dates of the events, the incomes raised, and the expenses incurred.
The list of the events and the responses provided by was summarized in ,
’s Events List attached to this report.

Unsubstantiated Withdraws and Expenses

This examination was initially year . However, after examining the bank
statements, noticed that the beginning balance did not simulate the information
provided by regarding the incomes received and the expenses incurred by
its . In addition, the explanations provided by could not be verified by
the related substantiation documents, thus, the examination was expanded to include ,
, and

Of all the withdraws and expenses incurred from (based on the debit transactions
reflected on ’s bank statements), excluding the bank fees and the fees to the

and the Secretary of the State, was able to
provide substantiation receipts / invoices for of the expenses (see below). Of all the
deposits and incomes received from (based on the credit transactions reflected on

"s bank statements), was able to provide reasonable explanations and

check images for of the deposits. See , Bank Statement Transactions attached to the
back of this report for a summary of the banking activities and the information
collected pertaining to the activities.

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

F Schedule number or
Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
Banking Activities
Date Deposits Withdrawls Description
and and
Other Credits Other Debits
t 1 2 L x z ei i

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

Form 886-A Department of the Treasury ~ Internal Revenue Service Seneaule number or
(May 2017) Explanations of Items |
Name of taxpayer Tax Identification Number (/ast 4 digits) | Year/Period ended
Table -Substantiated & Unsubstantiated Expenses
Descriptions Amount
Total Withdrawls & Other Debits $
Withdrawls & Debits with Substantiations @ $
Withdrawls & Debits with Substantiations ® $
Withdrawis & Debits with Substantiations © $
Withdrawis & Debits without Substantiations $
Note @: Per , the $ withdrawal on ; was for a wire to
, the Director of in , for the provision of salaries for
the in (IDR # ). provided a receipt of a wire exchange
on of USD from ( ’s Secretary) to
as substantiation. A letter dated written by stating
gave to the in was also provided as
substantiation. However, in the letter, stated the US$ was awarded on

, which was before the date of the cash withdraw from the bank account and
the wire transaction.

Note ®: When the inquired about the $ from the fundraising
event in stated the fund collected was used to cover the expenses incurred
for the fundraising trip to . According to , the roundtrip airfare was purchased
with cash, thus, no receipts or substantiation documents could be provided.
presented to a letter dated from , the director of

in , Stating that had awarded the of
on (roughly US$ using exchange rate on ), and the fund
was used to cover for , Wages for , and an

accompanist (IDR # ).

Note ©: also provided a purchase invoice of dated on
. The invoice amount was (about US$ using exchange rate on
). According to , the purchase was made in cash, and the
were awarded to the in . also provided a
letter dated on from stating that the fund provided
with instruments in the year and these were given to
different

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
stated in his revised IDR # response that had a fundraising tour in
and from to . However, the US$ was awarded to the
on and the cash purchase of the was on
. The dates provided by and the dates on the substantiation
documents given, which were created post factum, did not match.
's Suspension Status with the

On , the website shows that ’s status has
been suspended by the (  ). When a business has been suspended, it is

not in good standing and loses its rights, powers, and privileges to do business in
Additionally, a business cannot retain its tax-exempt status when the business is suspended. The
tax-exempt status is revoked as of the suspension date (

).

was aware of the suspension status with the . The had requested
to take all the steps necessary to reinstate the organizations status to active on every
information document requests (IDRs) exchanged with . Nevertheless, the status is still
suspended as of , the report completion date.

LAW:

Laws on Operational Requirement and Inurement

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

Treasury Regulation section 1.501(c)(3)-1(a) provides that in order to be exempt as an
organization described in Code 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.

Treasury Regulation 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 Code section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities in not in

furtherance of an exempt purpose.

Treasury Regulation section 1.501(c)(3)-1(c)(2) provides that the operational test is not satisfied
where any part of the organization’s earnings inure to the benefit of private shareholders or
individuals, and where the organization serves a private benefit rather than public interests.

