IRS revoked an organization’s exemption after its original charitable purpose no longer existed

View official IRS release (PDF)

Plain-English summary

The IRS issued a final adverse determination that an organization no longer qualified for exemption under IRC § 501(c)(3). The organization had originally been established to operate a residential facility for autistic people, but the IRS determined that purpose no longer existed and that the organization was not operated exclusively for a charitable, educational, or scientific purpose. Contributions were no longer deductible under IRC § 170, and the organization was required to file Forms 1120 for later tax periods. The released file includes the final determination, an appeal notice, and an examination report.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501, 509, 6104, and 7428

Full text (IRS public release)

Appeals Office

Date: August 11, 2010

|
Tel: |
Fax: |
Number: 201044025 Refer Reply to:
Release Date: 11/5/2010 .
In Re:
A
B Employer Identification No.:
Cc
Form Required to be Filed:
Tax Period(s) Ended:
UIL: 509.02-00
LEGEND:
A =
B =
Cc =
Certified Mail
Dear

This is a final adverse determination as to your exempt status under section 501(c)(3) of
the Internal Revenue Code

from Federal income tax un
agreement to this final adverse determination.

Our adverse determination was made for the following reason(s):

Internal Revenue Service

Department of the Treasury

Person to Contact:

Employee ID Number:

(IRC). It is determined that you do not qualify as exempt
der IRC Section 501(c)(3) effective XXXXX. You are in

It was determined that you are not operated exclusively for any charitable,
educational, or scientific purpose. The purpose for which you were originally
established, that of operating a residential facility for the autistic, no longer exists.

Contributions to your organization are not deductible under Code section 170 as of
XXXXX,

You are required to file converted Forms 1120, U.S. Corporation Income Tax Return. for
tax periods beginning on and after January ,20 with the

, 4

You have waived your right to contest this determination under the declaratory judgment
provisions of Section 7428 of the Code by your execution of Form 906, Closing

Agreement Concerning Specific Matters, an executed copy of which is being sent to you
under separate cover.

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.

See the enclosed Notice 1214, Helpful Contacts for Your “Notice of Deficiency” for
additional Taxpayer Advocate telephone numbers and addresses.

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

Sincerely,

TEAM MANAGER

Enclosure:
Notice 1214

Ce:

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT ANDO
GOVERNMENT ENTITIES

DIVISION
June 30, 2007

Taxpayer Identification Number:

ORG
ADDRESS Form:

Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

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

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

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

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

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

Letter 3618 (04-2002)
Catalog Number 34809F

Da

2

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

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

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

Thank you for your cooperation.

Sincerely,

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

ee

Form 886 A. Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
12/31/20XKX
LEGEND
ORG = Organization name XX = Date City = city State = state
County = county President = president Secretary = secretary BM-1,
BM-2 & BM-3 = 157, 2%° ¢ 39 BOARD MEMBER MGR = MGR RA-1, RA-2 & RA-3 =
157, 2 ¢ 39 RA CO-1, CO-2, CO-3. CO-4 & CO-5 = 157, 2™, 382) 4™ « 5™
COMPANIES
PRIMARY ISSUE

Whether or not this organization is operating exclusively for any charitable, educational,
or scientific reason under IRC section 501(c)(3).

FACTS

A, Corporate Information:

1. Articles of Incorporation:

The ORG (‘Foundation’) was incorporated under the Nonprofit Public Benefit
Corporation law of the State of State on January 17, 20XX. Its stated purpose was that
it would:

e operate exclusively for charitable, education, scientific and other
charitable purposes;

e that it will not, “except to an insubstantial degree”, engage in any activities
or exercise any powers that are not in the furtherance of the purposes of
this corporation... .”;

e that no substantial part of the activities shall consist of carrying on
propaganda, or otherwise attempting to influence legislation;

e that the property of this corporation is irrevocably dedicated to
educational, scientific, and charitable purposes;

e no part of the net earnings shall inure to the benefit of its directors,
trustees, officers, private shareholders or to any individual; and

e that upon dissolution remaining assets will be distributed to other
organizations that are tax-exempt.

President’ was noted as the incorporator of the ‘Foundation’ and signed as such on
January 15, 20XX. These articles were filed by him on January 22, 20XX.

kkk
’ President does not appear in any other operation or activity of the organization.

Form 886-Arev.468) Department of the Treasury - Internal Revenue Service
Page: -1-

Se

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

2. Bylaws- governing body:

According to the organization's bylaws, the governing body was stated to be comprised
of three Board of Director (BOD) members and three Officers. The Officers’ positions
consist of the President, Secretary and Chief Financial Officer. At the discretion of the
BOD, other officers may be appointed as may be required. “Each officer shall hold such
Office for such period, have such authority and perform such duties as are provided in
the Bylaws. . . Any two or more offices may be held by the same person”. The duties of
the officers are:

e President — shall be the general manager and chief executive
officer and is subject to the BOD; will have general supervision,
direction and control over the corporation’s business and officers;
shall have general powers and duties of management customarily
vested in a corporation's president

e Secretary — shall keep books of minutes of all meetings and actions
taken by the written consent of the BOD or any committees
appointed by the BOD; will give notice of all meetings . . .

e Chief Financial Officer — shall keep and maintain adequate and
correct books and records of corporation's properties, businesses
transactions, accounts of assets, liabilities, receipts, disbursements,
gains, losses and shares; shall be responsible for all funds,
securities, and other valuables; receive and give receipts for monies
due and payable to corporation; deposit all monies and other duties
prescribed by the BOD.

Both the BOD & Officers are supposed to be elected at each annual meeting. Annual
meetings are supposed to be conducted on the 1st Monday of May of each year or the
next Monday if that day is a holiday.

