Organization loses exemption over real-estate deals and private benefits

Plain-English summary

The IRS revoked a tax-exempt organization's status under section 501(c)(3) after finding that substantial parts of its operations did not further exempt purposes. The organization directed proceeds from fundraising events toward expenses of selected individuals who worked at those events. It also acquired and disposed of real estate through controlled limited liability companies under arrangements that the IRS found commercial, unfavorable to the organization, and beneficial to private companies and donors. The examination report said the organization failed to report related entities and taxable activities, allowed a for-profit company to control income, and provided contribution documents based on potentially overstated values. The IRS concluded that these activities failed the operational test because they served private interests and were more than insubstantial.

Ruling snapshot

• Question: Did the organization remain exempt when its fundraising and real-estate activities served selected individuals, donors, and for-profit businesses?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(c)(3), 509(a)(1), 7428; Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1(a), (c), (d), 301.7701-2(c)(2)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 10/26/2023
Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):

Form:

Release Number: 202408008 Tax periods ended:
Release Date: 2/23/2024
UIL Code: 501.03-00
Person to contact:
Name:
ID number:
Telephone:
Fax:
Last day to file petition with United States
Tax Court:

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 one or more exempt purposes as required by section 501(c)
(3). You do not meet the operational test under Treas. Reg. § 1.501(c)(3)-1(c)(1) because your involvement
with acquisition and disposition of real estate makes up more than an insubstantial part of your activities, does
not further an exempt purpose, and benefits private interests. You also operated for the benefit of private
individuals by directing payments from various fundraising events to be used by selected individuals for
personal use. Your tax exempt status under section 501(c)(3) of the Internal Revenue Code is thus revoked,
effective from

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

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

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:

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.

Information about the IRS Taxpayer Advocate Service
The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service

Taxpayer Advocate Office

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above.
Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time
to file an action for declaratory judgment.

Where you can find more information

Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Letter 6337 (Rev. 8-2022)
Catalog Number 74608E

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.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

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

Keep the original letter for your records.

Sincerely,

[illegible]
Lynn A. Brinkley

Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

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

Department of the Treasury Date: 6/09/2023

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:

July 10, 2023
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.irs.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.

Sincerely,
Lynn Brinkley
Director, Exempt Organizations
Examinations
Enclosures:
Form 886-A
Form 6018
3 Letter 3618 (Rev. 8-2019)

Catalog Number 34809F

Department of the Treasury - Internal Revenue Service Schedule number or

Form 886-A Explanation of Items exhibit

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

ISSUES:

1) Whether , . is operated exclusively for exempt purposes
described within Internal Revenue Code (IRC) §501(c)(3)?
a. Whether , . is engaged primarily in activities that
accomplish an exempt purpose?
b. Whether , . is operated to serve a public rather
than a private interest?

2) Should , . continue to be recognized as tax exempt
under IRC §501(a) as an organization described in IRC §501(c)(3)?

FACTS

, _., hereinafter referred to as , was incorporated under the
laws of the state of as a nonprofit corporation on : , and subsequently under the laws of
the state of as a nonprofit corporation on :

On , , the Internal Revenue Service (Service) received ’s Form 1023, Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, signed on ,
The application listed the following in the narrative of past, present and planned activities:
‘ activities include , : ;
for the furtherance of the , , etc.

Both Articles of Incorporation dated ; , and ; , provided that the organization was
created for , , and

After the review of the Form 1023 and the original Articles of Incorporation, the Service determined that

was created for the advancement of , which is considered and therefore is an exempt
purpose under IRC §501(c)(3). The organization must be organized and operated exclusively for exempt
purposes and serve the public interests rather than private interest by law. On , , Letter 1045
was issued indicating that could reasonably expect to be classified as a public charity described in IRC
§509(a)(1) and §170(b)(1)(A)(vi) after an advance ruling period beginning , and ending December
31,

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

ACTIVITIES
’s Profit and Loss Statement recorded the largest sources of income for the periods under
examination as follows:

20 20 20

1. Fundraising- . % Fundraising- . % Fundraising- . %
$C, $ $ ,
2. Donations- . % Conference Income- .-% Income- . %
$C. $ , $ ,
3. | Conference Income- . % Income- . % Non-Profit Income- . %
$,. $ 3,
’s Form recorded the largest sources of income for the periods under examination as follows:
20 20 20
1. _Fundraising- .% Fundraising- . % Fundraising- . %
$ , ¢ i $ +]
2.| Program Revenue- . % | Program Revenue- . % | Program Revenue- . %
$ ? $ 7 $ ,
3. | Membership Dues- . % Membership Dues - . % Membership Dues - . %
$, $ , $ ,
Per the Form filed for the periods under examination, described its most significant activity to be
. The Statement of Revenue, Part VIII lists the sources of revenue to include ;
events and revenue. Statement of Functional Expenses, Part IX, lists functional expenses
to include employee and non-employee ; ; ; and other
expenses. reported as “other expenses” payments to : ; :

expenses and “all other expenses.”

