Determination 201007076: IRS revokes an organization's tax-exempt status for private benefit and founder inurement

Plain-English summary

The IRS revoked an organization's recognition as exempt under IRC § 501(c)(3). The final adverse determination states that the organization operated substantially for a non-exempt purpose, provided private benefit, and allowed earnings to inure to its founders. The accompanying examination report describes grants outside the organization's governing schedule, weak governance, and loans of organizational assets to founders that were not properly secured or repaid. The revocation was effective March 19, 20XX, and contributions to the organization were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Did the organization operate exclusively for exempt purposes and avoid private benefit and inurement under IRC § 501(c)(3)?
• Outcome: Revocation, exemption terminated
• Key authorities: IRC §§ 170, 4946, 501(c)(3), 509(a), 511(a)(2), 6104(c), and 7428; Treas. Reg. §§ 1.501(a)-1, 1.501(c)(3)-1, and 1.6033-2

Full text (IRS public release)

LEGEND
ORG = ORGANIZATION XX = DATE ADDRESS = ADDRESS

Release Number: 201007076
Release Date:
Date: 11/25/09
UIL Code: 501.03-00
ORG
ADDRESS Person to Contact:

Identification Number:

Contact Telephone Number: (
In Reply Refer to: TE/GE Review Staff

EIN:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

Dear

This is a Final Adverse Determination Letter as to ORG's exempt status under section
501(c)(3) of the Internal Revenue Code.

Our adverse determination was made for the following reasons:

The ORG has not been operating exclusively for exempt purposes within the meaning of
Internal Revenue Code section 501(c)(3). You are also not a charitable organization
within the meaning of Treasury Regulations section 1.501(c)(3)-1(d). You are not an
organization which operates exclusively for one or more of the exempt purposes which
would qualify it as an exempt organization. You operate substantially for a non-exempt
purpose, for private benefit, and its earnings inure to the benefit of the founders of the

organization.
Based upon these reasons, your IRC section 501(c)(3) tax exempt status is revoked

effective March 19, 20XX. You have signed Form 6018, “Consent to Proposed Action”,
agreeing to the revocation of your exempt status under section 501(c)(3) of the Code.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code.

You are required to file Form 1041, “US Income Tax Return for Estates and Trusts” for
all open years with the appropriate Service Center indicated in the instructions for the

return.

-2-

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 initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District
Court of the United States for the District of Columbia before the 91st day after the date
this determination was mailed to you. Contact the clerk of the appropriate court for the
rules for initiating suits for declaratory judgment.

You also have the right to contact the office of the Taxpayer Advocate. However, you
should first contact the person whose name and telephone number are shown above since
this person can access your tax information and can help you get answers.

You can call and ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer
Advocate from the site where the tax deficiency was determined by calling or writing to:
Internal Revenue Service, Taxpayer Advocates Office.

Taxpayer Advocate assistance cannot be used as a substitute for established IRS
procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse
legal or technically correct tax determinations, nor extend the time fixed by law that you
have to file a petition in the United States Tax 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.

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,

Sunita B. Lough
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
1616 Capitol Av Ste Stop 4710 OMA
Omaha, NE 68102-4923

TAX EXEMPT AND
GOVERNMENT ENTITIES

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

plaining why we believe

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.

An Appeals offic
Director, EO Exa
promptly. The enclos

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


lf 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 4-877-777-4778 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,

Sunita Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
December 31,
20XX
December 31,
20XX
LEGEND
ORG - Organization name XX - Date FDN-1 = 1st Founder FDN-2 = 2nd
Founder Founder family = founder family Founders = founders CO-1
thru CO-16 = 1st, 2nd, 3rd, 4th, 5th, 6th, 7th, 8th, 9th, 10th, 11th, 12th, 13th, 14th,
15th, 16th, 17th & 18th Companies BM-1 thru BM-7 = 1st, 2nd, 3rd, 4th, 5th, 6th &
7th Board Members ED = Executive Director
PRIMARY ISSUE:

Whether the ORG ("Organization") tax exempt status as an organization described in section
501(c)(3) of the Internal Revenue Code ("Code") should be retroactively revoked because it is
not operated exclusively for tax exempt purposes and because its net earnings inured to the
private benefit of FDN-1, a trustee, founder, board member and substantial contributor, and to
FDN-2, a founder, board member and substantial contributor.

FACTS:

Organizing Document

The ORG (the “Organization’”) was created with a Declaration of Trust (Declaration) by FDN-1
and FDN-2, (each being a “Founder”) on March 26, 19XX. The Trustee was FDN-1 (‘Trustee’).
The Declaration provides that the Organization was created for the purpose of establishing an
organization which is described in Code section 501(c)(3) and section 509(a)(3). The
Declaration provides that the Founder renounces any power to determine or control, by alteration,
amendment, revocation, termination or otherwise, the income or principal of the trust estate and
renounces any interest, either vested or contingent, including any reversionary interest or
possibility of reverter, in the income or principal of the trust estate.

The Declaration further requires that each year the Trustee shall distribute 35% of the net income
of the Organization to the CO-1, the named primary supported organization. In addition to this
distribution, each year the Trustee shall distribute a total of 50% of the net income to one or more
of the organizations listed on Schedule A. If the Board has not directed the Trustee as to which
organizations should receive grants within 7 days prior to April 30 of the year after the income is
earned, the Trustee shall determine the grant recipients.

Per the Declaration, distributions in excess of 85% of the Organization’s net income must be
authorized by at least three board members, in writing. Further, the primary supported
organization can only be changed if the specified primary charity is not an organization to which
supporting organizations can make distributions.

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

There are 108 organizations listed on Schedule A. Some of the organizations include
“affiliated organizations,” such as “CO-2 and affiliated organizations.”

The Declaration provides that the Board shall be the governing body of the Organization and that

the members of the Board shall be determined as follows:

- One Board member shal] be appointed by the CO-1 or its designated agent

- Two Board members shall be from the class consisting of FDN-1 and FDN-2 and their
descendants (the Founder Family)

- The Other Members of the Board shall be appointed by a majority vote of the Board. The
initial remaining Board members were BM-1 and BM-2

- The Founders appointed successor Other Members of the Board and they were BM-3 and
BM-4 to replace BM-1 and BM-2.

The Declaration provides that upon winding up and dissolution of the Organization, the assets
shall be distributed to a non-profit fund, foundation or corporation, which is organized and
operated exclusively for charitable, educational, religious, and/or scientific purposes and which
has established its tax exempt status under section 501(c)(3).

The Declaration provides that if the Trustee determines the trust fund is too small to
economically administer, the Trustee shall distribute the trust fund in its entirety outright and free
of trust to such organizations described in section 170(c)(3) as the Trustee shall determine.

By letter dated March 19XX, the Organization was recognized by the Service as exempt from
Federal income tax under section 501(a) as an organization described in section 501(c)(3) and
classified as a supporting organization described in section 509(a)(3). The Service’s
determination letter was based on the Organization’s representations concerning its proposed
operation and the supporting documents it submitted during the application process. The
Organization did not disclose during the application process that it would lend virtually all of its
assets to disqualified persons and would not enforce the loan terms.

On July 1, 20XX, the Declaration of Trust was amended to provide that references to CO-1
are to be deleted and in its place CO-3 (an organization affiliated with CO-4) is to be
substituted. It was signed by the following Board of Directors: FDN-1, FDN-2 and BM-2.
BM-5, the person purportedly appointed by CO-1, did not sign the amended Declaration of
Trust. There are no board minutes that reflect the board voted on the amendment. At the time
of the amendment, the CO-1 was recognized as a public charity. It appears that the
Organization could have continued to provide support to CO-1. Despite the July 1, 20XX
amendment, the Organization continued to list the supported organization as the CO-1 on its
Forms 990.

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

An April 16, 20XX letter from CO-3 is addressed to the Founders personally and not to the
Organization. The letter states that the donation upgraded the Founders’ membership to CO-5

($) and they would receive exclusive benefits as a Legacy member.

A June 11, 20XX letter from the Organization's CPA firm states that all contributions to the
Organization were made by FDN-1 and FDN-2.

Although its governing instrument and its application representations indicated that the
Organization would not be controlled by disqualified persons, the Organization appears to have
held only two Board meetings through November 20XX. No known Board meetings were held

after November 14, 20XX.

