Determination 1040026: IRS revoked an organization’s section 501(c)(3) exemption after finding substantial non-exempt activities

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization’s federal income tax exemption under IRC § 501(c)(3), effective January 1, 20XX. The organization’s activities included drum practice, bingo and other charitable gaming, and operating a club that the report says sold alcohol illegally. The IRS found that these activities did not primarily further exempt purposes and that the organization had not shown that its income did not benefit private interests. The report states that the organization spent no time on exempt activities in the years reviewed and spent zero or only a very small percentage of its gross gaming income on possible charitable purposes. Contributions made after January 1, 20XX, were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(c)(2), and 1.501(c)(3)-1(d)(1)(ii); Rev. Ruls. 64-182, 80-301, and 80-302

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
625 Fulton Street, Room 503 501.03-00
Brooklyn, NY 11201

TAX EXEMPT AND

GOVERNMENT ENTITIES

DIVISION July 19, 2010

Number: 201040026
Release Date: 10/8/2010

LEGEND Taxpayer Identification Number:
ORG = Organization name Person to Contact:
XX = Date Address = address Identification Number:
Contact Telephone Number:

ORG
ADDRESS

CERTIFIED MAIL
Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated January 9, 20XX is hereby revoked and you are no longer exempt under
section 501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

You are not operating exclusively for any charitable purpose, educational purpose, or
any other exempt purpose. Our examination reveals that you are not engaged primarily
in activities which accomplish charitable, educational or other exempt purposes as
required by Treas. Reg. 1.501(c)(3)-1(c)(1). Your activities, including your financial
transactions, more than insubstantially furthered non-exempt purposes. Moreover, you
failed to establish that you did not operate for the benefit for the private interest of a
private shareholder or individual, as required for continued recognition of exemption
pursuant to Treas. Reg. 1.501(c)(3)-1(d)(1)(ii). Your income inured to the benefit of
private shareholders and individuals.

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

You are required to file income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the tax year ending December 31, 20XX
and for all tax years thereafter in accordance with the instructions of the return.

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

Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st Day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgments by referring to the enclosed Publication 892. You may write to
these courts at the following addresses:

You also have the right to contact the Office of the Taxpayer Advocate.

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

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

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

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosure:
Publication 892

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE EO Examinations
1500 Ormsby Station Court Suite A - Stop 700
Louisville, KY 40223

TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION December 14, 2009
LEGEND Taxpayer Identification Number:
ORG = Organization name Form:
XX = Date Address = Address Tax Year(s) Ended:
Person to Contact/ID Number:

ORG Contact Numbers:
ADDRESS 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, please sign and return the enclosed Form 6018, Consent
to Proposed Action - Section 7428. If you have already given us a signed Form 6018,
you need not repeat this process. 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.

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.

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,

Nanette M. Downing, Acting Director
Exempt Organizations Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO Examinations

1500 Ormsby Station Court Suite A — Stop 700

Louisville, KY 40223

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION December 14, 2009
LEGEND Taxpayer Identification Number:
ORG = Organization name Form:
XX = Date Address = Address Tax Year(s) Ended:
Person to Contact/ID Number:
ORG Contact Numbers:
ADDRESS 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, please sign and return the enclosed Form 6018, Consent
to Proposed Action - Section 7428. If you have already given us a signed Form 6018,
you need not repeat this process. 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.

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.

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,

Nanette M. Downing, Acting Director
Exempt Organizations Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

LEGEND
ORG = Organization name XX = Date County = county CO-1 = 1st
COMPANY
Issue:

Whether ORG (ORG) continues to meet the requirements of Internal Revenue Code (IRC) section
501(c)(3), and therein continues to qualify for exemption from Federal income tax.

Facts:

Organizational
ORG was granted tax-exempt status under IRC 501(c)(3) on January 9, 20XX.

The Constitution and Bylaws (dated December 1, 20XX) state,
Article II: Purpose

To raise public aware of the history, culture, and current conditions of Native People.

To organize and develop programs for the advancement of interests of Native People.

To educate others of the Native way of life.

To provide a “home” for Native People, their descendants, and those who come seeking a
Tribal unit.

To support Members who suffer economic or emotional difficulties to the extent of the
organization's capabilities.