In an attachment to the bylaws was a document titled “Certificate of Secretary”.
The purpose was to certify that the bylaws adopted by the ‘Foundation’ were official.
This certificate was signed on January 25, 20XX, by Secretary, as Secretary. (See
Exhibit A)

In a second attachment to the bylaws titled “Written Consent by Directors in Lieu of
First Meeting”, President, acting as the incorporator of the ‘Foundation’ adopted the
Bylaws of the Corporation and appointed Secretary as President, CFO and Secretary.
Secretary was also designated as the agent of the ‘Foundation’ for the’purpose of
service of process’. Subsequent to all of the resolutions made in this document,
Secretary signed the document as the newly appointed President on 1/25/20XX. (See
Exhibit B)

Form 886- Acrev.+68) Department of the Treasury - Internal Revenue Service
Page: -2-

eee eee

F 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or’
™ Explanation of Items Exhibit =
N: fT. Year/Period En
“ORG axpayer 12/31/20XX
12/31/20XX

3. Form 1023 Application:

In February 20XX, the ‘Foundation’ submitted an application to the Service to request
tax-exempt status for its activities. Per the application, the ‘Foundation’ identified four
general categories under which its activities would be conducted; mission, research,
education and grants.

1. Mission aspect of the taxpayer was the:

'e “Eradication of world hungry [er] through such means as improved health
of and brea[e]ding techniques of livestock”;
e “Taxpayer will engage in research, sponsor research, will disseminate the
results of research, develop educations programs all relating to
addressing world hunger.”

2. Research aspect is to:

e Initially engage in research designed to improve the health of livestock;

e Look to the application of alternative health care techniques that are being
applied to humans to determine the effectiveness of same when applied
to livestock; and

e Investigate innovative breeding techniques that enhance the output of
quality protein from livestock.

3. Education aspect is to:

e Integrate results of all research conducted into curriculum that is intended
for veterinarians, animal geneticists, universities, colleges, agricultural
clubs, governmental agencies (i.e. FDA, WHO, & UN) and others. To be
shared with the agricultural community;

e “Teaching at existing accredited educations institutions . . . “ Or through
special conferences and seminars or through classes orchestrated by the
Taxpayer;

e Publish, initially without charge, the results of its research to veterinarians,
animal geneticists .. . ; and

e Eventually develop programs and research designed to achieve its goals
of elimination of world hunger.

4. Grants aspect is to:

e Select candidates for grants with principal requirements with expertise and
prior research experience.

Because the Determination Specialist believed that this organization was like an
organization described in Regulations section 1.501(c)(3)-1(d)(iii) (scientific

Form 886-Avrev.468) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 88 Department of the Treasury- Internal Revenue Service Schedule No. or
m 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
12/31/20XX

organization), based solely upon the documentation submitted, exemption from federal
income taxes was granted on June 13, 20XX under section 501(c)(3) as a public charity
described in IRC Section 170(b)(1)(A)(vi). (See Exhibit C)

Secretary signed and submitted the Form 1023 Application for Recognition of
Exemption, under penalties of perjury.

B. Activities:

In 20XX, an examination was opened to examine the organization’s operations for tax
years ending 12/31/20XX and 12/31/20XX. During that examination, a number of
material concerns were identified that would preclude the organization from

1. having received exemption initially, if all items were accurately
   disclosed; and/or

2. that would disqualify the organization from retaining exemption.

These areas of concern were reviewed circumspectly to determine if exemption should
be retained.

I. False Statements in 1023 Application:

The Form 1023 application was submitted in February 20XX. In an attachment to the
application, it was stated that there were no assets of the organization [Per Part ll, Item
8 (assets)] and that since the organization was dormant, there was no current financial
information with regard to source of income, or use of proceeds [Part IV-Item A —
(revenue and expenses)]. (See Exhibit D)

Nevertheless, in a meeting of the CO-1 (CO-1 y on April 10, 20XX, Secretary and RA-1°
met to discuss the formation of a new corporation in State. During that meeting, the two
agreed to provide financial assistance to this new corporation (which is the ORG) and to
transfer the improvements and any assets to the new corporation once it was formed.
(See Exhibit E)

kx kk &
2 CO-1, formerly the ORG Non-profit housing Corporation, is a State State nonprofit, tax-exempt organization
created by Secretary in 19XX for the purpose of housing and providing services to children with autism. It receives

its primary funding from Secretary.
3 RA-1 is the mother of Secretary .and presently resides in State.

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

eer

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

In 20XX, CO-1 reported expending $$ as a “grant” (See Exhibit F) to another 501(c)(3)
organization. An expense analysis of the “grant” amount showed that $$‘ was actual
expenses paid out of the personal funds of Secretary for the improvement of her
personal real property. $$ were management and general expenses of the ‘Foundation’
paid out of the personal funds of Secretary $$ was actual expenses paid in 20XX. The
remaining $$ was direct expenses drawn from the bank account of CO-1. (See Exhibit
G) The ‘Foundation’

1. did not record any receipt of this “grant” in its budgets submitted with
   the application;

2. did not recognize any “transfer of assets” post formation; and

3. it did not file any type of tax/information retum to record the receipt of
   the income

Secretary controls the activities of the CO-1. Secretary also controlled the formation
and creation of the ORG. Statements made on the Form 1023 application, with respect
to “no current financial information” did not coincide with other known and readily
available evidence in Secretary's possession and knowledge. It was Secretary's her
money that was used to make the alleged “grant”. The Form 1023 application was
signed under penalties of perjury.

2. Nonfiler (Noncompliance with Federal Reporting Requirements):

Evidence from an examination of Secretary's Form 1040 returns divulged that
charitable contributions were made by Secretary, or one or more of her for-profit and
nonprofit extensions, to the ‘Foundation’ during 20XX and 20XX in excess of $$. This
minimum threshold would require the ‘Foundation’ to file Form 990 returns for both
years. However, upon reviewing the Service database none had been filed. (See
Exhibit H) When returns were requested in an initial Information Document Request
(IDR), unsigned copies were provided to the Agent. This indicates that Forms 990
returns had been prepared. These copies were then signed by Secretary on April 21,
20XX and sent to the Service for processing by the Revenue Agent.