Income and grants

The following income and grants were reported on the Organization's Forms 990:

Income

Interest
Contributions
Total

Grants
CO-1

20XX 20XX

(received $ and $ in 19XX and 19XX,

respectively)
CO-2 (CO-6)
CO-3
(received $ in 19XX)
CO-7

CO-8

CO-9

CO-10
CO-11
CO-12
CO-13

Total

20XX 20XX

No grants were given in 20XX to the primary supported organization, CO-1. The Organization's

20XX trial balance shows $ in grants not listed above paid to "other".

Form 886-A (rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -3-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
December 31,
20XX
December 31,
20XX

More than 85% of the Organization’s net income was granted to charities without approval of
three members of the board of directors, in writing.

The Organization does not conduct any independent charitable activities, it only provides grants.

In 20XX, the Organization started giving grants to organizations that were not listed on
Schedule A of its Declaration as supported organizations. It gave a total of $ to CO-9, CO-11,
CO-10, CO-12 and CO-14 ($ in 20XX not listed above) organizations not listed on the
Schedule A.

From inception, the Organization gave grants to CO-6, part of the CO-2 (CO-2). CO-2 is
listed on Schedule A. The memo line on the checks for the grants frequently showed the
grants were actually tithes.

Balance Sheet (end of year)
The following are the Organization’s assets per its Forms 990:

20XX 20XX 20XX 20XX
Cash
Other notes and
Loans receivable

Loans
The Organization's Forms 990 show three loans. Per the Forms 990, all three loans were
made to FDN-1 and FDN-2. There is written documentation to support the loans.

___LOANS
Per Exam Form 990,
_20XX |
_20XX |
'20XX_
'20XX_
20XX
FIRST LOAN:
$ Promissory Note
Stated 8% interest rate
Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -4-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/ Period Ended
ORG

December 31,
20XX
December 31,
20XX

Loan date March 19, 20XX

Interest only until March 19, 20XXK

Loan term: All principal and interest due in full on March 19, 20XX

Borrowers: FDN-1 and FDN-2

Lender: ORG(no signature for the Organization)

Security: March 19, 20XX Trust Deed on real property (no evidence of recording; signed by
FDN-1 and FDN-2 as Trustees of the FDN-1 and FDN-2 Trust; not signed on behalf of the
Organization) and March 19, 20XX Quit-Claim Deed (no evidence of recording; not signed
on behalf of the Organization)

Promissory Note replaced with Revised Promissory Note (Revolving Line of Credit) signed
by FDN-1 and FDN-2 but not by the Organization for $ at 5% effective January 1, 20XX; no
maturity date;

A Trust Deed Note dated March 19, 20XX is signed by FDN-1 and FDN-2 as Trustees of the
FDN-1 and FDN-2 Trust as borrower; the lender is the FDN-1 and FDN-2

for a line of credit in the amount of $, with 8% interest per annum and monthly interest-only
payments until March 19, 20XX when all principal and interest becomes due. The document
sets forth that it is secured by a Deed of Trust of even date. This document is not recorded. A
Trust Deed dated March 19, 20XX was signed by FDN-1 and FDN-2, Trustees of the FDN-1
and FDN-2 Trust. The Trust Deed names the FDN-1 and FDN-2 Trust as Trustor, BM-2, a
member of the CO-15, as Trustee, and the ORG as Beneficiary. The Trust Deed purports to
secure real property for the trust deed note. The Founders’ signatures were notarized on March
19, 20XX. There is no evidence that the Trust Deed was recorded. A Quit-Claim Deed from
FDN-1 and FDN-2 individually to the "FDN-1 and FDN-2 Trust" is dated March 19, 20XX.
The Quit-Claim Deed is signed by FDN-1 and FDN-2 individually. There is no evidence that
the Quit-Claim Deed was recorded.

A Memorandum of a ORG Board meeting apparently held on April 13, 20XX reflects that the
Board members present, FDN-1, FDN-2, BM-5 (by conference call) and BM-2 BM-2,
unanimously approved the $ loan to FDN-1 and FDN-2 as a line of credit secured by a second
trust deed on the Founders residence. Although the Memorandum contains signature lines for
FDN-1 as Trustee and for all five board members, there is no evidence of any signature on the
Memorandum.

Per the Organization, the loan was orally extended each year so long as all interest payments
were made. Thus, the funds were not repaid.

SECOND LOAN:

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
December 31,
20XX
December 31,
20XX

$ Promissory Note

Stated 8% per annum interest rate

Loan date May 15, 20XX

Interest only payments of $ starting June 15, 20XX and every 15th day of each month
thereafter until May 15, 20XX

Loan term: All principal and interest due in full on May 15, 20XX

Borrowers: FDN-1 and FDN-2 (both signed)

Security: Trust deed on real property (no evidence of recording; signed by FDN-1 and FDN-2
as Trustees of the FDN-1 and FDN-2 Trust)

Promissory Note replaced with Revised Promissory Note (Revolving Line of Credit) signed
by FDN-1 and FDN-2 but not by the Organization for $ at 5% effective January 1, 20XX; no
maturity date

A Trust Deed Note dated May 15, 20XX is signed by FDN-1 and FDN-2 as Trustees of the
FDN-1 and FDN-2 Trust as borrower; the lender is the FDN-1 and FDN-2

for a line of credit in the amount of $, with 8% interest per annum and monthly interest-only
payments in the amount of $ until May 15, 20XX when all principal and interest becomes due.
The document sets forth that it is secured by a Deed of Trust of even date. This document is
not recorded.

Per the Organization, the loan was orally extended each year so long as the interest was paid.
The note reflects that the loan is secured by a Trust Deed. No Trust Deed secured this note.

THIRD LOAN:

$ Promissory Note

Stated 8% per annum interest rate

Loan date October 15, 20XX

Interest only payments of $ due on or before the 15th day of each month until May 15, 20XX.
Lender may demand repayment of all or a portion of the principal amount at any time. The
entire amount outstanding shall become fully due and payable on the death of Seller. [The
ORG explained in a June 11, 20XX response that the word "Seller" was mistakenly left in the
document from a form document and that the word would be interpreted to mean the
Foundation as lender.] No prepayment penalty.

Loan term: All principal and interest due in full on May 15, 20XX

Borrowers: FDN-1 and FDN-2 (both signed; no signature for the Organization)

Security: Trust deed on real property (no evidence of recording; signed by FDN-1 and FDN-2
as Trustees of the FDN-1 and FDN-2 Trust)

Promissory Note (no evidence of recording) signed by FDN-1 and FDN-2 but not by the

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

Form 886-A Department of the ‘I'rcasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

Organization replaced with Revised Promissory Note (Revolving Line of Credit) (no evidence
of recording) for $ at 5% effective January 1, 20XX, and no maturity date

Per the Organization, the loan was orally extended each year so long as the interest was paid.

Each of the $, $ and $ Promissory Notes includes a footnote stating that they replace original
Promissory Note referenced in the Trust Deed recorded September 6, 20XX, as Entry No.

, and respectively, with the CO-16, "which is now unable to be
located." It is unclear whether the document(s) which cannot be located is the purportedly
recorded Trust Deed, or the original Promissory Notes. The Trust Deed referenced only
encompasses the $ note. The spaces into which the maturity date and the due date for
principal and interest are to be written are left blank. All three Revised Promissory Notes
state they are effective January 1, 20XX, but there is no indication when they were actually
signed. All three revised Promissory Notes are signed by FDN-1 and FDN-2 as borrowers.
None of the three includes a signature on behalf of the FDN-1 and FDN-2

The Forms 990 for 20XX through 20XX did not provide any information about the loans.
The Form 990 for 20XX reported the interest rate for all three notes to be 5%. The prime
interest rate at the time was 5.25%. The mortgage interest rate at the time was 5.86%. The
loans were secured by the real property for which the loans were taken; however, signatures,
proper authorization from the Organization and recording are in question. The loans were
reported on the Forms 990 as loans receivable rather than as receivables from officers,
directors, etc.

Based on the documentation described above it appears that the Organization will continue to
loan money to the Founders because they now have Revolving Lines of Credit without
maturity dates. Correspondence from the Founders dated March 25, 20XX noted that all the
notes were secured with a Trust Deed. Only one Trust Deed was provided. As discussed
above, it only secures the $ loan. There is no evidence that any of the loan documents were
recorded.

