Charity lost exemption after routing donations to related for-profit entities

Plain-English summary

The IRS revoked a charity's Section 501(c)(3) status after finding that its primary activity was collecting donations and making grants to related for-profit entities. The organization did not select or screen the people receiving discounted or free products, retain control over the grants, or keep records showing that the funds served a charitable class. Donor interviews also indicated that some payments were connected to product purchases and were presented as charitable contributions. The examination found overlapping officers, directors, owners, and paid preparers among the charity and the for-profit entities, and concluded that the transfers were excess benefit transactions involving disqualified persons under Section 4958. Because the organization had no adequate safeguards, did not correct the transactions, and substantially benefited private interests, the IRS determined that it was not operated exclusively for exempt purposes and that its net earnings inured to private individuals.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 4958; Treas. Reg. §§ 1.501(c)(3)-1, 53.4958-1 through 53.4958-4

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Independent Office of Appeals

Date: FEB 06 2024

Person to contact:
Name:
Employee ID number:
Telephone:
Hours:
Employer ID number:

Release Number: 202418014
Release Date: 5/3/2024

Uniform issue list (UIL):
501.03-15

Certified Mail

Dear        :

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3).

We made the adverse determination for the following reasons:

You have failed to demonstrate that you are operated exclusively for a charitable purpose, and that no part of
your net earnings inures to the benefit of private individuals, as required by section 501(c)(3) of the Code. In
addition, your activities more than insubstantially further non-exempt purposes, and your operate primarily for
the private benefit of for-profit entities, controlled by a disqualified individual.

You're required to file federal income tax returns on Forms        . Mail your form to the appropriate Internal Revenue
Service Center per the form's instructions. You can get forms and instructions by visiting our website at IRS.
gov/forms or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under IRC
Section 6110 after deleting certain identifying information. We provided to you, in a separate mailing, Notice 437,
Notice of Intention to Disclose. Please review the Notice 437 and the documents attached that show our proposed
deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of IRC Section 7428 in either:

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

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

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

of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

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

United States Tax Court

400 Second Street, NW

Washington, DC 20217

ustaxcourt.gov

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

U.S. Court of Federal Claims

717 Madison Place, NW

Washington, DC 20439

uscfc.uscourts.gov

U.S. District Court for the District of Columbia

333 Constitution Avenue, NW

Washington, DC 20001

dcd.uscourts.gov

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

Taxpayer rights and sources for assistance

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

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and
protects taxpayers’ rights. TAS can offer you help if your tax problem is causing a financial difficulty, you've
tried but been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure
isn't working as it should. If you qualify for TAS assistance, which is always free, TAS will do everything
possible to help you. To learn more, visit taxpayeradvocate.IRS.gov or call 877-777-4778.

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

Low Income Taxpayer Clinics (LITCs) can represent low-income persons before the IRS or in court. LITCs can
also help persons who speak English as a second language. Any services provided by an LITC must be for free
or a small fee. To find an LITC near you:

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

Letter 1371 (Rev. 9-2022)
Catalog Number 48683R


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

organizations may also be able to provide referrals.

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

in a United States Court.

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

Sincerely,

Danny Werfel
Commissioner

By

Valeria B Farr

Appeals Team Manager
Enclosures:
Publication 1
IRS Appeals Survey
cc:

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


Department of the Treasury                                      Date:
Internal Revenue Service                                        03/25/2022
Tax Exempt and Government Entities                              Taxpayer ID number:

Form:

Tax periods ended:

Person to contact:
Name:

ID number:
Telephone:
Fax:

Address:

Manager's contact information:

Name:
CERTIFIED MAIL — Return Receipt Requested ID number:

Telephone:

Response due date:
04/24/2022

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-
Catalog Number 348D9F


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,

/s/ Ryan Johansen

for Lynn A. Brinkley

Acting Director, Exempt Organizations Examinations

Enclosures:
Forms 6018, 4621-A and 886-A

Pub 892 and 3498

Letter 3618 (Rev. 8.
Catalog Number 34809F


Schedule number
Form 886-A, Department of the Treasury - Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
ISSUE:
Whether exempt status under internal Revenue Code

(IRC) Section (Sec.) 501(c)(3) should be revoked for failing to demonstrate it operates primarily
for an exempt purpose and that no part of its net earnings inures to the benefit of an individual.

