Determination 1037035: IRS revoked a veterans organization's exemption

View official IRS release (PDF)

Plain-English summary

The IRS revoked an existing exemption under IRC § 501(c)(19), effective January 1 of a redacted year. The examination concerned a veterans organization that operated a bar and related entertainment activities open to the general public. The IRS concluded that the organization did not satisfy the statutory membership requirements, that income inured to its founder and president, and that its records and reporting were inadequate. The report also treats income from bar, vending, Keno, and gaming activities as unrelated business income under IRC § 512, subject to tax under § 511. The release includes the final adverse letter, a proposed-action letter, and the examination report.

Ruling snapshot

• Question: Did the veterans organization qualify for exemption under IRC § 501(c)(19), and alternatively was its activity income unrelated business income?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(19), 511, 512, 6001, and 6033; Treas. Reg. §§ 1.501(c)(19)-1(c), 1.513-1(a), 1.513-1(d)(1), and 1.513-1(d)(2)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

Attn: Mandatory Review, IC 4920 DAL 501.19-00
1100 Commerce Street .
Dallas, TX 75242

Date: 4/30/2010

Release Number: 201037035
Release Date: 9/17/10

LEGEND
ORG = Organization name xX = Date Address = address
ORG Person to Contact/ID Number:
ADDRESS Contact Numbers:

Voice:

Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear

In a determination letter dated November 19XX, you were held to be exempt from
Federal income tax under section 501(c)(19) of the Internal Revenue Code.

Based on recent information received, we have determined you have not operated in
accordance with the provisions of section 501(c)(19) of the Code. Accordingly, your
exemption from Federal income tax is revoked effective January 1, 20XX. This is a final
adverse determination letter with regard to your status under section 501(c)(19) of the
Code.

We previously provided you a report of examination explaining why we believe
revocation of your exempt status is necessary. At that time, we informed you of your
right to contact the Taxpayer Advocate, as well as your appeal rights.

You are therefore required to file Form 1120, U.S. Corporation Income Tax Return, for
the years ended December 31, 20XX and 20XX with the Ogden Service Center. For
future periods, you are required to file Form 1120 with the appropriate service center
indicated in the instructions for the return.

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 contact the person whose name and telephone
number are shown at the beginning of this letter.

Sincerely,

Nanette M. Downing
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Se, B Internal Revenue Service
iN oy TEGE EO Examinations

“ 3730 South Elizabeth Street

TAX EXEMPT AND
GOVERNMENT ENTITIES Independence, MO 64057
DIVISION

January 6, 2010

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 an
adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains 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.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

te

You may also request that we refer this matter for technical advice as explained in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. Ifa
determination letter is issued to you based on technical advice, no further administrative
appeal is available to you within the IRS on the issue that was the subject of the
technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter modifying or revoking
exempt status. If we do not hear from you within 30 days from the date of this letter, we
will process your case on the basis of the recommendations shown in the report of
examination and this letter will become final. In that event, you will be required to file
Federal income tax returns for the tax period(s) shown above. File these returns with
the Ogden Service Center within 60 days from the date of this letter, unless a request
for an extension of time is granted. File returns for later tax years with the appropriate
service center indicated in the instructions for those returns.

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.

Letter 3610 (04-2002)
Catalog Number 34801 V

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Acting Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

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

Explanation of Items Exhibit
Year/ Period Ended

Name of Taxpayer

ORG 12/31/20XX,
12/31/20XX
LEGEND
ORG = Organization name XX = Date Address = address City = city
State = state BM-1, BM-2 & BM-3 = 1st, 2nd g 3rd BM RA-1, RA-2, RA-3 &
RA-4 = 157, 2NP, 388 g gt RB CO-1, CO-2, CO-3, CO-4, CO-5 & CO-6 = 157, 2",

4th, 5th & 6th COMPANIES
Issue:

(1) Whether ORG, doing business as “ORG”, has failed the IRC 501(c)(19)(B) requirements
to have “at least 75 percent of the members of which are past or present members of the
Armed Forces of the United States and substantially all of the other members of which
are individuals who are cadets or are spouses, widows, widowers, ancestors or lineal
descendants of past or present member of the Armed Forces.” Ifso, should ORG’s
exemption under IRC section 501(a), as an organization described in section 501(c)(19) be
revoked, effective January 1, 20XX.

(2) Whether the primary activity of ORG, doing business as “ORG”, is the operation of a
commercial bar open to the general public. If so, should CO-1 exemption under IRC
section 501(a) as an organization described in section 501(c)(19) should be revoked,
effective January 1, 20XX.

(3) Whether ORG, doing business as “ORG”, records are inadequate under Section 6033. If
so, should ORG’s exemption under IRC Section 501 (a), as an organization described in
Section 501(c)(19) be revoked, effective January 1, 20XX?

Facts for issues 1, 2, and 3:

According to the State of State’s Secretary of State, ORG, doing business as “ORG” was
incorporated February 4th 20XX by BM-1. On July 5th 20XX, the annual report filed with the
State of State shows BM-1 as the Chairman and Secretary, and the Board of Director members
being BM-1, BM-2 and BM-3. The 20XX annual report filed with the State of State shows BM-1
as the owner. See attachment one for the state filings.

The rest of the informational attachments were provided, and sent, in the revocation letter dated
August 6th, 20XX and are included in the body of these facts as they were presented in the
original revocation letter of that date. The Attachment One of that revocation letter shows that
BM-1 is the 100% owner of ORG.