Based on a review of the Organization’s bank deposits, none of the loans were being repaid on
a regular basis. It appears that several months go by without any payments. The Organization
does not receive any penalty payments for late payments of loan amounts due. The correct
amount of interest was paid without consideration of late payments by the end of the year but
regular monthly interest payments were never made for the 20XX and 20XX time periods.
The Form 990 for 20XX did not report any interest income. Instead it showed the interest
payment as a principal payment of $ and decreased the loan balance. The Form 990 for 20XX
showed $ for interest income and $ was shown as a principal payment, again decreasing the

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

loan balance. On June 11, 20XX, correspondence received from the Organization explained
its error in 20XX and 20XX in applying interest payments to the principal. The Organization
corrected the loan balance to the original amount of $$. The correspondence also stated the
correct interest payments for both 20XX and 20XX was § and §, respectively. Furthermore,
the Founders made payments totaling $ for 20XX and $ for 20XX. The Organization
had been advised by letter dated January 24, 20XX that it was under examination.

During the application process, the Organization did not disclose that Organization funds were
going to be loaned to FDN-1 and FDN-2 or their trust. There is no evidence that any of the
loan documents were recorded, or that the Organization properly authorized the loans.

At a minimum, the Organization transferred, purportedly as loans, $$ of its funds to FDN-1
and FDN-2 or their trust in 20XX, to be repaid in 20XX. Interest was paid annually but not in
accordance with the loan terms. The loans were orally extended each year. The Organization
erroneously applied interest payments to the principal balance in 20XX and in 20XX. The
Organization entered into new loan agreements with the Founders dated January 1, 20XX, and
reduced the interest rate on all three loans. It was represented that all three loans were secured
but only the smallest loan was secured and recording of that secured interest is not established.
Proper authorization of the loans by the Organization has not been established.

The Foundation's trial balances for each of the years 20XX through 20XX show the same
amount in receivables, $$. This amount is the total principal amount of the three loans to the
Founders.

Minutes

The Organization has minutes of the first meeting of the Board held on March 26, 19XX.
These minutes pertain to how the Organization would operate. Item 12 says that “this Trust
need not have any employees in the sense that no one will be carried on a payroll as such.
That is to say, that this Trust need not withhold State or Federal income taxes or Social
Security taxes. All its executives, agents or other employees, will be remunerated as
consultants, receiving consultant fees on a contract basis, and any and all remuneration paid to
them will be reported by this Trust at the year end on IRS Form 1099."

A Memorandum of a ORG Board April 13, 20XX meeting reflects that the Board members
present, FDN-1, FDN-2, BM-5 (by conference call) and BM-2 BM-2, unanimously approved
the $ loan to FDN-1 and FDN-2. Although the Memorandum contains signature lines for
FDN-1 as Trustee and for all five board members, there is no evidence of any signature on the
Memorandum.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

Form 886-A Department of the ‘I'teasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

A November 14, 20XX document, which appears to be in the nature of minutes of aORG
Board meeting, states that by majority vote BM-6 and BM-7 were instated as Board members.
The document states that BM-2 resigned from the Board as a trustee in spring 20XX, and that
BM-1 was removed as a trustee by majority vote effective July 20XX. Those signing the
document are FDN-1, FDN-2 and ED. The three remaining Board members were FDN-1 and
FDN-2 and ED. ED is the Executive Director of the CO-3. No minutes of 20XX meetings
were provided to explain or contemporaneously document the referenced spring 20XX or July
20XX actions.

A February 1, 20XX document on Organization letterhead states that BM-6 and BM-7 were
appointed to the Board in November 20XX because "we needed to replace BM-1 and BM-2."
The document states that "Wwe changed our financial management services from CO-17 to CO-
18." The document states that BM-6 and BM-7 are "trusted business friends" and that they are
not affiliated with the new financial management services from CO-18. However, the
Organization on its Forms 990 for 20XX and 20XX continued to reflect that its Board was
composed of FDN-1 and FDN-2, BM-2 BM-2, BM-1 and BM-S.

These were the only minutes provided by the Organization.

Tithing
The Organization's 20XX General Ledger reflects entries for "tithing" as follows:
Date Amount
2-15-20KK §$
12-12-20XX
12-12-20XX
Total $

Checks for the above payments were written to CO-6 which is part of CO-2. The Organization
asserts that these amounts were grants to the CO-3 in 20XX.

LAW - PRIMARY ISSUE:

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

Form 886-A  (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

Treas. Reg. Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization
described in Code section 501(c)(3), the organization must be one that is both organized and
operated exclusively for one or more of the purposes specified in that section.

Treas. Reg. section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as
“operated exclusively" for one or more exempt purposes only if it engages primarily in activities
which accomplish one or more of such exempt purposes specified in Code section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Treas. Reg. section 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 in part to the benefit of
private shareholders or individuals. The words "private shareholder or individual” refer to
persons having a personal and private interest in the activities of the organization. The term
“private shareholder or individual” is defined in Treas. Reg. section 1.501(a)-1(c).

Treas. Reg. section 1.501(a)-1(c) defines "private shareholder or individual" for purposes of
section 501 as "persons having a personal and private interest in the activities of the
organization."

Treas. Reg. section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or
operated exclusively for exempt purposes unless it serves a public rather than a private interest.
It is necessary for an organization to establish that it is not organized or operated for the benefit
of private interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests. An
organization does not serve a public rather than a private interest within the meaning of Treas.
Reg. section 1.501(c)(3)-1(d)(1) if any of its assets or earnings inure to the benefit of any insiders
(or disqualified persons).

Treas. Reg. section 1.6033-2(i)(2) provides that, "[e]very organization which is exempt from tax,
whether or not it is required to file an annual information return, shall submit such additional
information as may be required by the Internal Revenue Service for the purpose in inquiring into
its exempt status and administering the provisions of subchapter F (section 501 and following),
chapter 1 of subtitle A of the Code..."

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the Supreme Court stated that
an organization is considered to be "operated exclusively" for exempt purposes if it engages
primarily in activities which accomplish one or more exempt purposes. The presence of a single
noncharitable purpose, if more than insubstantial in nature, will preclude exemption under

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

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

section 501(c)(3) of the Code regardless of the number or importance of the charitable purposes.
See also, Church By Mail, Inc. v. Commissioner, 765 F.2d 1387 (9th Cir. 1985); Copyright
Clearance Center v. Commissioner, 79 T.C. 793, 804 (1982).

Whether an organization satisfies the operational test is a question of fact to be resolved on
the basis of all the evidence presented by the record. Church of Scientology of California v.
Commissioner, 83 T.C. 381, 474 (1984), affd. 823 F.2d 1310 (9th Cir. 1987); Leon A,
Beeghly Fund v. Commissioner, 35 T.C. 473, 518 (1960).

When an organization operates for the benefit of private interests, such as designated individuals,
the creator or his family, or persons directly or indirectly controlled by such private interests, the
organization by definition does not operate exclusively for exempt purposes. American
Campaign Academy v. Commissioner, 92 T.C. 1053, 1065-66 (1989).

In Church of World Peace, Inc. vy. Commissioner, T.C. Memo 1994-87, aff'd, 75 A.F.T.R.2d
2082 dio" Cir. 1995), the Tax Court held that a church did not operate exclusively for religious
purposes because the church facilitated a circular tax-avoidance scheme. The facts showed that
individuals made tax-deductible contributions to the church. The court found that the church
then returned the money to the individuals without substantiating that the payments furthered any
purpose described in section 501(c)(3).

In Founding Church of Scientology v. U.S., 412 F. 2d 1197 (Ct. Cl. 1969) the court stated that
loans to an organization’s founder or substantial contributor can constitute inurement that is
prohibited under section 501(c)(3). The church made loans to its founder and his family and
failed to produce documentation that demonstrated that the loans were advantageous to the
church. The church also failed to produce documentation to show that the loans were repaid.
Significantly, the court stated that, “the very existence of private source of loan credit from an
organization’s earnings may itself amount to inurement of benefit.”

In Help the Children, Inc. v. Commissioner, 28 T.C. 1128 (1957), an organization operated bingo
games. Its charitable function consisted of contributions to charitable institutions of amounts that
were insubstantial when compared to gross receipts from the bingo games. The court held that
the organization did not qualify for exemption under Code section 501(c)(3) because it did not
operate any charitable institutions and its principal activity was the profitable operation of bingo
games on a business or commercial basis.

In Revenue Ruling 67-5, 1967-1 C.B. 123, it was held that a foundation controlled by the
creator’s family was operated to enable the creator and his family to engage in financial activities
which were beneficial to them, but detrimental to the foundation. It was further held that the

Form 886-A  (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
December 31,
20XX
December 31,
20XX

foundation did not operate a charitable program commensurate in scope with its financial
resources, rather the foundation was only able to carry out minimal charitable activities. The
Revenue Ruling stated that the foundation was operated for a substantial non-exempt purpose
and served the private interests of the creator and his family. Therefore, the foundation was not
entitled to tax exemption under section 501(c)(3).