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

Schedule number or

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

Treasury Regulation section 1.501(c)(3)-1(d)(ii) provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than private
interest. Thus, it is necessary for an organization to establish that is not organized or operated for
the benefit of private interests such as designated individuals, the creator or his family,
shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests.

In Spokane Motorcycle Club v. United States, 222 F. Supp. 151 (E.D. Wash. 1963), net profits

were found to inure to private individuals where refreshments, goods and services amounting to $825
(representing some 8 percent of gross revenues) were furnished to members. A small amount of
private inurement is fatal to exemption.

Laws on Record Keeping

IRC section 6001 provides that every person liable for any tax imposed by the IRC, or for the
collection thereof, shall Keep adequate records as the Secretary of the Treasury or his delegate

may from time to time prescribe.

IRC section 6033(a)(1) provides, except as provided in IRC section 6033(a)(2), every organization
exempt from tax under Section 501(a) shall file an annual return, stating specifically the items of
gross income, receipts and disbursements, and such other information for the purposes of
Carrying out the internal revenue laws. The Secretary may also prescribe by forms or regulations
the requirement of every organization to keep such records, render under oath such statements,
make such other returns, and comply with such rules and regulations as the Secretary may from
time to time prescribe.

Treas. Reg. Section 1.6001-1(c) states that in addition to such permanent books and records as
are required by paragraph (a) of this section with respect to the tax imposed by section 511 on
unrelated business income of certain exempt organizations, every organization exempt from tax
under section 501(a) shall keep such permanent books of account or records, including
inventories, as are sufficient to show specifically the items of gross income, receipts, and
disbursements. Such organizations shall also keep such books and records as are required to
substantiate the information required by section 6033. See section 6033 and Section1.6033-1
through -3.

Treas. Reg. Section 1.6001-1(e) states that the books or records required by this section shall be
kept at all times available for inspection by authorized Internal Revenue Service officers or
employees and shall be retained as long as the contents thereof may be material in the
administration of any Internal Revenue law.

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
. XMDI
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (/ast 4 digits) | Year/Period ended

Treas. Reg. Section 1.6033-1(h)(2) provides that every organization which has established its right
to exemption from tax, whether or not it is required to file an annual return of information, shall
submit such additional information as may be required by the district director for the purpose of
enabling him to inquire further into its exempt status and to administer the provisions of
subchapter F (section 501 and the following), chapter 1 of the Code and IRC section 6033.

Treas. Reg. Section 1.6033-2(i)(2) provides that every organization which is exempt from tax,
whether or not it is required to file an annual information return, shall submit such additional
information as may be required by the Internal Revenue Service for the purpose of inquiring into
its exempt status and administering the provisions of Subchapter F (section 501 and following),
Chapter 1 of Subtitle A of the Code, section 6033.

Treas. Reg. Section 1.274-5 addresses the substantiation requirements with respect to the
business purpose of an expense. If the substantiation requirements are not met no deduction is

allowed with respect to that expense.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to
produce a financial statement and statement of its operations for a certain year. However, its
records were so incomplete that the organization was unable to furnish such statements. The
Service held that the failure or inability to file the required information return or otherwise to
comply with the provisions of IRC section 6033 and the regulations which implement it, may result
in the termination of the exempt status of an organization previously held exempt, on the grounds
that the organization has not established that it is observing the conditions required for the
continuation of exempt status.

In Church of Gospel Ministry, Inc. v. United States, 640 F. Supp. 96, (D.D.C. 1986), due to the
taxpayer's failure to keep adequate records, the court held that the taxpayer failed to sustain its
burden to show that it was qualified for federal tax exemption as a corporation organized and
operated exclusively for religious and charitable purposes, as required under IRC 501(c)(3) , and
that it was further qualified to receive deductible charitable contributions under IRC 170(c)(2) . The
court found that the inadequate records failed to show that the taxpayer's operations did not inure
to the private benefit of its officers, as provided under IRC 6001 .

TAXPAYER’S POSITION:
’s position is unknown.