FACTS:
About the Organization’s History
(Organization) Articles of Incorporation state, the
Organization was incorporated on , in the State of with the legal
name of the corporation as The Organization
was granted exemption from income tax under IRC Sec. 501(c)(3) and recognized as

a publicly supported organization under IRC Sec. 509(a)(1) and IRC Sec. 170(b)(1)(A)(vi).

The Articles of Incorporation state that the Organization is a nonprofit public benefit corporation
and is not organized for the private gain of any person. It is organized under the Nonprofit
Public Benefit Corporation Law for public and charitable purposes. The specific function of this
nonprofit corporation was to be charitable legal services.

The Organization’s exemption was automatically revoked on as a result of not
having filed a Form 990, Return of Organization Exempt From Income Tax, or equivalent return
for consecutive years.

On , the Organization submitted Form 1023, Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code, and requested retroactive
reinstatement of their exempt status. The Organization’s application for retroactive
reinstatement was approved under Revenue Procedure 2014-11 and the effective date of the
exemption was retroactive to the date of revocation

On , the Organization’s Articles of Incorporation were amended to change the

specific functions from to

On , the Organization’s Articles of Incorporation were amended to change the
Organization’s legal name from to

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


Schedule number

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

In response to the initial examination report, the Organization provided a document titled,
ORGANIZATION INFORMATION, The document lays out the Organization's plans to provide

About the Organization’s Activities

The Organization’s activity is collecting money from individuals and in turn provide grants
to for-profit entities in the field. The for-profit entities are
and

According to an article published in the on the
Organization had agreed to accept donations on behalf of

the article and the Organization’s power of attorney, ' explained that
individuals make donations to the Organization with the understanding that the funds will be
used to help make their more readily
available to purchase by individuals that cannot afford them.

On stated that the Organization provides grants to
in order for patients that were unable to pay for the to
receive a discount on products. However, in response to the initial examination report, the
Organization explained that products are not sold ata
discount but that to of all their for sale will be made available for
free to the entire underserved category of the population.

. During and the Organization provided $ in grants to
and The Organization does not
maintain control and discretion as to the use of the funds and does not maintain records to
show that the funds were used for IRC Sec. 501(c)(3) purposes. The Organization does not
select or screen individuals that will receive a discount or free product from the for-profit
entities. The Organization does not have documentation that verifies the grants went to
members of a charitable class or furthered an exempt purpose.

About the Organization’s Financial Records

The table on the top of page shows the Organization’s revenues and expenses for and

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


Schedule number
Form 886-A Department of the Treasury - Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
Gross Receipts $ $
Revenues
Contributions and grants $ $
Program service revenue $ $
Total Revenue $ $
Expenses
Grants to domestic organizations $ $
Grants to domestic individuals $
Compensation of current officers... $ $
Accounting $ $
Office expenses $ $
Depreciation $ $
Insurance $
Contract labor $ $
Communications $ $
Fees & licenses $
Fundraising event $
Other expenses $
Total Expenses $ $
Excess (deficit) $ $
The table below shows the companies and amounts the Organization provided grants to during
and
Grant Recipient
$ $
$ $
$ $
Total $ $
During the Organization paid $ in grants to which was % of the
grants paid out by the Organization for In response to the initial examination report, the
Organization explained that provided to the underserved
population of However, their records were disrupted by the and therefore

they do not have documentation to show the recipients.

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


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

About the Organization’s Insiders

The Organization’s board of directors consisted of members during
and and are related as and The
Organization had board of director during President, according to
the Form 990 for The board of director meeting minutes for a meeting held on

listed and as Directors. The Organization paid
$ in and $ in and paid $ to
in

During a prior examination, for the tax period ended , the Organization was
issued an advisory for failure to have adequate internal control procedures in place as a result
of having individual board member, who controlled most of the financial
transactions of the Organization.

The Organization provided copies of their board of director meeting minutes for meetings held
in per an Information Document Request (IDR) for a prior examination. The minutes from
a board of director meeting held on , state that was appointed
as the Organization’s Secretary/Treasurer and that the checking account signers were
and In a subsequent meeting held on , the board removed
and added as a checking account signer. During a board of director
meeting held on : , the board accepted the resignation of and
removed him as a checking account signer. The Form 1023, filed on , shows
as the primary contact (officer, director, trustee, or authorized representative),
website lists as President and Chief Executive
Officer.