6. To engage in all other scientific, educational, or cultural activities of benefit to the
   membership.

Article IV: Membership

_...Members of ORG shall be Native American People, their descendants, and all other persons
who subscribe to the purpose of the association....

Article Vill: Resignations and Removals

... 3. Actions that may result in removal include but not limited to:
A. Possession, use, and/or distribution of alcohol and/or drugs at Tribal functions...

On April 7, 20XX, the CO-1 (CO-1) assumed the name of ORG. See Exhibit A.
CO-1 is not a tax-exempt organization under any Code Section.
Activities

During the course of the examination, ORG was asked to provide written documentation concerning the
exempt and non-exempt activities.

In response to the exempt activities, ORG provided copies of the weekly minutes. The minutes stated that
on a weekly basis, normally 6 — 8 members would have “Drum Practice” for approximately four hours. The
“Drum Practice” was the only entry on the minutes that indicated what occurred at the meeting. A few

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 20XX - 200K

other topics at the meetings including bingo, spring gathering, and Christmas party. ORG also held annual
gatherings that were open to members only.

In response to the non-exempt activities, ORG provided a brief summary of the charitable gaming activity.
ORG stated that in 20XX, 1456 man hours was devoted to bingo

ORG applied for and was granted a charitable gaming license (ORG # 1775) by the Department of
Charitable Gaming (DCG). On or about August 21, 20XX, DCG suspended ORG's charitable gaming
license for failing to retain the required 40% (or greater) of the adjusted gross receipts. For 20XX, ORG
only retained 5.67%.

On January 29, 20XX, ORG was asked to describe its involvement with the “CO-1.”

ORG's response (See exhibit B).

“we obtained a DBA Certification as the CO-1. All of our business dealings are done under the
name ORG.

Membership

During the course of the examination, ORG was asked to provide their membership applications. Part of
the application process included genealogy information.

The application states,
beeeeas “Please give a brief outline of your tribal lineage and why you wish to become a member of ORG on
a separate sheet. /t is required that you have the information provided on these forms notarized so
you have a legal document showing your Native ancestry. Do not list family members above, unless
they wish to become tribal members, and are under eighteen.” .........
44 membership applications were provided. 44 applications included genealogy information.

Financial

ORG has two separate bank accounts. One labeled general and one gaming.

The Form 990 for the period ended December 31, 20XX reported gross receipts from charitable gaming
activities as $$ and total gross receipts as $$.

In 20XX, zero dollars were spent for a tax-exempt purpose.

The Form 990-EZ for the period ended December 31, 20XX reported gross receipts from charitable
gaming activities as $$ and total gross receipts as $ $.

In 20XX, zero dollars were spent for a tax-exempt purpose.

The Form 990 for the period ended December 31, 20XX reported gross receipts from charitable gaming
activities as $$ and total gross receipts as $ $

in 20XX, $$ was possibly spent for a tax-exempt purpose.

For 20XX, ORG filed an electronic post-card stating that its gross receipts are normally less than $$.

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 20XX - 20XXK

Pull-Tab Inventory

From June 30, 20XX — September 30, 20XX, an analysis of ORG’s Pull-tab inventory was conducted.
Based off of the information provided, 27 additional boxes of pull-tabs were sold but not accounted for.

ORG was asked for an explanation. ORG failure to provide a response.
20XX Activities

On or about March 7, 20XX the County County Sherriff Department conducted a raid on the CO-1 for
illegally selling alcohol without a license.

Posted in the club were “CO-1 Rules.” The rules were printed on ORG letterhead. See Exhibit C.

On May 21, 20XX, ORG was provided a copy of the newspaper articles for comment. ORG stated See
Exhibit D,

“The CO-1 has absolutely nothing to do with the ORG the people working this club were doing so
in hopes of creating jobs for themselves and others and were not being paid. We also lost about
$$ in the five weeks we were open, so I/m afraid there won't be any taxes to collect. We were not
running this establishment as a non-profit.”

Law:

Section 501(a) of the Internal Revenue Code exempts from taxation organizations described in subsection
(c) or (d) under this subtitle unless such exemption is denied under section 502 or 503.

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

Section 501(c)(3) of the Code provides for the exemption from Federal income tax of organizations
organized and operated exclusively for charitable, educational, or scientific purposes, no part of the net
earnings of which inures to the benefit of any private shareholder or individual.