Purported Primary Activity-

During the period under examination, oversaw the of an and process,
which it called “ .” Additionally, it offered and for the
. affiliated with and similar paid to enroll in a
to complete the “ ”, which entailed by and .
who successfully completed an through the would be
considered a “ a could then apply for their organization to become an “ ” and
would be required to . Based on , received " to
the & within
their respective - would then the at their organizations and refer
their “ * to participate in various activities.

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

As determined during the examination, income from the & and was

$ , in 20 ,§$ . in 20 and $ , in 20  which represents . %, %and . %of
income, respectively. Actual received was $ . in 20 ,$, in 20 ,and $ . in
20 which represents %, % and. % of income, respectively. The -year average of income from

; ; and is . %. This equates to the largest

source of income and not the

Fundraising- and Event
entered into with various and companies. The organization
states that the purpose of this activity was to to and pay for . The activity was
suggested by an as a means of making money to offset the charged by the group
to the . was required to provide a specific number of “ ”* to
during in exchange for a to the number of and hours . The
organization recorded these activities as ° ” and utilized the ’S ; of ,
and as the and paid as ; and expenses were
provided to the to attend these events.
As determined during the examination, income from the was $ . in ,
$C, in and $ ,.. in which represents . %, %and . %of income,
respectively. The - average of income from is . %. This equates to the
largest source of income.
Donations- IRC §
participated in the and of in IRC §
transactions. contracted with ; (hereinafter referred to as ),a and
company specializing in providing and the nonprofit sector with
services including ; , , , ,

' , and . purchased , most of which were ,
from and fora in for the equivalent
to the * ” of the . created ( s) for the

and of the and was the sole member of these . It would then of the

to other or fora that was often than the stated “
” and and/or from the . During the periods of
; assumed the and income, which was paid on its behalf to
pursuant to the . All income including ;
income, and were held by and against and i ,
; ; , and . would receive a
after representing the net income. The net income, including received in prior
periods, was reported in the period of the disposition as “ ”
Between , , and , : completed a total of and/or
transactions encompassing the and/or of . Public records indicate that
additional transactions occurred prior and subsequent to the periods under examination. During the initial
interview with , President of (hereafter referred to as President) conducted on &
' , the organization stated that it began participating in transactions in and concluded

participation in

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

The were purchased for a total of $ .  . and sold for a total of $ . . The total
proceeds from the transactions were $ , , of which $ , or . % was paid to :
$C, or . % was paid to others for , and $ or . % was retained by
See detail below.

income as a Percentage
Profit %
$ ; %
$ , %
Other $ ; %
Total $ , ,..- . %
Income as a Percentage
Profit %
$ , %
$ : oe
Other $ ; %
Total S$. _ %
Income as a Percentage
Profit %
$ ; %
$ , %
Other 5 : %
Total $ . %
Income as a Percentage
Profit YM
$ %
$ : %
Other $ , %
Total $ %

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

entered into with (hereafter

referred to as ) or its assignees totaling ¢ . . for the purposes of funding the
. Per the ' , and :
were %- % with ranging from  days to months. Depending on the date, some
_ allowed for between days and months of . Some

also required

As determined during the examination, income from the IRC § and related
was $ , in i$ . in and $ . in , less cost or other basis. This
represented %, . % and % of income, respectively. The -year average of income from IRC §
and related — - is %. Net of expenses, this equates to the largest source of
income, but is the source of gross income.
A summary of sources of income earned by during the periods under examination follows:
Revenues
Total as a
$ $ $ 8 %
$ 3 $ $ %
All other Contributions $s $ $ 3 2%
$ $ $ $ %,
$ $ $ $ %
Less Cost or other Basis and $ $ $ $
Gross Income from $ $ $ $ %
Less. $
Other revenue $ & & u
TOTAL REVENUE $ 3 3s $ * . %

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

For each transaction, provided a signed, written statement on letterhead to the listing their name,

date and amount of donation, totaling ' ; . also signed an incomplete Form 8283, Noncash

Charitable Contribution for each property, which is required for the to the charitable deduction of

properties exceeding $500. The forms were incomplete, in that they did not include the Name or Identifying

Number of the at the time of signature. In Part |V, Donee Acknowledgement, checked “No”

affirming that the organization did not intend to use the for an unrelated use. When the was
; did not file to the Service or furnish to the original donor Form 8282, Donee Information

Return as required.