GOVERNMENT’S POSITION:

Failure to Maintain Records

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

In accordance with the above cited provisions of the Code and Regulations under IRC section
6001 and 6033, organizations recognized as exempt from federal income tax must meet certain
reporting requirements. These requirements relate to the filing of a complete and accurate annual
information (and other required federal tax forms) and the retention of records sufficient to
determine whether such entity is operated for the purposes for which it was granted tax-exempt
status and to determine its liability for any unrelated business income tax.

During the examination, had either provided inconsistent information or failed to
meaningfully respond to the ’s requests for the information needed for the examination.

concealed the activities conducted, the incomes received, and the expenses incurred until
evidence of occurrence were presented by the during the examination. Toward of
the ; attempts were made to request the information needed for the
examination of tax years , was entirely unresponsive to the
requests.


Internal Revenue Code section 6033(b) sets out an affirmative duty on the part of the organization
to furnish annual information in such a manner as the Secretary may prescribe via forms or
regulations. Tax exemption is a matter of legislative grace, and an organization seeking an
exemption must prove that it “comes squarely within the terms of the law conferring the benefit
sought”. Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958): see also Florida. Hosp. Trust Fund
v. Commissioner, 103 T.C. 140, 153, (1994), affd. 71 F.3d 808 (11th Cir.1996). Because an
exemption from tax is a deviation from the norm of taxation, courts have reasoned that “a heavy
burden” to establish satisfaction of all requisites for such status falls on the entity. Harding Hosp..,
Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir.1974); Western Catholic Church v.
Commissioner, 73 T.C. 196, 210 (1979).

had failed to provide records as required in Code Section 6033(a)(1) and Regulation
Section1.6033-1(h)(2). failed to provide substantiation documents for of its incomes
received, expenses incurred, and the cash withdrew by when _ requested them during
the examination. The attempted to obtain these records numerous times via Information
Document Requests. Without ’s records, the could not verify that solely
operated according to its exempt purposes, and if any of the expenses or cash withdrawals were
for inurement purposes.

Revenue Ruling 59-95, and Church of Gospel Ministry, Inc. v. United States, 640 F. Supp. 96,
1986, supra, provide that failure or inability to file a required information return or otherwise to
comply with the provision of section 6033 of the Code and the regulations which implement it, may
result in the termination of the exempt status of an organization previously held exempt, on the
grounds that the organization has not established that it is observing the conditions required for
the continuation of an exempt status. Therefore, the ’s position is that ’s tax
exemption status should be revoked as it was not observing the conditions required for the
continuation of its exempt status. had provided little evidence to the contrary. failed

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

: Schedule number or
Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
to provide the needed substantiation documents to allow the to examine its records

regarding receipts, expenditures, or activities as required by sections 6001 and 6033(a)(1) of the
Internal Revenue Code.

Failure to Meet Operational Test and Inurement

Because of ’s failure to meaningfully respond and provide information, had not

established that it was observing the conditions required for the continuation of its exempt status.
had not established that it was organized and operated exclusively for an exempt purpose

and that no part of its net earnings inured to the benefit of private shareholders or individuals. For

example, the $ purchase made on , at , the ATM cash
withdrawals of $ made in , the ATM withdrawal of $ on , and
the $ online banking payment to on failed to

provide any explanations and substantiations for these purchases and withdrawals.

Even with the expense items ®, ©, and © in below (discussed in detail in the Facts

section of this report), proper supporting documents were not kept and provided to the

Expenses are the costs a business incur for normal business operations. The supporting
documents for the expenses should identify the payee, the amount paid, proof of payment, the
date incurred, and include a description of the item purchased or service received. Documents for
expenses include 1) canceled checks or other documents reflecting proof of payment/electronic
funds transferred; 2) cash register tape receipts; 3) account statements; 4) credit card receipts and
statements; and 5) invoices and receipts. Sometimes, a combination of supporting documents

may be needed to substantiate all elements of the expense. For the expense items
mentioned above, was able to provide written statements created by the same
individual post factum, and with mismatched dates, as substantiation. found these

statements to carry little weight on credibility as they could not be verified.