An IDR issued to the Organization for the examination, asked the following question,

About the Organization’s relationships with and

The Organization’s power of attorney, is listed as an officer for
according to its website, and
according to their Form D, Notice of Exempt Offering of Securities, filed with the Securities and

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


Schedule number
Form 886-A Department of the Treasury — Internal Revenue Service or exhibit
(May 2017) Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
Exchange Commission on . In response to the initial examination report, the
Organization stated that is only the Form 1120, U.S. Corporation Income Tax
Return, preparer and not an officer or an employee of
However, the meeting minutes for a board meeting held
on list “Treasurer ” in attendance at the meeting.

Form 1120, U.S. Corporation Income Tax Return, Schedule G,
Information on Certain Persons Owning the Corporation's Voting Stock, for the tax period

ended indicates owns % of the corporation’s voting
stock. Form 1120, Schedule G, for the tax period ended
indicates owns % of the corporation’s voting stock.

In response to the initial examination report, the Organization provided a letter from
In the letter, stated that their
goal was to

Furthermore, to show where the grant funds received were spent,
provided shipping records for pallets of products that were donated and
shipped to the Organization. However, the delivery location is different than the Organization’s
address and there is no explanation as to how the pallets of product were used to
further the Organization’s exempt purpose.

The Organization provided a letter from that explained they have

been striving to accommodate the Service’s request for documentation that shows where grant

moneys were spent, however, their computers were taken by during a in and
of and some of their file folders were damaged or lost.

The flowchart on the next page shows the interrelated network of directors, stockholders,
officers, and employees between the Organization, and

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


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

— Director & President
— Director
POA & Form 990 Paid Preparer
— Secretary/Treasurer during & Form 1023 Primary Contact
— Behind the Organization & introduced

President & CEO
Secretary, VP owns % stock
Executive Officer, Accountant
Employee, Promoter

President & CEO
Secretary, owns % stock
CFO

Catalog Number 20810W

Page 6 www.irs.gov

Form 886-A (Rev. 5-2017)


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

Contact with Donors

contacts were made during the examination to individuals who had made monetary
donations to the Organization during The purpose of the contacts was to find out the
purpose of the donations and if the donors received any products or services in exchange for
their donation.

donor explained that they had contacted (aka with
about purchasing some of their product. asked that the
individual send their payment for ; products to the
Organization. When the individual asked why the payment for the was being
sent to a charity, explained it was so the individual could then take a charitable

deduction on their taxes for the purchase.

A different contact who had donated to the Organization during explained that
they were told by that they had a partnership with the
Organization and that the individual could pay for

with a donation to the Organization.

donor explained that had made separate donations to the Organization during

The first donation was for $  , and received of
products named and donation was for $
and received of and for donation.

LAW:

Internal Revenue Code (IRC)

IRC Sec. 501(c)(3) provides for exemption from Income Tax for corporations, and any
community chest, fund, or foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to foster

national or international amateur sports competition (but only if no part of its activities involve
the provision of athletic facilities or equipment), or for the prevention of cruelty to children or
animals, no part of the net earnings of which inures to the benefit of any private shareholder or
individual, no substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in subsection (h)), and which
does not participate in, or intervene in (including the publishing or distributing of statements),
any political campaign on behalf of (or in opposition to) any candidate for public office.

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


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

IRC Sec. 4958(c) defines the term “excess benefit transaction” as any transaction in which an

economic benefit is provided by an applicable tax-exempt organization directly or indirectly to

or for the use of any disqualified person if the value of the economic benefit provided exceeds

the value of the consideration (including the performance of services) received for providing

such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated

as consideration for performance of services unless such organization clearly indicated its
intent to so treat such benefit.

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

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

Treasury Regulations (Treas. Reg.)

Treas. Reg. 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization
described in IRC Sec. 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)(2) provides that an organization is not operated exclusively for
one or more exempt purposes if its net earnings inure in whole or part to the benefit of private
shareholders or individuals.