A review of the Form 990 for the years ended December 31, 20XX and 20XX shows that the
returns do not have a year beginning date on the Form 990s. The organization operates using the
cash method. Under program service accomplishments for 20XX there are three exempt purpose
achievements: (1) Gathering together fraternally of veterans and families, (2) Participating in
things of a platonic nature and (3) Helping needy veterans families. For 20XX, the total reported
sales were $ with a reported cost of goods sold being $. Total reported revenue reported is $ and

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

Page: -1-

Form 886A Department of the ‘l'reasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

total reported expenses of $. The Form 990 for the year ended December 31, 20XX was signed
by BM-1 on May 8, 20XX.

The Form 990 for the year ended December 31, 20XX had the same three exempt purpose
achievements as was stated on the Form 990 for the year ended December 31, 20XX. The total
reported sales were $ with a reported cost of goods sold being $. Total revenue reported is $ and
total reported expenses of $. The Form 990 for the year ended December 31, 20XX was signed
by BM-1 (who identified herself as the owner) on June 30, 20XX.

According to the State of State’s Division of Alcohol and Tobacco Control, the original mailing
address for ORG was Address, City, State. The organization notified the State of State that they
moved their location to Address on March 30, 20XX. The managing officer is BM-1 (see
attachment two).

According to the City Tip of the Day dated January 16, 20XX by description is the statement,
“School is back in session, and by Wednesday night of the first week, your probably needing to
let off a little steam. Not to many places are 18 and up anymore (especially for the guys), but
ORG is one of them on Wednesday night (ladies 18 and older are always admitted). With a
college ID, you'll get a discount admission. Its also industry night, so if you’re a waitress who
also goes to college, you’re home free.” See attachment three.

According to the Night Life Guide (see attachment four), ORG located at Address is the
following statement: “A crazy bright sign is now up at this club near the corner of Address and
State. Its 18-and-up which makes for a diverse crowd even in its farwestern location.”

According to CO-2 ORG, located at Address, City, State is a bar / tavern. See attachment five.

According to a CO-3 RA-2 dated October 27, 20XX (see attachment six) “City Attorney: ORG is
now Problem Property.” The RA-2 goes on with, “After several shooting incidents, assaults and a
stabbing. City’s city attorney says one night club is now considered a problem property. Someone
called police to ORG parking lot 34 times this year. That means police were at the club at least
once every ten days. The most recent call was lor a shooting early Sunday that sent one man to
the hospital. Police. city staff and nearby businesses say the violence isn't uncommon and
something may be done to change that.

RA-I is the education leader for The System: Co-4 on south State Expressway. RA-! says, "1
have had the experience of walking into work with glass shattered." RA-1 says her main concern
is for the safety of the nearly 80 people learning their trade at the school. “Weve had employees’
cars vandalized.” RA-1 said. "We've also had a couple of break-ins within the year ORG has
been here."

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

Ronn 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

However it’s the violence in the parking lot that has police and nearby businesses concerned.
RA-1 says, "The violence is hard to coexist with as a daytime business trying to protect your
customers." City Police Officer RA-2 says, "We've had a lot of calls from assaults, to
disturbances, to leaving the scene of an accident to noise complaints.”

Thirty-four police calls, complaints and concerns could cause the city to step in. City Attorney
RA-3 says if problems persist the city could enforce the nuisance ordinance ayainst the club. RA-
3 says. "We've had contact with the owner I won't say what the response was but I will say our
goal is to reestablish contact with the owner and express our continued concern."

CO-3 called the owner. BM-3. whose number was listed on ORG front door. BM-1 told CO-3 he
did not want to comment. Police and city staff say only certain clubs require strict action. RA-2
says. "We certainly do have fights at other bars but shootings are particularly a concern for us
because innocent by standers can easily be pulled into those.” RA-3 says, "When you have a
property that despite problems and serious criminal activity shows no response to your advice,
then we step in." Without someone stepping nearby businesses are taking their own precautions.
RA-1 says. "We will never leave the parking lot until everyone is picked up and gone.” The city
attorney says he will likely decide if the city will take any action sometime within the next week
or so. Punishment could range from a warning up to closing the business for one year. The victim
and witnesses in Sunday's shooting are not cooperating with police.”

Certified letters were sent to several addresses in an effort to contact the organization and
determine if the organization is an exempt organization described under Internal Revenue Code
Section 501(c)(19). The letters were sent to: Address , City, State; Address, City, State; and
Address, City, State; and the owner’s address which, according to Internal Revenue Service
records, is Address, City, State. All the certified letters were returned from the post office with
the notation, “Return to Sender, Attempted — not known, unable to forward.”

A postal tracer was sent on April 23, 20XX and the Post Office responded on May 4, 20XX in
order to obtain the address for the organization from the U.S. Post office. According to the U.S.
Post Office, the organization receives their mail at Address, City, State and is physically located
at Address, City, State. Because this is where the organization receives their mail, and this is the
owner’s address, that is where mail was sent.

The CO-5 was contacted for more information, but the national organization had no records of
any kind on any subsidiary, so no information of any kind could be obtained from CO-5.

In a letter dated June 5, 20XX from State’s Division of Alcohol and Tobacco Control ORG
D/B/A ORG the organization notified the Division of Alcohol and Tobacco Control that they
were placed in Out of Business Status effective December 31, 20XX. See Attachment Seven.

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

Page: -3-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,

12/31/20XX

However, the State of State’s Secretary of State still shows that the organization is an active
organization, In all the information reviewed, there is no reference to the organization being a
veteran's organization and there is no reference to the organization not being open to the public.
In fact, everything shows that the organization was open to the public.