The organization vehemently claims that it had timely filed the returns, but the Service
had lost or misplaced those returns. (See Exhibit l) But prior to 20XX, there was no
indication that any Form 990 return had ever been filed. And in spite of numerous
requests for any corroborating evidence that would contradict the information on the
Service database, the organization was not able to produce such.

k kk

• Secretary’s Form 1040 is presently under examination in tandem with the examination of this
  organization. The $$ is being disallowed on the Form 1040 for 20XX.
• If an actual grant was made, the matter of transferring the “assets” would be immaterial.

Form 886- Acrev.468) . . Department of the Treasury - Internal Revenue Service
Page: -5-

eee

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

This ‘Foundation’ is not the only nonprofit organization created by Secretary that has a
poor or nonexistent history of filing required information returns.

3. Governing Body —Tenuous (No Independent Board):

Per the organization’s bylaws, the officers consist of the President, Secretary and Chief
Financial Officer. Per the organization's Form 990, Part V, officers, directors, trustees
and key employees are listed as:

Figure 1

Title 20XX 20XX 20XX
President | Secretary Secretary Secretary
Secretary | RA-1° RA-1 RA-1

The organization held a meeting on May 6, 20XX. The purpose of the meeting was to
appoint MGR as Manager of Animal Projects and to re-elect herself as President. MGR
is an employee of Secretary's and is paid by CO-2 The position of Manager of Animal
Projects is not listed in the bylaws as a position entitled to vote on the activities of the

organization. The only person with the official right to vote on the organization's
operations, was Secretary. And she voted herself as President to serve another term.

Attending a meeting held on January 9, 20XX, was Secretary, RA-2 and MGR. The
purpose of this meeting was to commence communications with experts in the animal
husbandry world for the purpose of appointing a BOD. Three names were selected BM-
1 (veterinarian and former sheep breeder), BM-2 (director of sheep program at CO-3)
and, BM-3 (head of sheep program at CO-4).

Even though the date of the minutes is outside the parameters of the examination
period, neither RA-2 nor MGR was listed on the Form 990 as individuals with the right
to govern the operations of the organization. Additionally, neither was appointed and
approved in writing, by the sole BOD member (Secretary), to a position that would
accommodate a vote.

4. Sources of Income/Revenue (Not a Public Charity):

Per the delinquently filed Form 990 returns, the organization reported gross receipts of
$$ and $$ for 20XX and 20XX, respectively. Of the gross amounts received, the
following sources were derived from Secretary or one or more of her for-profit or
nonprofit controlled corporations listed below.

Figure 2
kk ek
° ibid
Form 886- Acrev.468) Department of the Treasury - Internal Revenue Service
Page: -6-

a

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

Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended

ORG . 12/31/20XX_

| 12/31/20XX
Donor 20XX 20XX Total

Secretary $$ $$ $$

CO-2 : $$ $$ $$

CO-5 $$ $$ $$

cO-1 $$ $ $$

CO-2 $ $$ $$

Totals $$ $$

CO-2 and CO-5 are two wholly-owned for-profit subchapter S corporations of Secretary.
CO-1 is a nonprofit tax-exempt corporation that was organized and is controlled by
Secretary. It also received more than % of its funding from Secretary. CO-2 was
incorporated as a for-profit entity in the State of State in 20XX and automatically
dissolved in July 20XX. RA-3, the listed resident agent is also an employee of CO-2 and
was so during the years of examination.

Secretary claimed a charitable contribution deduction for the amounts paid directly to or
on behalf of the ‘Foundation’ from her personal return, CO-2, and CO-5 While the
amount paid from the CO-1 to or on behalf of the ‘Foundation’ would generally be
treated as a “grant”, Secretary only claimed a charitable contribution deduction with
respect to the original amount paid to the CO-1. With respect to the amounts paid by
CO-2 this entity is a regular for-profit corporation and would generally be limited to a
contribution deduction of 10%.

For 20XX, of the $$ recorded as gross receipts, $$ or % was derived from
Secretary. For 20XX, of the $$ recorded as gross receipts, $$ or % was derived
from her. For the years of operation, Secretary, President, has been the primary
funding for the ‘Foundation’.

5. Uses of Income/Revenue-Meeting Minutes (Inurement):

Subsequent to the ‘Foundation’s’ incorporation and prior to the date exemption was
granted, the organization had a meeting on 3/4/20XX. (See Exhibit J) There were two
people present at the meeting, Secretary, who is listed as the president and RA-2, who
is purported to be the acting secretary. RA-2 was not listed as a Board of Director
member on the delinquent Form 990’s secured from the organization.

The purpose of the meeting was for the attendees to vote on a document called the
“Affidavit of Irrevocable Restriction and Indemnification” (See Exhibit K) proposed
by Secretary.

Per this affidavit Secretary is to purchase 560 acres of land in City, State. 75 acres are
for the unlimited use of the ‘Foundation’. The remainder is to be used by Secretary for
development. The ‘Foundation’ is to incur costs of land development, including roads,

Form 886- Acrev.+68) Department of the Treasury - Internal Revenue Service
Page: -7-

aX

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

clearing, wells, and waterlines, etc. for the entire property. ‘Foundation’ will be
reimbursed for all costs if property is sold and indemnified against any loss; conditions
are legally binding on herself, heirs etc and that the document will be recorded in the
local county. This agreement was signed by Secretary, as property owner on 3/4/20XX.
The document was alleged to have been notarized, but did not have the notary seal
and date. Additionally, the document was not recorded in the County prior to June
20XX.