Table -Substantiated & Unsubstantiated Expenses
Descriptions Amount

Total Withdrawls & Other Debits $

Withdrawls & Debits with Substantiations ®

' |Withdrawls & Debits with Substantiations ©
Withdrawis & Debits without Substantiations

$
Withdrawls & Debits with Substantiations $
$
$

Documentations were essential to validate these expenses and withdrawals were for genuine
exempt purposes and not for personal expenses. was in a position of complete
financial control during the years under examination. Because of this control, was able to use
the ‘s bank account to pay for any expenses including his personal expenses. It was crucial

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

Schedule number or

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
for to provide substantiation documentation to show these transactions which have an

appearance of inurement do not constitute inurement.

Without evidence that the withdrawals and the expenses serve any kind of a charitable purpose,

or that they were ordinary and necessary to carry out its charitable program, can

conclude that any unsubstantiated expense incurred is inurement. Furthermore, the
deposits of $ on ,$ on ; any explanations
and substantiation documents, the could not determine the sources of these deposits, and
whether they were income related to ’s exempt purpose or ’s personal musical
businesses. |

inurement issues are highly fact dependent, the courts do not look with favor on an
organization's failure to provide relevant facts and they are not hesitant to find that an organization
has failed to carry its burden. See Gondia Corporation v. Commissioner, T.C. Memo. 1982-422:
Schoger Foundation v. Commissioner, 76 T.C. 380 (1981): The Basic United Ministry of Alma Karl
Schurig v. Commissioner, 670 F. 2d 1210 (1982); First Libertarian Church v. Commissioner, 74

T.C. 396 (1980); Church of Gospel Ministry, Inc. v. United States, 58 AFTR 2d 86-5232 (D.C.
1986); Universal Bible Church, Inc. v. Commissioner, T.C. Memo. 1986-170.

Treas. Reg. section 1.501(c)(3)-1(c)(2) indicates an organization is not operated for exclusively
exempt purposes if its net earnings inure in whole or part to an individual. Pursuant to IRC section
501(c)(3), any amount of inurement is ground for revocation. Even a small amount of private
inurement is fatal to exemption. In Spokane Motorcycle Club v. United States, 222 F. Supp. 151
(E.D. Wash. 1963), net profits were found to inure to private individuals where refreshments,
goods and services amounting to $ (representing some % of gross revenues) were furnished
to members. Not to mention, the total unsubstantiated amount during the years of examination
was $ for (representing % of gross revenues). Therefore, revocation of

’s section 501(c)(3) status is warranted.

In addition to the inurement issue, appeared to have fraudulently applied and
misused the Economic Injury Disaster Loan (EIDL) grant payment of from the . TO
access the advance grant payment, needs to apply for an EIDL and then request for the
advance on the application. On the application, the applicant also needs to provide the number of
employees as of . The advance is $ per employee and may be used to
keep employees on payroll, to pay for sick leave, meet increased production costs due to supply
chain disruptions, or pay business obligations, including debts, rent and mortgage payments.

had no employees its and the grant advance received was not used

for the required purposes.

Furthermore, as of , ’s status with the ( ) is
suspended. When a business is suspended, it loses its rights to do business in . As a

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

F Schedule number or
Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
result, it cannot retain its tax-exempt status when the business is suspended. 's

tax-exempt status was revoked as of the suspension date On
_ CONCLUSION:

failed to establish that it met the reporting requirements under IRC section 6001 and 6033
to be recognized as exempt from federal income tax under IRC section 501(c)(3). Additionally,

had not established that it observed the conditions required for the continuation of its
exempt status or that it was organized and operated exclusively for its exempt purpose.
failed to provide documentation to validate its expenses occurred. It also failed to provide
documentation to demonstrate that certain transactions which has an appearance of inurement do
not constitute inurement. Accordingly, the is proposing revocation of ’s exempt status
effective due to failure to maintain records per sections 6001 and 6033 of the
Internal Revenue Code and inurement.

Forms 1120, U.S. Corporate Income Tax Return, should be prepared and filed by for the
period of examination forward.

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