Treas. Reg. 1.501(c)(3)-1(f)(2)(ii) provides that, in determining whether to continue to
recognize the tax-exempt status of an applicable tax-exempt organization (as defined in IRC
Sec. 4958(e) and Treas. Reg. 53.4958-2) described in IRC Sec. 501(c)(3) that engages in one
or more excess benefit transactions that violate the prohibition on inurement under IRC Sec.
501(c)(3), the Commissioner will consider all relevant facts and circumstances, including, but
not limited to, the following —

A. The size and scope of the organization's regular and ongoing activities that further
exempt purposes before and after the excess benefit transaction or transactions
occurred;

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

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

B. The size and scope of the excess benefit transaction or transactions (collectively, if
more than one) in relation to the size and scope of the organization's regular and
ongoing activities that further exempt purposes;

C. Whether the organization has been involved in multiple excess benefit transactions with
one or more persons;

D. Whether the organization has implemented safeguards that are reasonably calculated to
prevent excess benefit transactions; and

E. Whether the excess benefit transaction has been corrected (within the meaning of IRC
Sec. and Treas. Reg. 53.4958-7), or the organization has made good faith efforts to

seek correction from the disqualified person(s) who benefited from the excess benefit
transaction.

Treas. Reg. 53.4958-1(b) defines excess benefit as the amount by which the value of the
economic benefit provided by an applicable tax-exempt organization directly or indirectly to or
for the use of any disqualified person exceeds the value of the consideration (including the
performance of services) received for providing such benefit.

Treas. Reg. 53.4958-1(c) states that if more than one disqualified person is liable for the tax
imposed by IRC Section 4958, all such persons are jointly and severally liable for that tax.

Treas. Regs. 53.4958-3(c), (b), (d), & (e) provide that family members, 35% controlled
entities, voting members of the governing body, presidents, chief executive officers, chief
operating officers, or the person who founded the organization are among persons who are in
a position to exercise substantial influence over the affairs of the organization.

Treas. Reg. 53.4958-4(a)(1) provides that to determine whether an excess benefit transaction
has occurred, all consideration and benefits exchanged between a disqualified person and the
applicable tax-exempt organization and all entities it controls are taken into account.

Treas. Reg. 53.4958-4(a)(2)(iii) provides that an applicable tax-exempt organization may
provide an excess benefit indirectly through an intermediary. An intermediary is any person
who participates in a transaction with one or more disqualified persons of an applicable tax-
exempt organization.

Court Cases

In International Postgraduate Medical Foundation v. Commissioner, 56 T.C.M. 1140 (1989),
the court ruled as non-exempt under section 501(c)(3) of the Code an organization formed to
sponsor medical seminars and symposia that was founded and run by an individual who was a
shareholder and officer in a for-profit travel agency that provided travel arrangement services

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


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

to the nonprofit. Finding that the nonprofit was formed to obtain customers for the for-profit's
business, the court concluded that the nonprofit had, as a substantial purpose, increasing the
for-profit's income. When a for-profit organization benefits substantially from the manner in
which the activities of a related nonprofit organization are carried on, the court reasoned, the
nonprofit organization is not operated exclusively for exempt purposes within the meaning of
section 501(c)(3), even if the nonprofit furthers other exempt purposes.

In Est. of Hawaii v. Commissioner, 71 T.C. 1067 (1979), the Tax Court held that compensation
need not be unreasonable or exceed fair market value to be private benefit, stating “[n]or can
we agree with petitioner that the critical inquiry is whether the payments made to International
were reasonable or excessive. Regardless of whether the payments made by petitioner to
International were excessive, International and EST, Inc., benefited substantially from the
operation of petitioner.”

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the
Court held that the presence of a single non-exempt purpose, if substantial in nature, will
destroy an organization's tax-exempt status regardless of the organization's other charitable
purposes or activities.

In Church in Boston v. Commissioner, 71 T.C. 102 (1978), the Court upheld the denial of
exemption on an organization that made grants to individuals. The organization asserted that
its grants were made in furtherance of a charitable purpose: to assist the poor. The
organization was unable to furnish any documented criteria which would demonstrate the
selection process of a deserving recipient, the reason for specific amounts given, or the
purpose of the grant. The only documentation contained in the administrative record was a list
of grants made during one of the three years in question which included the name of the
recipient, the amount of the grant, and the “reason” for the grant. The court held that this
information was insufficient in determining whether the grants were made in furtherance of an
exempt purpose.