When details of expenses were reviewed, it was noted that the majority of the funds
were indeed used to enhance the 560 acres of land owned by Secretary. Our review
noted the following uses:

1. to purchase farming assets (i.e. livestock),

2. to purchase supplies and other items (feed) to support livestock and
   operate a farm;

to purchase farming equipment (Truck);

to make major improvements of the land owned by the President;

to maintain the upkeep of land and buildings owned by the President;
to pay for utilities and phone service in the name of the President; and

to pay for legal service related to easements of property owned by the
President.

Only a minimal amount of monies were expended for items that might be
considered related to the administrative operations of an exempt organization.
None of the funds were used for any educational purposes or scientific research.
The specific categories are noted as follows:

NO aA w

Figure 3
Category 20XX ____ 20XX Total

Unidentified expenses $$ $ $$
Equipment (farming or other) | $$ $$ $$
Farm Assets $$ $$ $$
Farming expenses $$ $$ $$
Legal $$ $ $$
Land, equipment & general

maintenance $$ $ $$
Leasehold Improvements $$ $$ $$
Miscellaneous $ $$ $$
Telephone — Personal $$ $$ $$
Start-up $$ $ $$
Operational $$ $$ $$

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

(nee

FE 886A Department of the Treasury- Internal Revenue Service Schedule No. or
om Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
12/31/20XX
[ Annual Totals [$$ [$$ |

Details of categorized terms are briefly described below and can be reviewed per
attached (See Exhibit L)

e Unidentified expenses were paid out of Secretary's personal funds and
deducted as a 170(c)(2) contribution as an expense paid on behalf of a
qualified charitable organization, no other evidence regarding these
amounts were verified;

e Equipment expenses included the purchase of a 20XX Polaris Truck &
other farming machinery;

e Farm assets were determined to be the purchase of sheep, donkeys
and a goat. The goat was sold during the year. Also, other sheep had
been sold during the year;

e Farming expenses included items like oats, hay, grain, sheep shearing
expenses, farming supplies, etc;

e Legal services were paid for discussion relating to property easements;

e Land, equipment, maintenance and other includes costs associated with
mowing, barn repairs, truck repairs and fuel, utilities, trash removal etc;

e Leasehold improvements included permanent additions or renovations
to the land such as fencing, well drilling, dirt road construction, barn
construction and capitalized architect expenses;

e Personal expenses included telephone service for two numbers # and #.
The former number address data was unpublished and the latter
number was listed under the name of Secretary;

e Start-up costs included the payment of fees for incorporation in the State
of State, 1023 application user fee and general consulting on
corporation structure; and

e Operational expenses included bank charges, office supplies and faxing
information. These were believed to be administrative costs of operating
an organization;

All expenditures were made and approved by Secretary.

There was no official lease agreement between the organization and Secretary,
property owner for the alleged use of the 75 acres of land prior to June 20XX.

6. False Statements in Form 990 Regarding Program Activities

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

A

Form 886 A 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

On the Form 990, Part Ill, the organization said it paid out $$ and $$ for 20XX and

20XX, respectively for “research for improved health & breeding techniques of livestock
and matters related thereto, for the purpose of eradication of world hunger through such .
means” (See Exhibit M)

From the factual analysis of the expenses, the significant majority of expenditures made
during 20XX and 20XX (and even prior to actual incorporation) were for the
improvement, maintenance and upkeep on the 560 acres of land that is owned by
Secretary. The return was signed, under penalties of perjury, by Secretary as President
on April 21, 20XX.

LAW

Internal Revenue Code section 501(c)(3) provides for the exemption from Federal
income tax of corporations organized and operated exclusively for religious,
charitable, literary, scientific, and educational purposes; no part of the net earnings
of which inures to any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the income Tax Regulations provides that in order to
qualify for exemption under section 501(c)(3), an organization must be both organized
and operated exclusively for one or more exempt purposes. Failure to meet either the
organizational or operational test will disqualify an organization from exemption under
501(c)(3).

Treasury Regulations section 1.501(c)(3)-1(c)(1) states that, an organization will be
regarded as “operated exclusively’ for one or more exempt purposes only if it engages
primarily in activities which accomplish one or more of such exempt purposes specified
in section 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose. Thus, in
construing the meaning of the phrase “exclusively for educational purposes” in Better
Better Business Bureau v. United States, 326 U.S. 279 (1945), the Supreme Court of the
United States stated, “This plainly means that the presence of a single non-educational
purpose, if substantial in nature, will destroy the exemption regardless of the number or
importance of truly educational purposes.”

Treasury Regulations section 1.501(c)(3)-1(c)(2) states 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.

Treasury Regulations section 1.501(a)-1(c) defines a private shareholder or individual
in section 501 as those persons having a personal and private interest in the activitie
of the organization. :

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

0

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

Treasury Regulations section 1.501(c)(3)-1(d)(ii) provides that an organization is not
organized or operated exclusively for one or more of the purposes specified in
subdivision (i) of this subparagraph unless it serves a public rather than a private
interest. Thus, to meet the requirement of this subdivision, it is necessary for an
organization to establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests.
Moreover, even though an organization may have exempt purposes, it will not be
considered as operating exclusively for such purposes, if more than an insubstantial
part of its activities serve private interests.

In Est. of Hawaii v Commissioner, 71 TC 1067, the non profit organization engaged in
activities relating to “est” programs involving training, seminars, lectures, etc., in areas
of intrapersonal awareness and communication. Such activities were conducted under
licensing arrangements with for-profit corporations. The courts held that although the
activities were educational in nature, the non-profit served the commercial purposes of
the for-profit. Thus the non-profit was not operated exclusively for exempt purposes
within the meaning of section 501(c)(3) of the Code.

In Hancock Academy of Savannah, Inc. v Commissioner, 69 TC 488, the founder of

a for-profit entity formed a non profit corporation to take over the educational functions
of the for-profit. The non-profit assumed an excessive liability of the for-profit. The court
found the academy failed to meet the requirements of section 501 (c)(3).

