Determination 1037030: IRS revoked an animal-rescue organization's exemption

Plain-English summary

The IRS revoked a section 501(c)(3) animal-rescue organization's exemption effective January 1 of a redacted year. The organization said its purpose was to rescue abandoned horses, provide medical care, and place the horses with families. The examination found minimal records, questionable personal purchases on the organization's credit card, stolen checks deposited into its account, and forged traveler’s checks used by the founder to buy a washer and dryer. The report also states that the founder was convicted of forgery and that the organization agreed to the revocation. The release includes the final adverse letter, the proposed-action letter, and the examination report.

Ruling snapshot

• Question: Did the organization operate exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 5603, 6001, 6104(c), 170, and 7428; Treas. Reg. §§ 1.501(c)(3)-1(d), 1.501(c)(3)-1(e), and 1.6001-1(e)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

Release Number: 201037030
Release Date: 9/17/10
Date: 6/24/10

LEGEND
ORG = Organization name XX = Date Address = address
501.03-00
ORG Person to Contact:
ADDRESS Identification Number:
Contact Telephone Number:
In Reply Refer to: TE/GE Review Staff
EIN:
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:

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 January 1, 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 1120, “US Corporation Income Tax Return” for all open
years with the appropriate Service Center indicated in the instructions for the return.

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 1-877-777-4778 and ask for Taxpayer Advocate assistance. Or you can
contact the Taxpayer Advocate from the site where the tax deficiency was determined by
calling (213) 576-3140, or writing to: Internal Revenue Service, Taxpayer Advocates
Office, 300 N. Los Angeles Street, Stop 6710LA, Los Angeles, CA 90012.

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,

Nanette M. Downing
Director, EO Examinations

AREASURY

DEPARTMENT OF THE TREASURY
Internal Revenue Service

‘ 4 Exempt Organizations

Nee 2525 Capitol Street #217

TAX EXEMPT AND Fresno, CA 93721-2227

GOVERNMENT ENTITIES
DIVISION

August 31, 2009

Taxpayer Identification Number:

ORG
ADDRESS Form:

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

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

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

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

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

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

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

Letter 3618 (04-2002)
Catalog Number 34809F

If we do not hear from you within 30 days from the date of this letter, we will process
your case based on the recommendations shown in the report of examination. If you do
not protest this proposed determination within 30 days from the date of this letter, the
IRS will consider it to be a failure to exhaust your available administrative remedies.
Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this section shall not be issued in any proceeding unless the Tax Court, the
Claims Court, or the District Court of the United States for the District of Columbia
determines that the organization involved has exhausted its administrative remedies
within the Internal Revenue Service." We will then issue a final revocation letter. We
will also notify the appropriate state officials of the revocation in accordance with section
6104(c) of the Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal
appeals process. The Taxpayer Advocate cannot reverse a legally correct tax
determination, or extend the time fixed by law that you have to file a petition in a United
States court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling. You
may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you
prefer, you may contact your local Taxpayer Advocate at:

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

Thank you for your cooperation.

Sincerely,

Francisco N. Favila
Revenue Agent

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

; (Gayzan 886A Department of the Discs - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items

Year/Period Ended

Name of Taxpayer
December 31, 20XX

ORG EIN
LEGEND
ORG = Organization name xX = Date City = city State = state
Secretary = secretary Founder = founder Founder-1 = founder-1l CO-

1, CO-2, CO-3, CO-4, CO-5, CO-6, CO-7 & CO-8 = 1°, 2", 38, 4™, 5M, 6M, 7 *
8°" COMPANIES

Issue:
Should the tax exempt status granted to ORG be revoked due to the manner in which the
organization is operating?

Facts:

ORG, the ORG, was granted tax exempt status from Federal income tax under Internal Revenue
Code, IRC, 501 (a) as an organization described in IRC 501 (c) (3) in May 19XX. The ORG’s
primary exempt purpose is to rescue abandoned horses bound for slaughter, provide medical
attention if needed, and make efforts to place the rescued horses with caring families.

The ORG provided very minimal income and expense records during the examination conducted
in April of 20XX, for the period ending December 31, 20XX. According to the Executive
Director, the ORG was a victim of a burglary in which record files were stolen. The ORG
provided a copy of a County of City Sherriff's Department Supplementary Loss Report stating
that 60 files were stolen. The report was completed and signed by the Executive Director on May
28, 20XX.

The CO-1 credit card statements the ORG provided showed questionable and unsupported
purchases. The questionable purchases were made at retailers that do not provide services or
merchandise that would further the ORG’s exempt purpose. Some of the listed retailers were
CO-2s, T shirt and CO-3, CO-4, CO-5, and CO-6.

The ORG provided copies of documents related to stolen checks that were deposited into the
ORG’s checking account. The two checks in question total $. The copies of the checks clearly
show that the intended payee’s name was crossed out and the initials ORG were entered on one
check and ORG on the other. The report shows that FOUNDER, the founder of the ORG, stated
that the checks were stolen by her former roommate.

A copy of a CO-7 letter, dated August 9, 20XX and addressed to the ORG, stated that the ORG’s
checking account received credit for at least one of the checks on June 10, 20XX. The letter also
stated that because the bank received a forgery claim against the check deposited into the ORG’s
account, the bank was withdrawing $ from the same account.

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

Page: -1-

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

Year/Period Ended

Name of Taxpayer
December 31, 20XX

ORG_ EIN

A copy of the ORG’s CO-7 statement covering the period ending on June 27, 20XX showed that
a $ deposit was made on June 10, 20XX. The statement’s daily balance summary shows a $
balance on June 10 and a $ balance on June 27, 20XX.