A schedule detailing the ; , stated and - is as follows:

No Date of
Letter

10

11

12

13

14

Totals

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

ANNUAL RETURN FILINGS

For the periods ending ; , and ' timely filed
Form , Return of Organization Exempt From Income Tax. For the period under examination:
° The Form , Part | Summary, Line 1 did not list Fundraising to be among the organization’s most

significant activities.

e The Form , Part IV Checklist of Required Schedules, Line 2 was checked “ ” to indicate that the
organization was required to complete Schedule B, Schedule of Contributions. The organization
did not complete Schedule B to disclose the receipt of contributions totaling $5,000 or more from
contributors.

e The Form , Part IV Checklist of Required Schedules, Line 18 was checked “ ” to indicate that the
organization did report more than $15,000 total fundraising event gross income and contributions
on Part VIII, lines 1c and 8a, and that Schedule G, Supplemental Information Regarding Fundraising or
Gaming Activities was not required. Form , Line 1c listed $ in income from fundraising
events. Schedule G was not completed by the organization.

e The Form , Part IV Checklist of Required Schedules, Line 29 was checked “ ” to indicate that the
organization was required to complete Schedule M, Noncash Contributions to disclose the receipt
of more than $25,000 in non-cash contributions. Schedule M was not completed to disclose the receipt
of non-cash contributions.

e The Form , Part IV Checklist of Required Schedules, Line 34 was checked “ ” to indicate that the
organization did have related taxable entities and was not required to attach Schedule R, Related
Organizations and Unrelated Partnerships. The organization did not complete Schedule R to disclose
the existence of the 100% controlled LLCs.

The Form for the subsequent periods included similar misstatements and omissions. Form for all
periods did not disclose the related organizations, the assets or ownership of the , ,or
and . Form was not filed in any period to report the unrelated

business income or pay the unrelated business income taxes.

The Service conducted an examination of Form for the period ending and
found that the return was incomplete because all gross receipts and expenditures were not reported. On
; , Letter 3609, No Change Advisory, was issued to notify of the requirement to file complete
returns and the consequences of filing incomplete returns. The organization filed Form for the period
ending , ,on , and filed Form for the period ending ,
on ; , both after receipt of the Letter 3609.

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

LAW

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

Treasury Regulations (Treas. Reg) §1.501(a)-1(c). The words “private shareholder or individual” in §501 refer
to persons having a personal and private interest in the activities of the organization.

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

Treas. Reg. §1.501(c)(3)-1(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 IRC §501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

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

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

Treas. Reg. §1.501(c)(3)—1(d)(2) defines “Charitable” to include; relief of the poor and distressed or of the
underprivileged: advancement of religion; advancement of education or science; erection or maintenance of
public buildings, monuments, or works; lessening of the burdens of government; and promotion of social
welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood
tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or
(iv) to combat community deterioration and juvenile delinquency.

Treas. Reg. §301.7701-2(c)(2) defines “Wholly Owned” Business Entities. In General, except as otherwise
provided in this paragraph (c), a business entity that has a single owner and is not a corporation under
paragraph (b) of this section is disregarded as an entity separate from its owner.

Revenue Ruling (Rev. Rul.) 56-403, 1956-2 C.B. 307, holds that awarding scholarships by a foundation solely
to undergraduate members of a designated fraternity will not preclude the foundation from exemption under
IRC 501(c)(3).

Rev. Rul. 67-367, 1967-2 C.B. 188, holds an organization that pays scholarships to pre-selected, specifically
named individuals designated by subscribers, is serving private interests rather than public charitable and
educational interests contemplated under IRC §501(c)(3) and does not qualify for exemption.

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

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945), the Supreme Court held that “the
presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the
number or importance of truly exempt purposes.”

