Determination 201007072: IRS revoked an organization's section 501(c)(3) exemption

Plain-English summary

The IRS issued a final adverse determination revoking an organization's exemption under section 501(c)(3), effective January 1, 20XX. The IRS said the organization did not provide enough information about its expenditures, distributions, and exempt activities to establish that it operated exclusively for an exempt purpose. The examination report described proposed and actual joint ventures, management arrangements, and partnerships with for-profit entities, including entities connected to the organization's founder. The IRS concluded that the organization's non-exempt activities were substantial and served private interests rather than the public, so contributions were no longer deductible under section 170 and the organization was required to file Form 1120 returns.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation.
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 512(c), 6104(c), and 7428; Treas. Reg. §§ 1.501(a)-1, 1.501(c)(3)-1, and 601.201(n).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC: 4920 DAL
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION Date: 24 September 2009

Release Number: 201007072
Release Date: 2/19/10
UIL Code: 501.03-00

LEGEND Taxpayer identification Number:
XX - DATE ADDRESS - ADDRESS

Employee Identification Number:
Contact Numbers:

ORG
Telephone:
ADDRESS

Last day for filing a pleading with the Tax

Court, The Claims Court, or the United States

District Court for the District Columbia:
December 22, 20XX

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (“Code”). Our favorable determination letter to
you dated September 29, 19XX is hereby revoked and you are no longer exempt under
section 501(a) of the Code effective January 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations described in IRC §501(c)(3) and exempt under §501(a) must be
organized and operated exclusively for an exempt purpose. You have not provided
sufficient information regarding your expenditures, distributions, and exempt activities.
You have not established that the has been organized and
operated exclusively for an exempt purpose, benefited a charitable class or that its non-
exempt activities were insubstantial. You have failed to establish that you meet the
requirements of §501(c)(3) and Treasury regulation §1.501(c)(3)-1(d) in that you have
failed to provide information to establish that you were operated exclusively for an
exempt purpose.

Since you have not established that you have operated exclusively for an exempt
purpose, we hereby revoke your organization’s exemption from Federal income tax
under section 501(c)(3) of the Internal Revenue Code effective January 1, 20XX.

Contributions to your organization are no longer deductible under IRC §170 after
January 1, 20XX.

You are required to file income tax returns on Form 1120. The returns should be filed
with the appropriate Service Center for the tax years ending beginning with January 1,
20XX and for all tax years thereafter in accordance with the instructions of the return.
Because the statute of limitations on assessment of tax is about to expire, we are
concurrently making income tax determinations with respect to your 20XX taxable year.
Processing of income tax returns and assessments 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 under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Court of Federal Claims, or the District Court of the United States for the District of
Columbia must be filed before the 91st Day after the date this determination was mailed
to you. Please contact the clerk of the appropriate court for rules regarding filing
petitions for declaratory judgments by referring to the enclosed Publication 892. You
may write to the United States Tax Court at the following address:

You also 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 at:

See the enclosed Publication 1546, Taxpayer Advocate Service - Your Voice at the
IRS, for Taxpayer Advocate telephone numbers and addresses.

We will notify the appropriate State Officials of this action, as required by Code section
6104(c). You should contact your State officials if you have any questions about how
this final determination may affect your State responsibilities and requirements.

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

Sincerely,

Douglas H. Shulman
Commissioner

By

Sunita B. Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 1546

Internal Revenue Service Department of the Treasury
Tax Exempt & Government Entities Division

1244 Speer Blvd, Suite 442
Denver, Colorado 80204

Taxpayer Identification Number:

Date: 10/25/09

Form:

ORG
ADDRESS

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 (Rev. 11-2003)
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,

Renee B. Wells
Acting Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

(Form 886A Department of the Treasury - Internal Revenue Service Schedule No.
Explanation of Items

ORG Year/Period Ended
December 31,
20XX
LEGEND
ORG = ORGANIZATION NAME XX = DATE STATE = STATE FOUNDER = FOUNDER
FDN-1 = 1st FOUNDER EMP-1 = EMP-1 CO-1 THRU CO-14 = 1st, 2nd, 3rd, 4th,
5th, 6th, 7th, 8th, 9th, 10th, 11th, 12th, 13th & 14th COMPANIES

Revocation of IRC 501(c) (3) tax-exemption

Issue:

Whether the IRC §501(c)(3) tax exempt status of ORG should be revoked because it is not
operated exclusively for tax exempt purposes.