Treasury Regulation 1.501(c)(3)-(a)(1)provides, in part, that: “In order to be exempt as an organization
described in section 501(c)(3), an organization must be both organized and operated exclusively for one
or more purposes specified in such section. If an organization fails to meet either the organizational test or
the operational test, it is not exempt.”

Section 1.501(c)(3)-1 of the Income Tax Regulations provides:

(c) Operational test--(1) Primary activities. An organization will be regarded as “operated exclusively” for
one or more exempt purposes only if it engages primarily in activities which accomplish one or more of

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 20XX - 20XX

such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(c)(2) of the Income Tax Regulations 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.

Section 1.501(c)(3)-1(d)(1)(ii) provides that the burden of proof is on the organization to establish that it is
not organized and operated for the benefit of private interests.

Church in Boston v. Commissioner, 71 T.C. 102, 107 (1978), provides, in part, that the word “exclusively”
does not mean “solely” or “without exception.” An organization which engages in nonexempt activities can
obtain and maintain exempt status so long as such activities are only incidental and insubstantial. (World
Family Corp. v. Commissioner, 81 T.C. 958, 963 (1983).) Neither the Internal Revenue Code, the
regulations nor the case law provide a general definition of “insubstantial” for purposes of 501(c)(3). This
is an issue of fact to be determined under the facts and circumstances of each particular case. (World
Family Corp. v. Commissioner, supra at 967.)

In Help The Children, Inc. v. Commissioner 28 TC 1128 (1957), the court held that an organization
engaged in fund-raising activities through operation of bingo games and whose actual charitable
contributions consisted of contributions to charitable institutions of insubstantial amounts when compared
to its gross receipts from operation of bingo games, did not qualify for exemption under section 501(c)(3)
of the Code.

Petitioner's fund-raising activities consisted of the operation of bingo games at the Lodge of the Fraternal
Order of the Eagles. It also operated a soda bar, and miscellaneous activities. Income from the soda bar
and miscellaneous activities was reported on the returns as $2,843.25 for 1953 and $3,672.64 for 1954.
The gross receipts from the fixed charge or donation for the use of the bingo cards were $313,802.20 for
1953 and $306,309.85 for 1954.

Petitioner did not operate any charitable institutions and its actual charitable function consisted of
contributions to various individual doctors and institutions. These contributions totaled $2,880 in 1953 and
$3,873.20 in 1954. Its principal activity was the profitable operation of bingo games on a business or
commercial basis. The principal source of gross receipts was from the fixed charge or donation assessed
against each player for the use of the bingo cards.

Therefore, the court held that the petitioner failed to establish that it is entitled to a tax-exempt status in the
taxable years in question.

In Make a Joyful Noise, Inc. v. Commissioner, 56 TCM 1003 (1989), the court held that operating regularly
scheduled bingo games on behalf of other exempt organizations was a trade or business unrelated to the
organization's exempt purposes.

In that case, the court concluded that the petitioner failed to carry its burden of proving that its participation
in bingo games was an insubstantial part of its activities.

In P.L.L. Scholarship Fund, v. Commissioner, 82 TC 196 (1984) the Tax Court held that petitioner was not
operated exclusively for exempt purposes under the provisions of section 501(c)(3), I.R.C. 1954, and
section 1.501(c)(3)-1(c)(1), Income Tax Regs. Therefore, it is not exempt from Federal income tax.

Petitioner was incorporated as a nonprofit corporation for the purpose of raising money to be used for
providing college scholarships. The money was raised from the operation of bingo games on the premises

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 20XX - 20XX

of a commercial establishment.

The court stated that: “After careful consideration of the entire record, this Court finds that the petitioner
has not carried its burden of showing that it was operated exclusively for an exempt purpose under the
required standards.”

The court further stated that: “Since the record in this case does not show that the petitioner was operated
exclusively for exempt purposes, but rather indicates that it benefited private interests, exemption was
properly denied.”

In People of God Community v. Commissioner, 75 TC 127 (1980), the court held, that part of petitioner's
net earnings inured to the benefit of private shareholders or individuals and that petitioner was not exempt
as an organization described in section 501(c)(3), of the Internal Revenue Code of 1954.