Revenue Rulings (Rev. Rul.)

Rev. Rul. 56-304, 1956-2 C.B. 306 states that an organization which otherwise meets the
requirements for exemption from Federal income tax are not precluded from making
distributions of their funds to individuals, provided such distributions are made on a true
charitable basis in furtherance of the purposes for which they are organized. However,
organizations of this character which make such distributions should maintain adequate
records and case histories to show the name and address of each recipient of aid; the amount
distributed to each; the purpose for which the aid was given; the manner in which the recipient
was selected and the relationship, if any, between the recipient and (1) members, officers, or

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


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

trustees of the organization, (2) a grantor or substantial contributor to the organization or a
member of the family of either, and (3) a corporation controlled by a grantor or substantial

contributor, in order that any or all distributions made to individuals can be substantiated upon
request by the Internal Revenue Service.

Rev. Rul. 68-489, 1968-2 C.B. 210 holds that an organization will not jeopardize its exemption
under IRC Sec. 501(c)(3), even though it distributes funds to nonexempt organizations,
provided it retains control and discretion over use of the funds for IRC Sec. 501(c)(3) purposes.
In this ruling, an organization exempt from Federal income tax under IRC Sec. 501(c)(3)
distributed part of its funds to organizations not themselves exempt under IRC Sec. 501(c)(3).
The exempt organization ensures use of the funds for IRC Sec. 501(c)(3) purposes by limiting
distributions to specific projects that are in furtherance of its own exempt purposes. It retains
control and discretion as to the use of the funds and maintains records establishing that the
funds were used for IRC Sec. 501(c)(3) purposes.

TAXPAYER'S POSITION:

Whether the Organization’s exempt status under IRC Sec. 501(c)(3) should be revoked for
failing to demonstrate it operates primarily for an exempt purpose and that no part of its net
earnings inures to the benefit of an individual.

It is the taxpayer's position that the Organization’s exempt status under IRC Sec. 501(c)(3)
should not be revoked.

The Organization believes that they have acted entirely for public benefit but acknowledge that

they did not have proper procedures and monitoring criteria during the years under
examination.

GOVERNMENT’S POSITION:

Whether the Organization’s exempt status under IRC Sec. 501(c)(3) should be revoked for
failing to demonstrate it operates primarily for an exempt purpose and that no part of its net
earnings inures to the benefit of an individual.

It is the Government's position that the Organization does not qualify as an organization
described in IRC Sec. 501(c)(3) because it is not operated exclusively for an exempt purpose;
the Organization substantially benefits private interests, and its net earnings inure to the
benefit of private shareholders and individuals.

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


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

Non-Exempt Purpose

To be exempt under IRC Sec. 501(c)(3), an organization must be organized and operated for

exempt purposes specified in the section. The presence of a single, nonexempt
purpose, if substantial, will preclude exemption regardless of the number or importance of
exempt purposes. See Better Business Bureau of Washington D.C. v. United States, 326 U.S.
279 (1945).

Here, the Organization’s sole activity is collecting money from individuals and in turn paying
the funds to non-charitable organizations, of which are owned by a former officer of the
Organization. The Organization collected funds from individuals for the purchase of

and products and from individuals who
had the understanding the funds would be used to make distributions to the non-charitable
organizations to make their more readily available to the public.

The Organization made distributions to non-charitable organizations —

and during and The
Organization is operated in a manner that substantially benefits commercial entities by
providing related commercial entities with revenue. Therefore, the Organization is not operated
for an exempt purpose. See International Postgraduate Medical Foundation v. Commissioner,
56 T.C.M. 1140, 1989-36 and Est. of Hawaii v. Commissioner, 71 T.C. 1067 (1979).

The Organization is unlike the organization described in Rev. Rul. 68-489. In this ruling, an
exempt organization showed that they would “ensure” use of the funds it disbursed for
permitted purposes by retaining control and discretion as to the use of the funds and
maintaining records limiting distributions to specific projects that further its own purposes.

