Other 200842051: Paid gaming operation did not further an exempt purpose

Plain-English summary

An organization recognized under § 501(c)(3) operated charitable gaming but made only limited charitable contributions. Its gaming report treated transfers from the gaming bank account to its own general bank account as charitable contributions. It paid gaming workers even though the report states that state law required those workers to be volunteers, and its gaming license was suspended for rule violations. The organization also failed to file Form 990 and did not provide requested bank records, which the IRS obtained using its examination authority. The IRS concluded that the gaming sessions did not serve a charitable purpose and that payments to workers produced prohibited inurement. It revoked the exemption retroactively and required Forms 1120, 730, and 11-C for the affected periods.

Ruling snapshot

• Question: Did the organization’s gaming activity operate exclusively for exempt purposes?
• Outcome: Revocation. The activity did not further charity, paid workers in violation of the stated volunteer rule, and produced inurement.
• Key authorities: IRC §§ 501(c)(3), 511-515, 6001, 6033, 7602; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
625 Fulton Street, Room 503
Brooklyn, NY 11201

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION Date: July 3, 2008

Release Number: 200842051
Release Date: 10/17/08

UIL Code: 501.03-01 XX = Date Address = address
Legend
ORG = Organization name Taxpayer Identification Number:
ORG Person to Contact:
ADDRESS Identification Number
Contact Telephone Number:
LAST DATE FOR FILING A PLEADING WITH THE
TAX COURT, THE CLAIMS COURT, OR THE UNITED
STATES DISTRICT COURT FOR THE DISTRICT OF
COLUMBIA: October 1, 20XX
Dear

This is a final determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code (IRC). Recognition of your exemption from Federal income tax
as an organization described in Internal Revenue Code section 501(c)(3) is retroactively
revoked to January 1, 20XX because it is determined that you are not operated
exclusively for an exempt purpose.

IRC 501(c)(3) exempts from taxation organizations which are organized and operated
exclusively for charitable or educational purposes, no part of the net earnings of which
inure 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 and which do not participate in, or intervene in, any political campaign on
behalf of (or in opposition to) any candidate for public office.

We have determined that you are not operating exclusively for any charitable purpose,
educational purpose, or any other exempt purpose. Our examination reveals that you
are not conducting charitable activities, educational activities, or any other exempt
activities pursuant to IRC section 501(c)(3), and that you failed to meet the “operational

test” under Treas. Regs. 1.501(c)(3)-1(d)(1)(ii).

We are revoking your exemption from Federal income tax as an organization described
in section 501(c)(3) of the Internal Revenue Code effective January 1, 20XX.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code. You are required to file Federal income tax returns on Form
1120. These returns should be filed with the appropriate Service Center for all years

beginning January 1, 20XX.

Processing of income tax returns and assessment of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal

Revenue Code.

If you decide to contest this determination in court, you must file a pleading seeking a
declaratory judgment in the United States Tax Court, the United States Court of Federal
Claims, or the United States District Court for the District of Columbia before the 91st
day after the date this final determination was mailed to you. Please contact the clerk
of the appropriate court for rules regarding filing pleadings for declaratory judgments
and refer to the enclosed Publication 892. You may write to these courts at the
following addresses:

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal
appeals process. The Taxpayer Advocate 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. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling. You
may call toll-free and ask for Taxpayer Advocate Assistance. If you prefer, you may
contact your local Taxpayer Advocate.

We will notify the appropriate State Officials of this action, as required by section
6104(c) of the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely Yours,

Marsha A. Ramirez
Director, EO Examinations

Enclosure:
Publication 892

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Period Ended
ORG December 31,
20XX
LEGEND
ORG = Organization name XX = Date XYZ = State motto = motto

Application = application

Issue:

Should the tax-exempt status of ORG (ORG) be revoked?

Facts:

ORG was granted tax exempt status as a 501(c)(3) on June 13, 19XX.

ORG conducted charitable gaming in XYZ during 20XX. ORG filed a 1st Quarter report with the
Office of Charitable Gaming with the following Figures:

1st Quarter

Income
Motto
Motto
Special
Total Income

Cash Prizes
Motto
Motto
Special
Total Cash Payouts

Adjusted Gross
Motto
Motto
Special
Adjusted Gross

Expenses
Rent
Advertising
Travel
Security
Other
Total Expenses

Purchase Prizes
Charitable Contributions
Subtotal
Total

The complete gaming report is found on Exhibit A.

ORG's charitable gaming license was suspended on July 1, 20XX and no 2nd quarter report was ever filed.
ORG license was suspended for 40% rule violations.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Period Ended
ORG December 31,
20XX

The Charitable contributions list on the quarterly report represented transfers from ORG's motto bank
account to ORG's general bank account.

No individual listed on the Secretary of State Report or Application claimed to be an officer for ORG. ORG
failed to provide bank records and the records were obtained under IRC 7602.

A summary of the General Bank account checks can be found on Exhibit B. A summary of the Gaming
Bank Account checks can be found on Exhibit C.

During the motto sessions, ORG paid its motto workers. ORG also paid security and janitorial help. ORG
made charitable contributions of less than $.

ORG did not file a Form 990 for any period. A Form 990 or some type of correspondence was completed
for 19XX only.