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

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

In University Hill Foundation v. Commissioner, 446 F.2d 701 (9th Cir. 1971), rev’g 51 T.C. 548 (1969), cert.
den., 405 U.S. 965 (1972), the court held an organization that engaged in several transactions to provide funds
for an exempt university to be nonexempt under IRC §501(c)(3). The court concluded that the organization was
engaged in the business of purchasing and selling businesses and was thus trading on its purported tax
exemption. The court also noted that the business was engaged in solely to produce a profit for disbursement
to the university and none of the acquired businesses were in any way related to the university's exempt

purposes.

In Capital Gymnastics Booster Club, Inc. v. C.I.R., 106 T.C.M. (CCH) 154 (2013), the Tax Court held that a
gymnastics booster club did not satisfy the requirements of IRC §501(c)(3) because its fundraising programs
operated in a manner that allowed substantial private inurement and promoted private, non-public interests.

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

ISSUE #1 Whether , . is operated exclusively for exempt
purposes described within IRC §501(c)(3)?

a. Whether . is engaged primarily in activities that
accomplish an exempt purpose?

b. Whether , . is operated to serve a public rather
than a private interest?

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

GOVERNMENT’S POSITION

It has been determined that is not operated exclusively for an exempt purpose because it is engaged
primarily in activities that do not accomplish an exempt purpose. has not demonstrated that its primary
activity is advancement of . It has also been determined that is not operated exclusively for an

exempt purpose because it operates to serve a private interest. Therefore, it does not meet the operational test
under Treas. Reg. §1.501(c)(3)-1(a)(1).

PRIMARY ACTIVITY- and (Recorded as )
The and serves the private interests of the and not a public
interest because the benefits received were for fundraising activities done on their own behalf.
received a benefit equivalent to their to reduce their personal financial liabilities, while and
received direct payment for the of the
reported this activity as its primary activity on its books and on Form . For “ ,
contracted with various companies whose stated purpose was to provide to groups.
As observed on . on ; , posted registration forms for various “ »
, such as the , , and the . The website listed a separate
for and an increased pay rate for . Interested individuals were able to complete an
Form and list which they were interested in , and identify themselves as ,
; , or . provided , ; ,
' and during the events for
Per the language in the that made with the companies, was to
provide “ ; ” who would “ for and to the benefit of
( ) without expectation of .” The company would, in turn, pay a “ * to equal to
a set rate per . Despite the terms of the agreement with the groups, directed the
payments to the benefits of the
in most cases, paid the a payment equivalent to the hours worked by its In
response to an Information Document Request received by the Service on ; explained that
, holds the funds for the and is responsible for paying
and for the ” It further stated that, “(t)he 's are
not required to pay any certain expenses from the funds paid. Each has their own leadership and has
accepted the funds as a . However, most do use the funds donated by
to pay expenses of the who volunteered their service at the event from which the funds

y

were donated to the

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

statement establishes that the funds were held in trust toward the individual for

: and expenses. During the examination, written statements were identified
detailing the names of the , the total hours , the and the total payment. These
statements were forwarded with the checks to the . This further supports the determination

that payments were itemized for the benefits of the individuals.

Rev. Ruls. illustrate the distinction between serving the public interest and serving a private interest. Rev. Rul.
56-403, 1956-2 C.B. 307, holds that awarding scholarships by a foundation solely to undergraduate members
of a designated fraternity will not preclude the foundation from exemption under IRC 501(c)(3). It notes the fact
that the foundation's scholarships are limited to a particular group would not preclude its exemption as an
educational organization in as much as there is no specific designation of persons eligible for scholarships and
the purposes of the foundation are not so personal, private, or selfish in nature as to lack the elements of
public usefulness and benefit which are required of organizations qualifying for exemption under IRC 501(c)(3).

In contrast, Rev. Rul. 67-367, 1967-2 C.B. 188, holds an organization that pays scholarships to pre-selected,
specifically named individuals designated by subscribers, is serving private interests rather than public
charitable and educational interests contemplated under IRC §501(c)(3) and does not qualify for exemption.

activities are analogous to the organization described in Rev. Rul. 67-367 and distinguished from the
organization described in Rev. Rul. 56-403 because the payments are for the benefit of specifically named
individuals who performed services in connection with the payments.