The organization was asked to supply documentation and substantiation of expenses. All efforts
to obtain those documents failed. Internal Revenue Service records were reviewed in an effort to
identify substantiated expenses. According to those records, the organization spent, in 20XX, $
for wages and $ for employment taxes. In 20XX, the organization spent $ for wages and $ for
employment taxes. The organization issued 1099s to RA-4 and BM-1 Rentals in 20XX for $ and
$ respectively. The organization issued 1099s to RA-4 and BM-1 Rentals in 20XX for $ and $
respectively. See attachment Eight.

According to the State Secretary of State, BM-1 CO-6 is a partnership equally owned by BM-3
and BM-2. The address listed on the Articles of Organization is listed as being: Address, City,
State. See Attachment Nine.

In order to locate the Form 1099s filed, a search was made using Internal Revenue Service
records. According to the Form 1099s filed, the address for BM-1 CO-6 in 20XX was Address,
City. State. The same address as ORG. In 20XX, BM-1 CO-6’s address was the same as it was
for 20XX.

BM-1. the 100% owner of ORG, and the information from State’s Division of Alcohol and
Tobacco Control showing that BM-1 is the managing officer. So, BM-1 appears to be the person
responsible for the organization. According to BM-1’s 20XX and 20XX Form 1040, BM-2 is
BM-1’s husband. From claimed Form 1040 information, BM-1 and BM-2 do not appear to have
been paid either directly, or indirectly, by ORG.

Law Background

Prior to the enactment of §501(c)(19 by Public Law 92-418, 1972-2 C.B. 675, many veterans
organizations qualified for exemption from federal income tax under §501(c)(4) because most of
the traditional activities of these organizations were recognized by the Internal RETEIUG Service
(“IRS”) as primarily promoting social welfare. Staff of Joint Comm. on Taxation, 109'" Cong.,
Historical Development and Present Law of the Federal Tax Exemption for Charities and Other
Tax-Exempt Organizations, JCX-29-05 NO 8, (Comm. Print 20XX).

The traditional activities of veterans organizations that were social welfare organizations
included promoting patriotism, preserving the memory of those who died in war, and assisting
veterans in need. Id. A veterans organization whose primary activity consisted of operating
social facilities for its members was not able to qualify for exemption as a §501(c)(4) social
welfare organization. but it could qualify as a social club under §501(c)(7). Rev. Rul. 66-150,

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

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,

12/31/20XX

1966-1 C.B. 147; S. Rep. No. 1082, 92d Cong., 2d Sess. 2 (1972) reprinted in 1972-2 C.B. 713;
II.R. Rep. No. 851, 92d Cong., 2d Sess. 1 (1972).

In 1972, Congress enacted §501(c)(19) and §512(a)(4) to address the concern that a veterans
organization exempt under §501(c)(4) or (7) may be subject to unrelated business income tax on
the provision of insurance to its members. S. Rep. No. 1082, 92d Cong., 2d Sess. 2 (1972)
reprinted in 1972-2 C.B. 713.' Section 512(a)(4) excludes amounts attributable to, or set aside by
a §501(c)(19) veterans organization for the payment of life, sick, accident, or health insurance
benefits for their members and their members’ dependents. Public Law 92-418, 1972-2 C.B.
675.

Section 501(c)(19) Exemption Requirements

General Requirements of a 501(c)(19) organization:

Section 501(c)(19) provides for the exemption from federal income tax of a post or organization
of past or present members of the United States Armed Forces if it is:

(a) Organized in the United States or any of its possessions,

(b) At least 75 percent of its members are past or present members of the Armed Forces
of the United States,

(c) substantially all of its other members are individuals who are cadets or are
spouses, widows, widowers, ancestors or lineal descendants of past or present
members of the Armed Forces of the Unites States or of cadets, and

(d) No part of the net earnings of which inures to the benefit of any private shareholder or
individual.

(1) Can ORG be considered to be a veterans organization as described in Internal Revenue
Code Section 501(c)(19)?

Issue One Law:

kK ke ke

| “Before the enactment of the Tax Reform Act of 1969, there was no tax on the insurance activities of the
veterans’ organizations since the unrelated business income did not apply to social welfare organizations
and social clubs. However, the 1969 Act extended the application of the unrelated business income tax to
virtually all exempt organizations including social welfare organizations and social clubs.” S. Rep.
No.1082, 92d Cong., 2d Sess, 2 (1972) reprinted in 1972-2 C.B. 713.

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

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

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,

12/31/20XX

Internal Revenue Code Section 501(c)(19) A post or organization of past or present members of
the Armed Forces of the United States, or an auxiliary unit or society of, or a trust or foundation
for, any such post or organization organized in the United States or any of its possessions, at least
75 percent of the members of which are past or present members of the Armed Forces of the
United States and substantially all of the other members of which are individuals who are cadets
or are spouses, widows, widowers, ancestors, or lineal descendants of past or present members of
the Armed Forces of the United States or of cadets, and no part of the net earnings of which
inures to the benefit of any private shareholder or individual.

Tax Regulation, §1.501(c)(19)-1(b) states that a war veteran organization there are two
requirements that must be met under this paragraph. The first requirement is that at least 75
percent of the members of the organization must be war veterans. For purposes of this section the
term “war veterans” means persons, whether or not present members of the United States Armed
Forces, who have served in the Armed Forces of the United States during a period of war
(including the Korean and Vietnam conflicts). The second requirement of this paragraph is that at
least 97.5 percent of all members of the organization must be described in one or more of the
following categories: (i) War veterans, (ii) Present or former members of the United States
Armed Forces, (iii) Cadets (including only students in college or university ROTC programs or at
Armed Services academies), or (iv) Spouses, widows, or widowers of individuals referred to in
paragraph (b)(2)(i), (11) or (iii) of this section.