In John Marshall Law School and John Marshall University v US, 81-2 USTC, an

organization that operated a law school and university did not qualify as an exempt
organization because a portion of the organization's net earnings ffiared to the benefit
of the private individuals who operated the organization and their families. The
corporation contended that the benefits iftéfinig to the individuals were reasonable
compensation for the services they performed, but the court concluded that the
payment of personal expenses purchases and interest-free loans involved here far

exceeded an ordinary and necessary level of compensation.

In Texas Trade School v Commissioner, 30 TC 642, 646-647, Exemption was denied
when leasehold improvements were made to property owned by the principal of the
corporation.

Revenue Ruling 76-441, Cumulative Bulletin, 1976-2, page 147 held that a nonprofit
organization takes over a school's assets and its liabilities, which exceed the value of
the assets and include notes owed to the former owners and current directors of the
school, is serving the director's private interest and is not operated exclusively for

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

F 886A Department of the Treasury - Internal Revere Service Schedule No. or
™ . Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG “ey 12/31/20XX
12/31/20XX

educational and charitable purposes.
ARGUMENT

Form 1023:
Evidence submitted in the Form 1023 and related documentation revealed that

Secretary made material false statements to the Internal Revenue Service in support of
budgets and other sources of revenue/expenses. She indicated that no monies had
been received by the ‘Foundation’ when, in fact, she was fully aware that monies had
been paid to the ‘Foundation’ during 20XX as a grant from the CO-1.

Nonfiler:

There is prima facie evidence that this organization did not file Forms 990 for any of the
years that it was required to file until it was examined by the Service. The mere
preparation of a Form 990 is not evidence of filing. While one may say that the
‘Foundation’ intended to file a Form 990, they did not follow through with that intention.
While an intention to file might absolve the organization of the willful and intentional
disregard rules for the imposition of certain delinquency penalties, it does not serve as
evidence of filing.

This organization also has a non-existent history of filing other required information
returns (i.e. Forms 1099). It is not that this organization is not required to file the
returns, but that it has not filed any such returns.

The inference here is that this organization has difficulty in complying with federal
reporting requirements with respect to its business operations. Noncompliance in this
area can be deemed as not operating for exempt purposes and could disqualify this
organization from retaining exemption.

Governing Body

Secretary has made a number of concerted efforts to lend some legitimacy to the
creation, purpose and operation of this organization. In its creation, another person
(President as “Incorporator’) assigns the overall management and oversight of the
organization to Secretary as President, Secretary and Chief Financial Officer.

Bylaws are created to lend some evidence of being governed properly. However,
created, they are not engaged in the actual operations of the organization. And if they
are, it is with minimal consideration (such as the conduct of an annual meeting).

Meetings are held and recorded to support actions taken or proposed. But in fact, the
Board of Directors or “ad hoc Officers” are either a family member (i.e. RA-1), an
employee (i.e. MGR) of one of the for-profit entities, or an added body (i.e. RA-2)for the

Form 886-A(Rev.4-68) Depastment of the Treasury - Internal Revenue Service
. Page: -12-

Has

F 886A Department of the Treasury - Internal Revenue Service Schedule No. or
om Explanation of Items Exhibit
Name of T r Year/ Period Ended
ORG ope 12/31/20XX
12/31/20XX

purpose of approving actions decided upon by Secretary who has the controlling
interest in all of the decisions made.

Certificates, Written Consents, and Affidavits are prepared to give some sense of
credibility that this organization will be operated in the best interest of the general
public. The Certificates, Written Consents and Affidavits have questionable authenticity
(i.e. Written Consent and Certificates with no notarized seal or scratched off dates), or
are not enforceable (i.e. Affidavit of Irrevocable Restriction and Indemnification). Even if
Secretary did indeed enforce the conditions of the “Affidavit”, she has nonetheless
conferred upon herself a benefit far greater than the cost to repay. If the property were
sold, it would be sold at its appreciated value, which includes the cost of the leasehold
improvements. The organization would only be receiving dollar for dollar value, while
the value of the property will far exceed the cost of the original improvements. This is
part and parcel of the inurement proscription. Furthermore, none of the aforementioned
“documents” were arms-length.

‘Not a Public Charity

Secretary reporting of revenue gives the public the illusion that this organization is
supported by the general public in spreading out her contributions amongst a number of
different controlled entities. The facts show otherwise. More than % of the funds
contributed to this organization come from Secretary or one or more of her wholly-
owned for-profit entities or her controlled nonprofit entities. This organization is not a
public charity described in IRC section 501(c)(3).

Inurement:

There is general agreement that inurement is a subset of private benefit and involves
unjust payment of money. The inurement proscription contained in Regulations
1.501(c)(3)-1(c)(1) states 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. Inurement is likely to arise where the financial
benefit represents a transfer of the organization's financial resources to an individual
solely by virtue of the individual relationship with the organization without regard to the
accomplishment of exempt purposes.

Inurement of income is strictly forbidden under section 501(c)3) without regard to the
amount involved. This proscription applies to persons who because of their particular
relationship with an organization have an opportunity to control or influence its activities.
Such persons are considered "insiders" for purposes of determining whether there is
inurement of income. Generally, an organization's officers, directors, founders, and their
families are considered "insiders".

A federal court of appeals held that the term “inurement": "may include more than the
term net profits as shown by the books of the organization or than the difference

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

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

between the gross receipts and disbursements in dollars" and that "[p]rofits may inure
to the benefit of shareholders in other ways than dividends. See Northwestem
Municipal Ass'n v Commissioner.

Secretary has enjoyed a tremendous tax benefit from financially supporting the
activities of the ‘Foundation’. Secretary created the ORG. Secretary supports the ORG
with her own personal funds, funds from one or more of her wholly-owned for-profit
entities or from a second nonprofit entity (CO-1) created and controlled by her. These
funds invariably revert back to Secretary in the form of “leasehold improvements”,
property maintenance, livestock purchase or in the form of payment of personal
expenses. Secretary, for all intents and purposes, is an insider.