The situation in which funds or income is directed to benefit specific individuals is also analyzed in Capital
Gymnastics Booster Club, Inc. v. C.I.R., 106 T.C.M. (CCH) 154 (2013). In Capital Gymnastics Booster Club,
the organization provided inurement to the parent member insiders who fundraised (by providing to those
insider’s relief from an economic burden in the form of “points” applied to their assessments) and thereby
conferred an impermissible substantial private benefit to the child athletes of those parents only (as opposed to
all child athletes generally). The organization authorized parent members to raise funds for their own benefit
but under the name of Capital Gymnastics and trading on its tax-exemption ruling. The organization rigorously
assured parents that its fundraising did not generally benefit all the child athletes in its programs but rather
benefited only the children of parents who did the fundraising. In fact, the fundraising activity conducted in the

Capital Gymnastics case is analogous to the fundraising activity conducted by . The fundraising income
is not paid in cash to the for which income and employment taxes would have been paid,
but instead is turned over to the to be earmarked for their own personal , , and

for which they would have borne themselves. Directing funds or income to be earmarked for
the use of pre-selected individuals to be used for their personal use is serving private interests and does not
qualify for exemption under IRC 501(c)(3).

PRIMARY ACTIVITY- IRC (Recorded Net as Donations)
The Service finds that the income received from recorded as donations were not indeed donations but
instead were proceeds from activities. The activities including the , ;
and acquired through IRC is a primary activity based on
income. This activity was the largest source of income before expenses, and the largest net of expenses.
This activity does not accomplish an exempt purpose. Analogous to the organization in University Hill
Foundation v. Commissioner, engaged in the business of and for tax
benefits only available under IRC and was thus trading on its purported tax exemption which is found to
be nonexempt activity under IRC §501(c)(3).

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

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

Exclusive Contract and Less than Arms-Length Relationship

entered into an exclusive contract to ; , and through .
Additionally, it obtained financing exclusively through . Typically, an entity looking
to purchase and would deal with a number of different entities. In this case, chose to
exclusively participate in such activities with and and did not question whether the
terms of the agreements were favorable to the exempt organization. the President indicated that it did not
conduct such transactions with other because no one else presented them with contracts.
When asked why the were not of in any other method, he stated that he saw the
transactions as “ .” This statement indicates that was contented with the proportion |

of income it received in contrast with the proportion of income received by

Further, it is noted that had a less than arms-length relationship with . of ,
and , were also members of board. meeting minutes dated
' records , who was also , suggesting the organization become
involved in IRC and . It states, in part, that he:
“feels that he can bring $ to without any cost to . The only problem is that it's a
conflict of interest because (he’s) on the . (He) can serve in an advisory rather than a
. (He) would have to so that he's not on paper but serve as an ”

Meeting minutes dated , , record the and ,a , due
to the potential perception of a conflict of interest. The same meeting minutes recorded the board’s approval to
begin the purchase of through . Further, as specified in the meeting minutes,
was available to serve “as an ” and likely continued his prior relationship and influence within the
organization and with its decision makers. These facts lend to the determination that participation in
the activities may have been motivated by the relationship with and therefore, less concern may have
been given to whether the transactions would serve a private rather than public interest.
During the initial interview, the President explained that he would receive “ ”
although many of them would not result in an or . After the interview, the power of
attorney sought to clarify that the President was exaggerating, and that the number of contracts would more
accurately be described as “ .” The President was responsible for reviewing and signing documents for
both potential and actual transactions. The President received a salary for his work done on behalf of
Additionally, the organization’s books show expenditures for “( ) "and “( ) .” Whether
or , the Service concludes that participation in the was a substantial
activity that involved a considerable amount of the President’s time and attention, and that resources were
being allocated toward this purpose.

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

Limited Liability Companies formed for Non-Exempt Purposes

established at least —_ Limited Liability Corporations (LLCs) that were disregarded as business entity
separate from its owner, as defined in Treas. Reg. 301.7701-2(c)(2). Evidence indicates that additional LLCs
were established either before and/or after the periods under examination. Once the were
in the name of the charity, often transferred the to its LLCs, which were established using the
name of each . During ownership, earned may have been paid to either the LLCs or

, based on the circumstances of the transactions. When the was __ , it was often in the
name of the LLC. When asked the purpose of the LLCs, the President explained that they were established
“due to the volume of transactions.”

These LLCs were created for non-exempt purposes. As evidenced in the language in the Operating Agreement
for , LLC, “(t)he Company is formed for purpose of, and the nature of the business to be
conducted and promoted by the Company is, the , , , , and
ultimate , and engaging in any and all activities necessary or incidental to the
foregoing”. These purposes are not purposes specified in IRC §501(c)(3) and instead are commercial in
nature. was the of the LLCs. Per the agreements, the allocation of net profits, tax credits
and tax losses were to the member.