Facts:

ORG (ORG) was incorporated under the laws of the state of State as a non-profit organization on
May 29, 19XX.

The organization’s status as a non-profit in the state of State has been suspended, (exhibit 1)

In 19XX, the founder of the organization, Founder was doing a project in State called CO-1; the
mission of that organization was to participate in selected humanitarian and charitable efforts, the

organization morphed into the ORG.
ORG was set up to support educational, religious, and or scientific purposes.

In the Bylaws of ORG, it advises that the founding director shall be a director of the corporation,
with the additional specific duties and powers as provided in the bylaws. The founding director
shall continue in office until he submits a written resignation. The additional duties of the
founding director include: the ability to designate and select all of the other directors authorized

in the bylaws.

The organization lists it a summary of activities over the past two decades as (Exhibit 2):

1. The Commission of EMP-1 to sculpt a likeness of in various movie
roles cast in bronze. This bronze work of art has been used to honor memory
and raise money for such organizations as CO-2, CO-3.

2. Raise funds for the CO-4.

3. Honored individuals such as for her public service, in addition to Former
President for his contributions to the country.
4. Produced a Montage of entitled which we make available to

social service organizations or youth groups in need of a fundraising event.

The operational plan of the organization is outlined by the organization as (Exhibit 3):

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.
Explanation of Items |

ORG

| Year/Period Ended
December 31,
20XX

1. Sponsor or co-sponsor approved projects in the area of interest as designated by the board
of directors
2. Assist in the formation of other 501(c)(3) organizations both public and private
3. Develop long term programs to provide health and well care to the general public.
4. Construct a health and medical compound to house all approved programs, staff, and
patient needs
5. Assist other organizations world wide, on a non-denominational basis, in obtaining funds
for charitable causes
6. Establish a permanent endowment fund to support all approved programs.

To accomplish these operational plans the organization lists it current programs as: (Exhibit 3):

1. Co-Sponsoring an audiology research and outreach program for the hearing impaired
through the CO-5.
2. Co-Sponsoring CO-7 to provide funding and research in optical enhancement for the
underprivileged and elderly.
3. Co-Sponsoring of a fundraising program for CO-2 “CO-6” program.
4. Providing free public seminars on the value of estate planning in conjunction with the
CO-8.

It is noted that through search of public records, The CO-5 as well as the CO-8 were both
established and incorporated by FDN-1 who sits on the board of the ORG.
Payments to these organizations could not be identified through the organization bank

statements.

The organization sends out a flyer to perspective donors seeking partnerships with existing
companies and individuals who are interested in the development of new answers to the old
problems facing man as well as the new problems that will surface in the 21st century. The
organization advises that there are licensing and territorial rights available that can be covered
under joint venture affiliations under the following areas:

1. Construction and Development Products
a. Thin Ceramic cements or ceramic coatings
b. Tilt up panel construction (fire retardant)
c. Mobile home & recreation vehicle housing, pre-fab housing
d. Ceilings, fire proof panels
e. Class-A fire rated products.