Tax Regulation, §1.501(c)(19)-1 (c) states that in addition to having the proper members, an
organization must be operated exclusively for one or more of the following purposes: (1) To
promote the social welfare of the community as defined, (2) To assist disabled and needy war
veterans and members of the United States Armed Forces and their dependents, and the widows
and orphans of deceased veterans, (3) to provide entertainment, care, and assistance to
hospitalized veterans or members of the Armed Forces of the United States, (4) To carry on
programs to perpetuate the memory of deceased veterans and members of the Armed Forces and
to comfort their survivors, (5) To conduct programs for religious, charitable, scientific, literary,
or educational purposes, (6) To sponsor or participate in activities of a patriotic nature, (7) To
provide insurance benefits for their members or dependents of their members or both, or (8) To
provide social and recreational activities for their members.

Tax Regulation, §1.501(c)(19)-1 (d) states that Auxiliary units or societies for war veterans
organizations may be exempt as an organization described in section 501(c)(19)(a)(2) if it is an
auxiliary unit or society of a post or organization of war veterans described in paragraph
$01(c)(19)(a)(1) of this section. A unit or society is an auxiliary unit or society of such a post or
organization if it meets the following requirements: (1) It is affiliated with, and organized in
accordance with, the bylaws and regulations formulated by an organization described in
paragraph (a)(1) of this section, (2) At least 75 percent of its members are either war veterans, or
spouses of war veterans, or are related to a war veteran within two degrees of consanguinity (1.e.,
grandparent, brother, sister, grandchild represent the most distant allowable relationships), (3) All

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

Page: -6-

(Reyer 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

of its members are either members of an organization described in paragraph (a)(1) of this
section, or spouses of a member of such an organization or are related to a member of such an
organization, within two degrees of consanguinity, and (4) No part of its net earnings inures to
the benefit of any private shareholder or individual.

Internal Revenue Code Section 501(c)(19) defines a veteran as being a past or present member of
the United States armed forces.

Internal Revenue Code Section 7701(a)(15) defines the term “military or naval forces of the
United States” and the term “Armed Forces of the United States” each includes all regular and
reserve components of the uniformed services which are subject to the jurisdiction of the
Secretary of Defense, the Secretary of the Army, the Secretary of the Navy, or the Secretary of
the Air Force, and each term also includes the Coast Guard. The members of such forces include
commissioned officers and personnel below the grade of commissioned officers in such forces.

Government Position:

Due to the lack of response by the organization, and the information that was found, it appears
that ORG is an open bar that allows anyone to use the facilities. Since nothing could be found to
show that the organization is a veteran’s organization, there is no substantiation of the
composition of the membership.

Absent verification of the membership. none of the membership is presumed to be veterans. For
that reason, the ORG has failed the membership test and should have its exempt status revoked
effective January 1, 20XX.

Organization Position:

Not known at the time of this Revenue Agent Report.

Conclusion:

The organization made no response. The governmental position will be accepted as the correct
and final position.

(2) Can ORG retain its exempt status when it is operating in a commercial fashion?
Law:
Internal Revenue Code Section 513(a) defines the term “unrelated trade or business” as any trade

or business the conduct of which is not substantially related (aside from the need of such
organization for income or funds or the use it makes of the profits derived) to the exercise or

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

Reyer 886A Department of the ‘reasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

performance by such organization of its charitable, educational, or other purpose or function
constituting the basis for its exemption under Internal Revenue Code Section 501. That term does
not include any trade or business in which substantially all the work in carrying on such trade or
business is performed for the organization without compensation; or which is carried on, in the
case of an organization primarily for the convenience of its members, students, patients, officers,
or employees, or, in the case of a local association of employees which is the selling by the
organization of items of work-related clothes and equipment and items normally sold through
vending machines, through food dispensing facilities, or by snack bars, for the convenience of its
members at their usual places of employment; which is the selling of merchandise, substantially
all of which has been received by the organization as gifts or contributions.

Treasury Regulations, $1.501(c)(19)-1(c) states that in addition to the requirements of paragraphs
(a)(1) and (b) of this section, in order to be described in section 501(c)(19) under paragraph
(a)(1) of this section an organization must be operated exclusively for one or more of the
following purposes:(1) To promote the social welfare of the community as defined in
§$1.501(c)(4)-1(a)(2), (2) To assist disabled and needy war veterans and members of the United
States Armed Forces and their dependents, and the widows and orphans of deceased veterans, (3)
to provide entertainment, care, and assistance to hospitalized veterans or members of the Armed
Forces of the United States, (4) To carry on programs to perpetuate the memory of deceased
veterans and members of the Armed Forces and to comfort their survivors, (5) To conduct
programs for religious, charitable, scientific, literary, or educational purposes, (6) To sponsor or
participate in activities of a patriotic nature, (7) To provide insurance benefits for their members
or dependents of their members or both, or (8) To provide social and recreational activities for
their members.

Treas. Reg. §1.501(c)(19), does not address what it means to “exclusively” provide social and
recreational activities for members. There are no cases or revenue rulings regarding the
operation of veterans organizations for the social and recreational activities of their members
under §501(c)(19).