Here, the Organization did not maintain adequate records for the distributions that it made and
did not have adequate control and discretion to ensure the furtherance of charitable purposes,
rather than private interests. The records and financial materials provided for and

by the Organization show that they do not maintain sufficient records and controls to detail the
activities and financial transactions and, therefore, are unable to show that they exclusively
further IRC Sec. 501(c)(3) exempt activities. See Church in Boston v. Commissioner, 71 T.C.
102 (1978) and Rev. Rul. 56-304, 1956-2 C.B. 306,

In response to the exam report, the Organization provided a letter from
and that stated their records were
during by and when returned, some of their files were damaged or

lost, preventing them from timely responding to the Service’s request to the Organization for
records to substantiate their distributions.

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


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

Rev. Rul. 68-489 held that distributions made by an IRC Sec. 501(c)(3) organization to non-
exempt organization would not jeopardize the IRC Sec. 501(c)(3) organization’s exemption if it
retains control and discretion as to the use of the funds and maintains records establishing
that the funds were used for IRC Sec. 501(c)(3) purposes. Here, the Organization had

months from the end of until to receive records as to how their funds were used
by and This timeframe and lack
of records demonstrates that the Organization did not maintain the records required by Rev.
Rul. 68-489 and Rev. Rul. 56-304 in order to not jeopardize their exempt status.

Therefore, it is the Government's position that the Organization is no longer operated
exclusively for charitable, religious, or educational purposes; the Organization substantially
benefits private interests, and its net earnings inure to the benefit of private shareholders and
individuals. The Organization does not qualify for exemption under IRC Sec. 501(c)(3).

Interaction with IRC Sec. 4958, Excess Benefit Transactions

Applicable Tax-Exempt Organization

In order for an excess benefit transaction to have occurred, the organization involved must be
an “applicable tax-exempt organization”.

IRC Sec. 4958(e) defines an applicable tax-exempt organization as any IRC Sec. 501(c)(3)
public charity or any organization exempt under IRC Sec. 501(c)(4) or 501(c)(29), and any
organization which was described under the above listed subsections at any time during the 5-
year period ending on the date of the transaction.

Here, the Organization was granted exemption under IRC Sec. 501(c)(3) and has been exempt
under IRC Sec. 501(c)(3) continuously during the 5-year period prior to the transactions in
question. Therefore, the Organization is an applicable tax-exempt organization under IRC Sec.
4958(e).

Disqualified Persons

IRC Sec. 4958(f)(1) defines “disqualified person” as including any person who was, at any time
during the five-year period ending on the date of a transaction, in a position to exercise
substantial influence over the affairs of the organization.

Treas. Regs. 53.4958-3(c) & (e) provide that voting members of the governing body,
presidents, chief executive officers, chief operating officers, or the person who founded the

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


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

organization are persons who are in a position to exercise substantial influence over the affairs
of the organization.

Treas. Reg. 53.4958-3(b) provides that a corporation is also a disqualified person if a
“disqualified person” owns more than _ percent of the combined voting power.

Here, was the Organization’s Secretary and Treasurer from
through owned % of the voting stock of both
and during Therefore,
and are all “disqualified
persons” of the Organization during under the 5-year lookback period.

IRC Sec. 4958 Excise Tax

The excise taxes imposed by IRC Sec. 4958 apply to each excess benefit transaction between
a disqualified person and an applicable tax-exempt organization. An excess benefit is defined
as the amount by which the value of the economic benefit provided by an applicable tax-
exempt organization, directly or indirectly, to or for the use of any disqualified person exceeds
the value of the consideration (including the performance of services) received for providing
such benefits. See Treas. Regs. 53.4958-1(b) and 53.4958-4(a)(1).

Here, the Organization made disbursements during for $ to

and $ to The Organization received no
performance of services or any other economic benefit in return. The expenditures did not
further the Organization’s exempt purposes. and

directly benefited from the disbursements.

indirectly benefited from the disbursements by being the stockholder
and officer for and See Treas.
Reg. 53.4958-4(a)(2)(iii).

The taxes imposed under IRC Sec. 4958 are payable by any disqualified person who received
an excess benefit from a particular excess benefit transaction. In addition, with respect to any
excess benefit transaction, if more than one disqualified person is liable for any of the section
4958 excise taxes, all such persons are jointly and severally liable for that tax. See Treas. Reg.
53.4958-1(c).