In Revenue Ruling 64-182, 1967 CB 186, a corporation organized exclusively for charitable
purposes derived its income principally from the rental of space in a large commercial office
building which it owns, maintains and operates. The charitable purposes of the corporation are
carried out by aiding other charitable organizations, selected in the discretion of the governing
body, through contributions and grants to such organizations for charitable purposes. The
Revenue Ruling deemed the corporation to meet the primary purpose test of Treas. Reg. section
1.501(c)(3)-1(e)(1), and to be entitled to tax exemption as a corporation organized and operated
exclusively for charitable purposes within the meaning of Code section 501(c)(3), because the
organization through such contributions and grants carried on a charitable program
commensurate in scope with its financial resources.

Effective date of revocation

An organization may ordinarily rely on a favorable determination of exempt status under Code
section 501(a) or the corresponding provision of prior law received from the Internal Revenue
Service. Treas. Reg. section 1.501(a)-1(a)(2).

A determination letter or ruling recognizing exemption may not be relied upon if there is a
material change, inconsistent with exemption, in the character, the purpose, or the method of
operation of the organization. A determination letter or ruling may be revoked retroactively if
the organization omitted or misstated a material fact, or operated in a manner materially different
from that originally represented. Where there is a material change, inconsistent with exemption,
in the character, the purpose, or the method of operation of an organization, revocation or
modification will ordinarily take effect as of the date of such material change. Treas. Reg.
section 1.501(a)-1(a)(2); Rev. Proc. 2008-9; 2008-2 I.R.B. 258, section 12.01.

GOVERNMENT POSITION - PRIMARY ISSUE:

Analysis

The Organization was not operated exclusively for charitable purposes within the meaning of
Code section 501(c)(3). The Organization violated Treas. Reg. sections 1.501(c)(3)-1(c)(2) and
1.501(c)(3)-1(d)(1)(ii) by allowing FDN-1 and FDN-2, founders, board members and substantial

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

Page: -12-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

contributors, to borrow a substantial amount of Organization assets without requiring repayment,
with forgiveness of missed interest payments and with slightly below market rates.

Even though the Organization did make grants which furthered its exempt purpose, the amounts
were insubstantial in comparison to the private use of the Organization's assets. The
Organization was operated primarily to serve the private interests of FDN-1 and FDN-2 by
allowing them to personally use more than an insubstantial amount of its assets for non-exempt
purposes over a period of years. The Organization provided non-incidental benefits to FDN-1
and FDN-2 that served their private interests as opposed to charity. The Organization's assets
inured to FDN-1 and FDN-2's benefit.

The Organization's income and grants totals from 20XX through 20XX are as follows:

20XX 20XX 20XX 20XX

Income Total
Grants Total

During this same time period, the Organization continued loaning FDN-1 and FDN-2 $ year to
year. The Organization has not established that the loans were properly authorized. It appears
that the loans were authorized, if at all, by a vote for which FDN-1 and FDN-2 constituted a
majority. The loan documents do not appear to have been recorded. The loans were not repaid
but rather were extended seriatim and orally until the loans were redrafted in 20XX at a reduced
interest rate. When the Organization came under audit in 20XX, some loan repayment was
made, for the first time, approximately five years after the original loan dates.

The Founders are not members of a charitable class and are not permissible beneficiaries of the
Organization. The “loans” to FDN-1 and FDN-2, as evidenced by the inconsistent interest
payments, put Organization assets at risk. There is no evidence that the loans were secured. The
documents that purport to represent security on the “loans” were not recorded. Further, the
Organization was not paid late fees when the Founders failed to make timely payments of
interest. The loans benefited the Founders because it enabled them to claim a charitable
contribution deduction and retain complete access to the funds that supported the deduction.
Moreover, no evidence was supplied to show that the Founders could have secured similar loans
on similar terms from an independent lender. The Organization engaged in operations which
were beneficial to its founders and detrimental to it. FDN-1 and FDN-2 were able to claim a
charitable contribution deduction, and subsequently use the funds for their personal benefit.

The loans were made at a slightly below market interest rate. However, even if the interest rate
was reasonable, private benefit does not require that payments for goods or services be

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -13-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

unreasonable or exceed fair market value where a private shareholder or individual benefits. In
est. of Hawaii v. Commissioner, 71 T.C. 1067 (1979), the Tax Court stated, “[rlegardless of
whether the payments made by petitioner to International were excessive, International and Est,
Inc., benefited substantially from the operations of petitioner.”

Similarly, in Church by Mail v. Commissioner, 765 F. 2d 1387 (9"" Cir. 1985), aff’g T.C. Memo.
1984-349, the Tax Court found it unnecessary to consider the reasonableness of payments made
by the applicant to a business owned by its officers. The Ninth Circuit Court of Appeals,
affirming the Tax Court’s decision, stated, “[t]he critical inquiry is not whether particular
contractual payments to a related for-profit organization are reasonable or excessive, but instead
whether the entire enterprise is carried on in such a manner that the [private party] benefits
substantially from the operations of the Church.”

Although the inurement prohibition is stated in terms of net earnings, it applies to any of a
charity’s assets that serve the interests of its private shareholders. Harding Hospital, Inc. v.
United States, 505 F.2d 1068, 1072 (6" Cir. 1974). Even if the transaction is characterized as an
investment, when a charity’s investments are decided in part by the needs of private interests, the
charity is not operating exclusively for exempt purposes. Western Catholic Church v.
Commissioner, 73 T.C. 196 (1979), aff'd, 631 F.2d 736 (a Cir. 1980).

The Court in Orange Co. Agricultural Society, Inc. v. Commissioner, 893 F.2d 529 (2d Cir.
1990) found private inurement and private benefit when an exempt organization loaned money to
a for-profit organization controlled by the exempt organization's largest shareholders. Although
some loans were repaid, the total amount was not repaid.

In Easter House v. United States, 12 Cl. Ct. 476 (1987), aff'd. without opinion, 846 F.2d 78 (Fed.
Cir. 1988), the Court found that the organization was not exempt because it provided a source of
loans to other organizations that were non-exempt and all the organizations were controlled by
the same person.

In John Marshall Law School v. United States, 228 Ct. Cl. 902 (1981), the Court upheld the
revocation of an organization's tax exempt status based in part on interest-free loans from the
organization to a founder. The Court noted that the lost interest provided benefit to the founder
but provided no financial benefit to the organization, and that the unsecured notes subjected the
organization to uncompensated risks for no business purpose. The Court also noted that the
founder could not have received such interest-free unsecured loans from banks or other lending
institutions.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -14-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

A charity’s assets are required to be irrevocably dedicated to charitable purposes. Treas. Reg.
section 1.501(c)(3)-1(b)(4). The inurement prohibition serves to prevent the individuals who
operate the charity from siphoning off any of a charity’s income or assets for personal use. The
Organization's loans to FDN-1 and FDN-2 were not enforced. This breaches the requirement that
the Organization’s assets be dedicated to charitable use and instead allowed its assets to inure to
the benefit of founders FDN-1 and FDN-2.

Further, the Founders may have been taking a charitable contribution deduction personally for
grants made by the Organization as indicated by the April 16, 20XX letter from CO-3 addressed
to the Founders personally, relating to the Organizaiton’s grant. This appears to be further use of
charitable funds for private benefit.

Effective Date of Revocation

While revocation of a determination letter is generally not retroactive, 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. In cases where the
organization omitted or misstated a material fact, revocation may be retroactive to all open years
under the statute. In cases where revocation is due to a material change, inconsistent with
exempt status, in the character, the purpose, or the method of operation, revocation will
ordinarily take effect as of the date of the material change. In any event, revocation will
ordinarily take effect no later than the time at which the organization received written notice that
its exemption ruling or determination letter might be revoked. Rev. Proc. 2008-9, 2008-2 IRB
258.

In its application, the Organization did not disclose that it would loan substantial amounts of its
assets to its founders. The Organization began entering into "loans" with its founders on March
19, 20XX. This constituted a change in its operations as represented in the Organization’s
application for exemption. The change in operations was material to its exemption because if
disclosed the Service could have determined that a substantial part of the Organization’s
activities would serve its founders private interests and that its assets would inure to the benefit
of its founders. Therefore retroactive revocation to the date the Organization's assets were first
returned to its donors is appropriate. This determination is effective March 19, 20XX.

TAXPAYER'S POSITION - PRIMARY ISSUE:

Power of Attorney wants to read the Revenue’s Agent Report .