2. Environmental remediation:
a. Microbe Technology
b. Water & Waste management

3. Reclamation of natural resources

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.
Explanation of Items
ORG Year/Period Ended
December 31,
20XX

a. Enzymes-Refineries- (oil wells) — wells
b. Waste water cleaned to 9ppm
c. Sewers-streams-lakes

As a part of the sponsorship and programming, ORG will assist in acquiring grants to kick start
the program and ORG will receive continuing royalties from business developed. (Exhibit 4)

At its board meeting on November 14, 20XX the board was advised that the purchase of the CO-
9 had been completed. The organization entered into a management agreement with CO-10 to
run the plant (Exhibits 5 & 6) As Part of this agreement CO-10 entered into Partnership with CO-
11 to run the day to day operations of the Organization, in addition CO-12; entered into contract
with CO-11 to also operate the CO-9 company.

It is noted that through public records, Founder is Managing Director of the CO-10; and CO-12.

On July 12, 20XX; by a resolution of the board of directors, Founder was given sole discretion to
execute all documents necessary to assign ownership interest in and to the CO-9, including all
patents, trademarks, to the to be formed CO-13. (Exhibit 7)

On August 23, 20XX a civil Suit was filled against ORG and it Founding Director Founder by
the CO-14 for breach of contract concerning the CO-9.

On February 16, 20XX judgment was entered against ORG and its Founding director

for $ in principal; $ in attorney’s fees; and $ in court costs. On June 26, 20XX the
judgment was upheld; and on November 28, 20XX Final judgment was entered against ORG for
$ for principal; $ in attorney’s fees; and $ in Court costs. (Exhibit 8)

On the organization’s 20XX 990, it reported contributions, gifts, grants and similar amounts
totaling $. In addition, a $ tax refund was included as income. Reportable expenses for the year
were broken down in the following manner $ in Legal Fees; $ in Supplies; $ for Telephones; $
for Postage; $ for Occupancy; $ for printing and publication; $ for travel; $ in bank charges; $ in
Insurance; and $ for Auto rentals.

Law:

Internal Revenue Code Section 501(c)(3) provides for tax exemption to organizations operated exclusively
for charitable purposes. 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 section 501(c)(3). An organization will not be so regarded if more
than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively
for one or more exempt purposes 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

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

(Form 886A Department of the Treasury - Internal Revenue Service Schedule No.
Explanation of Items
ORG Year/Period Ended
December 31,
20XX

the benefit of private interests such as the creator or his family, shareholders of the organization, or persons
controlled, directly or indirectly, by such private interests.

The "presence of a single [nonexempt] 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.
United States, 326 U.S. 279, 283, 66 S. Ct. 112 (1945) (BBB). The operational test focuses on the actual purposes
an organization’s activities advance rather than the organization’s stated purpose or the nature of its activities.
American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989).

In Butler v. Commissioner, 36 T.C. 1097 (1961) (“Butler”), the court examined the relationship between a
partner and a partnership for purposes of determining whether the partner was entitled to a business bad debt
deduction for a loan he had made to the partnership that it could not repay. In holding that the partner was entitled to
the bad debt deduction, the court noted that “[b]y reason of being a partner in a business, petitioner was individually

engaged in business.

In Housing Pioneers v. Commissioner, 65 T.C.M. (CCH) 2191 (1993), aff'd, 49 F.3d 1395 (9th Cir. 1995)
(“Housing Pioneers”), the Tax Court concluded that an organization did not qualify as a §501(c)(3) organization
because its activities performed as co-general partner in for-profit limited partnerships substantially furthered a non-
exempt purpose, and serving that purpose caused the organization to serve private interests. The organization entered
into partnerships as a one percent co-general partner of existing limited partnerships for the purpose of splitting the
tax benefits with the for-profit partners. Under the management agreement, the organization’s authority as co-general
partner was narrowly circumscribed. It had no management responsibilities and could describe only a vague
charitable function of surveying tenant needs.