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


Form 886-A
(May 2017)

Department of the Treasury — Internal Revenue Service

Explanations of Items

Schedule number

or exhibit

Name of taxpayer

Tax Identification Number (last 4 digits)

Year/Period ended

Tier I Taxes:
IRC Sec. | Rate | Imposed on... | For... | Amount | Excise Tax
4958(a)(1) | % | | Engaging in excess benefit transaction | $ | $
4958(a)(1) | % | | Engaging in excess benefit transaction | $ | $

Tier II Tax:
IRC Sec. | Rate | Imposed on... | For... | Amount | Excise Tax
4958(b) | | | If not corrected within the taxable period | $ | $
4958(b) | | | If not corrected within the taxable period | $ | $

Application of the

from Treas. Reg. 1.501(c)(3)-1(f)(2)(ii)

Treas. Reg. 1.501(c)(3)-1(f)(2)(ii) states that in determining whether to continue to recognize
the tax-exempt status of an applicable tax-exempt organization that engages in one or more
excess benefit transactions (as defined in IRC Sec. 4958(c) and Treas. Reg. 53.4958-2) that
violate the prohibition of inurement under IRC Sec. 501(c)(3), the Commissioner will consider
all relevant facts and circumstances, including, but not limited to, the following:

1. The size and scope of the organization’s regular and ongoing activities that further exempt
purposes before and after the excess benefit transaction(s) occurred.

Here, the Organization has not substantiated that it conducts exempt activity. The activities
of the Organization, collecting donations on behalf of for-profit entities, to make their

available at a

price, serve the private interest of the for-profit

entities and do not benefit a charitable class. Therefore, the Organization has no regular
and ongoing activities that further exempt purposes.

Catalog Number 20810W

Page 15 www.irs.gov

Form 886-A (Rev. 5-2017)


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

2. The size and scope of the excess benefit transaction or transactions (collectively, if more

than one) in relation to the size and scope of the organization's regular and ongoing
activities that further exempt purposes.

Here, substantially more than half of the Organization’s expenditures during were
excess benefit transactions at of total expenditures.

3. Whether the organization has been involved in multiple excess benefit transactions with
persons.

Here, there were excess benefit transactions with disqualified persons. The
excess benefit transactions were ongoing during the periods under examination.

4. Whether the organization has implemented safeguards that are reasonably calculated to
prevent excess benefit transactions.

There is no indication that safeguards have been implemented that would prevent further
excess benefit transactions. During a prior examination, for the tax period ended
, the Organization was issued an advisory for failure to have adequate
internal control procedures in place as a result of having individual board member,
control most of the transactions of the Organization.

Currently, still controls the financial transactions of the Organization. The
Organization’s Board consists of and who are related as
and and is employed by

5. Whether the excess benefit transaction has been corrected, or the organization has made
good faith efforts to seek correction from the disqualified person(s) who benefited from the
excess benefit transaction.

No corrections have been made. There is no indication that the Organization has made
efforts to seek correction from the disqualified persons who benefited from the
transactions.

Based on the analysis from Treas. Reg. 1.501(c)(3)-1(f)(2)(ii) above, the size and
scope of the inurement issues revealed by the examination show the Organization is not
operated exclusively for exempt purposes and, therefore, revocation of the Organization’s tax-
exempt status is warranted.

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


Schedule number

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

It has been determined that the Organization does not qualify as an organization described
under IRC Sec. 501(c)(3) because it is not operated for an exclusive exempt purpose; the
Organization substantially benefits private interests, and its net earnings inure to the benefit of
private shareholders and individuals.

Application of the analysis provided by Treas. Reg. 1.501(c)(3)-1(f)(2)(ii), to determine
whether to continue to recognize the tax-exempt status of a tax-exempt organization that has
engaged in excess benefit transactions, weighed heavily in favor of revocation.

The Organization no longer meets the requirements to qualify as exempt from income

tax under IRC Sec. 501(c)(3). Therefore, its exempt status under IRC Sec. 501(c)(3) will be

revoked effective The organization should file Forms 1120 for the years
and any years for which it is not exempt from income tax.

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