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -15-


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
December 31,
20XX
December 31,
20XX

CONCLUSION - PRIMARY ISSUE:

The ORG tax exempt status under Code section 501(a) as an organization described in Code
section 501(c)(3) should be retroactively revoked to March 19, 20XX, because the Organization
was not operated exclusively for charitable purposes. The Organization served the private
interests of FDN-1 and FDN-2 and its assets inured to their benefit.

Form 1041 U.S. Income Tax Return for Estates and Trusts should be filed for all prior open tax
years. Subsequent returns are due no later than the 15" day of the 4'" month following the close
of the trust’s accounting period.

Returns should be sent to the following mailing address:

Internal Revenue Service

ALTERNATE ISSUE:

In the alternative, whether the ORG should be reclassified as a private foundation because it is
not a supporting organization as defined in section 509(a)(3).

LAW - ALTERNATE ISSUE:

Code section 509(a) provides that organizations described in section 501(c)(3) are private
foundations unless they are described in section 509(a)(1)-(4).

Code section 509(a)(3) excepts from private foundation classification organizations that are: (A)
organized, and at all times thereafter operated, exclusively for the benefit of, to perform the
functions of, or to carry out the purposes of one ore more specified organizations described in
subsections 509(a)(1) or 509(a)(2); (B) operated, supervised, or controlled by or in connection
with one or more organizations described in subsections 509(a)(1) or 509(a)(2); and (C) not
controlled directly or indirectly by one or more disqualified persons other than foundation
managers and other than organizations described in subsections 509(a)(1) or 509(a)(2).

Treas. Reg. section 1.509(a)-4(c) regarding the organizational test a Code section 509(a)(3)
organization must meet provides:

(1) In general. —An organization is organized exclusively for one or more of the
purposes specified in section 509(a)(3)(A) only if its articles of organization (as defined
in §1.501(c)(3)-1(b)(2)):

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -16-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

(i) Limit the purposes of such organization to one or more of the purposes set
forth in section 509(a)(3)(A);

(ii) Do not expressly empower the organization to engage in activities which are
not in furtherance of the purposes referred to in subdivision (1) of this
subparagraph;

(iii) State the specified publicly supported organizations on whose behalf such
organization is to be operated (within the meaning of paragraph (d) of this
section); and

(iv) Do not expressly empower the organization to operate to support or benefit
any organization other than the specified publicly supported organizations referred
to in subdivision (iii) of this subparagraph.

Treas. Reg. section 1.509(a)-4(e) regarding the operational test a Code section 509(a)(3)
organization must meet provides:

(1) Permissible beneficiaries. —A supporting organization will be regarded as “operated
exclusively” to support one or more specified publicly supported organizations (hereinafter
referred to as the “operational test’’) only if it engages solely in activities which support or
benefit the specified publicly supported organizations. Such activities may include making
payments to or for the use of, or providing services or facilities for, individual members of
the charitable class benefited by the specified publicly supported organization. A supporting
organization may also, for example, make a payment indirectly through another unrelated
organization to a member of a charitable class benefited by a specified publicly supported
organization, but only if such a payment constitutes a grant to an individual rather than a
grant to an organization. In determining whether a grant is indirectly to an individual rather
than to an organization the same standard shall be applied as in §53.4945-4(a)(4) of this
chapter. Similarly, an organization will be regarded as “operated exclusively” to support or
benefit one or more specified publicly supported organizations even if it supports or benefits
an organization, other than a private foundation, which is described in section 501(c)(3) and
is operated, supervised, or controlled directly by or in connection with such publicly
supported organizations, or which is described in section 511(a)(2)(B). However, an
organization will not be regarded as operated exclusively if any part of its activities is in
furtherance of a purpose other than supporting or benefiting one or more specified publicly
supported organizations.

(2) Permissible activities. —A supporting organization is not required to pay over its
income to the publicly supported organizations in order to meet the operational test. It may
satisfy the test by using its income to carry on an independent activity or program which

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -17-

Form 886-A Department of the ‘l'reasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
December 31,
20XX
December 31,
20XX

supports or benefits the specified publicly supported organizations. All such support must,
however, be limited to permissible beneficiaries in accordance with subparagraph (1) of this
paragraph. The supporting organization may also engage in fund raising activities, such as
solicitations, fund raising dinners, and unrelated trade or business to raise funds for the
publicly supported organizations, or for the permissible beneficiaries.

Treas. Reg. section 1.509(a)-4(f) regarding the nature of relationships required for Code
section 509(a)(3) organizations provides:

(1) Jn general. —Section 509(a)(3)(B) describes the nature of the relationship required
between a section 501(c)(3) organization and one or more publicly supported
organizations in order for such section 501(c)(3) organization to qualify under the
provisions of section 509(a)(3). To meet the requirements of section 509(a)(3), an
organization must be operated, supervised, or controlled by or in connection with one or
more publicly supported organizations. If an organization does not stand in one of such
relationships (as provided in this paragraph) to one or more publicly supported
organizations, it is not an organization described in section 509(a)(3).

(2) Types of relationships. —Section 509(a)(3)(B) sets forth three different types of
relationships, one of which must be met in order to meet the requirements of
subparagraph (1) of this paragraph. Thus, a supporting organization may be:

(i) Operated, supervised, or controlled by,
(ii) Supervised or controlled in connection with, or
(iii) Operated in connection with, one or more publicly supported organizations.

(3) Requirements of relationships. —Although more than one type of relationship may
exist in any one case, any relationship described in section 509(a)(3)(B) must insure that:

(i) The supporting organization will be responsive to the needs or demands of one or
more publicly supported organizations; and

(ii) The supporting organization will constitute an integral part of, or maintain a
significant involvement in, the operations of one or more publicly supported
organizations.

(4) General description of relationships. —In the case of supporting organizations
which are “operated, supervised, or controlled by” one or more publicly supported
organizations, the distinguishing feature of this type of relationship is the presence of a

Form 886-A  (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -18-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

ORG
December 31,

20XX
December 31,
20XX

substantial degree of direction by the publicly supported organizations over the conduct
of the supporting organization, as described in paragraph (g) of this section. In the case of
supporting organizations which are “supervised or controlled in connection with” one or
more publicly supported organizations, the distinguishing feature is the presence of
common supervision or control among the governing bodies of all organizations
involved, such as the presence of common directors, as described in paragraph (h) of this
section. In the case of a supporting organization which is “operated in connection with”
one or more publicly supported organizations, the distinguishing feature is that the
supporting organization is responsive to, and significantly involved in the operations of,
the publicly supported organization, as described in paragraph (1) of this section.

Treas. Reg. section 1.509(a)-4(i) provides guidance on the meaning of “operated in
connection with” as follows:

(1) General rule

(i) Except as provided in subdivisions (ii) and (iii) of this subparagraph and
subparagraph (4) of this paragraph, a supporting organization will be considered as being
operated in connection with one or more publicly supported organizations only if it meets
the “responsiveness test” which is defined in subparagraph (2) of this paragraph and the
“integral part test” which is defined in subparagraph (3) of this paragraph.

(2) Responsiveness test

(i) For purposes of this paragraph, a supporting organization will be considered to
meet the “responsiveness test” if the organization is responsive to the needs or demands
of the publicly supported organizations within the meaning of this subparagraph. In order
to meet this test, either subdivision (ii) or subdivision (iii) of this subparagraph must be
satisfied.

(ii)

(a) One or more officers, directors, or trustees of the supporting organization are

elected or appointed by the officers, directors, trustees, or membership of the

publicly supported organizations;

(b) One or more members of the governing bodies of the publicly supported
organizations are also officers, directors or trustees of, or hold other important
offices in, the supporting organizations; or

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -19-

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

(c) The officers, directors or trustees of the supporting organization maintain a
close and continuous working relationship with the officers, directors or trustees
of the publicly supported organizations; and

(d) By reason of (a), (b), or (c) of this subdivision, the officers, directors or
trustees of the publicly supported organizations have a significant voice in the
investment policies of the supporting organization, the timing of grants, the
manner of making them, and the selection of recipients of such supporting
organization, and in otherwise directing the use of the income or assets of such
supporting organization.

(iii)

(a) The supporting organization is a charitable trust under State law;

(b) Each specified publicly supported organization is a named beneficiary under
such charitable trust's governing instrument; and

(c) The beneficiary organization has the power to enforce the trust and compel an
accounting under State law.