The payment of leasehold improvements to a property not owned by the organization
was sufficient to preclude exemption under 501(c)(3) in the Texas Trade School case .
In the John Marshall Law School and John Marshall University, the payment of
personal expenses was deemed inurement and caused the organization to not qualify
as an exempt organization. In Est of Hawaii, the operation of the organization was not
exclusively for exempt purposes within the meaning of section 501(c)(3) of the Code.

Per Regulations section 1.501(c)(3)-1(d)(ii), even though an organization may have
exempt purposes, it will not be considered as operating exclusively for such purposes, if
more than an insubstantial part of its activities serve private interests. See Better
Business Bureau. In this instance more than a substantial amount of the funds of the
‘Foundation’ are used for private interests.

False Statement in 990:

Evidence submitted in the Forms 990 return further indicated that Secretary made a
material false statement to the Service when it was stated that monies of the
‘Foundation’ were paid for “research for improved health & breeding techniques of
livestock and matters related thereto, for the purpose of eradication of world hunger
through such means” in the amount of out $$ and $$ for 2OXX and 20XX, respectively.
The expenses of the organization did not evidence any of the purported amounts for the
purpose stated.

TAXPAYER’S POSITION

Taxpayer has not officially advocated a position, but ascertains that it is a valid
organization operating for the benefit of the public and not for private purposes.

GOVERNMENT’S CONCLUSION

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

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

Based upon cited court cases, the regulations and Code, we hold that your organization
is not operated exclusively for any charitable, educational, or scientific purpose and that
you have excessive private benefit and inurement, thereby, defeating the retention of
exemption.

Therefore, we have concluded that you do not qualify for exemption from Federal
income tax as an organization described in section 501(c)(3) of the Code.

Revocation of your exempt status will be effective as of January 17, 20XX. Your
organization is not entitled to Internal Revenue Section 7805(b) relief because your
organization made material false statements in its Form 1023 application. Had the
organization disclosed the fact that income sources were derived from a related
organization and expended for leasehold improvements to the property owned by the
creator, this information would have precluded this organization from receiving
exemption. Consequently, the organization's tax-exempt status should be revoked
retroactively to the date it received recognition of its exemption.

In accordance with this determination, you are required to file Federal income tax
returns on Form 1120. Contributions to your organization are not deductible by donors
under section 170(c)(2) of the Code.

In accordance with the provisions of section 6104(c) of the Code a copy of this letter will
be sent to the appropriate State officials.

On December 2, 20XX, the D.C. Circuit ruled that the Service will disclose our denials
and revocations under section 6110 effective August 1, 20XX. Tax Analysts v. IRS,
350 F.3d 100 (D.C. Cir. 20XX)

ALTERNATIVE ISSUE
Should it be determined that this organization is operated for one or more exempt
purposes and its income does not inure to be the benefit of private individuals, then
based upon the income sources, this organization should not be a public charity as
described in IRC 509(a)(2), but a private foundation.

If the organization is reclassified to a private foundation, then is it subject to the excise
tax provisions of IRC 4941?

FACTS

The ORG (‘Foundation’) was incorporated under the Non-Profit Public Benefit
Corporation laws of the State of State on January 17, 20XX. On September 10, 19. it

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

a

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

was granted exemption under section 501(c)(3), as other than a private foundation
under section 509(a)(1) and IRC 170(b)(1)(A)(vi).

Sources of Income/Revenue (Not a Public Charity):

Per the delinquently filed Form 990 returns, the organization reported gross receipts of
$$ and $$ for 20XX and 20XX, respectively. Of the gross amounts received, the
following sources were derived from Secretary or one or more of her for-profit or
nonprofit controlled corporations listed below.

Figure 2

Donor 20XX 20XX Total
Secretary $$ $$ $$
CO-2 $$ $$ $$
CO-5 $$ $$ $$
CO-1 $$ $ $$
CO-2 $ $$ $$
Totals $$ $$

e CO-2 and CO-5 are two wholly-owned for-profit subchapter S corporations of
Secretary;

e CO-1 is a nonprofit tax-exempt corporation that was organized and is controlled
by Secretary. It also received more than % of its funding from Secretary;

e CQ-2 was incorporated as a for-profit entity in the State of State in 20XX and
automatically dissolved in July 20XX. RA-3, the listed resident agent is also an
employee of CO-2 and was so during the years of examination.

Secretary claimed a charitable contribution deduction for the amounts paid directly to or
on behaif of the ‘Foundation’ from her personal return, CO-2, and CO-5 With respect to
the amouhile the amount paid from the CO-1 to or on behalf of the ‘Foundation’ would
generally be treated as a “grant”, Secretary only claimed a charitable contribution
deduction with respect to the original amount paid to the CO-1. With respect to the
amounts paid by CO-2 this entity is a regular for-profit corporation and would generally
be limited to a contribution deduction of 10%.

For 20XX, of the $$ recorded as gross receipts, $$ or % was derived from
Secretary. For 20XX, of the $$ recorded as gross receipts, $$ or % was derived
from her. For the years of operation, Secretary, President, has been the primary
funding for the ‘Foundation’.