However, the permitted purpose reflected in Treas. Reg. §1.501(c)(19)-1(c)(8) is similar to the
exempt purpose contained in §501(c)(7) as both provisions permit an exempt organization to
operate social and recreational facilities for its members. In fact, prior to the enactment of
§501(c)(19), a veterans organization whose primary activity consisted of operating a bar or
restaurant for the benefit of its members would have to qualify as §501(c)(7) social club to be
tax-exempt. See Rev. Rul. 60-324 and Rev. Rul. 69-219.

---

• In 1976. Congress amended § 501(c)(7) replacing “exclusively” with “substantially all”. This change was effected to establish
  that social clubs will not jeopardize their exempt status if they receive 35% of their gross receipts from non-membership sources.
  However. only 15% of their gross receipts may be derived from nonmembers’ use of club facilities or services. Pub. L. No. 92-

568. S. Rep. 1318, 94 Cone.. 2d Sess. (1976)

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

Page: -8-

Form 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

These organizations, prior to 1976, were required to operate “exclusively” for the pleasure and
recreation of its members. See §501(c)(7) (1975). Thus, the rulings and case law under
§501(c)(7) may be useful for determining whether a §501(c)(19) veterans organization is
providing social and recreational activities exclusively for its members.

Treas. Reg. § 501(c)(7)-1(b) provides that a club which engages in business, such as making its
social and recreational facilities available to the general public or by selling real estate, timber, or
other products, is not organized and operated exclusively for pleasure, recreation, and other
nonprofit able purposes, and is not exempt under Section 501(a). Solicitation by advertisement
or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging
in business and is not being operated exclusively for pleasure, recreation, or social purposes.

In West Side Tennis Club v. Commissioner, 111 F.2d 6 (2nd Cir. 1940), the Second Circuit
upheld the board of tax appeals determination that a social club was not exempt because a
substantial amount of its income was received from the general public. In that case, the West
Side Tennis Club was organized to provide tennis facilities for the use and enjoyment of its
members. The facilities were only available to members for most of the year; however, the club
hosted annual national championship tennis matches that were open to the general public. The
club shared in the ticket proceeds from these matches. The Second Circuit upheld the board of
tax appeals determination that the national championship matches were a substantial and
profitable business which jeopardized the club’s exemption. West Side Tennis Club, 111 F.2d at
7

In Rev. Rul. 60-324. 1960-2 C.B. 173 and Rev. Rul. 69-219, 1969-1 C.B. 153, the Service held
that a §501(c)(7) social club is not operated exclusively for the pleasure or recreation of its
members if it makes its facilities available to the general public to a substantial degree. /d.
However, this does not mean that all dealings with the general public are necessarily inconsistent
with the club’s exempt purposes. For instance, in Rev. Rul. 60-324, 1960-2 C.B. 173, the
Service stated that:

[w]hile [the] regulations indicate that a club may lose its exempt status if it
makes its facilities available to the general public, [it] does not mean that
any dealings with outsiders will automatically cause a club to lose its
exemption. A club will not lose its exemption merely because it receives
some income from the general public, that is, persons other than
members and their bona fide guests, or because the general public may
occasionally be permitted to participate in its affairs, provided such

ae a a

“dn The Minnequa University Club v, Commissioner, T.C. Memo 1971-305 (1971), the Tax Court upheld the Service’s
determination that a § 501(c)(7) organization was no longer exempt from Federal income tax because at least 30 percent of its
income over a 5 year period was derived from the general public

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

Page: -9-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,

12/31/20XX

participation is incidental to and in furtherance of its general club purposes
and the income therefrom does not inure to members.

In 1971. the Service issued Revenue Procedure 71-17, 1971-1 C.B. 683, which contains
guidelines for determining the impact of an organization’s nonmember gross receipts on its
exempt status under §501(c)(7). The revenue procedure provides that “[a] significant factor
reflecting the existence of a nonexempt purpose is the amount of gross receipts derived from use
of aclub’s facilities by the general public.” The revenue procedure went on to provide a safe
harbor for organizations serving the general public:

As an audit standard, [the gross receipts derived from general public]

alone will not be relied upon by the Service if annual gross receipts from
the general public for [use of the club’s facility] is $2,500 or less or, if more

than $2,500, where gross receipts from the general public for use is five
percent or less of total gross receipts of the organization. Id. at §3.01.

The term “general public” is defined as persons other than members or their dependents or
guests. Id. at $2.01. Section 3.03 of Rev. Proc. 71-17 provides four instances in which
nonmembers are assumed to be the guests of the members. The assumptions include:

Where a group of eight or fewer individuals, at least one of whom is a member, uses club
facilities, it will be assumed for audit purposes that the nonmembers are the guests of the
member, provided payment for such use is received by the club directly from the member or the
member’s employer:

Where 75 percent or more of a group using club facilities are members, it will likewise be
assumed for audit purposes that the nonmembers in the group are guests of members, provided
payment for such use is received by the club directly from one or more of the members or the
member’s employer.

In Pittsburgh Press Club v. United States, 615 F.2d 600 (3 Cir. 1980), the Third Circuit

Upheld the Commissioner’s determination that a social club failed to qualify for

exemption from income tax as a §§ 501(c)(7) organization because it was operated for business
and not for the pleasure and recreation of its members. The Pittsburgh Press Club was organized
for the purpose of providing a professional and social meeting place for its members. However,
during the years under exam, it hosted several functions for nonmember outside groups, although
each such group had been member sponsored. Based on the amount of nonmember revenues
($281,000 of nonmember receipts), as well as the percentage of those revenues (11 to 17 percent
of gross receipts), the Third Circuit upheld the revocation stating that the exemption from
Federal income tax for §501(c)(7) organizations “‘is to be strictly construed.” Pittsburgh Press
Club, 615 F.2d at 606. The Court stated that such strict construction cannot be reconciled with
the fact that a substantial amount of the Club’s activities and income consisted of nonmember

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

Bi 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

functions and nonmember income. Therefore, the Court held “revocation of its exemption was
proper.” /d.