(3) Integral part test; general rule
(i) For purposes of this paragraph, a supporting organization will be considered to
meet the “integral part test” if it maintains a significant involvement in the
operations of one or more publicly supported organizations and such publicly
supported organizations are in turn dependent upon the supporting organization
for the type of support which it provides. In order to meet this test, either
subdivision (ii) or subdivision (iii) of this subparagraph must be satisfied.

(ii) The activities engaged in for or on behalf of the publicly supported
organizations are activities to perform the functions of, or to carry out the
purposes of, such organizations, and, but for the involvement of the supporting
organization, would normally be engaged in by the publicly supported
organizations themselves.

(111)

(a) The supporting organization makes payments of substantially all of its income
to or for the use of one or more publicly supported organizations, and the amount
of support received by one or more of such publicly supported organizations is
sufficient to insure the attentiveness of such organizations to the operations of the
supporting organization. In addition, a substantial amount of the total support of
the supporting organization must go to those publicly supported organizations

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

Page: -20-

Form 886-A Department of the ‘l'reasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

which meet the attentiveness requirement of this subdivision with respect to such
supporting organization. Except as provided in (6) of this subdivision, the amount
of support received by a publicly supported organization must represent a
sufficient part of the organization's total support so as to insure such attentiveness.
In applying the preceding sentence, if such supporting organization makes
payments to, or for the use of, a particular department or school of a university,
hospital or church, the total support of the department or school shall be
substituted for the total support of the beneficiary organization.

(b) Even where the amount of support received by a publicly supported
beneficiary organization does not represent a sufficient part of the beneficiary
organization's total support, the amount of support received from a supporting
organization may be sufficient to meet the requirements of this subdivision if it
can be demonstrated that in order to avoid the interruption of the carrying on of a
particular function or activity, the beneficiary organization will be sufficiently
attentive to the operations of the supporting organization. This may be the case
where either the supporting organization or the beneficiary organization earmarks
the support received from the supporting organization for a particular program or
activity, even if such program or activity is not the beneficiary organization's
primary program or activity so long as such program or activity is a substantial
one.

(d) All pertinent factors, including the number of beneficiaries, the length and
nature of the relationship between the beneficiary and supporting organization and
the purpose to which the funds are put (as illustrated by subdivision (iii)(b) and (c)
of this subparagraph), will be considered in determining whether the amount of
support received by a publicly supported beneficiary organization 1s sufficient to
insure the attentiveness of such organization to the operations of the supporting
organization. Normally the attentiveness of a beneficiary organization is
motivated by reason of the amounts received from the supporting organization.
Thus, the more substantial the amount involved, in terms of a percentage of the
publicly supported organization's total support the greater the likelihood that the
required degree of attentiveness will be present. However, in determining whether
the amount received from the supporting organization is sufficient to insure the
attentiveness of the beneficiary organization to the operations of the supporting
organization (including attentiveness to the nature and yield of such supporting
organization's investments), evidence of actual attentiveness by the beneficiary
organization is of almost equal importance. An example of acceptable evidence of

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -21-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

actual attentiveness is the imposition of a requirement that the supporting
organization furnish reports at least annually for taxable years beginning after
December 31, 1971, to the beneficiary organization to assist such beneficiary
organization in insuring that the supporting organization has invested its
endowment in assets productive of a reasonable rate of return (taking appreciation
into account) and has not engaged in any activity which would give rise to liability
for a tax imposed under sections 4941, 4943, 4944, or 4945 if such organization
were a private foundation. The imposition of such requirement within 120 days
after October 16, 1972, will be deemed to have retroactive effect to January 1,
1970, for purposes of determining whether a supporting organization has met the
requirements of this subdivision for its first two taxable years beginning after
December 31, 1969. The imposition of such requirement is, however, merely one
of the factors in determining whether a supporting organization is complying with
this subdivision and the absence of such requirement will not preclude an
organization from classification as a supporting organization based on other
factors.

(e) However, where none of the beneficiary organizations is dependent upon the
supporting organization for a sufficient amount of the beneficiary organization's
support within the meaning of this subdivision, the requirements of this
subparagraph will not be satisfied, even though such beneficiary organizations
have enforceable rights against such organization under State law.

Rev. Rul. 76-208, 1976-1 C.B. 161, held that a charitable trust described in Code section
501(c)(3) did not satisfy the “substantially all” requirement of the integral part test set forth in
Treas. Reg. section 1.509(a)-4(i)(3)(iii)(A) and was therefore not a supporting organization. The
trust instrument provided that 75 percent of the trust income was to be distributed annually to a
specified church with the remaining 25 percent to accumulate until the original corpus doubled,

at which time the entire annual income was to be distributed to the church. The Service also

stated that for purposes of the integral part test, the term “substantially all” means 85 percent or

more.

Treas. Reg. section 1.509(a)-4(j)(1) regarding control by disqualified persons provides:

(1) Jn general. —Under the provisions of section 509(a)(3)(C) a supporting
organization may not be controlled directly or indirectly by one or more disqualified
persons (as defined in section 4946) other than foundation managers and other than
one or more publicly supported organizations. If a person who is a disqualified
person with respect to a supporting organization, such as a substantial contributor to

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

Page: -22-


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

ORG

December 31,
20XX
December 31,
20XX

the supporting organization, is appointed or designated as a foundation manager of
the supporting organization by a publicly supported beneficiary organization to
serve as the representative of such publicly supported organization, then for
purposes of this paragraph such person will be regarded as a disqualified person,
rather than as a representative of the publicly supported organization. An
organization will be considered “controlled”, for purposes of section 509(a)(3)(C), if
the disqualified persons, by aggregating their votes or positions of authority, may
require such organization to perform any act which significantly affects its
operations or may prevent such organization from performing such act. This
includes, but is not limited to, the right of any substantial contributor or his spouse
to designate annually the recipients, from among the publicly supported
organizations of the income attributable to his contribution to the supporting
organization. Except as provided in subparagraph (2) of this paragraph, a supporting
organization will be considered to be controlled directly or indirectly by one or more
disqualified persons if the voting power of such persons is 50 percent or more of the
total voting power of the organization's governing body or if one or more of the total
voting power of the organization's governing body or if one or more of such persons
have the right to exercise veto power over the actions of the organization. Thus, if
the governing body of a foundation is composed of five trustees, none of whom has
a veto power over the actions of the foundation, and no more than two trustees are at
any time disqualified persons, such foundation will not be considered to be
controlled directly or indirectly by one or more disqualified persons by reason of
this fact alone. However, all pertinent facts and circumstances including the nature,
diversity, and income yield of an organization's holdings, the length of time
particular stocks, securities, or other assets are retained, and its manner of exercising
its voting rights with respect to stocks in which members of its governing body also
have some interest, will be taken into consideration in determining whether a
disqualified person does in fact indirectly control an organization.

Code section 4946(a)(1)(A) states that the term “disqualified person” means, with respect to a
private foundation, a person who is a substantial contributor to the foundation. Code section
4946(a)(1)(D) states that "disqualified person" includes the family member of another
disqualified person.

Date of reclassification:

The revocation or modification of a determination letter or ruling recognizing exemption may be
retroactive if the organization omitted or misstated a material fact, operated in a manner
materially different from that originally represented. Where there is a material change,

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

Page: -23-

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

inconsistent with exemption, in the character, the purpose, or the method of operation of an
organization, revocation or modification will ordinarily take effect as of the date of such material
change. Rev. Proc. 2008-9; 2008-2 I.R.B. 258, section 12.01.

GOVERNMENT’S POSITION - ALTERNATE ISSUE:

It is the government’s position that, if the Organization's exempt status is not revoked, then the
ORG should be reclassified from a supporting organization to a private foundation.

In general, private foundations receive their funding from one or just a few donors and their
operations are controlled by those donors. Private foundations are subject to a regulatory
scheme in Chapter 42, not applicable to public charities that was added to the Internal Revenue
Code by the Tax Reform Act of 1969. The definition of a private foundation is intentionally
inclusive so that all organizations exempted from tax by Code section 501(c)(3) are private
foundations except for those specified in section 509(a)(1) through(4). Roe Foundation
Charitable Trust v. Commissioner, T.C. Memo. 1989-566; Quarries Charitable Fund v.
Commissioner, 603 F.2d 1274, 1277 (7" Cir. 1979). The Organization is currently classified as
an organization described in section 509(a)(3), which defines supporting organizations, rather
than a private foundation.