Each LLC was formed in the . The website shows that the

corporation types were declared as “A - General — Type.” General refers to a legal entity with no special

attributes such as nonprofit or religious. The LLCs filed for and received Tax Identification Numbers (TINs)

from the Service with NAICS code -- . These filings

provide insight into the intended purposes of the LLCs and confirm that they were not organized to promote
exempt purposes of advancement of

Research of the Service’s payer and payee filing system shows that the LLCs filed and received information
returns reporting payments and income. For example, in , LLC filed a
Form 1099-INT, Interest Income to report a ; payment to an . The
Service has not been provided information about the nature of this payment; however, it further provides
evidence of the scope of transactions outside the organization’s stated purposes. Additionally, Forms 1099-S,
Proceeds from Real Estate Transactions and 1099-MISC, Miscellaneous Income for rents were received by
the entities. In total, approximately | Form 1099 returns were located during the periods for these entities.
These information returns indicate that the scope of the activities conducted were not insubstantial. The

activities were not reported on the Form ,no Form were filed, no tax was paid, and Schedule R was
not completed to disclose the existence of the entities. As these entities were wholly owned entities that were
not regarded as separate from the owner, was required to report all activities and income on its returns.

After consideration of the number of LLCs established, the non-exempt purposes of the LLCs per its Operating
Agreements, the type of entity as declared in the Certificates of Formation, and the scope of the activities
conducted, it is determined that the organization and operation of the wholly owned LLCs was for a primary
activity that did not accomplish an exempt purpose. The Service also notes that failed to provide notice
of the existence of the LLCs and the gross income earned on Form , and no individual tax returns were
filed for the entities. As the LLCs obtained TINs, and filed and received information returns, the failure to report
the non-exempt activities and taxable income does not appear inadvertent. Additionally, was provided
notice by the Service on , , via Letter 3609 of the consequences of filing incomplete returns, and

still did not comply when filing the Forms for the period endings ; and :

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

Unfavorable Terms of Agreements

entered into exclusive contracts with highly unfavorable fee structures that conferred more than a
nonincidental private benefit to a for-profit entity. The fee schedule was based on the appraised value of the

, not the actual purchase or sale price. which was substantially less. This arrangement maximized the

earnings of , while minimizing the earnings of the organization. Based on the definition in Treas. Reg
§1.501(a)-1(c), is a private shareholder as defined in §501 because it has a personal and private
interest in the activities of the organization. Accordingly, the Service finds that arrangement
with violated the restriction on private benefit. See Treas. Reg. §1.501(c)(3)-1(d)(1)(ii), Example 3.

The Service finds the fee structure and cost of services to be problematic. The fees appear to be inflated and
add no value to the services provided. Often the fees were so large that had to discount them by
hundreds of thousands of dollars for to receive any income. As an example, a Profit and Loss statement
prepared for by on ' details the fees for the :

, which was for $ , and sold for with $ , stated FMV.

% of

Service Charges for % of
FMV Price

Total Cost of Services

In the above case, was charged $ . ._ in service charges before the discount amounting to %
of the FMV of the ( % after a % discount), which amounted to  % of the actual price before
the discount ( % after a discount). This has the characteristics of a predatory based fee system. Further,
when the individual fees are reviewed, they appear to be only based on the FMV of the and not
allocated based on actual services provided. For example, typically vary based on direct
costs. Here, it is charged at a fixed rate without regard to whether any marketing was conducted.

The reviewed during the period under examination were purchased for a total of $ .  . . and
for a total of $ , .  .. incurred $ , ., .  in debt for the purchase prices and payment

of costs and other fees. The total proceeds from the transactions were $ _ of which

$ or % was paid to Broker, $ or % was paid to others for closing costs, and

$ or 5% was retained by . See the exhibit on Page 4. During the interview, the President

indicated that the income was regarded as fundraising to support other programs. If this was the case, it is

questionable as to why would be willing to pay $ in fees to others and retain only

$ to be used toward its exempt purposes.