Treasury Regulation §1.501(c)(4)-1(a)(2)(i) of the Income Tax Regulations provides that an
organization is operated exclusively for the promotion of social welfare if it is primarily engaged
in promoting in some way the common good and general welfare of the people of the
community. An organization embraced within this section is one which is operated for the
purpose of bringing about civic betterments and social improvements.

Treasury Regulation §1.501(c)(4)-1(a)(2)(ii) states that promotion of social welfare does not
include any of the following: A. Direct or indirect participation or intervention in a political
campaign on behalf of or in opposition to any candidate for public office, B. Operating a social
club for the pleasure, benefit or recreation of its members, C. Carrying on a business with the
general public in a manner similar to organizations operated for profit.

Tax Regulations, $1.501(c)(19)-1(c) limits the organizations social and recreational activities to
its members. The sponsorship of gaming activities, to the extent of the members’ participation, is
an activity related to the exempt purposes of an IRC 501(c)(19) organization. Thus, to the extent
of member participation, income derived from the gaming activities is not subject to the tax on
unrelated business income, provided such participation is documented. If the organization is
unable to support the conclusion that such income was received from members, based on the
facts and circumstances, the examiner may presume income to be from nonmembers.

Participation by nonmembers in the sponsored gaming activities may be deemed unrelated to the
sponsoring organization’s exempt purposes, and may jeopardize the organization’s exemption or
result in the imposition of unrelated business income tax. Analyze revenue from gaming
activities, such as pull-tabs, to determine whether it is considered unrelated income. Gaming
activities involving nonmembers are generally not considered substantially related to the
organization’s exempt purpose(s).

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 283 (1945), the
Supreme Court held that “the presence of a single . . . [non-exempt] purpose, if substantial in
nature, will destroy the exemption regardless of the number or importance of truly. . . [exempt]
purposes.”

Government Position:

The operations of the organization can not be distinguished from the commercial operations of a
for-profit bar. The primary activity is the operation of a club that is available for everyone for the
purpose of pleasure, or recreation, that benefits those who come to participate in its activities.

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

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,

12/31/20NX

The principle activity of the bar and organization is for non-members. The principle activity
appears to be the same as seen in for-profit bars and so there is a commercial hue and tone to the
operations of the organization.

While the organization has refused to accept mail from the Internal Revenue Service, according
to the U. S. Post Office, they appear to accept other mail at two of the addresses that examiner
mailed certified mail to.

Therefore, examiner will arrive at a conclusion based on the facts available. Because there is a
taxable effect, examiner will not terminate the status of the organization when it appears that the
organization is still operating. ORG is substantially operating for non-veterans and so has a
substantial non-exempt purpose. For that reason, the organization should have its exempt status
revoked effective January 1, 20XX.

Organization Position:
Not known at the time of this Revenue Agent Report.
Conclusion:

The organization did not respond. Therefore, the governmental position is accepted as the correct
and final position.

(3) Whether ORG, doing business as “ORG”, records are inadequate under Section 6033.
Law:

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

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

Treas. Reg. § 1.6033-2(a)(1) states in part that every organization exempt from taxation under
Section 501(a) shall file an annual information return specifically setting forth its items of gross

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

Page: -12-

Seni 886A Department of the ‘Preasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

income, gross receipts and disbursements, and such Tax Regulation §1.6033-2(a)(2)(i) states in
pertinent part that every organization exempt from taxation under Section 501 (a), and required to
file a return under Section 6033 and this Section (including, for taxable years ending before
December 31, 1972, private foundations, as defined in Section 509(a), other than an organization
described in Section 401(a) or 501(d), shall file its annual return on Form 990.

Treas. Reg. § 1.6033-2(i)(1) states that an organization which is exempt from taxation under
Section 501(a) and is not required to file annually an information return required by this Section
shall immediately notify in writing the district director for the internal revenue district in which
its principal office is located of any changes in its character, operations, or purpose for which it
was originally created.

Treas. Reg. § 1.6033-2(i)(2) states that every 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 of inquiring into its exempt
status and administering the provisions of subchapter F (Section 501 and following), chapter 1 of
subtitle A of the Code, Section 6033, and chapter 42 of subtitle D of the Code. See Section 6001
and §1.6001-1 with respect to the authority of the district directors or directors of service centers
to require such additional information and with respect to the books of accounts or records to be
kept by such organizations.

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

Government Position:

In order to qualify for exemption under Section 501(c)(19) of the Code, an organization must
keep accurate books and records to determine the nature of the organization’s income and records

of its exempt and non exempt activities.

The organization did not accept the mail even though the U. S. Post Office states that the
organization received their mail at the locations mail was sent to. For that reason, the examiner
will not accept any expenses that are not substantiated. Further, as covered in the facts section,
the organization appears to have been open to the general public.