The court stated that the burden falls upon petitioner to establish the reasonableness of the
compensation. The court indicated that by basing compensation upon a percentage of petitioner's gross
receipts, apparently subject to no upper limit, a portion of petitioner's earnings was being passed on to an
individual.

The court stated that: “The statute specifically denies tax exemption where a portion of net earnings is
paid to private shareholders or individuals. We hold here that paying over a portion of gross earnings to
those vested with the control of a charitable organization constitutes private inurement as well. All in all,
taking a slice off the top should be no less prohibited than a slice out of net.”

Revenue Ruling 64-182, 1964-1 (Part 1) C.B. 186, concluded that an organization qualified for exemption
under section 501(c)(3) of the Code where it used the proceeds from a business activity to conduct a
charitable, program, “commensurate in scope” with its financial resources, of making grants to other
charitable organizations. Thus, an organization whose principal activity is operating games of chance may
nevertheless qualify for exemption, provided it uses the proceeds of that business activity in a real and
substantial charitable program (such as charitable grant making) commensurate in scope with its financial
resources, and other wise meets the requirements of exemption.

The Callaway Family Association, Inc. v. Commissioner, 71 T.C. 340 (1978), held that a family association
formed as a nonprofit organization to study immigration to and migration within the United States by
focusing on its own family history and genealogy does not qualify for exemption under section 501(c)(3) of
the Code. The association's activities included researching the genealogy of its members for the ultimate
purpose of publishing a family history. The court stated that the association's family genealogical activities
were not insubstantial and were not in furtherance of an exempt purpose. Rather, they served the private
interests of the members. Thus, the association was not operated exclusively for exempt purposes. See
also Benjamin Price Genealogical Association v. United States, Civil No. 78-2117 (D.D.C., April 26, 1979).

Revenue Ruling 80-301, 1980-2 CB 180, states a genealogical society that (1) opens its membership to all
persons in a particular area, (2) provides instruction in genealogical research techniques to its members
and to the general public, but does not research genealogies for its members, (3) conducts research
projects and makes the results available to the state historical society, (4) provides materials for libraries
and community displays, and (5) promotes various other related activities forthe public qualifies for
exemption under section 501(c)(3) of the Code.

Revenue Ruling 80-302, 1980-2 CB 182, states an organization that (1) limits its membership to
descendants of a particular family, (2) compiles family genealogical research data for use by its members
for reasons other than to conform to the religious precepts of the family’s denomination, (3) presents the

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 20XX - 20XXK

data to designated libraries, (4) publishes volumes of family history, and (5) promotes social activities
among family members does not qualify for exemption under section 501(c)(3) of the Code.

Christian Echoes National Ministry, Inc. v. United States, 470 F2d 849 (1972), held, in part, that “tax
exemption is a privilege, a matter of grace rather than right’.

Government’s position:

Activities

Based on the information provided by ORG, drum practice accounted for a substantial amount of the
organization’s time. Drum practice in its self does not constitute an exempt purpose and is considered a
non-exempt activity.

The other activities outlined in ORG’s response do not serve a tax-exempt purpose and are also
considered a non-exempt activity. The bingo activity conducted by ORG does not serve a charitable
purpose and is considered a non-exempt activity.

Based on the information furnished, approximately 100% of ORG’s time was devoted to activities that do
not serve a charitable purpose. These activities primarily include the operation of a bingo session and
drum practice.

In 20XX, ORG had 2467 hours devoted to non-exempt activities (including 1640 hours of drum practice)
and 0 hours devoted to exempt activities.

In 20XX, ORG had 2082 hours devoted to non-exempt activities (including 1416 hours of drum practice)
and 0 hours devoted to exempt activities.

In 20XX, ORG had 936 hours devoted to non-exempt activities (including 306 hours of drum practice) and
0 hours devoted to exempt activities.

Membership

ORG’s membership applications that were provided by ORG were basically limited to people of Cherokee
Indian decent. The genealogical information was for use of the members and does not constitute a tax-
exempt purpose was outlined in Rev. Rul. 80-302.

Financial

Gross income from you exempt function activities was $. 100% of your gross income came from your
charitable gaming activities.

0% of your gross income was spent on a tax-exempt purpose.