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

Additionally, the terms of the agreement allowed for to collect all on behalf of the

organization. When asked to provide accounting of the , explained it did not know how
much was collected and from whom, indicating it released all control of the income to . relied on
to properly credit them for all income collected and is not in fact able to determine if it did. During the
examination, the Service determined that checks paid to wholly owned LLCs were in fact
deposited into a checking account in the name of . then retained the and netted
against its fees, thus allowing income to inure to the benefit of the for-profit entity.
entered into agreements with , that were unusual and highly
unfavorable to the non-profit organization. Some amounts were unreasonable based on the price of the
. For example, the price for the ;
was $ ,  , however, the to was¢_, and required %
interest payments of $ , for months. There is no benefit to the organization to encumber debt of that
amount or enter into such repayment terms for a $ . The benefit for this agreement is to the

, as the amount in excess of the principal was secured to pay the excessive fees.

Between and , the National Average ranged from % to %.
Historically, short-term mortgages typically come with lower interest rates than . In the case of
, the showed rates between %and_ %. Additionally, some agreements stipulated a
prepayment penalty of interest despite the initial expectations to not hold the for the full term. In many
cases, buyers for the of the were already identified when the were
signed. Such was the case with the .& . , , where the
for its was signed effective , and the agreement for its was
signed on ; . Further, this specified the of the to
LLC, another of and hereafter referred to as , which
confirms that all parties were aware of the pending transaction. also agreed to pay % of
the amount of the on some , including $ fee for the $ , on the ,
and the $ fee for the $ ; on the . Taking together into
consideration that the was the subsidiary of who also controlled every other
aspect of the transaction including price, the above market interest rates, and the terms related to prepayment
of the , it is determined that these financing transactions serve the private interest of and his
, and not a public interest.

For-Profit Company’s Income reported as paid to

After was to ; income was reported to the Service as paid to In
the case of the & : : ; acquired the on

, and transferred it to ; ,on
the same day. On ; , the was by to

. However, information returns were filed by for made to

, LLC in , and for a period in . Public records indicate that the was
owned by until . If no longer owned the , having income
reported to the Service under its TIN transfers the tax return filing requirement from the actual owners to

. It is unknown if filed or paid tax related to this income, however the arrangement

serves the private interest of the owner, and not that of the public.

Catalog Number 20810W Page 15 www.irs.gov Form 886-A (Rev. 5-2017)

For-Profit Company’s Possession of Non-Profit Income
In some cases, allowed to maintain possession of its income beyond a reasonable period. In the
case of the & 4 ; ; the and it to a
wholly owned subsidiary, , LLC, on : . On the same day, the was
to . A profit and loss statement dated : was prepared by

indicating a profit of $ . . However did not receive distribution until after the was by

on ; . This indicates that retained control of ’s profit for an
additional months beyond of ownership with no plausible need to continue the management of the
funds. In fact, no distribution was made until the disposed of the from its
ownership. During the period of the ownership the amount due to did not
increase, which indicates that no was paid by to for the use of the funds.
A similar fact pattern exists with the & ; ; on

; , the ; ; on , , the
; on ; , and the 4 on
' , all of which did not receive disbursement until ; . This arrangement is

questionable, and serves the private interest of , and not that of the public.

Donor Deductions
The structure of the involved a who would to for a
value below the appraised amount, treat the difference between the FMV and the sales price as a non-cash
contribution, and claim a charitable deduction under IRC (a) based on the appraised FMV of the
at the time of the . In this case, found the donor and connected them with a tax-exempt entity willing
to participate in the transaction. signed Letters of Intent, which detailed the terms of the

and marketed to the donor the benefits based on the tax savings and not the sales price.
Specifically, the Letter of Intent would list the Current List Price, the IRC of Value
Price, the Federal Tax-Free Contributions Tax Savings at . %, the State Tax-Free Contributions Tax
Savings @ %, the Total Cash Benefit and the resulting Equivalent Selling Price. This structure allowed the
donor to compare traditional sales with the benefit they received for entering into the agreement.

The FMV was determined by an appraiser who was chosen from a list of preferred appraisers provided by

. Because controlled the selection of the appraiser, and the fee structures were based on the
amount of the appraisal, the possibility existed that the appraisal could provide an inflated FMV. During the
initial interview, the President stated that they were minimally involved in the appraisal process, and never met
with or talked to the appraiser. Nevertheless, provided a signed, written statement for each transaction
on letterhead to the donor listing their name, date and amount of donation, based on the potentially overstated
FMV, totaling $  , . . He further stated that at the time of ; did not doubt the
valuation of the , but at the time of the initial interview, did not agree with the accuracy of the
valuations.