Based on the information available, the organization’s December 31, 20XX and December 31,
20XX form 990’s do not accurately reflect the organizations activities, nature of income &

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

Bovin 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

expenses, and amount of income & expenses as required by Section 6001 and 6033 of the Code
and its Regulations. Therefore, since the organization’s records were not sufficient to accurately
reflect the nature of their income & expenses, amount of income & expenses, and its exempt vs.
non exempt activities, such failures have risen to a level that would support revocation of
exemption under Section 501(c)(19) and Section 501(c)(7) of the Code as described in Rev. Rul.
59-95, 1959-1 C.B. 627,

The exempt status of ORG Doing Business As “ORG” should be revoked effective January 1,
20XX. All non-substantiated expenses will be disallowed as expenses.

Organizational Position:

Not known at the time of this Revenue Agent Report.

Conclusion:

The organization did not respond. Therefore, the governmental position is accepted as the correct
and final position.

Conversion of Form 990 to form 1120:

In the absence of a lease contract, and considering the close relationship between the owners of
the ORG and BM-1 CO-6, the expense represented by the Form 1099s to BM-1 Rentals is not
considered to be substantiated and so is not accepted as an expense of ORG.

The organization was asked to supply documentation and substantiation of expenses. All efforts
to obtain those documents failed. Internal Revenue Service records were reviewed in an effort to
identify substantiated expenses. According to those records, the organization spent, in 20XX, $
for wages and $ for employment taxes. In 20XX, the organization spent $ for wages and $ for
employment taxes. The organization issued 1099s to RA-4 and BM-1 Rentals in 20XX for $ and
$ respectively. The organization issued 1099s to RA-4 and BM-1 Rentals in 20XX for $ and $
respectively. See attachment Eight.

According to the State Secretary of State, BM-1 CO-6 is a partnership equally owned by BM-3
and BM-2. The address listed on the Articles of Organization is listed as being: Address, City,
State. See Attachment Nine.

In order to locate the Form 1099s filed, a search was made using Internal Revenue Service
records. According to the Form 1099s filed, the address for BM-1 CO-6 in 20XX was Address,
City, State. The same address as ORG. In 20XX, BM-1 CO-6’s address was the same as it was
for 20XX.

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

Page: -14-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,

12/31/20XX

BM-1, the 100% owner of ORG, and per the information from State’s Division of Alcohol and
Tobacco Control shows that BM-1 is the managing officer. So, BM-1 appears to be the person
responsible for the organization. According to BM-1’s 20XX and 20XX Form 1040, BM-2 is
BM-1’s husband. From claimed Form 1040 information, BM-1 and BM-2 do not appear to have
been paid either directly, or indirectly, by ORG.

BM-1 Rental did file a partnership return but no revenue was claimed as a result of that
partnership on the BM-1’s joint return. Because of the close relationship of the individuals
involved, and the absence of substantiation, the Form 1099 amounts are treated as a sham
transaction and considered to be the discrepancy adjustment amount for the owner’s Form 1040.

There does not appear to be a business purpose for the BM-1 Rental, or the issuance of the Form
1099 to BM-1 Rental when ORG and / or its owner BM-1 could just as easily have entered into
the rental contract with the owner of the building.

Because the certified mail was returned as undelerable, then it appears that BM-1 Rentals is not
the building owner. If they were, then the partnership owners who were ORG Board of Director
members in 20XX would have known to accept the certified letters, or they would have known
what the correct address for the organization was.

According to the documents cited above BM-1 is the sole officer and 100% owner of the
organization. As an officer of the organization she is a common law employee of the Exempt
Organization (EO) unless, under IRC 414(n) there is a leased employment agreement. Since the
organization did not respond, no substantiation was provided to demonstrate that BM-1 is under
a lease agreement, so BM-1 is a common law employee.

A review of the Form 990s filed for 20XX and 20XX do not show ORG as owning any property.
The Form 990s filed show BM-3 as the organizational manager.

As the 100% owner, BM-1 was entitled to receive 100% of the net income. Because the Form
1099 does not appear to have a business purpose, but does appear to be for a sham activity and
appears to have been made soley for the purpose of tax avoidance.

Because BM-1 is the 100% owner of the organization, was its president (or chairman depending
on which State Annual Report you are looking at) and had unlimited control of the organization’s
activities, there is no reason to allocate the sham activity represented by the 20XX and 20XX
Form 1099s issued to BM-1 Rentals to anyone other than BM-1. She bears sole responsibility for
this activity as she represents herself as being the 100% owner of ORG Doing Business As
“ORG.”

In Higgins v Smith (308 U.S. 473, 60 S. Ct. 355), the court stated that, “... The government may
not be required to acquiesce in a taxpayer's election of that form for doing business which is most
advantageous to him, but the government may look at actualities and upon determination that the

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

form employed for doing business or carrying out a challenged tax event is unreal or a sham may
sustain or disregard the effect of the fiction as best serves the purposes of the tax statute.”

Internal Revenue Code Section 61(a) states that except as otherwise provided in this subtitle,
gross income means all income from whatever source derived.

In Revenue Ruling 79-9, 1979-1 CB 125 stated that property or an economic benefit received by
the controlling shareholders or their families as a result of the corporations charitable
contribution is a constructive dividend.

Revenue Ruling 73-605, 1973-2 CB 109, (Jan. 01, 1973) states that, “Section 316 of the Code
defines a dividend as a distribution of property by a corporation to its shareholders out of its
earnings and profits of the taxable year or earnings and profits accumulated after February 28,
1913. This definition has been considered by the courts to be broad enough to cover an amount
paid by a corporation under an agreement or contract in excess of its allocable share of the
consolidated tax liability. See Beneficial Corporation, 18 T.C. 396 (1952), aff'd per curiam, 202
F.2d 150 (3rd Cir. 1953); Dynamics Corporation v. United States, 392 F.2d 241 (Ct. Cl. 1968).
See also section 1.1552-1(b)(2) of the Income Tax Regulations. It is not necessary that the

corporation to a third party for the benefit of a shareholder is a constructive dividend, which will
be taxed as a dividend to the shareholder for whose benefit the distribution is made...”