LAW

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

Neen eee eee eee

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

Internal Revenue Code Section 509(a)(2)(A) the term "private foundation” means a
domestic or foreign organization described in section 501(c)(3) other than an
organization which normally receives more than one-third of its support in each taxable
year from any combination of--

(i) gifts, grants, contributions, or membership fees, and

(ii) gross receipts from admissions, sales of merchandise, performance of
services, or furnishing of facilities, in an activity which is not an unrelated
trade or business (within the meaning of section 513,not including such
receipts from any person, or from any bureau or similar agency of a
governmental unit (as described in section 170(c)(1)), in any taxable year
to the extent such receipts exceed the greater of $5,000 or 1 percent of
the organization's support in such taxable year,

from persons other than disqualified persons (as defined in section 4946) with respect
to the organization, from governmental units described in section 170(c)(1), or from
organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii),
and

(B) normally receives not more than one-third of its support in each taxable year from
the sum of—

(i) gross investment income (as defined in subsection (e)) and

(ii) the excess (if any) of the amount of the unrelated business taxable income
(as defined in section 512) over the amount of the tax imposed by section 511

Internal Revenue Code section 4946(a)(1) states that the term “disqualified person”
means, with respect to a private foundation, a person who is—

(A) a substantial contributor to the foundation,
(B) a foundation manager (within the meaning of subsection (b){1)),
(C) an owner of more than 20 percent of-

(i) the total combined voting power of a corporation,

(ii) the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated enterprise,

which is a substantial contributor to the foundation,

(D) a member of the family (as defined in subsection (d)) of any individual described
in subparagraph (A), (B), or (C),

Form 886-A;rev.468) Department of the Treasury - Internal Revenue Service
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Le

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

(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D)
own more than 35 percent of the total combined voting power,
(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D)
own more than 35 percent of the profits interest,
(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D)
hold more than 35 percent of the beneficial interest,
(H) only for purposes of section 4943, a private foundation—
(i) which is effectively controlled (directly or indirectly) by the same
person or persons who control the private foundation in question, or
(ii) substantially all of the contributions to which were made (directly or
indirectly) by the same person or persons described in subparagraph
(A), (B), or (C), or members of their families (within the meaning of
subsection (d)), who made (directly or indirectly) substantially all of the
contributions to the private foundation in question, and
(I) only for purposes of section 4941, a government official (as defined
in subsection (c)).

(2) Substantial contributors.—For purposes of paragraph (1), the term “substantial
contributor" means a person who is described in section 507(d)(2).

(b) Foundation manager.--For purposes of this subchapter, the term "foundation
manager” means, with respect to any private foundation—

(1) an officer, director, or trustee of a foundation (or an individual having powers
or responsibilities similar to those of officers, directors, or trustees of the
foundation), and

(2) with respect to any act (or failure to act), the employees of the foundation
having authority or responsibility with respect to such act (or failure to act).

(d) Members of family.—For purposes of subsection (a)(1), the family of any individual
shall include only his spouse, ancestors, children, grandchildren, great grandchildren,
and the spouses of children, grandchildren, and great grandchildren.

+Internal Revenue Code Section 507(d)(2)(A) -For purposes of paragraph (1), the term
“substantial contributor” means any person who contributed or bequeathed an
aggregate amount of more than $5,000 to the private foundation, if such amount is
more than 2 percent of the total contributions and bequests received by the foundation
before the close of the taxable year of the foundation in which the contribution or
bequest is received by the foundation from such person. In the case of a trust, the term
“substantial contributor” also means the creator of the trust.

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

a

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

Internal Revenue Code Section 4941(a)(1) states that there is hereby imposed a tax
on each act of self-dealing between a disqualified person and a private foundation. The
rate of tax shall be equal to 10 percent of the amount involved with respect to the act of
self-dealing for each year (or part thereof) in the taxable period. The tax imposed by
this paragraph shall be paid by any disqualified person (other than a foundation
manager acting only as such) who participates in the act of self- dealing. In the case of
a government official (as defined in section 4946(c)), a tax shall be imposed by this
paragraph only if such disqualified person participates in the act of self-dealing knowing
that it is such an act.

Internal Revenue Code Section 4941(a)(2) In any case in which a tax is imposed by
paragraph (1), there is hereby imposed on the participation of any foundation manager
in an act of self-dealing between a disqualified person and a private foundation,
knowing that it is such an act, a tax equal to 5 percent of the amount involved with
respect to the act of self-dealing for each year (or part thereof) in the taxable period,
unless such participation is not willful and is due to reasonable cause. The tax imposed
by this paragraph shall be paid by any foundation manager who participated in the act
of self-dealing.

Internal Revenue Code Section 4941(b) Additional taxes.--
(1) On self-dealer.—In any case in which an initial tax is imposed by subsection
(a)(1) on an act of self-dealing by a disqualified person with a private foundation and
the act is not corrected within the taxable period, there is hereby imposed a tax
equal to 200 percent of the amount involved. The tax imposed by this paragraph
shall be paid by any disqualified person (other than a foundation manager acting
only as such) who participated in the act of self-dealing.

(2) On foundation manager.—In any case in which an additional tax is imposed by
paragraph (1), if a foundation manager refused to agree to part or all of the
correction, there is hereby imposed a tax equal to 50 percent of the amount
involved. The tax imposed by this paragraph shall be paid by any foundation
manager who refused to agree to part or all of the correction.

Internal Revenue Code Section 4941(c) Special rules.--For purposes of subsections
(a) and (b)--
(1) Joint and several liability.-If more than one person is liable under any paragraph
of subsection (a) or (b) with respect to any one act of self-dealing, all such persons
shall be jointly and severally liable under such paragraph with respect to such act.

(2) $20,000 limit for management.--With respect to any one act of self-dealing, the
maximum amount of the tax imposed by subsection (a)(2) shall not exceed $20,000,

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

(Rhames ener enna

F 88 A Department of the Treasury - Internal Revenue Service Schedule No. or
orm 886 Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
“ORG anpay 12/31/20KX
12/31/20XX

and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed
$20,000.

Internal Revenue Code Section 4941(d)(1) In general.--For purposes of this section,
the term "self-dealing” means any direct or indirect--

(A) sale or exchange, or leasing, of property between a private foundation and a
disqualified person;

(B) lending of money or other extension of credit between a private foundation and
a disqualified person;

(C) furnishing of goods, services, or facilities between a private foundation and a
disqualified person;

(D) payment of compensation (or payment or reimbursement of expenses) by a
private foundation to a disqualified person;

(E) transfer to, or use by or for the benefit of, a disqualified person of the income or
assets of a private foundation; and

(F) agreement by a private foundation to make any payment of money or other
property to a government official (as defined in section 4946(c)), other than an
agreement to employ such individual for any period after the termination of his
government service if such individual is terminating his government service within a
90-day period.