The ORG’s president stated that the ORG received several CO-8 Travelers Checks as donations,
but could not recall the exact number or time frame. The founder purchased a washing machine
and a dryer from Sears with the checks. The checks were later determined to be forgeries and the
founder was soon after arrested. The founder was convicted, among other charges, of two counts
of Penal Code 476 on February 29, 20XX in the Superior Court of State, County of City, case
number #. Penal Code 476 states that a person making, passing, or possessing of fictitious or
altered checks with the intent to defraud is guilty of forgery.

The current Executive Director provided copies of the Minutes of the organizational meeting that
took place on March, 28, 20XX. According to the document Secretary attended the meeting and
serves as the ORG’s Secretary. Secretary is the CPA who completed the ORG’s second 20XX
amended F990. Secretary said that he did not attend the meeting and is not serving as the
Secretary or any other position in the ORG.

Law;

IRC 501(a) states that an organization described in subsection (c) or (d) or IRC 401 (a) shall be
exempt from taxation under this subtitle unless such exemption is denied under IRC 502 or IRC
503.

IRC 501(c) (3) states that corporations, and any community chest, fund, or foundation, organized
and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition (but only if
no part of its activities involve the provision of athletic facilities or equipment), or for the
prevention of cruelty to children or animals, no part of the net earnings of which inures to the
benefit of any private shareholder or individual, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise
provided in subsection (h)), and which does not participate in, or intervene in (including the
publishing or distributing of statements), any political campaign on behaIf of (or in opposition to)
any candidate for public office.

IRC 6001 provides that every person liable for any tax imposed by this title, or for the collection
thereof, shall keep such records, render such statements, make such returns, and comply with
such rules and regulations as the Secretary may from time to time prescribe. Whenever in the
judgment of the Secretary it is necessary, he may require any person, by notice served upon such

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

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

; Name of Taxpayer Year/Period Ended
December 31, 20XX

ORG _ EIN

person or by regulations, to make such returns, render such statements, or keep such records, as
the Secretary deems sufficient to show whether or not such person is liable for tax under this
title.

IRC 5603 provides that any person required by this chapter (other than subchapters F and G) or
regulations issued pursuant thereto to keep or file any record, return, report, summary, transcript,
or other document, who, with intent to defraud the United States, shall fail to keep any such
document or to make required entries therein; or make any false entry in such document; or
cancel, alter, or obliterate any part of such document or any entry therein, or destroy any part of
such document or any entry therein; or hinder or obstruct any internal revenue officer from
inspecting any such document or taking any abstracts there from; or fail or refuse to preserve or
produce any such document, as required by this chapter or regulations issued pursuant thereto; or
who shall, with intent to defraud the United States, cause or procure the same to be done, shall be
fined not more than $10,000, or imprisoned not more than 5 years, or both, for each such offense.

Government’s Position:

The ORG was unable to provide the necessary records as required by IRC 6001. Although it is
possible that the records were stolen, it is very improbable. The police report is not a
confirmation by the police that the records were stolen, but rather, serves as a record provided by
the victim as to what was supposedly stolen.

The limited expense records show that private inurement exists. The founder made purchases for
personal benefit utilizing the ORG’s credit card.

The stolen checks are also inurement to the founder. The stolen checks were deposited into the
ORG’s checking account on June 10, 20XX. The founder was aware of the theft by July 11,
20XX, or possibly earlier, when the police made contact. The bank statement cut off date was
June 27, 20XX; as a result the bank statement would have been mailed to the ORG in late June
and in the ORG’s possession by early July, 20XX. Even in the unlikely possibility that the
founder was unaware of stolen checks and their subsequent deposit to the ORG’s checking
account prior to July 11, 20XX; the founder did not return the money to the appropriate owner
once she became aware of the theft. A forgery claim had to be filed by the victim and bank had
to withdraw the money from the ORG’s checking account and return it to the owner on August 9,
20XX. It is evident that despite being aware of the theft and the police intervention, the founder
was not compelled to return the stolen funds on her own.

The fictitious travelers checks, supposedly received by the ORG, negotiated by the founder may
also be considered inurement. The ORG’s President and Executive Director were unable or
unwilling to provide all the pertinent facts during the examination, but it is a fact that the court

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

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

Name of Taxpayer Year/Period Ended
December 31, 20XX

ORG_ EIN

convicted the founder of forgery related to the travelers checks. Considering the facts and
circumstances regarding the traveler’s checks, it is very probable that the ORG’s name was used,
by the founder, as the payee on the forged checks. Although not outside the realm of possibility,
it is very unlikely that a person forged the traveler’s checks and then made a charitable
contribution to the ORG. It is also very unlikely that a person unknowingly receiving a forged
check would be convicted of forgery. The purchase of a washer and a dryer by the founder with
the donated funds is considered inurement.

The Executive Director provided false documents related to a Board of Directors meeting during
the examination. The question of whether or not the facts and circumstances in this particular
case may or may not meet all the criteria in IRC 5603 is not being addressed in this report.

Given the manner in which the ORG is operating, and considering the facts and circumstances, it
is the government’s position that the tax exempt status granted to the ORG be revoked.

Taxpayer’s position:

The tax payer did not provide a written response to the propose revocation. On October 10,
20XX FOUNDER-1 called to say that he was not going to respond to the L3618, but that he
agreed with the revocation. POA, POA, signed F6018 on October 26, 20XX.

Conclusion:
ORG’s tax exempt status will be revoked.

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