Additionally, indicated on the Form 8283 that the would be used for a related, exempt purpose.
However, the intention was to use the for an unrelated non-exempt purpose. If correctly
checked “ ___” to indicate the expectation that the donated were to be used for an unrelated purpose,
the donor’s deduction would have been limited. also did not file the required Form 8282 to report the
sale of the asset. If the Form 8282 was correctly furnished to the original donor, a recapture of the donor's prior
year contribution deduction may have been required. By not disclosing the true, non-exempt nature of the
donation on Form 8283, failure to file and furnish Form 8282 and providing charitable contribution
documentation with questionable FMV, provided for an excess benefit to be received by the donor in the
form of deductions that were not allowable. This serves a private benefit, and not the benefit of the public at

large.

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

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

The benefits received by and the donors were not a mere byproduct of a benefit received by the public.
The were not related to the exempt purpose, or any activity carried on to fulfill
that exempt purpose. involvement was purely for purposes with the goal of generating
capital. status as a tax-exempt organization was used to facilitate the . In its
absence, no charitable deduction could be claimed. The ’ sole purpose of participating in the transaction
was to receive the inflated charitable deduction and reduce their taxable income, as evidenced in the Letter of
Intent. purpose for conducting the transaction was to maximize fee revenue. The activity had no direct
benefits to the public at large. Therefore, the benefit was not qualitatively incidental.

The benefits received by and the were not insubstantial. The fee schedules of the transactions
were structured so that the EO retained very little profit and and its related { :
, etc.) received the largest benefit from the transactions. The . in fees paid to
for the facilitation of the transactions, as well as the ; in charitable
deduction documentation given to the are substantial amounts. On average, retained Ye of
the proceeds and retained . % of the proceeds. Additionally, ; in
, above rates of - % and excessive prepayment penalties were not insubstantial.

Therefore, the benefit was not quantitatively incidental.

Catalog Number 20810W Page 17 www.irs.gov Form 886-A (Rev. 5-2017)

EXEMPT ACTIVITY- Ministry

activities to fulfill its exempt purpose of advancement of included conducting conference calls,
sending email and providing to enrollees of the programs, hosting conferences and retreats,
facilitating peer groups, on-site program assessment, and referring to colleges for
testing. During the and years under examination, the EO conducted an annual International

and held monthly and quarterly conference calls, however the conferences ceased in
due to the pandemic. It also conducted program-related travel and received new applications and
maintained the existing for and . The average of income from
; ; and is .%.

The presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of
the number or importance of truly exempt purposes. Better Business Bureau of Washington, D.C. v. U.S., 326
U.S. 279 (1945). In the case of , evidence indicates that two of the primary activities fulfill non-exempt
purposes. Like the ruling in Capital Gymnastics Booster Club, conferred an impermissible substantial
private benefit to the workers by transferring the equivalent of funds raised during fundraising activities to
affiliates to reduce the workers’ personal expenses, and therefore is not operated exclusively for exempt

purposes. Like the ruling in est of Hawaii v. Commissioner, the for-profit entities were able to use as an
“instrument” to further its for-profit purposes. allowed for-profit entities and individuals to receive
substantial private benefit from the arrangements. As such, fails the operational test under Treas. Reg.

§1.501(c)(3)-1(c)(1) and Treas. Reg. §1.501(c)(3)-1(d)(1)(ii) as it engaged primarily in activities that served
private interests, and therefore more than an insubstantial part of its activities is not in furtherance of an
exempt purpose.

Catalog Number 20810W Page 18 www.irs.gov Form 886-A (Rev. 5-2017)

ISSUE #2 — Should the taxpayer continue to be recognized as tax exempt under IRC §501(a) as an
organization described in IRC §501(c)(3)?

TAXPAYER’S POSITION

On | , _ , Power of Attorney, provided a copy of a page on

website stating that the organization dissolved on , . No copies of the Intent to Dissolve or
Articles of Dissolution documents were provided but are referenced on the print.

GOVERNMENT’S POSITION

It has been determined that does not qualify for exemption as an organization described in IRC
§501(c)(3) because it does not meet the operational test under Treas. Reg. §1.501(c)(3)-1(a)(1). fails the
operational test because it is not operated exclusively for exempt purposes, as it is engaged primarily in
activities that do not accomplish an exempt purpose and more than an insubstantial part of its activities serves
a private rather than a public benefit.

The organization should not continue to be recognized as tax exempt under IRC §501(a) as an organization
described in IRC §501(c)(3).

CONCLUSION

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

Catalog Number 20810W Page 19 www.irs.gov Form 886-A (Rev. 5-2017)