20XX 20XX 20XX 3-Year Average
Gross Income $$ $$ $$ $$
Possible Charitable
Expenses $ - $ - $__$.00 $ _ $.00
Percentage 0.00% 0.00% % %
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -6-

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

Pull-tab inventory

Since ORG was unable to provide an explanation for the 27 boxes of pull-tabs, the proceeds of the pull-
tabs must have went to private interests. The additional income was not deposited into the bank and not
used for a tax-exempt purpose.

20XX Activities

The operation of an illegal club in which the primary activity is the selling of bootleg alcohol in a dry county
to members of ORG is not a tax-exempt purpose.

You are operated similar to the organizations described in Make a Joyful Noise v. Commissioner, Help the
Children v. Commissioner; and P.L.L. Scholarship Fund, v. Commissioner. Those cases involved
organizations engaged primarily in fund raising activities through bingo games. The courts held that
neither organization qualified for exemption under section 501(c)(3) of the Internal Revenue Code
because they were not operated exclusively for exempt purposes.

Because a substantial part of your activities is not in furtherance of an exempt purpose, we have
determined that you are not operated exclusively for an exempt purpose pursuant to section 501(c)(3) of
the Internal Revenue Code and section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations.

In addition, by engaging in substantial activities that serve private rather than public interests, you are not
operated exclusively for one or more exempt purposes pursuant to section 1.501(c)(3)-1(d)(1)(ii) of the
Income Tax Regulations. (See Church in Boston v. Commissioner and World Family Corp. v.
Commissioner.)

The amount of income distributed from the bingo account for possible charitable and other IRC 501(c)(3)
purposes in the year ended 20XX was $, year ended 20XX was $, and year ended 20XX was $$
respectively. The percentage of gross bingo income distributed for possible charitable purposes was
approximately 0% for the year ended 20XX, 0% for year ended 20XX, and approximately 0.78% for the
year ended 20XX. Over a three-year period, a possible 0.20% was spent on charitable purposes.

Based on the amount of gross bingo income that was distributed for charitable purposes, we have
concluded that the amount of the proceeds received from your bingo activities to conduct charitable and
educational programs is not “commensurate in scope” with the financial resources of your bingo operation.
(See Revenue Ruling 64-182, 1964-1 (Part 1) C.B. 186)

Taxpayer's position:

The taxpayer's position is unknown at this time.
Conclusion:

Based on the analysis of your activities and the sources and amounts of your gross income and expenses,
we have determined that you no longer meet the requirements for exemption under section 501(c)(3) of
the Internal Revenue Code.

You are operated similar to the organizations described in Make a Joyful Noise v. Commissioner, Help the
Children v. Commissioner; and P.L.L. Scholarship Fund, v. Commissioner. Those cases involved
organizations engaged primarily in fund raising activities through bingo games. The courts held that

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 20XX - 20XX

neither organization qualified for exemption under section 501(c)(3) of the Internal Revenue Code
because they were not operated exclusively for exempt purposes.

Based on the amount of gross bingo income that was distributed for charitable purposes, we have
concluded that the amount of the proceeds received from your bingo activities to conduct charitable and
educational programs is not “commensurate in scope” with the financial resources of your bingo operation.
(See Revenue Ruling 64-182, 1964-1 (Part 1) C.B. 186)

Because a substantial part of your activities is not in furtherance of an exempt purpose, we have
determined that you are not operated exclusively for an exempt purpose pursuant to section 501(c)(3) of
the Internal Revenue Code and section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations.

By engaging in substantial activities that serve private rather than public interests, you are not operated
exclusively for one or more exempt purposes pursuant to section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax
Regulations. (See Church in Boston v. Commissioner and World Family Corp. v. Commissioner.)

Based on the facts, law and conclusions cited above, we have determined that you no longer qualify for
exemption under section 501(c)(3) of the Internal Revenue Code.

Therefore, your exemption under section 501(c)(3) of the Internal Revenue Code is revoked effective
January 1, 20XX, the first day of the year that we determined that you are not operated exclusively for
exempt purposes.

Contributions made to you after January 1, 20XX , are not deductible under section 170 of the Internal
Revenue Code.

The appropriate state officials will be notified.

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

Page: -8-