In Baumer v. United States, 580 F.2d 863 stated that for federal taxation purposes, transactions
between closely held corporations and its shareholders or relatives of shareholders are not
entitled to the presumption that they are conducted at arm's length. The court further stated that
the crucial determinate of whether or not there is a dividend or not is whether or not the
distribution served a business purpose or not, and Where corporation consummates transaction
with favorable consequences for controlling shareholder's immediate family, only in most
extraordinary circumstances would it be possible to conclude that shareholder had not exercised
substantial influence in causing diversion of corporate assets, thereby justifying constructive
dividend treatment..

Internal Revenue Code Section 162(k)(2)(A) disallows, as a corporate business expense, the
payment of dividends.

The money represented by the Form 1099s is considered to be a constructive Dividend received
by BM-1. For that reason, the dividend amount is not considered to be a valid business expense
of ORG.

In the absence of substantive documentation, no liabilities will be considered as substantiated. In
the absence of substantive documentation, no members will be considered to be veterans. In the

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

eyaun 886A (department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX

absence of documentation to the contrary, the organization will be treated as an organization that
is not seperable from BM-1.

The below information summarizes the Form 990 information per return and per examination:

Year:
Part one:
Line:
Ja
1b
1c
id
2
3
4
5
6a
6b
6c
7
8a
8b
8c
8d
9a
9b
9c
10a
10b
10c¢
11
12
13
14
15
16
17
18
19

20

21
Part two:

22

Per Return Per Exam Change

December- December-
XX XX

Direct public support
Indirect Public support
Government Contr
Total
Program Rev
Membership Dues
Interest on Savings
Dividends
Gross Rents
Less: Rental Exp

Net Rental Income $ - $ -
Other Inv Income
Gross Sales
Less: COGS
Gain (or Loss)
Net Gain
Special Events
Less: Direct Exp
Net Income $ - $ -
Gross Inv Sale
Less: COGS
Gross Profit
other revenue
Total Revenue
Program Services
Management & General
Fundraising
Payments to affiliates
Total Expenses
Excess or deficit
Net BOY fund balance
Other Changes in net
assets
Net EOY fund balance

PRAA AS
'
AHA
'

Grants $ -

Form 886-ARev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -17-

oven 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX
23 Specific Assistance
24 Benefits Paid to mbr
25 Officer Comp $ -
26 Other Salaries
27 Pension Plan
28 Other Emp Benefits
29 payroll taxes
30 prof fundraising fees
31 accounting fees
32 legal fees
33 supplies
34 telephone
35 postage & shipping
36 occupancy
37 equip rental & maint
38 printing & Pubs
39 travel
40 conf, conv
41 interest
42 Depreciation
43a Misc
43b Insurance
43c Taxes, Fees
43d Donations ) -
43e Bank Charges $ -
44 Total

For 20XX, the Form 990 information per return and per examination is summarized below:

Per Return Per Exam Change
December- December-
Year: XX XX
Part one:
Line:
1a Direct public support
1b Indirect Public support
1c Government Contr $ - $ -
1d Total $ - §
2 Program Rev $ - $
3 Membership Dues $ -
4 Interest on Savings $ - §$
5 Dividends
6a Gross Rents
6b Less: Rental Exp :
6c Net Rental Income $ - $
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -18-

"Form 886A Department of the ‘l'rcasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
12/31/20XX
7 Other Inv Income
8a Gross Sales
8b Less: COGS
8c Gain (or Loss) $ - $ -
8d Net Gain
9a Special Events
9b Less: Direct Exp
9c Net Income
10a Gross Inv Sale
10b Less: COGS
10c Gross Profit
11 other revenue
12 Total Revenue
13 Program Services
14 Management & General
15 Fundraising
16 Payments to affiliates -
17 Total Expenses
18 Excess or deficit
19 Net BOY fund balance
Other Changes in net
20 assets
21 Net EOY fund balance
Part two:
22 Grants
23 Specific Assistance
24 Benefits Paid to mbr
25 Officer Comp
26 Other Salaries
27 Pension Plan
28 Other Emp Benefits
29 payroll taxes
30 prof fundraising fees
31 accounting fees
32 legal fees
33 supplies
34 telephone
35 postage & shipping
36 occupancy
37 equip rental & maint
38 printing & Pubs
39 travel
40 conf, conv
41 interest
42 Depreciation
43a Misc
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -19-

Royern 886A Department of the ‘I'rcasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

ORG 12/31/20XX,
12/31/20XX
43b Insurance
43c Taxes, Fees
43d Donations
43e Bank Charges = —
44 Total
Tax Effect:

Because the revocation is deemed to be correct, then the tax effect of converting from the Form
990 to the Form 1120 for the years ended December 31, 20XX and 20XX should be completed
by the organization. Because there was no response to the revocation letter, a substitute for return
was prepared by the Internal Revenue Service examiner. The information from the Form 990s, if
it was transferred to the Form 1120 for the applicable years, would yield the following tax effect:

Line Line Title 20KX 20XX
lc Gross Receipts $ §$
Cost of Goods Sold
3 Gross Profit $ §$
27 Total Deductions
28 Taxable Income $
30 Taxable Income $
3] Total Tax $

This tax does not include applicable interest.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -20-