Internal Revenue Code Section 4941(d)(2) For purposes of paragraph (1)--
(A) the transfer of real or personal property by a disqualified person to a private
foundation shall be treated as a sale or exchange if the property is subject to a
mortgage or similar lien which the foundation assumes or if it is subject to a
mortgage or similar lien which a disqualified person placed on the property within
the 10-year period ending on the date of the transfer;

(B) the lending of money by a disqualified person to a private foundation shall not be
an act of self-dealing if the loan is without interest or other charge (determined
without regard to section 7872) and if the proceeds of the loan are used exclusively
for purposes specified in section 501(c)(3);

(C) the furnishing of goods, services, or facilities by a disqualified person to a private
foundation shall not be an act of self-dealing if the furnishing is without charge and if
the goods, services, or facilities so fumished are used exclusively for purposes
specified in section 501(c)(3);

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

IS

E 8 6A Department of the Treasury - Internal Revenue Service Schedule No. or
om 88 Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
. 12/31/20XX

(D) the furnishing of goods, services, or facilities by a private foundation to a
disqualified person shall not be an act of self-dealing if such furnishing is made on a
basis no more favorable than that on which such goods, services, or facilities are
made available to the general public;

(E) except in the case of a government official (as defined in section 4946(c)), the
payment of compensation (and the payment or reimbursement of expenses) by a
private foundation to a disqualified person for personal services which are
reasonable and necessary to carrying out the exempt purpose of the private
foundation shall not be an act of self-dealing if the compensation (or payment or
reimbursement) is not excessive;

(F) any transaction between a private foundation and a corporation which is a
disqualified person (as defined in section 4946(a)), pursuant to any liquidation,
merger, redemption, recapitalization, or other corporate adjustment, organization, or
reorganization, shall not be an act of self-dealing if all of the securities of the same
class as that held by the foundation are subject to the same terms and such terms
provide for receipt by the foundation of no less than fair market value;

(G)(1) in the case of a government official (as defined in section 4946(c)), paragraph
shall in addition not apply to--
(i) prizes and awards which are subject to the provisions of section 74(b)
(without regard to paragraph (3) thereof), if the recipients of such prizes and
awards are selected from the general public,

(ii) scholarships and fellowship grants which would be subject to the
provisions of section 117(a) (as in effect on the day before the date of the
enactment of the Tax Reform Act of 1986) and are to be used for study at
an educational organization described in section 170(b)(1)(A)(ii),

(iii) any annuity or other payment (forming part of a stock-bonus, pension, or
profit-sharing plan) by a trust which is a qualified trust under section 401,
(iv) any annuity or other payment under a plan which meets the
requirements of section 404(a)(2),

(v) any contribution or gift (other than a contribution or gift of money) to, or
services or facilities made available to, any such individual, if the aggregate
value of such contributions, gifts, services, and facilities to, or made
available to, such individual during any calendar year does not exceed $25,

(vi) any payment made under chapter 41 of title 5, United States Code, or

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

Page: -21-

a A

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

(vii) any payment or reimbursement of traveling expenses for travel solely
from one point in the United States to another point in the United States,
but only if such payment or reimbursement does not exceed the actual cost
of the transportation involved plus an amount for all other traveling
expenses not in excess of 125 percent of the maximum amount payable
under section 5702 of title 5, United States Code, for like travel by
employees of the United States; and

(H) the leasing by a disqualified person to a private foundation of office space for
use by the foundation in a building with other

ARGUMENT

In 20XX, the ‘Corporation’ received % of its gross income (see figure 1) from
Secretary. Secretary is not only a disqualified person as described in IRC 4946(a)(1)(A),
but also a foundation manager as noted in IRC 4946(a)(1)(B). In 2OXX and 20XX, more
than one-third of the income sources were derived from gross investment income and
unrelated business income (billboard advertising). With respect to code section
509(a)(2), this organization does not meet the public support test and thus is a private
foundation.

More that % (figure 4) of the funds received from the disqualified person/foundation
manager were used to improve land owned by the disqualified person, purchase farm
equipment or purchase other farming related supplies. Additionally, other sources were
used to pay attorneys and accountants and other service providers on behalf or for the
private use of Secretary. In accordance with IRC 4941(d)(1)(E) , the transfer fo, or use
by or for the benefit of, a disqualified person of the income or assets of a private
foundation constitutes an act of self-dealing. The excise tax is imposed on the amount
involved. With respect to the years in question, the amount involved is:

[Verified Total Annual Payouts _| $$ [$s Iss }
The excise tax is computed as noted below:
IRC Section 20XX - DP 20XX-FM 20XX-DP 20XX-FM
4941(a)(1) 10% $$ $$
4941(a)(2) 5% $$ $$
4941(b)(1) 200% | $$ $$
4941(b)(2) 50% $$ $$$
Totals $$ $$ $$ $$
TAXPAYER’S POSITION

Department of the Treasury - Internal Revenue Service
Page: -22-

a

Form 886- Acrev.4-68)

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

The ‘Corporation’ agreed with the Service regarding this classification. Albeit, it jumped
the gun in filing a Form 990-PF for 20XX when the examination had not reached its final
audit conclusions. The organization does not agree with the imposition of the excise tax
on the acts of self-dealing.

GOVERNMENT’S CONCLUSION

The organization is a private foundation. Consequently, it is required to file delinquent
Form 990-PF’s effective January 1, 20XX. The transaction between the organization
and disqualified person/foundation manager constitutes an act of self-dealing.
Secretary, as disqualified person and foundation manager is liable for the excise
imposed under Chapter 42, with respect to 4941.

Form 886- Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -23-