In Plumstead Theatre Society, Inc. v. Commissioner, 74 T.C. 1324 (1980), aff'd, 675 F.2d 244 (9th Cir.
1982) (“Plumstead ”), the Tax Court held that a charitable organization’s participation as a general partner in a
limited partnership did not jeopardize its exempt status. The organization co-produced a play as one of its charitable
activities. Prior to the opening of the play, the organization encountered financial difficulties in raising its share of
costs. In order to meet its funding obligations, the organization formed a limited partnership in which it served as
general partner, and two individuals and a for-profit corporation were the limited partners. One of the significant
factors supporting the Tax Court’s holding was its finding that the limited partners had no control over the
organization’s operations.

In est of Hawaii v. Commissioner, 71 T.C. 1067 (1979), aff'd in unpublished opinion 647 F.2d 170 (9th
Cir. 1981) (“est of Hawaii”), several for-profit organizations exerted significant indirect control over est of Hawaii, a
non-profit entity, through contractual arrangements. The Tax Court concluded that the for-profits were able to use
the non-profit as an “instrument” to further their for-profit purposes. Neither the fact that the for-profits lacked
structural control over the organization nor the fact that amounts paid to the for-profit organizations under the
contracts were reasonable affected the court’s conclusion. Consequently, est of Hawaii did not qualify as an
organization described in §501(c)(3)

In Broadway Theatre League of Lynchburg, Virginia, Inc. v. U.S., 293 F.Supp. 346 (W.D.Va. 1968)
(“Broadway Theatre League”), the court held that an organization that promoted an interest in theatrical arts did not
jeopardize its exempt status when it hired a booking organization to arrange for a series of theatrical performances,
promote the series and sell season tickets to the series because the contract was for a reasonable term and provided
for reasonable compensation and the organization retained ultimate authority over the activities being managed.

Revenue Ruling 98-115, I.R.B. 1998-12, 6, (March 4, 1998) provides that for purposes of determining
exemption under §501(c)(3), the activities of a partnership, including an LLC treated as a partnership for federal tax

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

(Form 886A Department of the Treasury - Internal Revenue Service Schedule No.
Explanation of Items
ORG Year/Period Ended
December 31,
20XX

purposes, are considered to be the activities of the partners. A §501(c)(3) organization may form and participate in a
partnership and meet the operational test if 1) participation in the partnership furthers a charitable purpose, and 2)
the partnership arrangement permits the exempt organization to act exclusively in furtherance of its exempt purpose
and only incidentally for the benefit of the for-profit partners.

Effective date of revocation

An organization may ordinarily rely on a favorable determination letter received from the
Internal Revenue Service. Treas. Reg. §1.501(a)-1(a)(2). An organization may not rely on a
favorable determination letter, however, if the organization omitted or misstated a material fact
in its application or in supporting documents. In addition, an organization may not rely on a
favorable determination if there is a material change, inconsistent with exemption, in the
organization’s character, purposes, or methods of operation after the determination letter is
issued. Treas. Reg. § 601.201(n)(3)(ii); Rev. Proc. 2008-9, Section 12

The Commissioner may revoke a favorable determination letter for good cause. Treas. Reg. §
1.501(a)-1(a)(2). Revocation of a determination letter may be retroactive if the organization
omitted or misstated a material fact or operated in a manner materially different from that
originally represented. Treas. Reg. § 601.201(n)(6)(i), Rev. Proc. 2008-9, Section 12.

Government’s Position:

The Internal Revenue Service has held for an organization to be exempt under §501(c)(3) the
organization needs to meet both the organization and operational tests under Treasury Regulation
§1.501(c)(3)-1(a). In addition, §501(c)(3) and Treasury Regulation §1.501(c)(3)-1(c)(2) hold that
an organization shall not be exempt if any of its earnings inure to the private benefit of any of its
shareholders. The organization does not meet the operational test because it is not operated
exclusively for IRC §501(c)(3) purposes as required and defied by Treasury regulation
§1.510(c)(3)-1(d)(1)(i), and has been used as a vehicle to serve the private interests of its
members rather than public interest as prescribed under Treasury Regulation §1.510(c)(3)-
1(d)(1)(ii).. These tests focus on the purposes the organization promotes by means of its
activities. Article II of the organizations articles provide that the purpose of the organization;
“Not for private gain of any person; and the public for which is it organized include educational,
religious, and or scientific purposes”. However, the organization was operated in a way that
would allow for joint ventures and partnerships with for-profit entities to generate substantial
income which has not been distributed for charitable endeavors. The operations ended December
31, 20XX the organization was unable to provide sufficient evidence that would substantiate its
charitable activities or that it had implemented an actual plan to use its share of received income
to meet its current charitable objectives. This lack of substantiation caused the organization to
fail the operational test under §501(3) as stated above for the 20XX and subsequent years.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

(Form 886A Department of the Treasury - Internal Revenue Service ] Schedule No.
Explanation of Items |
ORG | Year/Period Ended
December 31,
20XX

We need not, however, dwell upon the charitable aspects of ORG’s charitable activities. The
crucial issue is whether the purpose of the organization non-exempt activities are substantial in

nature.

Section 501(c)(3) requires that the exempt organization be organized and operated exclusively
for religious, charitable, etc purposes. The service has recognized that a non-exempt purpose
even perhaps somewhat beyond a de minimis level is permitted without loss of exempt.
Nevertheless, that is a limit beyond which the statute may not be stretched. That limit was set
forth by the Supreme Court in BBB when it stated 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] activities. As in BBB, A review of the operations of ORG indicates that the
organization’s activities actual and proposed include at least a “single” non-exempt activity

“substantial in nature.”

to determine a “single” non-exempt activity that is “Substantial in nature” it first must be
determined if the activities of the Joint venture between ORG and CO-10 are includable as
activities includable in the determination of operated exclusively for exempt purposes within the

meaning of §501(c)(3).

A §501(c)(3) organization may form and participate in a partnership, including an LLC treated
as a partnership for federal income tax purposes, and meet the operational test if participation in
the partnership furthers a charitable purpose, and the partnership arrangement permits the exempt
organization to act exclusively in furtherance of its exempt purpose and only incidentally for the
benefit of the for-profit partners. See Plumstead and Housing Pioneers. Similarly, a §501(c)(3)
organization may enter into a management contract with a private party giving that party
authority to conduct activities on behalf of the organization and direct the use of the
organization’s assets provided that the organization retains ultimate authority over the assets and
activities being managed and the terms and conditions of the contract are reasonable, including
reasonable compensation and a reasonable term. See Broadway Theatre League. However, if a
private party is allowed to control or use the non-profit organization’s activities or assets for the
benefit of the private party, and the benefit is not incidental to the accomplishment of exempt
purposes, the organization will fail to be organized and operated exclusively for exempt
purposes. See est of Hawaii; Harding; §1.501(c)(3)-1(c)(1) ; and §1.501(c)(3)-1(d)(1)(ii)

For federal income tax purposes, the activities of a partnership are often considered to be the
activities of the partners. See Butler. Aggregate treatment is also consistent with the treatment of
partnerships for purpose of the unrelated business income tax under §512(c) . In light of the
aggregate principle discussed in Butler and reflected in §512(c), the aggregate approach also
applies for purposes of the operational test set forth in §1.501(c)(3)-1(c) . Thus, the activities of
an LLC treated as a partnership for federal income tax purposes are considered to be the activities
of a nonprofit organization that is an owner of the LLC when evaluating whether the nonprofit
organization is operated exclusively for exempt purposes within the meaning of §501(c)(3).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

(Form 886A Department of the Treasury - Internal Revenue Service ] Schedule No.
Explanation of Items |
ORG | Year/ Period Ended

December 31,
| 20XX

We must next determine if the activities of the organization serve an exempt purpose, and the
activities do not inure to the private benefit of individuals over the public good.