Code section 509(a)(3) provides an exception from private foundation status for organizations
that support one or more section 509(a)(1) or (2) organizations ( public charities). Public
charities (organizations described in Code section 501(c)(3) that meet the requirement of sections
509(a)(1) or (2)) were excepted from the regulatory scheme that applies to private foundations on
the theory that their exposure to public scrutiny and their dependence on public support keep
them from the abuses to which private foundations were prone. Supporting organizations were
excepted from the private foundation regulatory scheme on the theory that their close
relationships with public charities would keep them from the potential abuses to which private
foundations were prone. In other words, the regulatory scheme applicable to private foundations
was not needed for supporting organizations because their relationships with public charities
were supposed to provide sufficient oversight to keep supporting organizations from the types of
abuses to which private foundations are prone. Quarrie Charitable Fund, 603 F.2d at 1277-78.

To be classified as a Code section 509(a)(3) supporting organization, the Organization must meet
all of the following tests:

1) Organizational and Operational Tests under Code section 509(a)(3)(A).
2) Relationship Test under Code section 509(a)(3)(B).
3) Lack of Disqualified Person Control Test under section Code 509(a)(3)(C).

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -24-

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

Overall, these tests are meant to ensure that a supporting organization is responsive to the needs
of a public charity and intimately involved in its operations and that the public charity (or
publicly supported organization) is motivated to be attentive to the operations of the supporting
organization and that it is not controlled, directly or indirectly, by disqualified persons. The
Organization has not established that it has met any of these tests.

Organizational and Operational Tests

The Organization is not organized to benefit one or more specified publicly supported
organizations. Pursuant to Treas. Reg. section 1.509(a)-4(c)(1)(iii) and (iv), an organization’s
governing instrument must state the specified publicly supported organization(s) on whose behalf
the organization is to be operated and cannot expressly empower the organization to support or
benefit any organizations other than the specified publicly supported organization(s). The
Organization’s dissolution clause allows distributions to organizations other than the specified
publicly supported organizations upon termination of the Organization. The possible
beneficiaries are not limited to the CO-1 or CO-3 or to the organizations specified on Schedule A
of the Organization’s Declaration of Trust. Furthermore, the Trustee has the power to determine
when the trust corpus is too small to economically administer and distribute the assets to any
section 170(c)(3) organization that he chooses. In Quarrie Charitable Fund v. Commissioner,
603 F.2d 1274 (7th Cir. 1979), the court held that substitution of a supporting organization’s
beneficiaries is permissible only if it is conditioned upon the occurrence of an event which is
beyond the control of the supporting organization.

Further, the Declaration permits distributions to affiliated organizations of some of the public
charities. These affiliated organizations may not be public charities. Therefore, the
organizational test is not met.

Moreover, the operational test set forth in Treas. Reg. section 1.509(a)-4(e)(1) is not satisfied. A
supporting organization will be regarded as ‘‘operated exclusively” to support a specified publicly
supported organization(s) only if it engages in activities which support or benefit the specified
publicly supported organizations(s). On July 1, 20XX, there was an amendment to the
Declaration of Trust and a new primary charity to be supported was specified. At the time of the
amendment, the CO-1 was recognized as a public charity and it could be supported by a
supporting organization. Therefore, the primary charity was changed without a showing that the
change occurred for reasons that were beyond the Organization’s control. This violated the
operational test.

The Organization has served the private interests of the Founders by giving them loans/lines of
credit, not requiring them to make interest payments in accordance with the terms thereof, and

Form 886-A  (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -25-

Form 886-A Department of the lreasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG
December 31,
20XX
December 31,
20XX

not requiring principal repayment. Therefore, the Organization has not established that it
operated exclusively for the benefit of the publicly supported organizations.

In addition, the operational test is not satisfied because the Organization made distributions to
organizations that were not specified in the original or the amended Declaration of Trust. These
distributions are in violation of Treas. Reg. section 1.509(a)-4(e)(1). The Organization gave
total grants of $ to CO-14, CO-9, CO-10, CO-11 and the CO-12 from the years 20XX to 20XX.
None of these organizations are listed on Schedule A of the Declaration. One of these
organizations, the CO-12, is not a public charity.

Relationship Test

As set forth in Treas. Reg. section 1.509(a)-4(f)(2), there are three permissible relationships:
(a) operated, supervised, or controlled by; (b) supervised or controlled in connection with; and
(c) operated in connection with one or more publicly supported organizations.

The relationships “operated, supervised or controlled by” and “supervised or controlled in
connection with” presuppose a substantial degree of direction over the policies, programs and
activities of the supporting organization by a publicly supported organization. The “operated,
supervised or controlled by” relationship is established by the fact that a majority of the officers,
directors, or trustees of the supporting organization are appointed or elected by the governing
body, members of the governing body, officers acting in their official capacity or the membership
of the publicly supported organization. The “supervised or controlled in connection with”
relationship is established by the fact that there is common supervision or control by the persons
supervising or controlling both the supporting and the publicly supported organizations (1.e.; that
control or management of the supporting organization is vested in the same persons that control
or manage the publicly supported organization).

In the present case, only one of the five members of the board is appointed by the supported
organization. The Organization cannot meet the requirements to satisfy one of the first two types
of relationships because a majority of its control and supervisory personnel are not appointed by
a supported organization nor is there common supervision and control by the same persons over
the supporting and supported organizations.

Thus, the only relationship test the Organization can possibly meet to be a supporting
organization is the “operated in connection with” test. This test requires that the Organization
satisfy both a responsiveness test and an integral part test. Neither test has been met in this
case.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -26-


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

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

In order to meet the responsiveness test, either Treas. Reg. section 1.509(a)-4(i)(2)(ii) or (iii)
must be satisfied. Treas. Reg. section |.509(a)-4(i)(2)(i1) requires that the board member
appointed by the supported organization have a significant voice in the operations of the
supporting organization. The organization has established only two instances of board meetings
from inception through November 20XX. There were no board minutes after November 20XX.
There are five members of the board; two are from the family, two are trusted business associates
of the founder and one is appointed by the supported organization. In the absence of any board
meetings after November 14, 20XX, there is no indication that the member appointed by the
supported organization had a voice in the Organization’s investment policies, the timing of its
grants or the selection of grant recipients. See Roe Foundation Charitable Trust v.
Commissioner; 58 T.C. Memo. 402 (1989).

Prior to the enactment of the Pension Protection Act on August 17, 20XX, there was an
alternative responsiveness test for charitable trusts. Under Treas. Reg. section 1.509(a)-
4(1)(2)(iii), the supporting organization that was a charitable trust under state law could meet the
responsiveness test if each of its publicly supported organizations were named as beneficiaries
under the charitable trust’s governing instrument and the beneficiary organizations had the power
to enforce the trust and compel an accounting under state law. Treas. Reg. section 1.509(a)-
4()(2)(iii).. Section 2.2.1 of the Declaration states that the trustee shall distribute 35% of the net
income of this trust to the primary charity. Section 2.2.2 states, “a total of 50% of the net income
shall be distributed to one or more of the organizations listed on Schedule A”. There are 108
organizations listed on Schedule A, including the primary charity. Only the primary charity is
specifically named as entitled to receive a portion of the Organization’s net income. The
Organization is not required to make any payments to any specific charity among the other 107
organizations. There is no other evidence to establish that each publicly supported organization
has the power to enforce the trust.

Therefore, the Organization does not meet either of the “responsiveness” tests.

While the responsiveness test guarantees that the publicly supported organization can
influence the activities of the supporting organization, the integral part test ensures that the
publicly supported organization will be motivated to attend to the operations of the supporting
organization. The integral part test is considered to have been satisfied if the supporting
organization maintains a significant involvement in the operations of one or more publicly
supported organizations and the publicly supported organizations are in turn dependent upon
the supporting organization for the type of support which it provides. Treas. Reg. section
1.509(a)-4(i)(3)(i).

There are two ways to meet the integral part test. One is based on the nature of the activities

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

Page: -27-

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

the supporting organization engages in to support the supported organization. The alternate is
based on the financial support the supporting organization provides the supported
organization.

Treas. Reg. section 1.509(a)-4(4)(3)(ii) provides that the activities engaged in for or on behalf of
the publicly supported organizations must be activities to perform the functions of, or to carry out
the purposes of, such organizations and, but for the involvement of the supporting organization,
would normally be engaged in by the publicly supported organizations themselves. Thus, this
part of the integral part test applies in those situations in which the supporting organization
actually engages in activities which benefit the publicly supported organizations as opposed to
simply making grants to the publicly supported organizations. In contrast, Treas. Reg. section
1.509(a)-4(i)(3)(i1) sets forth the integral part test rules applicable to supporting organizations
that make payments to or for the use of publicly supported organizations); see also Roe
Foundation, T.C. Memo. 1989-566; Cuddeback Memorial Fund v. Commissioner, T.C. Memo.
2002-300. The Organization does not meet the integral part test because, while it made some
grants to publicly supported organizations, it did not perform any activities for or on behalf of the
publicly supported organizations.