Law:

IRC 501(c)(3) 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.
FINAL-REG, TAX-REGS, §1.501(c)(3)-1

(a) Organizational and operational tests

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

exempt.
(c) Operational test

(1) Primary activities. —An organization will be regarded as “operated exclusively” for one or more
exempt purposes only if it engages primarily in activities which accomplish one or more of such
exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

(2) Distribution of earnings. —An organization is not operated exclusively for one or more exempt
purposes if its net earnings inure in whole or in part to the benefit of private shareholders or
individuals. For the definition of the words “private shareholder or individual’, see paragraph (c) of

§1.501(a)-1.

(e) Organizations carrying on trade or business

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Period Ended
ORG December 31,
20XX

(1) In general. —An organization may meet the requirements of section 501(c)(3) although it
operates a trade or business as a substantial part of its activities, if the operation of such trade or
business is in furtherance of the organization's exempt purpose or purposes and if the organization
is not organized or operated for the primary purpose of carrying on an unrelated trade or business,
as defined in section 513. In determining the existence or nonexistence of such primary purpose, all
the circumstances must be considered, including the size and extent of the trade or business and the
size and extent of the activities which are in furtherance of one or more exempt purposes. An
organization which is organized and operated for the primary purpose of carrying on an unrelated
trade or business is not exempt under section 501(c)(3) even though it has certain religious
purposes, its property is held in common, and its profits do not inure to the benefit of individual
members of the organization. See, however, section 501(d) and §1.501(d)-1, relating to religious and
apostolic organizations.

(2) Taxation of unrelated business income. —For provisions relating to the taxation of unrelated
business income of certain organizations described in section 501(c)(3), see sections 511 to 515,
inclusive, and the regulations thereunder.

(f) Applicability of regulations in this section. —The regulations in this section are, except as
otherwise expressly provided, applicable with respect to taxable years beginning after July 26, 1959.
For the rules applicable with respect to taxable years beginning before July 27, 1959, see 26 CFR
(1939) 39.101(6)-1 (Regulations 118) as made applicable to the Code by Treasury Decision 6091,
approved August 16, 1954 (19 F.R. 5167; C.B. 1954-2, 47). [Reg. §1.501(c)(3)-1.]

Section 6001 of the Code provides that every person liable for any tax imposed by the Code, or for the
collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from
time to time prescribe.

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

Section 1.6001-1(a) of the regulations in conjunction with section 1.6001-1(c) provides that every
organization exempt from tax under section 501(a) of the Code and subject to the tax imposed by section
511 on its unrelated business income must keep such permanent books or accounts or records, including
inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters
required to be shown by such person in any return of such tax. Such organization shall also keep such
books and records as are required to substantiate the information required by section 6033.

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

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

Form 886-A (Rev.4-68) Deparmment of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Period Ended
ORG December 31,
20XX

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

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

Government's Position:

ORG's tax exempt status should be revoked. ORG is not “operated exclusively” for one or more exempt
purposes as required by Treas. Reg. 501(c)(3)(a)(1) — (¢)(2).

ORG's activities did not serve any charitable purpose. ORG's only purpose was to run motto sessions.

ORG's method of operation results in the inurement of its income to its motto workers. Inurement of
income is strictly forbidden under IRC 501(c)(3) without regard to the amount involved. In the state of XYZ,

all motto workers must be volunteers.

The tax-exempt status of ORG should be revoked effective January 1, 20XX.
Taxpayer's Position:

The taxpayer's position is unknown.

Conclusion:

————————————

The tax-exempt status of ORG will be revoked effective January 1, 20XX.
ORG is responsible for filing Forms 1120 for all required periods after January 1, 20XX.

ORG is responsible for filing Forms 730 and 11-C for all required periods after January 1, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TE/GE EO Examinations
1500 Ormsby Station Court Suite A - Stop 700
TAX EXEMPT AND GOVERNMENT ENTITIES Louisville, KY 40223

DIVISION

September 12, 2007

Taxpayer Identification Number:
ORG
ADDRESS Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

We have enclosed a copy of our report of examination explaining why we believe
revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code

(Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written
request for Appeals Office consideration within 30 days from the date of this letter to
protest our decision. Your protest should include a statement of the facts, the
applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the
Director, EO Examinations. The Appeals Office resolves most disputes informally and
promptly. The enclosed Publication 3498, The Examination Process, and Publication
892, Exempt Organizations Appeal Procedures for Unagreed Issues, explain how to
appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes
information on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in
Publication 892. If we issue a determination letter to you based on technical advice, no
further administrative appeal is available to you within the IRS regarding the issue that
was the subject of the technical advice.

Letter 3618 (04-2002)
Catalog Number 34809F

If we do not hear from you within 30 days from the date of this letter, we will process
your case based on the recommendations shown in the report of examination. If you do
not protest this proposed determination within 30 days from the date of this letter, the
IRS will consider it to be a failure to exhaust your available administrative remedies.
Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this section shall not be issued in any proceeding unless the Tax Court, the
Claims Court, or the District Court of the United States for the District of Columbia
determines that the organization involved has exhausted its administrative remedies
within the Internal Revenue Service." We will then issue a final revocation letter. We
will also notify the appropriate state officials of the revocation in accordance with section

6104(c) of the Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal
appeals process. The Taxpayer Advocate 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. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling. You
may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you
prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter. If you write, please provide a telephone number and
the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez, Director
Exempt Organizations Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F