As was the case in Housing Pioneers, the limited partnership with which ORG has agreed to
associate itself with are for-profit entities; and the partnerships interests, other than ORGs are
non-exempt holding companies. In addition, as was the case in Housing Pioneers; among the
non-exempt owners of CO-10, and are individuals who are also the
organizers and officers of ORG and even though there may be non-exempt parties not mentioned,
they nonetheless stand to benefit from the activities of the partnership. Thus significant Federal
income tax benefits will flow to the non-exempt partners. As such a substantial private benefit is
being conveyed on individuals, of which the benefit is not incidental to the carrying on of ORGs

exempt purpose.

A keystone to the organization’s entire plan is its ability for ORG to use its exempt status to
acquire grants to “kick-start” the ventures. As was the case in Housing Pioneers; which in that
case the organization used its exempt status to receive property tax deductions for the venture. It
is apparent that the incentives for the joint ventures between ORG and for-profit organizations
are to provide tax incentives to business entities not to further an exempt purpose.

In addition, as in Revenue Ruling 98-15 When ORG and CO-10 formed their Joint Venture, and
turned substantial control over to CO-10; ORG maintained that its activities would consist of
providing sponsorship to humanitarian and environmental solutions. “While the diagnosis and
cure of disease are indeed purposes that may furnish the foundation for characterizing the activity
as ‘charitable,’ something more is required”

Continuing, Revenue Ruling 98-15; In the absence of a binding obligation in Joint Ventures
governing documents for the Joint Venture to serve charitable purposes or otherwise provide its
services to the community as a whole, the Joint Venture will be able to deny advantages to
segments of the community, such as roofs for homes for the homeless. Because ORG will share
control of the Joint Venture with CO-10, ORG will not be able to initiate programs within the
Joint Venture to serve charitable building needs within the community without the agreement of
at least one governing board member appointed by CO-10. As a business enterprise, CO-10 will
not necessarily give priority to charitable building needs of the community over the consequences
for the Joint Venture’s profits. The primary source of information for board members appointed
by ORG will be the chief executives, who have a prior relationship with CO-10 and the
management company, which is a subsidiary of CO-10. The management company itself will
have broad discretion over the Joint Ventures activities and assets that may not always be under
the board’s supervision. For example, the management company is permitted to enter into all but
“unusually large” contracts without board approval. The management company may also
unilaterally renew the management agreement. Based on all these facts and circumstances, ORG
cannot establish that the activities it conducts through Joint Venture further exempt purposes. “

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No.
Explanation of Items
ORG Year/Period Ended
December 31,

20XX

In order for an organization to qualify for exemption under §501(c)(3) the organization must
‘establish’ that it is neither organized nor operated for the ‘benefit of private interests.’
Consequently, the benefit to CO-10 resulting from the activities ORG conducts through the Joint
Venture will not be incidental to the furtherance of an exempt purpose. Thus, ORG will fail the
operational test when it forms the Joint Venture, contributes its operating assets to the Joint
Venture, and then serves as an owner of Joint Venture. .

Based on the forgoing analysis, the government holds that ORG has non-exempt activities which
are substantial, and that private interests are being served by its activities.

Taxpayer’s Position:
The organization has no stated position.

Conclusion:

Therefore, it is the Governments position that the organization no longer meets the guidelines
under Internal Revenue Code §501(c)(3) and Treasury Regulation 1.501(c)(3)-1(c), as the income
of the organization inures to the personal benefit of the members, and that the activities of the
organization are incidental to providing for the personal benefits of the members of the
organization. Nor does the organization meet the operational test because it is not operated
exclusively for IRC §501(c)(3) purposes as required and defied by Treasury regulation
§1.510(c)(3)-1(d)(1)(i), and has been used as a vehicle to serve the private interests of its partners
rather than public interest as prescribed under Treasury Regulation §1.510(c)(3)-1 (d)(1)(ii).

It is recommended that that exempt status of this organization be Revoked as of January 1, 20XX

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