Because the Organization did not perform any activities for or on behalf of publicly supported
organizations aside from grants, the applicable rules for satisfying the integral part test are in
Treas. Reg. section 1.509(a)-4(i)(3)(iii), which has the following three basic requirements: 1)
payment of substantially all of its income to publicly supported organizations; 2) the amount
received by one publicly supported organization must be sufficient to motivate it to pay attention
to the operations of the supporting organization; and 3) a substantial amount of the total support
of the organization must go to those publicly supported organizations that meet the attentiveness
requirement. In the present situation, the Organization does not meet the second requirement so
it cannot meet the third requirement.

Except as provided in Treas. Reg. section 1.509(a)-1(1)(3)(iii)(b), the amount of support received
by a publicly supported organization must represent a sufficient part of the organization's total
support so as to ensure its attentiveness to the operations of the supporting organization. Treas.
Reg. section 1.509(a)-4(i)(3)(iii)(a). The regulations do not specify what percentage of a
supported organization's support must be received from a supporting organization to meet the
integral part test. The requirement is that facts and circumstances show that the support is
sufficient to ensure that the supported organization is attentive to the operations of the supporting
organization. Treas. Reg. section 1.509(a)-4(i)(3)(iii). Treas. Reg. section 1.509(a)-4(i)(3)(iii)(b)
provides that a supporting organization can meet the attentiveness requirement, even where the
amount of support received by the publicly supported organization does not represent a sufficient
part of the publicly supported organization’s total support, if it can be demonstrated that support

Form 886-A  (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -28-

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

is earmarked for a substantial program of the publicly supported organization that would be
interrupted without the supporting organization’s support. Treas. Reg. section 1.509(a)-4(4)(3)(d)
provides that, ‘“‘[a]ll pertinent factors...will be considered in determining whether the amount of
support received by a publicly supported organization is sufficient to insure the attentiveness of
such organization to the operations of the supporting organization.” The Regulation notes the
importance of the percentage of the income received from the supporting organization in
determining if the publicly supported organization will have the requisite degree of attentiveness
and concludes that evidence of actual attentiveness is almost as important.

19XX was the first year that the primary supported charity was the CO-1. CO-1 received $, $
and $ in 19XX, 19XX and 20XX, respectively. In violation of its terms, the Declaration was
amended on July 1, 20XX, to change the primary charity to CO-3. The grants to the CO-3
were $, $ and $ in 19XX, 20XX and 20XX, respectively. The Organization was asked to
provide the total amount of support for the 20XX and 20XX years of the CO-3. The
Organization replied that it had no access to CO-3’s records because it is a large organization.
This demonstrates that the supported organization (CO-3) is not attentive to the operations of
the Organization because the Organization was unable to procure information required to
maintain its classification as a supporting organization. Further, a large organization implies a
large amount of outside support as well. Failure to provide this requested information is
indicative that it would be harmful to the Organization’s position. See Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), aff'd. 162 F.2d 513 (10" Cir. 1947). The
Organization stated in its application that the CO-1’s income in 19XX was

The amounts the Organization granted to it are insufficient to cause the primary supported
organization to be attentive to the Organization’s operations.

There is no evidence that either of the primary beneficiaries--CO-1 or the CO-3-- was
attentive to the operations of the FDN-1 and FDN-2 The fact that those
primary supported organizations did not object to virtually all of the Organization’s assets
being loaned to disqualified persons and that neither of them made any attempt to have the
loan terms complied with when payments were not made in conformity with the loan terms
demonstrates that the primary supported organizations were not attentive to the operations of
the Organization. Further, there is no evidence the change in the primary supported
organization was considered or properly approved by the Board or that the CO-1 objected to
the change or questioned why it was not receiving grants. acknowledged the
grants to it as if they came directly from the Founders rather than from the Organization.
Further, there were no Board meetings, meaning the supported organizations could not have
been attentive to the Organization’s operations.

Control Test

Form 886-A cRev.4-68) Department of the Treasury - Internal Revenue Service
Page: -29-


Form 886-A Department of the Treasury - Internal Revenuc Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

FDN-1 and FDN-2, as the only contributors to the Organization, are substantial contributors
and/or the spouse of a substantial contributor. As such, both FDN-1 and FDN-2 are disqualified
persons pursuant to Code section 4946(a)(1)(A) and (D) and Treas. Reg. section 1.509(a)-4(4)(1).
FDN-1 and FDN-2 as disqualified persons control the Organization.

When the primary supported organization was changed, only three Board members voted. Two
of those Board members voting were FDN-1 and FDN-2. In addition, when two new Board
members were instated in 20XX, only three Board members voted. Two of those Board
members voting to add new Board members were FDN-1 and FDN-2. Pursuant to Treas. Reg.
section 1.509(a)-4(j)(1), disqualified persons impermissibly controlled the Organization because
FDN-1 and FDN-2, both disqualified persons, by aggregating their votes or positions of
authority, could require such organization to perform any act which significantly affects its
operation or may prevent such organization from performing such act. Further, control by a
disqualified person includes, but is not limited to, the right of any substantial contributor or his
spouse to designate annually the recipients, from among the publicly supported organizations of
the income attributable to his contribution to the supporting organization. The Declaration
provides that, if the board has not directed the Trustee as to which organizations should receive
grants within 7 days prior to April 30 of the year after the income is earned, the Trustee shall
determine the grant recipients. There is no evidence that the board directed the Trustee as to
which organizations should receive grants. Further, in violation of the terms of the Declaration,
grants in excess of 85% of the Organization’s net income were made to charities without written
approval by three board members. Thus, the right to determine recipients of the Organization's
funds was with disqualified person FDN-1 as Trustee, contrary to the requirements of Treas. Reg.
section 1.509(a)-4G)(1).

Almost all of the Organization's assets have been transferred to disqualified persons FDN-1 and
FDN-2. Their loans have not been paid in accordance with their terms, were orally extended and
interest payments were applied to the principal balance. Treas. Reg. section 1.509(a)-4()(1)
states that among the pertinent facts and circumstances to be considered are the nature of the
organization’s assets. Where almost all of the Organization’s assets were under the control of
disqualified persons, there is evidence of indirect control.

The Declaration provides that if the Trustee determines the trust fund is too small to
economically administer, the Trustee shall distribute the trust fund in its entirety outright and free
of trust to such organizations described in section 170(c)(3) as the Trustee shall determine.
Trustee FDN-1 is a disqualified person and this provision therefore allows a disqualified person
an impermissible level of control because FDN-1 can determine the trust is too small to
economically administer and he can control the final distribution of trust assets.

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service
Page: -30-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG

December 31,
20XX
December 31,
20XX

Based on the lack of Minutes of the Organization's Board meetings, there is no indication that
any representatives of any of the organizations named in the Declaration have had any input into
the Organization's operations since November 14, 20XX.

The ORG is not a supporting organization under Code section 509(a)(3) because it is controlled
directly or indirectly by one or more disqualified persons.

Effective Date of Reclassification

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. Rev.
Proc. 2008-9; 2008-2 I.R.B. 258, section 12.01.

In its application, the Organization did not state that it would make grants to organizations not
specified in its Declaration, that it would not have a sufficient relationship with a supported
organization and that a disqualified person would control it or borrow substantial amounts of its
funds. Therefore retroactive reclassification is appropriate. This determination is effective July
1, 20XX, the date the Declaration was amended to substitute the primary charity.

TAXPAYER’S POSITION - ALTERNATE ISSUE:

Unknown.

CONCLUSION - ALTERNATE ISSUE:

Accordingly, the ORG should be reclassified as a private foundation retroactive to July 1, 20XX,
because it does not qualify as a supporting organization under the requirements set forth in Treas.
Reg. section 1.509(a)-4(c) through (j).

Form 990 PF Return of Private Foundation should be filed for all open tax years. Subsequent
returns are due no later than the 15"" day of the 5 month following the close of the
Organization’s accounting period. For tax year ending December 31, 20XX Form 990-PF is due
May 15, 20XX.

Send your returns for open years prior to 20XX to the following mailing address:

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -31-

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

Form 990-PF is required for each tax year until private foundation status is terminated under IRC

§ 507.

Form 886-Acev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -32-